Opinion
Case No. 301-12036.
December 16, 2004
MEMORANDUM
This preference action seeks recovery of $3.7 million in payments to the Debtors' primary supplier during the 90 days before bankruptcy. The Defendant moves for summary judgment on six grounds: 1) The subsequent new value defense in 11 U.S.C. § 547(c)(4) reduces its maximum preference liability to $59,328.78; 2) Defendant's status as the only "critical vendor" in post petition orders insulates the Defendant from this preference action; 3) the Confirmed Plan released this Defendant as a member of the Official Creditors' Committee from any avoidance exposure; 4) the Confirmed Plan failed to preserve preference actions under 11 U.S.C. § 1123(b)(3); 5) inadequate disclosure in the Confirmed Plan and the Disclosure Statement judicially estops Plaintiff from pursuit of preferences; and 6) resolution of Debtors' objection to Defendant's administrative expense request precludes this adversary proceeding.
To prevail under § 547(c)(4) a preference defendant must demonstrate that the debtor did not pay for new value with an otherwise unavoidable transfer. Post petition transfers to or from the estate are not considered in § 547(c)(4) analysis. Because this Defendant raises other § 547(c) defenses that are not ready for adjudication, the § 547(c)(4) defense cannot be resolved on summary judgment. The Critical Vendor Order did not exempt the Defendant from suit under § 547. The Confirmed Plan did not release Defendant, as a member of the Creditors' Committee, from this preference action. The Confirmed Plan did preserve preference actions for post confirmation prosecution. The Confirmed Plan and the Disclosure Statement are not inconsistent with this preference action for purposes of judicial estoppel. Debtors' objection to Defendant's administrative expense request does not preclude preference recovery. Accordingly, Defendant's Motion for Summary Judgment is denied.
I. FACTS
Phoenix Restaurant Group, Inc. ("PRG"), a Georgia corporation, resulted from a 1996 merger between Denwest Restaurant Corp. and American Family Restaurants. The principal business of PRG was operating Denny's family style restaurants pursuant to franchise agreements with Advantica Restaurant Group, Inc. (and its predecessors and successors). Throughout the 1990's PRG acquired Denny's locations, and expanded into other restaurant concepts, including Black-Eyed Pea restaurants. In September 2001, PRG operated 96 Denny's restaurants and 91 Black-Eyed Pea restaurants primarily in Florida, Texas, Arizona, Colorado and Oklahoma.
On October 18, 2001, an involuntary Chapter 7 proceeding was filed against PRG in the Middle District of Florida. The involuntary case was transferred to the Middle District of Tennessee by order entered October 29, 2001. On October 31, 2001, PRG moved to convert the involuntary Chapter 7 case to a voluntary Chapter 11. Also on October 31, 2001, five affiliates of PRG — Denam, Inc., Phoenix Foods, Inc., Black-Eyed Pea U.S.A., Inc., Prufrock Restaurants of Kansas, Inc. and Texas BEP, L.P. — filed voluntary Chapter 11 cases in the Middle District of Tennessee. An order converting PRG's case to Chapter 11 was entered November 6, 2001.
On November 13, 2001, the Office of the United States Trustee appointed a consolidated unsecured creditors committee (Creditors' Committee) pursuant to 11 U.S.C. § 1102(a). Proficient was one of five creditors named to the Creditors' Committee.
On November 16, 2001, the Debtors-in-Possession moved for authority to make "payments on account of prebankruptcy claims of the Debtors' critical food supply vendor Proficient Foods Company" ("Critical Vendor Motion"). Proficient was described as the only source approved by the Denny's franchisor for proprietary food-stuffs and restaurant supplies. Weekly inventory purchases from Proficient exceeded $250,000. Debtors stated that Proficient had threatened to stop providing goods unless payments were made on account of its prepetiton indebtedness of approximately $7 million. Debtors represented that continued operation of their Denny's restaurants would be cost prohibitive without Proficient.
The Critical Vendor Motion proposed wire transfers to Proficient of $63,750 each day through December 28, 2001. This amount would first pay all current, post petition claims (estimated at about $50,000 a day), with the balance (estimated at $13,750 per day or $68,750 per week) applied to Proficient's prepetition claim. In any week in which purchases did not reach $250,000, the difference would be applied to Proficient's prepetition claim. If weekly purchases exceeded $250,000, Debtors were obligated to pay Proficient the excess to net $68,750 for the week toward prepetition claims. After December 28, 2001, weekly payment toward prepetition debt was reduced to $50,000. Additionally, Debtors would make a lump sum payment of $122,500 at approval of the motion, and $250,000 on December 3, 2001, both applied to Proficient's prepetition claim. The $122,500 payment was earmarked for Proficient's claims under PACA and PASA. All other payments were to be applied first to any claims Proficient had for goods subject to reclamation (approximately $540,000). Total critical vendor payments on account of Proficient's prepetition claims were to be $900,000. In return, Proficient would supply Debtors through March 30, 2002.
The $900,000 was a set amount, that would be granted superpriority status in the event of a sale of the Debtors' assets, junior only to debtor-in-possession financing.
The Critical Vendor Motion was noticed to creditors with opportunity for objection and a hearing. The United States Trustee, the Creditors' Committee and LH Leasing Company filed objections to the Critical Vendor Motion, but the parties announced a global agreement prior to the hearing. An order granting the motion ("Critical Vendor Order) was entered on December 12, 2001.
Nothing in this memorandum should be misconstrued to express an opinion with respect to the propriety of this or any other "Critical Vendor" motion in the event of an unresolved objection.
On April 29, 2002, Debtors filed a Joint Liquidating Plan of Reorganization and Disclosure Statement. On October 23, 2002, the First Amended Joint Liquidating Plan was confirmed (the "Confirmed Plan"). The Confirmed Plan substantively consolidated the Debtors, and appointed PENTA Advisory Services as Plan Administrator.
The Confirmed Plan defined "Bankruptcy Causes of Action" as:
All claims, actions, causes of action . . . arising under the Bankruptcy Code (including, but not limited to, all claims and any avoidance, recovery, subordination or other actions against insiders and/or any other Entities under sections 506, 510, 543, 544, 545, 547, 548, 549, 500 [sic], 551, and 553 of the Bankruptcy Code or otherwise) of the Debtors, the Debtors in Possession, and/or the Post Confirmation Estate (including, but not limited to, those actions identified on Exhibits A, B, and C attached hereto to the extent they constitute Bankruptcy Causes of Action as defined herein) that . . . may be instituted by the Plan Administrator[.]
(Confirmed Plan ¶ 1.15, at 2.)
Article XVI of the Confirmed Plan provided:
16.6 Preservation of Rights of Action:
* * * *
16.6.2 In addition, potential Bankruptcy Causes of Action which may be pursued by the Debtors prior to the effective Date and by the Plan Administrator, on behalf of the Post-Confirmation Estate after the Effective Date, are identified on Exhibits A, B, and C attached hereto and also include, without limitation, the following to the extent they are not set forth on the attached Exhibits:
* * * *
Except for the express waiver of certain claims in the Plan, any and all actual or potential avoidance claims pursuant to any applicable section of the Bankruptcy Code, including, without limitation section 544, 545, 547, 548, 549, 550, 551, 553(b) and/or 724(a) of the Bankruptcy Code, arising from any transaction involving or concerning the Debtors.
* * * *
Certain potential Causes of Action as to which the Debtors are continuing their investigation of the complete nature, factual basis, and/or legal basis are identified on Exhibit C attached hereto and incorporated herein by reference. The Debtors specifically reserve any Causes of Action that may arise from the factual circumstances described on Exhibit C, in addition to any Causes of Action generally described herein.
