Campbell v. The Hanover Insurance Co. (In re ESA Environmental Specialists, Inc.)

Campbell v. Hanover Insurance Co. (In re ESA Environmental Specialists, Inc.), ___ F.3d ____, 2013 WL 765705 (4th Cir.) (2-1 decision).
Defendant's earmarking defense to preference claim rejected because the funds at issue were not used to pay an antecedent debt of the Debtor. Defendant's new value defense to preference claim upheld as the Debtor received new value in excess of the transfer and exchange was contemporaneous.
Procedural context:
Appeal from United States District Court for the Western District of North Carolina affirming Bankruptcy Court's grant of summary judgment for defendant in preference action. Factual findings reviewed for clear error, legal conclusions reviewed de novo. Judge Agee wrote the majority opinion, which was joined by Judge Wilkinson. Judge Traxler dissented on the new value issue, arguing that the property acquired (the contracts) were only a conditional promise to pay money in the future and could not support the new value defense.
ESA Environmental Specialists ("Debtor" or "ESA") bid on government contracts. ESA was required to obtain performance and payment bonds as part of those contracts. ESA's bonding company, Hannover Insurance, demanded additional collateral to issue bonds. As collateral, ESA obtained a letter of credit from a bank, which was in turn to be collateralized by $1.375 million in a CD. ESA borrowed money to fund the CD. Lender paid money to ESA, which then paid money to bank to be placed in CD. Within 90 days of those payments, ESA filed for Chapter 11. In Chapter 11, the contracts were sold to lender, but it did not perform work under the contracts and Hannover was required under the bonds to complete the projects. Case was converted to Chapter 7. Chapter 7 Trustee then commenced suit against Hannover alleging that it was an indirect beneficiary of ESA's transfer of the loan proceeds into the CD. Hannover raised two defenses: 1) The loan proceeds were earmarked specifically for payment to it, and; 2) ESA received new value in exchange for the loan proceeds.
Chief Judge Traxler, Circuit Judges Wilkinson and Agee

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