Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Sept. 15 — Debtor Eclipse Aviation Corporation's payments to Prudential Real Estate and Relocation Services, Inc. prior to filing bankruptcy were preferential transfers and not in the “ordinary course of business between two parties,” a district court in Delaware held.
Judge Leonard P. Stark of the U.S. District Court for the District of Delaware agreed with Chapter 7 trustee Jeoffrey L. Burtch that the bankruptcy court miscalculated Prudential's “new value” defense under Bankruptcy Code Section 547(c)(4), and remanded the case to determine the appropriate amount between pre- and post-petition payments for purposes of calculating the new value defense.
Under Section 547, a trustee can avoid certain pre-petition transfers of the debtor that are deemed preferential. In this case on appeal, it was undisputed that the transfers made were all preferences.
The Bankruptcy Code provides nine defenses that a transferee may raise to counteract liability for an otherwise avoidable preference. Two of those defenses include the “ordinary course of business” defense and the “new value” defense.
The district court also agreed with the trustee that the bankruptcy court abused its discretion by not awarding prejudgment interest to his judgment without a justification on the record. The court remanded the case so that the bankruptcy court can explain its reasoning for denying the trustee's request for prejudgment interest.
Prudential was engaged by the debtor to perform relocation services for its employees. Typically, the debtor would pay Prudential for services within 30 days of receiving an invoice. After a while, however, the debtor fell behind on payments, and Prudential put the debtor on “billing review.”
Subsequently, the debtor terminated 650 of its employees due to financial difficulties. The debtor then filed for bankruptcy relief.
In the 90 days prior to the petition date, the debtor had made 12 payments to Prudential totaling $781,702.
The Chapter 7 trustee then filed an adversary complaint against Prudential alleging that the transfers were recoverable preference transfers.
The bankruptcy court ruled in favor of the trustee for $653,323, which represented $781,702 of preferential transfers reduced by $128,379 of “new value” that Prudential had provided.
Prudential argued that the bankruptcy court erred by rejecting its defense that the debtor's transfers were not preferential because they occurred in the “ordinary course of business” between two parties under Section 547(c)(2).
“(1) the length of time the parties engaged in the type of dealing at issue; (2) whether the subject transfers were in an amount more than usually paid; (3) whether the payments at issue were tendered in a manner different from previous payments; (4) whether there appears to be an unusual action by the debtor or creditor to collect on or pay the debt; and (5) whether the creditor did anything to gain an advantage … in light of the debtor's deteriorating financial condition.”
The bankruptcy court correctly concluded that the change in payment timing was significant coupled with the fact that Prudential had “insisted on a quicker payment” schedule, the district court said. The change supported finding the transfers were not made in the ordinary course of business, the court said. The 40 percent increase in payment timing was “significant,” the court said.
The trustee cross-appealed, alleging that the bankruptcy court miscalculated Prudential's “new value” defense. According to the trustee, the new services that Prudential provided after the debtor's petition date do not count towards this defense.
Following the Third Circuit in In re Friedman's Inc., 738 F.3d 547 (3d Cir. 2013), the district court concluded that the trustee is correct that only services provided prior to the petition date are included in the Section 547(c)(4) defense.
The trustee also contended that the bankruptcy court abused its discretion by not awarding prejudgment interest to the judgment without a justification on the record.
The district court agreed with the trustee, and remanded the case for the bankruptcy court to explain its reasoning for denying the trustee's request for prejudgment interest.
Michael Busenkell, Gellert Scali Busenkell & Brown, LLC, Wilmington, Del., represented appellants Prudential Real Estate & Relocation Services, Prudential Relocation Inc.; Robert W. Pedigo, Mary Claire McCudden, Paula C. Witherow, Cooch & Taylor, Wilmington, Del., represented appellee/trustee Jeoffrey L. Burtch.
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