* * * *
Except as otherwise provided in the Plan or in any contract, instrument, release, indenture or other agreement entered into in connection with the Plan, in accordance with section 1123(b)(3) of the Bankruptcy Code, any claims, rights and Causes of Action that the respective Debtors, or the Post-Confirmation Estate may hold against any Entity, including but not limited to those Bankruptcy Causes of Action . . . shall vest in the Post-Confirmation Estate, and the Plan Administrator, on behalf of the Post-Confirmation Estate, shall retain and may exclusively enforce, as the authorized representative of the Post-Confirmation Estate, any and all such . . . Causes of Action.
(Confirmed Plan ¶ 16.6.2, at 22-3. See also Disclosure Statement ¶ V.E.8, at 62.)
"Causes of Action" is defined in the Plan to include Bankruptcy Causes of Action. Plan at ¶ 1.22.
In support of this provision of the Confirmed Plan, the Disclosure Statement provided under the heading "Preservation of Causes of Action:"
The Debtors are currently investigating whether to pursue potential Causes of Action against other Entities. . . . The investigation has not been completed to date, and under the Plan, the Plan Administrator, . . ., retains all rights on behalf of the Debtors and the Post-Confirmation Estate to commence and pursue any and all Bankruptcy Causes of Action . . . discovered in such an investigation to the extent the Plan Administrator, on behalf of the Post-Confirmation Estate, deems appropriate in his reasonable business judgment.
* * * *
b. In addition, potential Bankruptcy Causes of Action which may be pursued by the Debtors prior to the Effective Date and by the Plan Administrator, on behalf of the Post-Confirmation Estate after the Effective Date, also include, without limitation the following:
* * * *
Except for the express waiver of certain claims in the Plan, any and all actual or potential avoidance claims pursuant to any applicable section of the Bankruptcy Code, including, without limitation sections 544, 545, 547, 548, 549, 550, 551, 553(b) and/or 724(a) of the Bankruptcy Code, arising from any transaction involving or concerning the Debtors.
(Disclosure Statement ¶ V.E.8, at 59-60.)
The Exhibit A referenced in Confirmed Plan ¶ 16.6.2 reasserts the reservation of preference actions "arising from any transaction involving or concerning the Debtors relating to the Persons and Entities set forth in Exhibit A-1 and the specific payments received by such Persons or Entities during the statutory preference period, as identified on Exhibit A-1." (Pl.'s Amd. Resp. Ex. 1.)
The liquidation analysis attached to the Debtors' Disclosure Statement included a line item under "Non-cash Assets" for "Preference Actions," and assigned a value between $0 and $100,000.00 to such actions. The Disclosure Statement noted: "It is impossible to predict with any degree of certainly the range of recoveries available to General Unsecured Claimants due to the speculative nature of the Bankruptcy Causes of Action. . . . Accordingly, recoveries on account of Allowed Unsecured Claims may realistically be as low as zero." (Disclosure Statement ¶ V.C. 9.c, at 47.) The Disclosure Statement further explained that proceeds from Bankruptcy Causes of Action "are speculative and uncertain and therefore no value has been assigned to such recoveries. The Debtors and the Post-Confirmation Estate do not intend, and it should not be assumed that because any existing or potential Bankruptcy Causes of Action . . . have not yet been pursued by the Debtors or are not set forth herein, that any such Bankruptcy Causes of action . . . have been waived." (Disclosure Statement ¶ V.E. 8.b, at 61.)
The Disclosure Statement explained that the Plan Administrator would be granted authority to pursue Causes of Action, which included Bankruptcy Causes of Action, for the benefit of the estate. (Disclosure Statement ¶ 11.A (Description of Property to be Distributed under the Plan), ¶ V.E.3 (Provisions Governing Plan Implementation; Powers and Duties of the Plan Administrator).)
On October 31, 2003, the Plan Administrator filed over 200 adversary proceedings to avoid preferential transfers under 11 U.S.C. § 547(b). This action against Proficient seeks avoidance and recovery of payments totaling $3,707,311.97 during the 90 days before bankruptcy.
For reasons not revealed, the complaints, briefs and other documents filed by the Plan Administrator in these adversary proceedings are not consistent with respect to whether the Plaintiff is a singular entity — the Plan Administrator — or several entities — the Plan Administrator, the Reorganized Debtors and the Post Confirmation Estate.
Proficient pleaded many defenses including the statutory defenses in 11 U.S.C. § 547(c)(1) (contemporaneous exchange), (c)(2) (ordinary course of business) and (c)(4) (subsequent new value). Proficient moved for summary judgment.
II. Analysis
A. Summary Judgment Standards
Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Booker v. Brown Williamson Tobacco Co., Inc., 879 F.2d 1304, 1310 (6th Cir. 1989). The court is not to "`weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.'" Browning v. Levy, 283 F.3d 761, 769 (6th Cir. 2002) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986)). "A genuine issue for trial exists only when there is sufficient `evidence on which the jury could reasonably find for the plaintiff." Id. (quoting Liberty Lobby, 477 U.S. at 252).
The moving party bears the initial burden of showing that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. at 325. The burden then shifts to the nonmoving party to produce evidence that would support a finding in its favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-52, 106 S. Ct. 2505, 2511-12, 91 L. Ed. 2d 202 (1986). All inferences are drawn in the light most favorable to the nonmoving party. Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 442 (6th Cir. 2003) (citations omitted). The party opposing a motion for summary judgment, however, "may not rest upon mere allegations or denials of his pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial.' The party opposing the motion must `do more than simply show that there is some metaphysical doubt as to the material facts.'" In re Tri-City Turf Club, Inc., 323 F.3d at 442-43 (internal citations and quotations omitted). See also Liberty Lobby, Inc., 477 U.S. at 248; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). "if after reviewing the record as a whole a rational factfinder could not find for the nonmoving party, summary judgment is appropriate.'" Braithwaite v. Timken Co., 258 F.3d 488, 493 (6th Cir. 2001) (quoting Ercegovich v. Goodyear Tire Rubber Co., 154 F.3d 344, 349 (6th Cir. 1998)).
B. Res Judicata and Judicial Estoppel
Citing Browning v. Levy, 283 F.3d 761 (6th Cir. 2002), Proficient contends that the Confirmed Plan and Disclosure Statement failed to preserve preference actions from the res judicata effect of confirmation. Proficient argues that Debtors' failure to expressly name Proficient as a potential preference defendant before confirmation precludes this complaint. That the Debtors' "telephone-book style appendages attached to the First Amended Plan" named Proficient as an entity that received payments during the preference period, does not change this result because Proficient was (informed of but) not personally served with those attachments.
Plaintiff responds that the preference retention provisions of the Confirmed Plan and Disclosure Statement satisfy this court's recent decision in Elk Horn Coal Co., LLC v. Conveyor Manufacturing Supply, Inc. (In re Pen Holdings, Inc.), 316 B.R. 495 (Bankr. M.D. Tenn. 2004).
As explained in Pen Holdings, confirmation of a Chapter 11 plan can be preclusive of trustee or debtor-in-possession avoidance actions on principles of res judicata. Preclusion can be prevented by providing in the plan for the preservation of avoidance actions. This power of preservation is codified in 11 U.S.C. § 1123(b)(3). The issue addressed in Pen Holdings and raised here is whether the language of the Disclosure Statement and Confirmed Plan is sufficient to overcome the res judicata effect of confirmation with respect to this preference action.
11 U.S.C. § 1123(b)(3) provides:
(b) Subject to subsection (a) of this section, a plan may — * * * *
(3) provide for —
(A) the settlement or adjustment of any claim or interest belonging to the debtor to the estate; or
(B) the retention and enforcement by the debtor, by the trustee, or by a representatives of the estate appointed for such purpose, of any such claim or interest.
