Category Archives: Elements (11 U.S.C. § 547(b))

Delaware Bankruptcy Judge Addresses Issue of First Impression Regarding Section 547(b)(5): Must a Preference Defendant Be Secured on the Transfer Date or the Petition Date?

By Evan T. Miller, Esq.

In Stanziale v. Sprint Corp. (In re Simplexity, LLC), 578 B.R. 255 (Bankr. D. Del. 2017), Delaware Bankruptcy Judge Kevin Gross addressed an issue of first impression: which was the proper date for determining the secured status of a creditor in a preference dispute under 11 U.S.C. § 547(b)(5), the petition date or the transfer date?  Ultimately, Judge Gross decided that the petition date was most proper, at least with respect to creditors secured by a purchase money security interest (“PMSI”).  Nevertheless, this aspect of the analysis under section 547(b)(5) remains highly fact-specific.

Background

The Debtors, formerly independent online activators of mobile phones, filed for bankruptcy protection under Chapter 11 on March 16, 2014.  Prior to that time, the Debtors and Defendant were parties to an agreement that let the Debtors solicit and subscribe customers to Defendant; to that end, the Debtors could either purchase products from Defendant and resell them to customers, or sell products directly from Defendant’s inventory.  Defendant received a PMSI in products the Debtors purchased on credit and proceeds from the sale of such products.  Following conversion to Chapter 7, the Chapter 7 Trustee (the “Trustee”) initiated the instant adversary proceeding to recover these payments to Defendant; the parties’ motions for summary judgment ultimately followed, raising section 547(b)(5) and subsequent new value arguments.

Must a preference defendant be secured on the transfer date or the petition date for section 547(b)(5) purposes?

In light of the PMSI, Defendant argued that the Trustee could not satisfy his burden under section 547(b)(5)’s hypothetical liquidation test.  The Trustee first countered that the burden was not on him to do so in this instance; rather, Defendant had to prove it was truly secured given its reliance upon state law.  The Court rejected this reasoning based upon the plain language of section 547(g) (placing the burden on the Trustee to establish the elements under section 547(b)).

The Court next addressed the issue of first impression referenced above and incidentally, one that had created a split among courts which had considered it—is secured status assessed at the time of the transfer or the petition date?  Defendant argued that it was entirely secured, notwithstanding that the Debtors kept their funds in commingled accounts which were swept only a few days prepetition.  Further, Defendant argued that a Supreme Court decision which had determined the petition date to be the proper date of reference (Palmer Clay Products Co. v. Brown, 297 U.S. 227 (1936)) was misplaced in the context of a secured creditor, as that case had been dealing with an unsecured creditor.  Thus, with that in mind and in reliance upon a decision by Delaware Bankruptcy Judge Peter Walsh (Forman v. IPFS Corp. of the South (In re Alabama Aircraft Indus.), 2013 WL 6332688 (Bankr. D. Del. Dec. 5, 2013) (holding the transfer date to be the proper one for assessing preference liability of a creditor pursuant to an insurance premium financing agreement), Defendant argued that the transfer date controlled.

The Court disagreed, finding the fact-specific distinctions in Defendant’s “transfer date” cases and the instant case to be determinative; i.e., the Court distinguished between a PMSI case and cases dealing with premium financing arrangements or cases with liens of diminishing value.  This was so because a PMSI is a decidedly limited and better defined interest compared to a floating lien; moreover, the collateral at issue here (headsets and proceeds from selling the same) was unlikely to undergo stark changes in valuation.  Thus, while the Court envisioned a factual scenario that may warrant deviating from the petition date analysis, the instant case did not contain such facts.  The PMSI vs. floating lien distinction likewise underpinned the Court’s holding on the propriety of the Trustee’s tracing method—i.e., the “add-back” method, used for determining a defendant’s position on the petition date in a hypothetical liquidation.

Does an earlier-than-usual payment by a preference defendant to a debtor constitute subsequent new value?

The Court also ruled upon part of Defendant’s subsequent new value argument under section 547(c)(4).  Specifically, Defendant argued that a payment it made to the Debtors two days before the petition date qualified as subsequent new value, as it was commission money not yet owed to the Debtors under any of their agreements; ergo, it augmented the estate.  The Trustee opposed this defense on the grounds that it was a seemingly random payment made in Defendant’s capacity as a debtor, not a creditor, and that in any event, Defendant merely substituted one asset of the Debtor for another (i.e. an A/R for cash).  To the latter point, Defendant argued that the Trustee ignored the fact that Defendant would never have paid the A/R due to Defendant’s rights under various agreements and section 553 (setoff).

The Court agreed with Defendant, finding the issue centered around determining the purposes of Defendant’s payment.  To that end, Judge Gross found that the underlying agreements and the parties’ course of dealing demonstrated that Defendant’s commission payments to the Debtors were due at the end of the month, whereas the instant payment was made mid-month; as such, Defendant was not yet a debtor, nor were the Debtors creditors of Defendant.

Furthermore, the Court found that Defendant did not merely substitute Debtor’s A/R for cash.  For one thing, the commission payment was an (out of the ordinary) advance, not a regularly scheduled payment.  For another, the A/R would have been uncollectable for the reasons argued by Defendant.  At bottom, Judge Gross found Defendant’s commission payment personified section 547(c)(4)—a “beacon of light in a dark time” that decisively enhanced the Debtors’ estate.

Conclusion

The Court’s opinion in Simplexity sheds light on how the analysis under section 547(b)(5) changes where a creditor is secured.  Particularly, the Court makes clear that the type of security interest at play will likely impact the Court’s analysis.  In that sense, the Court seemingly harmonized its opinion here with earlier, seemingly conflicting decisions, including those from the same jurisdiction.  Perhaps the greater point, however, is that these analyses will remain highly contextual determinations.

