Faced with a result that would compel a business debtor’s creditors to make a significant repayment to the debtor’s bankruptcy estate as a result of a preference claim, the Bankruptcy Appellate Panel for the Eighth Circuit (BAP) recently reversed a Minnesota bankruptcy court’s calculation of creditors’ “new value” credits. In Stoebner v. San Diego Gas & Elec. Co. (In re LGI Energy Solutions), 2012 Bankr. LEXIS 5301 (B.A.P. 8th Cir. Nov. 14, 2012), the BAP affirmed the bankruptcy court’s holding that payments received by the creditors were preferences and that the transfers were on account of antecedent debts. The BAP’s reversal of the calculation of “new value” credits, however, provides potential relief for creditors subject to preference claims.
In the LGI case, LGI Energy Solutions, Inc. and LGI Data Solutions, LLC (collectively, the “Debtors”) entered into contracts with restaurants to collect and process their utility invoices. Once the Debtors had collected utility invoices, they would notify the restaurants of amounts due, and the restaurants would deposit funds into the Debtors’ bank accounts. Debtors, in turn, would pay utility providers such as the creditor-defendants San Diego Gas & Electric Company and Southern California Edison Company (collectively, the “Creditors”).
The Debtors each filed a petition in bankruptcy which was eventually consolidated into a single case. The bankruptcy trustee pursued the Creditors under a preference theory and demanded repayment of amounts paid by Debtors to the Creditors in the 90 days prior to the bankruptcy petition date.
The Minnesota bankruptcy court ruled that the transfers from the Debtors to the Creditors were preferential and that any “new value” credit that could be applied to offset the preference payments owed to the bankruptcy estate by the Creditors would be limited to the value of the utility services the Creditors provided to the Debtors’ customers (the restaurants) during the preference period.
In their appeal, the Creditors argued that the transfers at issue were not preferential because (i) the Creditors were not creditors of the Debtors, (ii) the transfers were not on account of antecedent debts under11 U.S.C. § 547, and (iii) the bankruptcy court erred in limiting the creditors’ new value credits under 11 U.S.C. § 547 to the value of the utility services they provided to the Debtors’ customers during the preference period.
Creditors Were Statutory “Creditors” of the Debtors
The Bankruptcy Code defines “creditor” as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” 11 U.S.C. § 101(10). A “claim” is a right to payment, whether or not reduced to judgment, and whether or not contingent or matured. 11 U.S.C. § 101(5).
The BAP affirmed the bankruptcy court holding that the Creditors were creditors of the Debtors under the Bankruptcy Code because they were (i) beneficiaries of a trust created between the Debtors and their customers, and (ii) the Creditors were contractual third party beneficiaries with direct claims against the Debtors.
Transfers to the Creditors Were in Payment of Antecedent Debts
The Creditors argued that the Debtors would not owe a debt to them until the Debtors breached their agreements with their restaurant customers by failing to make timely payment to the Creditors. Accordingly, their position was that amounts paid to them were not on account of an antecedent debt owed to them by the Debtors.
The BAP stated the key to determining whether a transfer is “for or on account of” a debt owed by a debtor is to consider whether a creditor would be able to assert a claim against the estate absent payment. As the Creditors had, in fact, filed a proof of claim for funds paid by the restaurants that the Debtors had not in turn paid to the Creditors, the BAP found no error in the bankruptcy court’s determination that the transfers at issue were made in payment of antecedent debts for purposes of 11 U.S.C. § 547(b)(2).
The Creditors New Value Credit was Improperly Determined
Section 11 U.S.C. 547(c)(4) of the Bankruptcy Code provides:
The trustee may not avoid under this section a transfer –
(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor –
A. not secured by an otherwise unavoidable security interest; and
B. on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor . . .
“New value” is defined as “money or money’s worth in goods, services, or new credit . . . including proceeds of such property.” 11 U.S.C. § 547(a)(2).
The Minnesota bankruptcy court had found that the plain language of § 547(c)(4) required that new value be supplied by the creditor that received the preferential transfer so as to constitute “new value” credit. Based on a strict reading of the statute, this conclusion was supportable.
The BAP, however, relied on the Eighth Circuit Court of Appeals case of Jones Truck Lines, Inc. v. Central States, Southeast and Southwest Areas Pension Fund in concluding that the new value credit should not be limited to value of the utility services provided to the restaurants, but should include a credit for all payments made by the restaurants to the Debtors subsequent to the preferential transfers. The BAP, dancing on a pinhead to some degree, stated:
[T]he holding in Jones Truck Lines can be harmonized with the statute by interpreting it as a recognition that in tripartite relationships where the transfer to a third party benefits the primary creditor, new value can come from that creditor, even if the third party is a creditor in its own right.
Jones Truck Lines, Inc. v. Central States, Southeast and Southwest Areas Pension Fund (In re: Jones Truck Lines, Inc.), 130 F.3rd 323 (8th Cir. 1997).
In other words, the Creditors were creditors of the Debtors because the payments made to them were intended to benefit the restaurants that were providing the new value. The result of finding the payee restaurants as creditors providing new value resulted in a significant decrease in liability of the Creditors. One of the Creditors, in fact, received a credit to the full extent of the payment transfers it received.
The take-away from the BAP’s decision is for practitioners to look beyond the new value provided by creditors from whom preferential transfers are sought. In select situations where there exists a tripartite relationship and another party that provides value to a debtor by agreement with the debtor and a payee creditor, additional relief to a creditor may be available.
About the Author:
Minnesota bankruptcy attorney James C. MacGillis represents bankruptcy trustees in preference and fraudulent conveyance actions, and has tried multiple cases on behalf of creditors seeking to avoid the discharge of debtors’ debts. Jim may be reached at 612.455.0503 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota bankruptcy litigation firm located in Minneapolis, Minnesota.