In Pen Holdings, after reviewing the history of 11 U.S.C. § 1123(b)(3), this court concluded that "the notice at issue in § 1123(b)(3) is not notice to potential defendants, it is notice to creditors generally that there are assets yet to be liquidated that are being preserved for prosecution by the reorganized debtor or its designee." Pen Holdings, 316 B.R. at 500-01. Considering Sixth Circuit precedent, in the context of the history of § 1123(b)(3) and acknowledging conflicting lower court decisions, this court determined that the Sixth Circuit has
not establish[ed] a general rule that naming each defendant or stating the factual basis for each cause of action are the only ways to preserve a cause of action at confirmation of a Chapter 11 plan. Read in the context of its history, § 1123(b)(3) protects the estate from loss of potential assets. It is not designed to protect defendants from unexpected lawsuits. The words sufficient to satisfy § 1123(b)(3) must be measured in the context of each case and the particular claims at issue: Did the reservation allow creditors to identify and evaluate the assets potentially available for distribution?
Id. at 504.
Application of this standard yields a clearer case than Pen Holdings. As detailed above, the Confirmed Plan, Disclosure Statement and exhibits repeatedly reserve Bankruptcy Causes of Action, defined to include preference actions under § 547. The references to preference litigation are not concealed as retention of jurisdiction provisions, are not ambiguously worded and specifically reference § 1123(b)(3) of the Code. That preference actions would be assets of the Post-Confirmation Estate, to be investigated and prosecuted by the Plan Administrator, is plainly set forth in the Confirmed Plan and Disclosure Statement. Potential preference recovery — admittedly speculative — was included in the liquidation analysis.
Debtors went further than a general reservation of preference actions and attached exhibits to the Disclosure Statement and Confirmed Plan that listed, to the extent then possible, creditors to whom payments were made during the preference period. Proficient was named in the exhibits to the Confirmed Plan. Creditors were able to identify and evaluate the estate's assets — including preference actions under § 547 — through the disclosures and reservations contained in the Confirmed Plan and Disclosure Statement.
Proficient's complaint that it was not personally served with the exhibits to the Disclosure Statement and Confirmed Plan misses the point. At one level, personal service of the lengthy list of potential preference recipients is not required by this court's analysis of § 1123(b)(3) in Pen Holdings. Service of such a list would certainly be a strong component of an effort to preserve preference actions, but hardly a mandatory element.
More basically, Proficient does not deny it was properly served with the Disclosure Statement and Confirmed Plan that referenced the exhibits available for delivery on request or for immediate viewing at the bankruptcy court. Proficient was a self-described major player in these bankruptcy cases — one of five members of the Creditors' Committee and the only "Critical Vendor," with a $7 million prepetition claim. There is no contention that Proficient was without knowledge of the exhibits to the Disclosure Statement and Confirmed Plan or that it lacked opportunity to look for itself therein.
Judicial estoppel does not add muscle to Proficient's preclusion argument. "The doctrine of judicial estoppel bars a party from (1) asserting a position that is contrary to one that the party has asserted under oath in a prior proceeding, where (2) the prior court adopted the contrary position `either as a preliminary matter or as part of a final disposition.'" Browning v. Levy, 283 F.3d at 775 (quoting Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218 (6th Cir. 1990)). The doctrine "is utilized in order to preserve `the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship.'" Id. at 776 (quoting Teledyne Indus., Inc. v. NLRB, 911 F.2d at 1218).
Defendant's judicial estoppel argument mischaracterizes the multiple references to preference actions reproduced above from the Confirmed Plan and Disclosure Statement as a "generic reservation" that is not consistent with pursuit of this action against Proficient. As explained above, the Confirmed Plan and Disclosure Statement quite adequately identify and preserve preference actions for investigation and litigation by the Plan Administrator after confirmation. Even considered alone, the Disclosure Statement clearly stated that the Debtors had not completed the preference analysis, and that the Plan Administrator would evaluate prepetition transfers with authority to pursue preference actions after confirmation. This adversary proceeding is not inconsistent with the Disclosure Statement; it is the incamation of exactly what the Confirmed Plan and Disclosure Statement foretold. Defendant's judicial estoppel argument fails on summary judgment because there is no inconsistent preconfirmation position on which to bottom the theory.
C. 11 U.S.C. § 547(c)(4) Defense
The Bankruptcy Code empowers the trustee in bankruptcy to recover for the benefit of all creditors transfers within 90-days of bankruptcy that have the effect of preferring one creditor over others. 11 U.S.C. §§ 547 550. The trustee bears the burden of proof on all elements of a preference listed in § 547(b). 11 U.S.C. § 547(g); Corzin v. Decker, Vonau, Sybert Lackey, Co., L.P.A. (In re Simms Constr. Servs. Co.), 311 B.R. 479, 484 (B.A.P. 6th Cir. 2004). The preference defendant has eight statutory defenses described in § 547(c), and bears the burden of proof on each defense. 11 U.S.C. § 547(g); see Chrysler Credit Corp. v. Hall, 312 B.R. 797, 803 (E.D. Va. 2004).
Section 547(c)(4) is short-handedly referred to as the subsequent advance exception to preference recovery. Waldschmidt v. Ranier (In re Fulghum Constr. Corp.), 706 F.2d 171, 172 (6th Cir.), cert. denied, 464 U.S. 935, 104 S. Ct. 342, 343, 78 L.Ed. 2d 310 (1983). This statutory defense provides:
(c) 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[.]
The logic of this defense is that an otherwise preferential transfer is not avoidable to the extent that, after the transfer, the creditor gave the debtor "new value" in a form that replenished the debtor. See, e.g., Williams v. Agama Sys., Inc. (In re Micro Innovations Corp.), 185 F.3d 329, 336 (5th Cir. 1999). Replenishing the debtor for purposes of the § 547(c)(4) defense has several faceis. Fundamentally, the debtor must receive "new value" defined by § 547(a)(2) as follows:
(a) In this section —
* * * *
(2) "new value" means money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such properly, but does not include an obligation substituted for an existing obligation.
New value given after a preferential transfer helps the defendant only if it is not secured by an unavoidable security interest. 11 U.S.C. § 547(c)(4)(A). See In re Micro Innovations Corp., 185 F.3d at 334-35. This makes sense because the debtor is not enhanced if the new value given after the preferential transfer is subject to liens and would not balance the loss caused by the preferential transfer.
Also, the new value must not have been paid for by the debtor with a transfer that cannot itself be avoided. 11 U.S.C. § 547(c)(4)(B). In other words, the new value must remain an enhancement of the debtor notwithstanding transfers (typically payments) to the creditor by the debtor after the new value was given. A payment by the debtor to the creditor after the creditor gave new value does not unravel the defense if the payment can itself be recovered as an avoidable transfer.
The policy behind § 547(c)(4) is two fold. One: It encourages creditors to continue to do business with troubled businesses, which may allow some to avoid bankruptcy altogether. See, e.g., In re Micro Innovations Corp., 185 F.3d at 332; Fitzpatrick v. Rockwood Water Wastewater Natural Gas Sys. (In re Tennessee Valley Steel Corp.), 201 B.R. 927, 939 (Bankr. E.D. Tenn. 1996) (citations omitted). Two: "A subsequent advance is excepted because a creditor who contributes new value in return for payments from the incipient bankruptcy . . . should not later be deemed to have depleted the bankruptcy estate to the disadvantage of other creditors." Charisma Inv. Co. v. Airport Sys., Inc. (In re Jet Florida Sys., Inc.), 841 F.2d 1082, 1083 (11th Cir. 1988) (per curiam). See also Chrysler Credit Corp. v. Hall, 312 B.R. at 803 ("It is grounded in `the principle that the transfer of new value to the debtor will offset the payments, and the debtor's estate will not be depleted to the detriment of other creditors.'") (quoting Lubman v. C.A. Guard Masonry Contractor, Inc. (In re Gem Constr. Corp. of Va.), 262 B.R. 638, 645 (Bankr. E.D. Va. 2000)). New value that replenishes the debtor balances the preferential effect of a prior transfer from the debtor. See, e.g., Waldschmidt v. Mid-State Homes, Inc. (In re Pitman), 843 F.2d 235, 241-42 (6th Cir. 1988).
