In Freund v. Nasonville Dairy, Inc. (2018AP1215), the Court of Appeals District III held that, in receivership proceedings, a preference is voidable under Wis. Stat. § 128.07(2) if an ordinarily prudent business person would have reasonable cause to believe 1) the transferor is insolvent and 2) the transfer would enable the recipient to obtain a greater percentage of debt than other creditors of the same class.

Wisconsin’s creditors’ action law (Wis. Stat. Ch. 128) encourages equal distribution of assets when an entity cannot fully pay its creditors. When an insolvent debtor obtains a court-appointed receiver to manage its assets, the receiver may recover certain preferential payments made by the debtor. A payment is preferential if it allows a creditor to obtain a greater percentage of its debt than any other creditor of the same class (§ 128.07(1)(a)). Section 128.07(2) deems preferential payments voidable if the payment was made within four months of the appointment of the receiver and the recipient has reasonable cause to believe the payment would effect a preference.

The issue in this case was whether § 128.07(2) requires the receiver to prove not only 1) that the recipient had knowledge the debtor was insolvent, but also 2) that the recipient had reasonable cause to believe they would obtain a greater share of their debt than other creditors of the same class. The court held that the statute does require proof of both elements to determine a payment voidable and recoverable by the receiver.

In this case, the court ordered Nasonville Dairy to return a voidable preferential payment to Liberty Milk Marketing Cooperative’s receiver. The court found that Nasonville 1) knew Liberty Milk was insolvent because Nasonville had been engaging in unusual business loan transactions with Liberty Milk that were increasing in size and frequency; and 2) had reasonable cause to believe that Nasonville would obtain a greater share of their debt than other creditors of the same class because Nasonville knew Liberty Milk was using the loaned funds to attempt to keep up with payments to its producers. Because the preferential payment to Nasonville met both elements of § 128.07(2), the payment was voidable, and the court ordered the payment returned to Liberty Milk’s receiver.