IN RE: AE LIQUIDATION, INC.

Case Type:
Consumer
Case Status:
Affirmed
Citation:
17-1794 (3rd Circuit, May 04,2018) Not Published
Tag(s):
Ruling:
The Third Circuit Court of Appeals affirmed the bankruptcy court’s decision on remand, finding that: (i) the payments that Eclipse, the debtor-appellee, made to Prudential, the creditor-appellant, during the preference period were outside the ordinary course of business under Section 547(c)(2)(A); and (ii) the bankruptcy court did not err in reducing the amount of creditor-appellant’s new value under Section 547(c)(4).
Procedural context:
The debtor-appellee filed for Chapter 7 bankruptcy. The creditor-appellant asserted (i) a new value defense under Section 547(c)(4) for the 12 payments that the debtor made to the creditor during the preference period, and (ii) further argued that such payments were made in the ordinary course of business under Section 547(c)(2)(A). The bankruptcy court found that there was new value but rejected the assertion that the payments were made in the ordinary course of business. The creditor appealed. The district court affirmed on the ordinary course of business grounds, but remanded for a re-calculation of the value granted under the new value defense. On remand, the bankruptcy court reduced the value and the creditor appealed. On appeal, the Third Circuit affirmed on both grounds.
Facts:
Prior to the Chapter 7 bankruptcy, Prudential, creditor-appellant, provided relocation benefits to the employees of Eclipse, the debtor-appellee. Under the parties’ original agreement, Eclipse had pay for Prudential’s relocation services within 30 days of each invoice Prudential issued. Eventually, Eclipse fell behind on its payments, amassing $1.7 million in debt for accounts receivable that were over 60 days old. As a result, Prudential imposed certain payment measures upon Eclipse to reduce the accounts receivable, which were later dubbed the “First Payment Plan”. Under the First Payment Plan, Eclipse made weekly payments to Prudential coupled with a lump sum payment. However, once again, Eclipse fell behind on its payments and discharged approximately 650 employees whom submitted their pending relocation expenses to Prudential for reimbursement. Upon learning of this, among other things, Prudential placed Eclipse on a new payment plan, requiring a weekly payment of $50,000 and lump sum payment in full, which was later dubbed the “Second Payment Plan”. Shortly thereafter, Prudential amended the terms of the payment plan, threatening to terminate its services if Eclipse did not agree to its amended terms. Eclipse agreed to the Amended Payment Plan and made 12 payments under the Amended Plan 90 days before Eclipse filed for Chapter 7 bankruptcy. In bankruptcy court, Prudential asserted two defenses: (i) that the payments Eclipse made during the 90-day period were in the ordinary course of business and therefore, were not preferential transfers under 11 U.S.C. 547(c)(2); and (ii) that Prudential gave new value after the transfers for the benefit of Eclipse under Section 547(c)(4). The bankruptcy court held that Prudential gave new value in the amount of $128,379.40 but denied that the payments were in the ordinary course of business. Prudential appealed. The district court affirmed on the ordinary course of business issue but remanded on the new value issue, finding that “only services provided prior to the petition date should be included in the Section 547(c)(4) new value defense” and that the bankruptcy court failed to distinguish between pre-petition and post-petition payments when it evaluated Prudential’s new value defense. On remand, the bankruptcy court reduced the value of Prudential’s new value defense to $56,571.37. Prudential appealed, asserting that its post-default payment plans with Eclipse were in the ordinary course of business and that the bankruptcy court erred when it denied Prudential’s request to reopen the record for the recalculation of the new value defense. The Third Circuit affirmed, finding that: (i) Prudential failed to show that the payments Eclipse made during the 90-day period were in the ordinary course of business; and (ii) the bankruptcy court did not err in declining to reopen the record for its recalculation of the value for Prudential’s new value defense on remand.
Judge(s):
Jordan and Roth, Circuit Judges; and Mariani, District Judge

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