This Motion for Summary Judgment raises two issues under § 547(c)(4)(B): 1) Whether transfers to or from the Debtors-in-Possession after the bankruptcy petitions affect the subsequent new value defense; and 2) application of the "otherwise unavoidable" element of § 547(c)(4)(B). Proficient calculates that the § 547(c)(4) defense reduces the maximum preference recovery from $3.7 million to $59,328.78. In support, Proficient offers the affidavit of Gordon Eatherly.
Plaintiff responds that Proficient's methodology gives credit for "new value" without regard to whether that new value "remained unpaid;" or alternatively, Proficient fails to disqualify new value that was subsequently paid for by Debtors with a transfer that is not "otherwise avoidable" as required by § 547(c)(4)(B). Plaintiff invites the adoption of cases that read § 547(c)(4) to require (only) that new value remain unpaid, regardless of the avoidability of any transfer that paid for new value. If the court rejects this approach, Plaintiff asserts that Proficient nonetheless neglected to account for "otherwise unavoidable" transfers in two ways: 1) Post petition payments under the Critical Vendor Order are unavoidable payments on account of new value; and 2) other defenses with respect to avoidance of prepetition transfers must be determined before consideration of the § 547(c)(4) defense. At oral argument, Plaintiff seemed to advocate that any payment rendered unavoidable by subsection (c)(4) should disqualify new value paid for by that unavoidable transfer. In other words, Plaintiff would apply subsection (c)(4) within itself.
1. Post Petition Transfers
The plain language of § 547 closes the preference window at the petition, limiting the § 547(c)(4) defense to new value supplied and payments made before the debtor crosses into bankruptcy. As explained by the Eighth Circuit in Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1284 (8th Cir. 1988), post petition goods or services provided to a debtor in possession do not qualify as "new value" for purposes of § 547(c)(4): "`for the benefit of the debtor * * *". . . impl[ies] that subsequent advances of new value are only those given pre-petition, because any post-petition advances are given to the debtor's estate, not to the debtor." (emphasis in original). Accord Field v. Maryland Motor Truck Assoc. Workers Compensation Self-Insurance Group (In re George Transfer, Inc.), 259 B.R. 89, 96 (Bankr. D. Md. 2001) ("Unfortunately for the defendant, its refund to the debtors does not qualify under Section 547(c)(4) as `new value' because it was made postpetition. Indeed, this Court has found no case decided under Section 547(c)(4) that permitted a transferee to successfully defend an action for the recovery of a preference based upon a subsequent advance that was made postpetition.") (citing Schwinn Plan Comm. v. AFS Cycle Co. Ltd. (In re Schwinn Bicycle Co.), 205 B.R. 557 (Bankr. N.D. Ill. 1997); Clark v. Frank B. Hall Co. of Colo. (In re Sharoff Food Serv., Inc.), 179 B.R. 669, 678 (Bankr. D. Colo. 1995) ("[T]he specific language `to or for the benefit of the debtor' [indicates] that the subsequent advances of new value are only those given prepetition, because any post-petition advances are given to the debtor's estate, not the debtor."); Wallach v. Vulcan Steam Forging (In re D.J. Mgmt. Group), 161 B.R. 5 (Bankr. W.D.N.Y. 1993); Wolinsky v. Central Vermont Teachers Credit Union (In re Ford), 98 B.R. 669 (Bankr. D. Vt. 1989); Warsco v. Ryan (In re Richards), 92 B.R. 369 (Bankr. N.D. Ind. 1988); Cullen v. TDK Elec. Corp. (In re Antinarelli Enter., Inc.), 76 B.R. 247 (Bankr. D. Mass. 1987); Official Labor Creditors Comm. v. Jet Florida Sys., Inc. (In re Jet Florida Sys., Inc.), 80 B.R. 544 (S.D. Fla. 1987)).
Section 547(c)(4)(B) focuses on actions of the debtor: "on account of which new value the debtor did not make an otherwise unavoidable transfer. . . ." Throughout § 547, "the debtor" refers to the prepetition entity that transferred property or engaged in business with the preference defendant. Had Congress intended § 547(c)(4)(B) to account for payments made post petition, the section would have included something like "an otherwise unavoidable transfer of an interest of the estate in property to or for the benefit of such creditor." Instead, Congress disqualified only new value paid for by "the debtor" with an otherwise unavoidable transfer. 11 U.S.C. § 547(c)(4)(B).
Closing § 547(c)(4) analyses at the petition is consistent with other Code remedies that only apply post petition. Creditors who continue to supply the debtor-in-possession with goods and services post petition are provided special priority for payment from the bankruptcy estate. See 11 U.S.C. §§ 364 503(b); see also Wolinsky v. Central Vermont Teachers Credit Union (In re Ford), 98 B.R. 669, 683 (Bankr. D. Vt. 1989) ("Once the bankruptcy petition is filed . . . other sections of the Code provide protection to parties advancing credit. For example, § 364 provides mechanisms for secured and unsecured lending to the debtor-in-possession. The problem with allowing post-petition advances to freely offset against otherwise avoidable preferences is that no mutuality of debt exists and control of the finances of the estate is taken out of the hands of the Court and fiduciaries for the estate and placed in the hands of a single creditor who is hostile to the overall interests of the estate and its creditors. `To permit such offsets notwithstanding possible prejudice to other creditors would ignore the orderly mechanism established by Congress to protect all interested parties concerned.'") (quoting Jet Florida Sys., Inc. v. Eastern Air Lines, Inc. (In re Jet Florida Sys., Inc.), 59 B.R. 886, 890 (Bankr. S.D. Fla. 1986)). A post petition transfer that is not authorized by the court or by the Code can be recovered by the trustee or debtor-in-possession under § 549: "the trustee may avoid a transfer of property of the estate that occurs after the commencement of the case[.]" 11 U.S.C. § 549(a)(1). Notice that § 549(a)(1) refers to a transfer of property of the estate, and not to a payment made by the debtor.
At its heart, the preference power in § 547 levels the playing field for creditors that do business with a debtor during the slide into bankruptcy. See Union Bank v. Wolas, 502 U.S. 151, 160-61, 112 S. Ct. 527, 533, 116 L. Ed. 2d 514 (1991) ("`The purpose of the preference section is two-fold. First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during his slide into bankruptcy. The protection thus afforded the debtor often enables him to work his way out of a difficult financial situation through cooperation with all of his creditors. Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that received a greater payment than others of his class is required to disgorge so that all may share equally. The operation of the preference section to deter `the race of diligence' of creditors to dismember the debtor before bankruptcy furthers the second goal of the preference section — that of equality of distribution.'") (quoting H.R. Rep. No. 595, 95th Cong., 177-78, reprinted in 1978 U.S.C.C.A.N. 5787, 6137, 6138); Gregory v. Community Credit Co. (In re Biggers), 248 B.R. 873, 879 (Bankr. M.D. Tenn. 2000) (accord). These policy considerations change when the petition is filed and the debtor becomes a bankruptcy estate under the administration of the bankruptcy court and subject to the scrutiny of creditors, committees, the U.S. Trustee, etc.
The Sixth Circuit has not decided whether post petition transactions between a creditor and a Chapter 11 debtor-in-possession affect the subsequent new value defense in § 547(c)(4). The Sixth Circuit has held that post petition debt does not affect the hypothetical liquidation value of the estate for purposes of § 547(b)(5).
In Neuger v. United States (In re Tenna Corp.), 801 F.2d 819 (6th Cir. 1986), the IRS received a large income tax payment two months before Tenna Corporation filed Chapter 11. During the Chapter 11 case, the corporation as debtor-in-possession borrowed several million dollars secured by superpriority liens. The Chapter 11 failed and converted to Chapter 7. The Chapter 7 trustee sued the IRS to recover the prepetition payment as a preference.
