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Bankruptcy Court Grants Insurance Premium Financing Company's Motion for Summary Judgment on Claims of Preference Liability

On December 5, 2013, Bankruptcy Judge Peter J. Walsh granted summary judgment in favor of an insurance premium financing company relating to alleged preference liability asserted by Chapter 7 trustee.  In ruling in favor of the Defendant, the Court determined that the company's secured status was determined as of the date of the transfer of payments consistent with the holdings of the Bankruptcy Courts of the Southern District of New York and the Northern District of Illinois.  As a result, the value of the unearned premiums exceeded the outstanding balance, and the creditor was secured in the ninety days prior to the bankruptcy petition.  The company did not receive more than it would have in a hypothetical chapter 7 because each transfer in question resulted in the financing company being oversecured.  A copy of the opinion may be found here.  

The case is Forman v. IPFS Corporation of the South f/k/a Premium Financing Specialists of the South, Inc. (In re: Alabama Aircraft Industries, Inc.),,  Adv. Proc. No. 13-50727 (PJW).

Bankruptcy Court Upholds Ordinary Course of Business Defense In Preference Action

 On October 2, 2013, Judge Mary F. Walrath issued an opinion in the case of Burtch v. Texstars, Inc. (In re AE Liquidation, Inc.),  Adv. Proc. No. 10-55502.  A copy of the opinion may be found here.  The case involved a preference claim asserted by the Chapter 7 Trustee against Texstars, Inc (“Texstars”). 

The Trustee claimed that Texstars had received $781,702.61 in preferential transfers.  When the parties were unable to resolve the matter, the case went to trial.  During the pretrial conference, the Trustee conceded that Texstars had $164,654 in new value.  Accordingly, the issues at trial revolved around whether the remaining payments were made in the ordinary course of business.  In particular, the sole issue was whether the payments were made in the ordinary course of business as between the parties pursuant to Section 547(c)(2)(A) of the Bankruptcy Code.

The Court’s opinion examined each element of the course of business in turn.  First, the Court looked at the length of the relationship between the debtor and Texstars, and found that the two years the parties had engaged in business was sufficient to establish a course of dealing.  Second, the Court examined the similarity of the transfers during the pre-preference and preference period, and found the 10% to 15% difference in payment timing to be insufficient to take the payments outside the norm where payments were made between 1 and 456 days after invoice historically.  Moreover, the Court confirmed that the operative date for looking at timing was the “clear date” as Texstars proposed and not the “check cut date” as the Trustee had proposed.

The Court also examined the manner in which payments were tendered.  In this case, the very last payment received by Texstars was by wire transfer.  This differed from all other historical payments, all of which had been by check.  Nonetheless, the Court found this difference to be immaterial where Texstars had not requested to be paid by wire.  While there was some evidence that a few checks were overnighted to Texstars, the Court nonetheless found that based on the timing analysis, the fact that some checks were overnighted was still insufficient to render the payments outside the ordinary course of business.

The Trustee also argued that Texstars had engaged in undue collection efforts.  In the lead up to bankruptcy, the debtor had sent correspondence to Texstars that the debtor would be winding down, or reducing production of airplanes, and would not accept further deliveries of airplane parts from Texstars.  Texstars sent a letter to the debtor indicating that while Texstars would “rightsize” production to meet the reduced demand by the debtor, a restart of full production would require the debtor to bring all accounts and outstanding amounts current.  After examining this correspondence, and comparing it with a demand for payment letter issued by Texstars to the debtor in a prior year, the Court found that while the “rightsizing” letter did complain about the debtor not keeping its accounts current, it did not constitute a demand for payment.

In sum, the Court found no evidence that Texstars attempted to take advantage of the debtor’s deteriorating condition, and found that Texstars met its burden under 547(c)(2) of showing that the alleged preferential payments were made in the ordinary course of business between the parties.

Summary Judgment Denied On 547(c)(2) Ordinary Course Defense, But Fraudulent Conveyance Claims Dismissed With Leave To Amend

Wahoski v. Classic Packaging Co. (In re Pillowtex Corp.), Adv. Pro. No. 05-30182 (KJC) (April 14, 2010) (J. Carey)

John Wahoski, as liquidating trustee of Pillowtex Corporation (the “Liquidating Trustee”) sought to recover $61,761.32 in allegedly preferential payments (the “Transfers”) from Classic Packaging Company (“Classic”), which had sold plastic bags and packaging printed with the Pillowtex brand names to the Debtors prior to the petition date.  The Liquidating Trustee was also pursuing a claim to recover allegedly fraudulent transfers. 

