Legal Definitions - Deprizio doctrine

The Deprizio doctrine is a rule in U.S. bankruptcy law that addresses certain payments made by a debtor before filing for bankruptcy. It allows a bankruptcy trustee to recover a payment made to a regular, unrelated creditor (often called an outside creditor) even if that payment occurred more than 90 days, but within one year, before the bankruptcy filing. This recovery is possible if the payment also indirectly benefited a closely related party (known as an inside creditor).

This doctrine typically applies when an inside creditor, such as a company's director, officer, major shareholder, or a family member, has personally guaranteed a debt owed by the debtor to an outside creditor. When the debtor makes a payment to the outside creditor, it reduces the total debt, thereby also reducing the inside creditor's personal liability on their guarantee. The Deprizio doctrine extends the period during which such "preferential" payments can be recovered from the outside creditor, effectively treating the payment as if it were made to the inside creditor for the purpose of the recovery period.

Here are some examples illustrating the Deprizio doctrine:

• Corporate Loan Guarantee: Imagine "InnovateTech Inc.," a struggling company, owes a large sum to "First National Bank." The CEO and primary shareholder of InnovateTech, Ms. Evelyn Reed, has personally guaranteed this loan. Seven months before InnovateTech files for bankruptcy, the company makes a $500,000 payment to First National Bank to reduce its outstanding loan. This payment is made more than 90 days but less than a year before the bankruptcy filing.

  How it illustrates the doctrine: The payment to First National Bank (an outside creditor) directly reduced InnovateTech's debt. Crucially, it also reduced Ms. Reed's (an inside creditor due to her role and ownership) personal liability under her guarantee. Under the Deprizio doctrine, the bankruptcy trustee could potentially recover that $500,000 from First National Bank, even though First National Bank is an outside creditor and the payment was made outside the standard 90-day window for recovering payments from such creditors. The doctrine allows the trustee to "look through" the payment to the outside creditor to recover the benefit received by the inside creditor.

• Family Business Debt: Consider "Green Valley Farms," a family-owned agricultural business. Green Valley Farms owes money to "AgriSupply Co." for equipment and supplies. Mr. David Chen, the owner of Green Valley Farms, had his brother-in-law, Mr. Robert Lee, personally guarantee the debt to AgriSupply Co. Five months before Green Valley Farms declares bankruptcy, it pays $75,000 to AgriSupply Co. for outstanding invoices. This payment falls between 90 days and one year before the bankruptcy filing.

  How it illustrates the doctrine: The payment to AgriSupply Co. (an outside creditor) reduced Green Valley Farms' debt. Because Mr. Lee (an inside creditor due to his close family relationship with the owner) had guaranteed this debt, the payment also reduced his potential personal financial exposure. The Deprizio doctrine would allow the bankruptcy trustee to recover the $75,000 from AgriSupply Co., as the payment indirectly benefited an inside creditor within the one-year preference period applicable to insiders.

• Subsidiary Loan Guaranteed by Parent: "Global Holdings Corp." is the parent company of "Subsidiary Solutions Ltd." Subsidiary Solutions Ltd. secured a loan from "Capital Bank," which was guaranteed by Global Holdings Corp. Ten months before Subsidiary Solutions Ltd. files for bankruptcy, it makes a $1 million payment to Capital Bank on the guaranteed loan. This payment occurred more than 90 days but less than a year before the bankruptcy filing.

  How it illustrates the doctrine: The payment to Capital Bank (an outside creditor) reduced the loan amount owed by Subsidiary Solutions Ltd. This action directly benefited Global Holdings Corp. (an inside creditor, as a parent company is an insider to its subsidiary) by reducing its liability under the guarantee. The bankruptcy trustee for Subsidiary Solutions Ltd. could use the Deprizio doctrine to recover the $1 million payment from Capital Bank, as it constituted a preferential transfer that indirectly benefited an insider within the one-year look-back period.