One element of the trustee's preference case was 11 U.S.C. § 547(b)(5) — the so-called "greater percentage test":
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —
* * * *
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
If calculated at the date of Tenna's Chapter 11 petition, the IRS's priority in a hypothetical Chapter 7 case would have produced a greater dividend than if the hypothetical liquidation was timed as of trial in the adversary proceeding — after the run up of debt and superpriority liens during the Chapter 11 case. The bankruptcy and district courts bought the trustee's argument for hypothetical liquidation at the date of trial. The Sixth Circuit disagreed.
Citing Palmer Clay Products Co. v. Brown, 297 U.S. 227, 56 S.Ct. 450, 80 L.Ed. 655 (1936), the Sixth Circuit held that the testing date for § 547(b)(5) purposes was the date of the bankruptcy petition. In support of this conclusion, the Sixth Circuit focused on congressional concern for equality of distribution among creditors and made these broader observations about post petition debt in preference litigation:
[I]n the context of § 547(b), Congress' stated concern is reflected only for those creditors with claims against the debtor's estate on the date the petition is filed.
. . . Although the Code gives the bankruptcy court power to grant super-priority status to banks which extend credit to debtors during their reorganization efforts under 11 U.S.C. § 364, we can find nothing in the Code indicating that post-petition debt incurred during a reorganization should be included in the § 547 determination.
Tenna, 801 F.2d at 823.
The subsequent new value defense in § 547(c)(4) was not at issue in Tenna. But the Sixth Circuit found good policy reasons to isolate post petition debt from preference analysis under § 547(b), and Tenna supports the similar conclusion here with respect to § 547(c)(4).
Plaintiff cites Ringel Valuation Services, Inc. v. Shamrock Foods Co. (In re Arizona Fast Foods, LLC), 299 B.R. 589 (Bankr. D. Ariz. 2003), for the proposition that post petition payments pursuant to the Critical Vendor Order on account of PACA and reclamation claims are "otherwise unavoidable" transfers that reduce the new value defense available to Proficient. In Arizona Fast Foods, a restaurant operator not unlike these Debtors, stipulated that it owed a supplier (Shamrock) a PACA claim for perishable agricultural commodities; a reclamation claim for goods delivered within 10 days before bankruptcy; and an ordinary unsecured claim. The confirmed plan paid Shamrock's PACA and reclamation claims in full. Months later, the liquidating trustee objected to Shamrock's remaining unsecured claim alleging that Shamrock had received preferential transfers during the 90 days before bankruptcy.
See Perishable Agricultural Commodities Act, 7 U.S.C. § 499a-499s.
See 11 U.S.C. § 546(c), that provides:
(c) Except as provided in subsection (d) of this section, the rights and powers of a trustee under sections 544(a), 545, 547, and 549 of this title are subject to any statutory of common-law right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods in the debtor has received such goods while insolvent, but —
(1) such a seller may not reclaim any such goods unless such seller demands in writing reclamation of such goods —
(A) before 10 days after receipt of such goods by the debtor; or
(B) If such 10-day period expires after the commencement of the case, before 20 days after receipt of such goods by the debtor; and
(2) the court may deny reclamation to a seller with such a right of reclamation that has made such a demand only if the court —
(A) grants the claim of such a seller priority as a claim of a kind specified in section 503(b) of this title; or
(B) secures such claim by a lien.
There was also a secured claim not relevant here.
See discussion below of 11 U.S.C. § 502(d) ("[T]he court shall disallow any claim of any entity from which property is recoverable . . . or that is a transferee of a transfer avoidable under section . . . 547 . . . unless such entity or transferee has paid the amount or turned over any such property for which such entity or transferee is liable.").
The trustee moved for summary judgment that Shamrock could not use goods shipped to the debtor prepetition that formed the predicate for its (fully-paid) PACA and reclamation claims as "new value" for § 547(c) purposes. Citing In re Fresh Approach, Inc., 51 B.R. 412 (Bankr. N.D. Tex. 1985), the bankruptcy court held that neither the PACA goods nor the proceeds of PACA goods figured in § 547 analysis because of the trust created by PACA.
The Courts have universally recognized that any property held by a debtor in a statutory PACA Trust is excluded from the bankruptcy estate. . . . Since PACA trust funds are not property of the estate, and the debtor never obtains a beneficial interest in the produce sold to it. PACA trust fund creditor has an otherwise unanticipated preference defense. . . . As the Debtor received payments for the produce, it was required to hold the funds in trust for Shamrock. These funds never became property of the bankruptcy estate, and the Debtor, or the Liquidating Trustee, as the Debtor's successor, was required to turn these funds over to Shamrock. This has happened. However, since these trust funds have no effect on the bankruptcy estate (they never became part of the estate), they cannot be used by the Liquidating Trustee or Shamrock in any preference analysis.
* * * *
The PACA claims, for the reasons stated above, must be excluded in considering whether Shamrock has a `new value' defense.
Arizona Fast Foods, 299 B.R. at 596-97 (internal citations omitted).
With respect to Shamrock's reclamation claim, the bankruptcy court stated this additional conclusion:
Shamrock was paid in full by Stipulation on its reclamation claim, so the `new value' has become unavoidable . . . and does not replenish the estate to protect earlier transactions from constituting preferences. . . . [A]ny reclamation goods shipped pre-petition, which have now been paid in full, may not be used as a part of the `new value' defense.
Arizona Fast Foods, 299 B.R. at 597.
Arizona Fast Foods seems correct with respect to PACA claims: Goods shipped to the debtor in statutory trust from the time of delivery are not new value for § 547(c)(4) purposes because the debtor is not enhanced as contemplated by § 547(a)(2); proceeds from the sale of goods held in a PACA trust do not become property of the debtor (or property of the bankruptcy estate) and thus, when paid to the PACA claimant there is no transfer of property of the debtor for § 547 purposes.
See In re Fresh Approach, 51 B.R. at 419-22.
Here, the Critical Vendor Motion and Order acknowledged a PACA claim in Proficient and resolved that claim with post petition cash payments. On summary judgment, neither party has accounted for the delivery of PACA goods or the payment of PACA funds consistent with the trust fund logic in Arizona Fast Foods. Arizona Fast Foods reaches the right result with respect to the effect of reclamation on the new value defense, but slightly different logic explains that outcome. As a matter of statutory interpretation, post petition payment through the confirmed plan in Arizona Fast Foods, or, as here, by the Debtors-in-Possession, was not a transfer by the debtor for § 547(c)(4)(B) purposes. Accordingly, the post petition payment cannot be an "otherwise unavoidable" transfer by the debtor that defeats the prepetition new value for which it paid.
However, goods shipped on the eve of bankruptcy that are subject to reclamation are not the same "money or money's worth" as goods shipped free of the seller's strings. See 11 U.S.C. § 547(a)(2). In the same sense that goods subject to a PACA trust do not enhance the debtor because the value of those goods is held in trust for the growers and shippers, goods subject to reclamation do not enhance the debtor to the extent the value of those goods can be reclaimed.
Here, the new value given by Proficient must be reduced to reflect its reclamation claim — not because it received an otherwise unavoidable payment after the petition — but because the new value given to the Debtors prepetition must be discounted to reflect the right of reclamation preserved by § 546(c). Put another way, the Plaintiff cannot use post petition payments under the Critical Vendor Order as "otherwise unavoidable" transfers that deplete the prepetition new value given by Proficient; but Proficient in its calculations failed to adjust new value during the preference period to reflect goods subject to reclamation.
