A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...
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.
To contact the reporter on this story: Diane Davis in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at mailto:%email@example.com
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)