The opinion also provides support for interesting subsequent new value arguments, and incidentally, strategic considerations for defendants dealing bilaterally (i.e., relationships where the defendant may be acting as both a creditor and a debtor at times) with companies on the verge of bankruptcy.  Specifically, making a payment earlier than contractually obligated can inure to Defendant’s benefit, as the advance potentially prevents the creation of an A/R—and concurrently may prevent the bankrupt company becoming a creditor of the defendant.  This argument becomes stronger if the defendant likewise maintains setoff rights, as Defendant did here.

A copy of the Opinion can be found here..

Advertisements

D.C. Bankruptcy Court Finds Pillowtex Analysis Not Required for Retaining Section 327(e) Professional

By Evan T. Miller, Esq.

In a helpful reminder for professionals regarding the nuances of 11 U.S.C. § 327 and its intersection with preference law, the Bankruptcy Court for the District of Columbia recently overruled a creditor’s objection to a debtor’s application (the “Application”) to retain special counsel under section 327(e).  The objection, filed in In re Core Communications, Inc., Case No. 17-00258, was based in part upon the fact that the debtor and proposed counsel (the “Professional”) had not provided a “Pillowtex Analysis” in support of the Application – i.e., an analysis disclosing any debtor payments made to the Professional in the 90 days prior to the Petition Date (the “Preference Period”).  The creditor maintained this assertion, notwithstanding the fact that the Professional had waived any claims it had against the estate.

The Court rejected the creditor’s argument.  Judge S. Martin Teel began with a recitation of professional retention guidelines and jurisprudence, noting that “[a] court authorizing the retention of professionals under 11 U.S.C. § 327(a) must determine whether the professional is disinterested, including whether the professional is the recipient of a preferential transfer.” In re Core Commc’ns, Inc., 2017 WL 5151674, at *3 (Bankr. D.D.C. Nov. 5, 2017) (citing In re Pillowtex, Inc., 304 F.3d 246 (3d Cir. 2002)).  While the Application did not disclose whether the debtor made any payments to the Professional during the Preference Period, the Court found the Application was made pursuant to 11 U.S.C. § 327(e), and as such, “adverse interests that would disqualify an attorney from being retained under § 327(a) are distinguishable from adverse interests that would disqualify an attorney from being retained under § 327(e).” Id. (quoting Giuliano v. Young (In re RIH Acquisitions NJ, LLC), 551 B.R. 563, 569 (Bankr. D. N.J. 2016).  Under section 327(e), “the attorney being retained only needs to be disinterested with respect to the matter on which such attorney is to be employed.” Id. (internal quotations omitted).  As a result, there was no need to “disclose the existence of any preferences incident to the Application.Id.

A copy of the Opinion can be found here.

 

 

 

Are Customer Funds Held by Debtor Logistics Company Property of the Debtor’s Estate? Chief Judge Ferguson (D.N.J.) Addresses Multiple Avoidance Issues in TransVantage Solutions

By Evan T. Miller, Esq.

Bankruptcies involving logistics management companies inherently involve unique issues with respect to avoidance actions, be it the tripartite nature of the transactions (customer/debtor/carrier), the contentious dispute over what constitutes property of the estate, and so on. Continue reading

Third Circuit Addresses Issue of First Impression in Finding the Payee Irrelevant for Purposes of Applying Section 547(c)(9)’s Aggregate Value Threshold in In re Net Pay Solutions, Inc.

By Evan T. Miller, Esq.

The United States Court of Appeals for the Third Circuit recently addressed an issue of first impression – whether a Chapter 7 trustee (the “Trustee”) could avoid multiple small-dollar payments to the Internal Revenue Service (“IRS”) that the debtor (the “Debtor”) had made on behalf of multiple clients, on the basis that all of the payments were made to the same payee. Continue reading

Revised on Remand: Judge Walrath Reduces Defendant’s New Value Defense and Awards the Trustee Prejudgment Interest in Remanded Proceeding

By Gregory J. Flasser, Esq.

On March 29, 2016, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued an opinion reducing the new value defense of Prudential Real Estate and Relocation Services, Inc., and Prudential Relocation, Inc. (collectively, “Prudential”) and awarding the chapter 7 trustee (the “Trustee”) prejudgment interest in Prudential Real Estate v. Burtch (In re AE Liquidation, Inc.), Adv. Proc. No. 10-55543 (MFW), 2016 WL 1238848 (Bankr. D. Del. Mar. 29, 2016). Continue reading

Is Denial of Receipt Enough to Contest Service Under 12(b)(5)? Must a Preference Complaint Allege More Than Recipient, Transfer Date, and Amount to Satisfy Twombly/Iqbal? Judge Sontchi Clarifies Delaware’s View

By Evan T. Miller, Esq.

Proper service and the degree of complaint detail are recurring issues in avoidance action jurisprudence.  In the United States Bankruptcy Court for the District of Delaware, at least, Judge Sontchi has provided guidance on both issues in an opinion that should be equally instructive to plaintiffs and defendants. Continue reading

Chief Judge Stark (D. Del.) Issues a Pair of Opinions Addressing New Value, Ordinary Course of Business, and Earmarking Defenses (Part II)

By Evan T. Miller, Esq.

“Payment Plan” Payments Not Necessarily Ordinary

The second of Chief Judge Stark’s two September opinions is Prudential Real Estate v. Burtch (In re AE Liquidation, Inc.), 2015 WL 5301553 (D. Del. Sept. 10, 2015). Continue reading