2. "Otherwise Unavoidable"
Proper accounting for new value for § 547(c)(4) purposes is thoroughly explained by Judge Waldron in Roberds, Inc. v. Broyhill Furniture (In re Roberds, Inc.), 315 B.R. 443 (Bankr. S.D. Ohio 2004). Judge Waldron convincingly discredits the "remains unpaid" test applied by some courts in favor of the plain meaning of the statute, double negatives notwithstanding. The statute requires that "the new value defense [be] permitted unless the debtor repays the new value by a transfer which is otherwise unavoidable." Id. at 471. Accord Jones Truck Lines, Inc. v. Central States (In re Jones Truck Lines, Inc.), 130 F.3d 323 (8th Cir. 1997); Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228 (9th Cir. 1995); Laker v. Vallette ( In re Toyota of Jefferson, Inc.), 14 F.3d 1088 (5th Cir. 1994); Chrysler Credit Corp. v. Hall, 312 B.R. 979 (E.D. Va. 2004); Field v. Maryland Motor Truck Assoc. Workers Compensation Self-Insurance Group ( In re George Transfer, Inc.), 259 B.R. 89, 95 (Bankr. D. Md. 2001); Pay `N Pak Stores, Inc. v. Slide-Co. ( In re PNP Holdings Corp.), 167 B.R. 619 (Bankr. W.D. Wash. 1994); Boyd v. The Water Doctor ( In re Check Reporting Servs., Inc.), 140 B.R. 425 (Bankr. W.D. Mich. 1992) (the requirement that new value remain unpaid is an "`inaccurate and confusing paraphrase of a clearly stated statutory purpose'") (quoting Valley Candle Mfg. Co. v. Stonitsch ( In re Isis Foods, Inc.), 39 B.R. 645, 653 (W.D. Mo. 1984)).
See Kroh Bros. Dev. Co. v. Continental Constr. Eng'rs, Inc. (In re Kroh Bros. Dev. Co.), 930 F.2d 648, 653 (8th Cir. 1991) (creditor who has been paid for the new value by the debtor may not assert a new value defense); New York City Shoes, Inc. v. Bentley Int'l, Inc. (In re New York City Shoes, Inc.), 880 F.2d 679, 680 (3d Cir. 1989) ("the debtor must not have fully compensated the creditor for the `new value' as of the date that it filed its bankruptcy petition"); In re Jet Florida Sys., Inc., 841 F.2d at 1083 (same); In re Prescott, 805 F.2d 719, 731 (7th Cir. 1986) (same).
Had Congress intended "otherwise unavoidable" to mean that new value must remain unpaid, it would simply have said so. Indeed, § 60(c) of the Bankruptcy Act, the predecessor to § 547(c)(4), specifically provided that only "the amount of such new credit remaining unpaid at the time of the adjudication in bankruptcy may be set off against the amount which would otherwise be recoverable" from the creditor as a preference. 11 U.S.C. § 96(c) (repealed). The word "unpaid" is conspicuously absent from § 547(c)(4). Reinserting a word from the prior statute that Congress omitted is not supported by ordinary canons of statutory construction. See Chrysler Credit Corp. v. Hall, 312 B.R. at 805. See generally Robert H. Bowmar, The New Value Exception to the Trustee's Preference Avoidance Power: Getting the Computations Straight, 69 AM. BANKR. L.J. 65, 73-4 (1995).
"Otherwise" in the phrase "otherwise unavoidable" is also not ambiguous. Otherwise means "in a different way or manner." WEBSTER'S THIRD NEW INT'L DICTIONARY 1598 (1981). "Otherwise" in § 547(c)(4) means a transfer unavoidable for reasons other than § 547(c)(4). The Plaintiff's contrary calculations in this adversary proceeding are not consistent with the language or logic of § 547(c)(4). As Professor Countryman explained:
If the debtor has made payments for goods or services that the creditor supplied on unsecured credit after an earlier preference, and if these subsequent payments are themselves voidable as preferences (or on any other ground), then under section 547(c)(4)(B) the creditor should be able to invoke those unsecured credit extensions as a defense to the recovery of the earlier voidable preference. On the other hand, the debtor's subsequent payments might not be voidable on any other ground and not voidable under section 547, because the goods and services were given C.O.D. rather than on a credit, or because the creditor has a defense under section 547(c)(1), (2), or (3). In this situation, the creditor may keep his payments but has no section 547(c)(4) defense to the trustee's action to recover the earlier preference. In either event, the creditor gets credit only once for goods and services later supplied.
Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 VAND. L.REV. 713, 788 (1985) (emphasis added and footnotes omitted). See also Robert H. Bowmar, The New Value Exception to the Trustee's Preference Avoidance Power: Getting the Computations Straight, 69 AM. BANKR. L.J. 65, 76 (1995) ("A payment by the debtor made subsequent to a particular extension of new value does not diminish the new value unless the payment is not avoidable on any basis other than the (c)(4) exception itself. . . . It is only if the payment is unavoidable because of the applicability of one of the other exceptions in subsection (c) or because of the applicability of some other Code provision, that the payment should be applied to reduce the new value,") (footnotes omitted).
That "the debtor did not make an otherwise unavoidable transfer" to the creditor on account of the new value is a predicate to the subsequent new value defense; "it requires the court to analyze other available defenses to paid new value first[.]" In re Roberds, Inc., 315 B.R. at 473 (emphasis added). In other words, application of § 547(c)(4) "requires prior determination of whether the transfer is protected under other portions of Code § 547." In re George Transfer, Inc., 259 B.R. 89 at 95 (emphasis added).
Proficient has asserted defenses under § 547 (c)(1) (contemporaneous exchange) and under § 547(c)(2) (ordinary course of business). Proficient's motion for summary judgment with respect to § 547(c)(4) fails to account for payments by the Debtors that may be "otherwise unavoidable" because of these other defenses. Until the other § 547(c) defenses are adjudicated, the math necessary to do the temporally sensitive calculation in § 547(c)(4) cannot be performed. D. Release Under the Confirmed Plan
The Confirmed Plan provides:
18.13 Exculpation; Indemnification
(a) The Creditors' Committee: From and after the Effective Date, the Committee and its members . . . shall be and hereby are fully exculpated by all Persons and Entities, including, without limitation, holders of Claims and other parties in interest, from any and all claims, causes of action, and other assertions of liability except for their own gross negligence or ultra vires acts arising out of the discharge of the powers and duties conferred upon the Committee by the Bankruptcy Code or any order of the Bankruptcy Court. No holder of a Claim or other party in interest will have or pursue any claim or cause of action against the Committee.
(Confirmed Plan ¶ 18.13(1), at 33.)
Proficient characterizes this provision as a general release that extends to this preference action. Proficient reads the paragraph to say that Creditors' Committee members received a waiver of any claim arising out of any order in these bankruptcy cases. This preference action "would not exist if there had not been an Order for Relief, [therefore] it must `arise out of' the Order for Relief . . . [and] this Preference Action fits squarely within the types of claims that are released by the Committee's General Release[.]" (Def. Mem. of Law in Sup. at 19.)
Proficient's strained interpretation is just the sort of mischief the United States Trustee predicted in In re WCI Cable, Inc., 282 B.R. 457, 475 (Bankr. D. Or. 2002), when the United States Trustee objected to a similar provision as a "gratuitous provision that should be rejected to the extent that it could be interpreted as enhancing liability protections for members of the Creditors Committee beyond the immunity for official acts of creditors' committees implicit in § 1103(c)."
The court in WCI Cable allowed the provision finding that it simply stated the standard for immunity of creditors' committee members in performing their official functions under the Bankruptcy Code.
This preference action does not fall within the plain words of paragraph 18.13 and Proficient's expansive interpretation is not reasonable. This preference action is not the "discharge of . . . powers and duties" by the Official Creditors' Committee. The Plaintiff in this adversary proceeding is the Plan Administrator. The Creditors' Committee participated in the confirmation process that preserved this preference action for prosecution by the Plan Administrator. Paragraph 18.13 might exculpate and indemnify Proficient for its role in confirmation of the plan. That protection doesn't morph into a defense to Proficient's individual liability for avoidable prepetition transfers. Even if the Bankruptcy Code conferred on the Creditors' Committee the power to bring preference actions, this Confirmed Plan vested the investigation and prosecution of preference actions in the Plan Administrator, not in the Creditors' Committee. Reading a release of this preserved cause of action into the general exculpation of Creditors' Committee members is inconsistent with the specific language of the Confirmed Plan and Disclosure Statement.