Classic filed a motion for summary judgment with regard to the Transfers, arguing that the ordinary course of business defense applied to each Transfer and a motion to dismiss arguing that the complaint did not set forth fraudulent transfer claims with sufficient specificity.  For the reasons articulated below, the Court denied the motion for summary judgment and granted the motion to dismiss. More ›

Genuine Issues Of Material Fact Preclude Summary Judgment On Recharacterization And Equitable Subordination Claims.

Official Unsecured Creditors’ Committee of Broadstripe, LLC v. Capital Management, L.P. (In re Broadstripe, LLC), Case No. 09-10006 (CSS), Adv. No. 09-50966 (CSS) (September 2, 2010) (J. Sontchi)

On January 2, 2009 (the “Petition Date”), Broadstripe commenced its Chapter 11 cases by filing voluntary petitions for relief.  Sometime thereafter, the Official Unsecured Creditors’ Committee (“OUCC”) filed the instant Complaint in which it sought relief from Highland Capital (“Highland”) under twelve theories.  The Complaint centered around two events: (1) Highland’s objection to the Wave Sale, pursuant to which WaveDivision Holdings, LLC (“Wave”) committed to purchase two of Broadstripe’s three systems for $157 million; and (2) Highland’s alleged representation that it would finance the James Cable Asset Purchase Agreement (the “James Cable APA”) – pursuant to which Broadstripe, which represented in the James Cable APA that it had the financial capacity to consummate the sale, would purchase substantially all of James Cable’s assets for a purchase price to be determined later – and its subsequent refusal and failure to do so.

On September 2, 2010, the Court issued a memorandum opinion containing its findings of fact and conclusions of law with respect to its May 3, 2010 order denying Highland’s motion for summary judgment as to Counts One (recharacterization), Two (equitable subordination), Four (breach of duty of care), Five (breach of duty of loyalty), Six (aiding and abetting breach of duty of care), Seven (aiding and abetting breach of duty of loyalty), Eight (preference claims related to First Liens), Nine (preference claims related to Second Liens), Eleven (recovery of avoidance actions), and Twelve (disallowance of Highland’s claims pursuant to § 502(d)) and granting the motion with respect to Count Three (alter ego).  More ›

Successor Trustee Of A Trust Is Not A "Transferee" For Purposes Of 11 U.S.C. § 550

Mervyn’s LLC v. Lubert-Adler Group IV, LLC (In re Mervyn’s Holdings, LLC), Adv. Pro. No. 08-51402 (KG) (March 12, 2010) (K. Gross).

The Official Committee of Unsecured Creditors (the “Committee”) asserted a subsequent transferee claim pursuant to 11 U.S.C. § 550(a)(2) against Bank of America (in its capacity as successor trustee of a trust) to recover certain liens granted to the former trustee on transferred real estate. Due to numerous omissions in the original Complaint, which Bank of America addressed in a timely filed motion to dismiss, the Committee sought to amend its Complaint. Bank of America opposed the amendments, arguing that they would prove futile because Bank of America was not a “transferee” for purposes of 11 U.S.C. § 550.

 

The Court agreed with Bank of America, denying the Committee’s Motion to Amend as futile and granting Bank of America’s Motion to Dismiss. More ›

Valid Setoffs Are Unavoidable

Claybrook v. Metro Auto Xpress, LLC (In re American Remanufacturers, Inc.), Case No. 05-20022, 2008 WL 2909871 (Bankr. D. Del. July 25, 2008) (Walsh, J.)

In this Chapter 7 case, the American Remanufacturers, Inc.’s (the “Debtors”) business involved remanufacturing automobile parts for resale. Prior to and after the bankruptcy, the Tri-City purchased automotive parts produced by the Debtors and received credits for used parts it sold to the Debtors. The Chapter 7 Trustee commenced an adversary proceeding against Metro Auto Xpress trading as Tri-City Automotive Warehouse (“Tri-City”) alleging breach of contract, unjust enrichment, quantum meruit, and avoidance and turnover of estate property.  The Bankruptcy Court granted Tri-City’s motion to dismiss the avoidance and recovery claims. More ›

The District Court Holds That the Discounted Cash Flow Methodology May Be Used to Determine a Debtors' Solvency Even If There Is a Public Market for the Debtors' Stock.

