Friedman's Liquidating Trust v. Roth Staffing Companies LP

No. 13-1712 (3rd Cir. Oct. 17, 2013)
- Debtor’s post-petition payment pursuant to a first-day wage order does not affect the calculation of preference liability and the new value defense. - Statutory language is not clear but statutory context suggests that the petition date is the cutoff for the preference analysis: (1) the 90-day preference period in section 547 is prepetition, (2) the “hypothetical liquidation test” must be performed as of the petition date, (3) the statute of limitations for filing an action under section 547 begins running on the petition date, (4) extending the preference period beyond the petition date would be inconsistent with the “improvement-in-position” test set forth in section 547(c)(5), and (5) finding post-petition payments affect the preference analysis would suggest that post-petition extensions of new value would be available as a defense, and the vast majority of courts have rejected this interpretation of the defense. - Policies underlying the preference statute are furthered by limiting the preference calculation to the prepetition period. The two main policies underlying the statute are (1) to prevent dismemberment of the debtor during its descent into bankruptcy, and (2) equality of distribution among creditors. Both policies focus on payments to creditors in the prepetition period. In addition, the two policies underlying the new value defense – encouraging creditors to deal with troubled businesses and treating fairly creditors that have replenished the estate – support limiting the preference analysis to the prepetition period. Although this interpretation may result in some unequal treatment between creditors, the Bankruptcy Code’s focus is on the treatment of similarly situated creditors. Finally, extending Roth Staffing’s preference liability would defeat the purpose of the wage order, which is to ensure continued services by the debtor’s employees. - The Third Circuit’s ruling in In re Kiwi Air, 344 F.3d 311 (3d Cir. 2003) -- that post-petition assumption of an executory contract precludes a trustee from bringing a preference action to recover pre-petition payments made pursuant to that contract -- does not aid the liquidating trust. Rather, Kiwi shows that there are unique circumstances in which other provisions of the Bankruptcy Code dealing with post-petition transactions can affect the preference analysis. The assumption of a contract, like the wage order, involves a “unique set of rights” that warrants different preference treatment of creditors not similarly situated. Hence, Kiwi is more helpful to Roth Staffing than the liquidating trust.
Procedural context:
On appeal from district court ruling.
- Prepetition, Friedman’s Inc. made payments for personnel to appellee staffing services provider Roth Staffing totaling approximately $81,000. After the payments but before the filing of the petition, Roth Staffing provided services valued at approximately $100,000 to Friedman’s. The money owed for the services was unpaid as of the date of the petition. - After filing its bankruptcy petition, Friedman’s made additional payments to Roth Staffing of approximately $72,000 pursuant to a first-day wage order. Subsequently, a liquidating trust that was successor in interest to the debtor sought to avoid the $81,000 transfer as a preference. Roth Staffing asserted a new value defense for the $100,000 of unpaid prepetition services it provided the debtor. The liquidating trust responded that Roth Staffing’s new value defense should be reduced by the approximately $72,000 of post-petition payments. - The bankruptcy court disagreed with the liquidating trust, and held that because the debtor’s payments pursuant to the wage order were made post-petition, the payments did not reduce the new value defense. The district court affirmed.
Rendell, Jordan, Lipez

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