This is a sometimes debated proposition. See, e.g., Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 220 F.3d 548 (3d Cir. 2003) (en banc) (derivative standing available to committee to pursue fraudulent conveyance action); Canadian Pacific Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re The Gibson Group, Inc.), 66 F.3d 1436 (6th Cir. 1995) (creditor or creditors' committee may have derivative standing to initiate avoidance actions when certain requirements are satisfied); Jefferson County Bd. of County Comm'rs v. Voinovich (In re The V Cos.), 292 B.R. 290 (B.A.P. 6th Cir. 2003) (derivative standing to pursue avoidance actions available).
Consistent with the whole of the Confirmed Plan, there is a reasonable interpretation of ¶ 18.13: to afford members of the Creditors' Committee protection from liability for actions pursuant to the statutory powers and duties of committees in 11 U.S.C. § 1103 or as may have been ordered by the court. See Philip v. L.F. Rothschild Holdings, Inc. (In re L.F. Rothschild Holdings, Inc.), 163 B.R. 45, 47 (S.D.N.Y. 1994) ("[I]n its capacity as a member of the Committee, [the member] has a right to limited immunity from suit. `The Bankruptcy Code `contemplates a significant and central role for committees in the scheme of a business reorganization." This broad scope of authority is set forth in section 1103(c)(3) of the Code, which provides that official committees are empowered to `participate in the formulation of a plan, advise those represented by such committee of such committee's determination as to any plan formulated,. . . .' This implies both a fiduciary duty to committee constituents, and a grant of limited immunity to committee members. Nevertheless, `any such immunity must be limited to actions taken within the scope of the committee's authority as conferred by statute or the court and may not extend to `willful misconduct' of the committee or its members.'") (internal citations omitted). See also In re Transit Group, Inc., 286 B.R. 811, 819 (Bankr. M.D. Fla. 2002) (efficacy of broad exculpation provisions has been questioned). The exculpation provision shielded Proficient from liability arising from the discharge of its duties as a member of the Creditors' Committee; no general release was contemplated with respect to Proficient's liability in a preserved cause of action that would be prosecuted after confirmation by the Plan Administrator.
E. Critical Vendor Order
The flip side of Plaintiff's argument that post petition payments under the Critical Vendor Order should disqualify prepetition new value is Proficient's argument that the Critical Vendor Order insulates it all together from preference liability. Proficient states: "[A]s a matter of law, it is inconsistent to pay down Proficient's pre-petition claim . . . pursuant to the Critical Vendor Order, as a means to ensure Proficient provides post-petition goods and services to the Debtors, but then later seek to recover other pre-petition payments of the same kind as a preference, thereby running up Proficient's prepetition claim and thereby increase [ sic] Proficient's losses. . . . [A]fter entry of the Critical Vendor Order, Proficient was no longer in the same class as other unsecured creditors. . . . [T]he decision to pay a creditor in exchange for forced performance benefitting the estate binds the trustee to the choice made and prevents the `mutually exclusive' remedy of preference avoidance." (Def. Mem. of Law in Sup. at 11-13.) In support of this position, Proficient cites In re Superior Toy Mfg. Co., 78 F.3d 1169 (7th Cir. 1996).
In Superior Toy, after conversion to Chapter 7, a preference action was filed to recover prepetition royalties paid by the debtor to a licensor. The license agreement had been assumed by the Chapter 11 debtor in possession, prior to conversion. The licensor argued that assumption of the license removed prepetition contract payments from the grasp of § 547. The Seventh Circuit agreed. Assumption of the license under § 365 required payment of all contract amounts — the Bankruptcy Code required that all pre- and post petition defaults be cured at assumption. The Seventh Circuit explained:
If Congress had intended to deprive contracting parties of monies they received prepetition, why would Congress require all default be cured prior to assumption. Serendipity would determine whether a contracting party is subject to a preference suit. We believe Congress passed § 365 to insure that a contracting party is made whole before a court can force the part to continue performing with a bankrupt debtor. Permitting a preference suit after an assumption order would undermine that purpose. . . . The congressional intent behind § 547 is consistent with this result. By retaining the monies paid to him prepetition, a party to an assumed contract does not receive more than other similarly situated creditors. Until the assumption decision is made, the "situation" of a party to an executory contract remains undetermined. As previously discussed, an assumption order effectively gives the contracting party a secured interest in the monies owed him. From the moment the assumption order is entered, the contracting party's interest is necessarily distinct from the interests of unsecured creditors.
Superior Toy, 78 F.3d at 1174.
This case is fundamentally different than Superior Toy. There is no statute that required the Critical Vendor payments on account of prepetition debt or that compelled Proficient to accept performance by the Debtors-in-Possession. Section 365 required the licensor to accept the debtor's performance in Superior Toy once the debtor paid the royalties due before assumption. Proficient had a choice to deal or not with the Debtors-in-Possession. Here, there was no contract or lease assumed and no statutory protection enveloped Proficient's receipt of prepetition payments. The Critical Vendor Motion specifically stated that nothing contained therein would be deemed an assumption of any contract or agreement between the Debtors and Proficient. (Critical Vendor Motion at 9.)
In exchange for on-going business paid for with daily wire transfers, and payment of $900,000 of prepetition debt, Proficient agreed to continue to supply goods to the Debtors-in-Possession after the petition. Indeed, had Proficient simply refused to do business with the Debtors-in-Possession, many of Debtors' restaurants would have shut down, and any dividend to unsecured creditors like Proficient would have evaporated. If anything, there was self-interest, not statutory compulsion, in Proficient's choice to become the Critical Vendor.
Proficient's expansive view of the Critical Vendor Order is not grounded in the plain wording of the Motion and Order. The payment terms within the Critical Vendor Motion specifically state, "nothing contained herein shall be deemed . . . an admission as to the validity or allowance of [Proficient's] prepetition claim." (Critical Vendor Motion at 9.) The Motion explains that if Debtors make all the required payments and Proficient then fails to supply goods, all payments "will be voidable transfers under 11 U.S.C. § 549." (Critical Vendor Motion at 10.) There is a cross-reference in the Critical Vendor Motion to § 546(c) of the Bankruptcy Code in connection with payment of Proficient's reclamation claim.
These provisions of the Critical Vendor Motion and Order reveal that the parties were aware of avoidance and recovery actions with respect to both pre- and post petition payments to Proficient and aware that Proficient had a substantial prepetition claim that had not been litigated. Yet nowhere in the Critical Vendor Motion or Order is there any whisper that the parties intended to insulate Proficient from preference liability under § 547. Why would the Critical Vendor Motion preserve objection to Proficient's claim and reference the limitation on preference recovery in § 546(c) if it was intended that Proficient would have no avoidance or recovery liability under any circumstances?
See 11 U.S.C. § 502(d) quoted above and discussed below.
Official Committee of Unsecured Creditors v. Medical Mutual of Ohio (In re Primary Health Systems, Inc.), 275 B.R. 709 (Bankr. D. Del. 2002), aff'd, C.A. No. 02-301 (D. Del. Feb. 27, 2003), fails to advance Proficient's argument for similar reasons. In Primary Health, the court approved post petition payment of wages, salaries and employee benefits, including payments to the defendant insurer to continue insurance coverages. The creditors committee later sued the insurer to recover preferential payments. The court concluded that if the alleged preferential payments were authorized by the post petition wage order they were protected from recovery under § 547.