In re American Classic Voyages, Co., 384 B.R. 62 (D. Del. 2008) (Judge Joseph J. Farnan, Jr.)

The Debtors appealed the bankruptcy court’s decision under the theory that a 2007 Third Circuit decision prohibited use of the discounted cash flow methodology when there was a public market for the Debtors’ stock. The District Court rejected Debtors’ argument, holding that the discounted cash flow methodology may be utilized. Further, the District Court determined there was no error in the bankruptcy court’s findings and analysis regarding the Debtors’ inability to prove its insolvency by a preponderance of the evidence.

 

More ›

The Scope of 11 U.S.C. § 546(e) Is Not Restricted To Publicly Traded Securities; Bad Faith or Intent to Defraud Must Be Demonstrated to Collapse Otherwise Independent Transactions

Plassein Int’l Corp. v. B.A. Capital Co. LP (In re Plassein Int’l Corp.), No. 03-14489, 2008 WL 2073495 (D. Del. May 15, 2008) (Judge Joseph J. Farnan, Jr.)

The Debtors’ Chapter 7 Trustee (the “Trustee”) commenced an adversary proceeding against B.A. Capital Co. LP alleging that a series of fraudulent transfers rendered the Debtors insolvent or with unreasonably small capital for its businesses. The Bankruptcy Court had dismissed the Complaint because the court concluded (i) the transfers were settlement payments, pursuant to 11 U.S.C. § 546(e) and thus, not subject to avoidance under 11 U.S.C. § 544(b); (ii) the Complaint failed to state a claim upon which relief could be granted because it failed to assert that Plassein or any of the related Debtors made the allegedly fraudulent transfers; and (iii) the allegations within the Complaint could not be collapsed because neither the intent to defraud nor bad faith was alleged. The District Court affirmed. More ›

Court Grants Motion to Dismiss Amended Avoidance Complaint, But Grants Plaintiff Leave to Amend

MAS Litigation Trust v. Plastech Engineered Prods. (In re Meridian Automotive Sys.-Composite Ops. Inc.), Adv. Pro. No. 07-51196 (KG), 2007 WL 4322527 (Bankr. D. Del. Dec. 5, 2007) (Judge Kevin Gross)

Plastech Engineered Products, Inc., a defendant in an avoidance action commenced by the MAS Litigation Trust, moved to dismiss the plaintiff’s amended complaint on the grounds that, inter alia, the new claims set forth in the amended complaint did not relate back to the original complaint.  In a matter related to one we discussed here last week, The United States Bankruptcy Court for the District of Delaware granted the motion, finding that the new claims did not seem to arise out of the same transactions described in the original complaint.  However, the Court granted the plaintiff twenty days to amend the complaint, if it could allege facts sufficient to show the additional claims related back to the original ones. More ›

Preference Defendant's "Insufficient" Affidavit as to Ordinary Business Terms Prompts Court to Grant of Summary Judgment in Favor of Plaintiff

In re Just for Feet, Inc., 375 B.R. 129 (Bankr D. Del. 2007) (Judge Judith K. Fitzgerald)

In these adversary proceedings in the United States Bankruptcy Court for the District of Delaware, the Court granted summary judgment in favor of the plaintiff, Charles R. Goldstein, Chapter 7 Trustee of the Estate of Just for Feet, Inc., with respect to the defendants’ ordinary course of business defense under 11 U.S.C. § 547(c)(2). The Court’s ruling was based on the defendants’ failure to prove the “ordinary business terms” element of the defense. Although the defendants’ produced an affidavit from their president in support of the industry terms prong of the ordinary course of business defense, the Court found the affidavit to be insufficient where it merely stated that the affiant was familiar with industry billing practices and that the transfers in question were made in a fashion consistent with those practices. The affidavit failed to identify what the practices were in the defendants’ industry and what the practices were between the debtor and the defendants. More ›