Stoebner v. San Diego Gas & Electric Co. (In re LGI Energy Solutions, Inc.)

Stoebner v. San Diego Gas & Electric Co. (In re LGI Energy Solutions, Inc.), No. 12-3899 & No. 12-4011 (8th Cir. March 20, 2014)
The Eighth Circuit affirmed the BAP's allowance of new value as a preference offset, but reduced the amount of preference liability based on an incorrect calculation by the BAP. In an issue of first impression, the Eighth Circuit ruled that in three-party relationships where the debtor's preferential transfer to a third party benefits the debtor's primary creditor, new value to the debtor can come from the primary creditor, even if the third party is a creditor in its own right and is the only defendant against whom the debtor has asserted a claim of preference liability. The Eighth Circuit addressed its concern that the trustee's claims against the utilities were apparently inequitable, given that recovery of the payments from the utilities to the debtors would unjustly enrich the bankruptcy estates, given that the transferred funds had originated from the energy end-users, and the end-users would not receive the avoided funds, but would become liable to the utilities for the utilities. The court concluded that its reading of 547(c)(4), i.e., allowing the utilities to assert the defense of the new value provided to the end users would limit the inequity. The court distinguished contrary precedence as non-controlling. The Eighth Circuit questioned whether the utilities were creditors of debtors. Because the utilities did not raise the issue on appeal, the court did not rule on the issue. However, it ruled that the BAP's determination that the utilities were creditors of debtors should not be considered Eighth Circuit precedent. One of the utilities (SCE) asserted that the BAP incorrectly double counted two payments from debtor in computing one of the utilities' preference liability. Trustee agreed, as did the Eight Circuit, which directed the BAP to enter a modified judgment reducing one of the utilities' preference liabilities by the double counted amount.
Procedural context:
Chapter 7 trustee sued utilities for avoidance of preferences. Utilities asserted new value defenses. In separate decisions, bankruptcy court allowed new value offsets, reducing the utilities' liability, but entered judgment against the utilities. Utilities separately appealed, and BAP consolidated the appeals. BAP reversed bankruptcy court in part, increasing the amount of the utilities' new value offsets, and reducing the trustee's judgments. Trustee appealed, and one of the utilities cross appealed, asserting that the BAP had incorrectly double counted two transfers as preferences.
Debtors performed bill payment services for its clients, large utility consumers such as the restaurant chains operated by Buffets, Inc. ("Buffets"), and Wendy's International, Inc. ("Wendy's") During the 90 days prior to bankruptcy, debtors transferred approximately $75k to one utility ("SDGE") and approximately $185k to another ("SCE"). Utilities continually provided services to Buffets and Wendy's. Utilities did not have contracts with debtors, their contracts were with Buffets and Wendy's. Utilities sent invoices to debtors. Debtors sent a spreadsheet to Buffets and Wendy's summarizing obligation. Buffets and Wendy's sent payment to debtors. Debtors deposited funds in debtors' comingled bank accounts. Debtors then issued checks on their own accounts to utilities. Trustee sought to avoid debtors' transfers to utilities as preferences. Defendant utilities asserted new value as setoff affirmative defenses. Utilities asserted that providing energy to Buffets and Wendy's after receipt of transfers from debtors constituted new value. Buffets and Wendy's sent $297k to debtors for payment of post-transfer energy received, but debtors did not pay utilities. Trustee asserted that because utilities did not provide new value to debtors, providing it only to Buffets and Wendy's, utilities should not be entitled to any offset for new value.
Loken, Gruender, and Shepherd

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