The order in Primary Health provided that the debtor "honor and pay all employee benefits in accordance with their prepetition employee benefit plans and policies, including all costs and expenses incurred in connection with the maintenance of such plans and policies." In effect, the wage order required debtor to pay all amounts in default at the petition — the same scenario as the license assumption in Superior Toy. See also HLI Creditor Trust v. Export Corp. (In re Hayes Lemmerz Int'l, Inc.), 313 B.R. 189, 193-94 (Bankr. D. Del. 2004) (Court rejects argument that critical vendor motion and order precluded recovery of prepetition preferential transfers. "[N]othing in the critical vendor order] require[d] that Export's pre-petition claims be paid in full, and did not provide that any preferential payments previously made to Export could not be recovered. In fact . . . there was no consideration or analysis of whether any potential critical vendor had received a preference.").
Here, the Critical Vendor Motion and Order did not contemplate the cure of all prepetition defaults. Payments were limited to $900,000, and Proficient's prepetition claim was nearly $7 million. No contracts were assumed, no waivers or releases were given. Perhaps, using its unique leverage with the Debtors, Proficient could have bargained for a provision releasing it from preference liability in this bankruptcy case. The Critical Vendor Motion and Order did not do so.
F. Resolution of Administrative Expense Request
Lastly, Proficient asserts that the Debtors' objection to and resolution of Proficient's administrative expense request precludes this preference action. On September 5, 2003, Proficient filed a request for payment of $17,000 as an administrative expense for attorney fees in connection with its participation on the Creditors' Committee. The Debtors objected and the parties came to a resolution. The Debtors agreed to pay $2,250, memorialized in an agreed order entered September 24, 2003.
Characterizing the administrative expense dispute as part of the claims allowance process, Proficient cites § 502(d) and contends that this preference action had to be asserted when its administrative expense request was in dispute. Proficient relies on LaRoche Industries, Inc. v. General American Transportation Corp. (In re LaRoche Industries, Inc.), 284 B.R. 406 (Bankr. D. Del 2002), and Caliolo v. TKA Fabco Corp. (In re Cambridge Industries Holdings, Inc.), No. 00-1919, 2003 WL 1818177 (Bankr. D. Del. Apr. 2, 2003).
LaRoche Industries and Cambridge Industries are distinguishable in an important respect; In both, the preference defendants filed proofs of claim to which the debtors objected and which were resolved by orders allowing claims before the preference actions were filed. Here, Proficient argues for preclusive effect from the resolution of an administrative expense request under 11 U.S.C. § 503 — a matter separate and distinct from the allowance of claims under § 502 of the Code. This is a distinction with a difference.
Section 501 provides that "[a] creditor . . . may file a proof of claim." 11 U.S.C. § 501(a). A creditor is defined 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; [or] [an] entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g) 502(h) or 502(i)." 11 U.S.C. § 101(10).
The claims allowance process is outlined in § 502. It begins with; "A claim or interest, proof of which is filed under section 501 . . ., is deemed allowed, unless a party in interest, . . ., objects." 11 U.S.C. § 502(a). Subsection (b) lists nine factors that affect the allowance of a claim filed pursuant to § 501.
Section 502(d) conditions the allowance of a claim filed under § 501 that the claim holder first return any avoidable transfer such as a preference under § 547. The courts in LaRoche Industries and Cambridge Industries applied this long standing statutory relationship to conclude that preference litigation was precluded by prior claims litigation when regurgitation of the preference was not raised as a ground for disallowance. See also Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed. 2d 391 (1966) (Under § 57(g) of the former Bankruptcy Act, 11 U.S.C. § 93(g) (repealed), the predecessor to 11 U.S.C. § 502(d), preference litigation must be resolved before claim could be allowed.). The holdings of LaRoche Industries and Cambridge Industries are controversial even within the Bankruptcy Court for the District of Delaware. See TWA, Inc. Post Confirmation Estate v. City and County of San Francisco Airports Comm'n (In re TWA, Inc. Post Confirmation Estate), 305 B.R. 221 (Bankr. D. Del. 2004) (Settlement of claims dispute does not preclude subsequent preference litigation under § 502(d).). See also Peltz v. Gulfcoast Workstation Group (In re Bridge Info. Sys., Inc.), 293 B.R. 479 (Bankr. E.D. Mo. 2003); Rhythms NetConnections, Inc. v. Cisco Sys., Inc. (In re Rhythms NetConnections), 300 B.R. 404 (Bankr. S.D.N.Y. 2003) (Both holding that § 502(d) does not bar preference litigation after allowance of claims.).
Section 503 concerns administrative expenses, which are distinct from claims filed under § 501, and indeed, need not be requested by a "creditor." Administrative expenses are pursued by filing "a request for payment" under § 503(a), not by filing a proof of claim under § 501. Procedure for the management of a request for administrative expense under the Federal Rules of Bankruptcy Procedure is separate and different than the management of proofs of claim. Compare FED. R. BANKR. P. 3001-3008 (dealing with filing and allowance of claims under § 501); with FED. R. BANKR. P. 1019(6) (timely filing of a "request" for payment of an administrative expense after conversion). There is no provision in § 503 analogous to § 502(d) disallowing administrative expenses held by an entity that received an avoidable transfer. Section 502(d) does not cross-reference or obviously affect the allowance or payment of administrative expenses under § 503.
Judge Waldron in Roberds recently observed that "[t]here is a split in the case law on whether an administrative claim is subject to the requirements of 11 U.S.C. § 502(d)." In re Roberds, Inc., 315 B.R. at 476 (citing Tidwell v. Atlanta Gas Light Co. (In re Georgia Steel, Inc.), 38 B.R. 829 (Bankr. M.D. Ga. 1984) (administrative claims are subject to § 502(d)); Microage, Inc. v. Viewsonic Corp. (In re Microage, Inc.), 291 B.R. 503 (B.A.P. 9th Cir. 2002) (Section 502(d) applies to administrative claims, but cannot be used to defeat a previously allowed administrative claim.); Beasley Forest Prods., Inc. v. Durango Georgia Paper Co. (In re Durango Georgia Paper Co.), 297 B.R. 326, 331 (Bankr. S.D. Ga. 2003) ("Section 502(d) does not apply to administrative claims allowable under § 503."); In re Lids Corp., 260 B.R. 680 (Bankr. D. Del. 2001) (administrative claims are not subject to § 502 (d)); Camelot Music, Inc. v. MHW Adver. Pub. Relations, Inc. (In re CM Holdings, Inc.), 264 B.R. 141 (Bankr. D. Del. 2000) (administrative claims not subject to § 502(d)). Roberds concluded that 11 U.S.C. § 502(d) was not a barrier to the allowance of an administrative expense. This court agrees.
Beyond § 502(d), Proficient's implicit appeal to equitable principles is not compelling on summary judgment. Proficient's administrative expense request was resolved by a one-page agreed order. The agreed order says nothing about preclusion of any kind — no mention of Proficient's prepetition claim for more than $7 million, and no mention of any other causes of action that were preserved by the Confirmed Plan nearly a year earlier. The agreed order does not convey any intent by Proficient or the Debtors-in-Possession to affect other issues between the parties by preclusion, contract or otherwise.
As Judge Waldron explained in Roberds, this action to recover prepetition preferential payments does not raise the same issues of law or fact as Proficient's request for reimbursement of post petition expenses. See Roberds, 315 B.R. at 474-75 (administrative expense request is not a compulsory counterclaim to a complaint for recovery of a preference). Administrative expenses are post petition charges entitled to statutory priority. They cannot be set off against prepetition claims. See 11 U.S.C. § 553. Proficient has not articulated why the Debtors "should" have litigated this preference in response to Proficient's administrative expense request. Resolution of this preference litigation was not necessary to the allowance or disallowance of Proficient's administrative expense request. This preference litigation lacks "identity" with the administrative expense dispute for purposes of ordinary principles of res judicata. The agreed order adjudicating Proficient's request for an administrative expense does not raise an equitable bar to litigation of this preference action.
III. Conclusion
Proficient's Motion for Summary Judgment will be denied by separate order.