Opinion
Case No. 301-12036, Adv. No. 303-0717.
November 19, 2004
Beth A. Dunning, Dunning Law Group, PLLC, Brentwood, TN, Counsel for the Consolidated Debtors acting by and through the Plan Administrator.
Robert Gonzales, Robin Bicket White, Mendes Gonzales PLLC, Nashville, TN, Attorneys for Defendants.
Russell R. Johnson, III, Richmond, VA, Attorneys for Defendants.
ORDER
For the reasons stated in the memorandum filed contemporaneously herewith, IT IS ORDERED, ADJUDGED and DECREED that the Defendants' motion for summary judgment is DENIED.
MEMORANDUM
In this preference case, Defendants move for partial summary judgment with respect to one defense: the subsequent new value defense in 11 U.S.C. § 547(c)(4). To prevail under § 547(c)(4) a defendant must demonstrate that the Debtors did not repay the new value with an otherwise unavoidable transfer. Because these Defendants raise other § 547(c) defenses that are not ready for adjudication, the § 547(c)(4) defense cannot be resolved on summary judgment.
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 case 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.
The Debtors remained in possession. On April 29, 2002, the 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.
On October 31, 2003, the Plan Administrator commenced over two-hundred adversary proceedings to avoid prepetition transfers as preferential under 11 U.S.C. § 547(b). Peoples Gas System ("Peoples"), a division of Tampa Electric Company, provided gas service to PRG and its affiliates on nine separate accounts during the preference periods. (Bayyat Aff. at ¶¶ 4 5.) Tampa Electric Company ("TEC") provided electric service to PRG and its affiliates on seven separate accounts during the preference periods. (Buttram Aff. at ¶¶ 4 5.) Payments were made by PRG during the preference periods on various of these accounts and, continuously, "new" utility services were provided by these Defendants. This complaint seeks to recover aggregate payments of $122,798.09 made to Peoples and TEC during the preference periods.
The petition date for PRG is October 18, 2001. The petition date for the affiliates of PRG is October 31, 2001.
Defendants move for partial summary judgment only on the ground that the new value exception in 11 U.S.C. § 547(c)(4) precludes avoidance of all but $22,358.92 of the transfers to TEC, and all but $12,006.57 of the transfers to Peoples. New value under § 547(c)(4) is not the only defense pleaded by Defendants. The Joint Stipulation of Contested Legal Issues includes the ordinary course of business defense under § 547(c)(2). In support of their Motions, Defendants submitted the affidavits and supplemental affidavits of Pamela Bayyat and Debra Buttram. Plaintiff opposes the Motions but offered no opposing affidavits.
II. Analysis
A. Summary Judgment Standard
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., 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. 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 Debtors "new value" in a form that replenished the estate. See, e.g., Williams v. Agama Sys., Inc. (In re Micro Innovations Corp.), 185 F.3d 329, 336 (5th Cir. 1999). Replenishing the estate for purposes of the § 547(c)(4) defense has several facets. Fundamentally, the estate 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 property, but does not include an obligation substituted for an existing obligation.
The new value given after the 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 estate 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 estate 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 estate 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).
The dispositive issue on these motions for summary judgment is the "otherwise unavoidable" element of § 547(c)(4)(B). Defendants performed their new value calculation by reasoning backwards from the date of the petition. In Defendants' affidavits "per diem" charges are determined for utility services supplied by the Defendants at each location by dividing the charge for each billing period by the number of days in that period. The amount so calculated is characterized as "new value." This new value is then subtracted from the last payment by the Debtors before the petition and the net (if any) is accumulated as "excess new value."
Plaintiff urges in its brief that Defendants failed to establish the "value" of the electric and gas services provided to the Debtors. Value is a fact question material to the § 547(c)(4) defense. Phoenix Restaurant Group, Inc. v. Lawson Software, Inc. (In re Phoenix Restaurant Group, Inc.), ___ B.R. ___, 2004 WL 2603561, at *6 (Bankr. M.D. Tenn. Nov. 15, 2004) (citing Shodeen v. Airline Software, Inc. (In re Accessair, Inc.), 315 B.R. 386, 395-96 (B.A.P. 8th Cir. 2004)); Claybrook v. Pizza Hut, Inc. (In re Discovery Zone, Inc.), 300 B.R. 856, 860-61 (Bankr. D. Del. 2003). Defendants offered affidavits showing their tariff-regulated charges for gas and electric services. It is undisputed that the Debtors paid many of those charges. Plaintiff offered no responsive affidavit or other evidence on summary judgment to put in dispute the value of the utility service. Plaintiff makes a legal argument that "late charges" included in some of Defendants' exhibits cannot provide new value. At oral argument, Defendants' counsel seemed to concede the doubtful "value" of late charges in the § 547(c)(4) context. See Peltz v. Application Eng'g Group, Inc. (In re Bridge Info. Sys., Inc.), 287 B.R. 258, 267 (Bankr. E.D. Mo. 2002) (service fee charged by creditor "without providing corresponding value to the debtor does not constitute `new value' for purposes of § 547(c)(4).").
The same calculation is then performed for each location for the time period between the last payment and the next-to-the-last payment, and so forth, backwards, to the beginning of the preference period, 90-days before bankruptcy. The "excess new value," if any, from each period between payments by the Debtors is carried backwards and added to the new value (if any) calculated during the next earlier period. When payments from the Debtors exceeded available new value during any period, the excess of payments was accumulated.
According to the Defendants' calculations, $12,006.57 and $22,358.92 are the amounts of payments from the Debtors during the preference periods that are not exempt from recovery after application of the § 547(c)(4) defense in this manner.
Plaintiff argues that Defendants' methodology gives credit for "new value" without regard to whether that new value was subsequently paid for by the Debtors with a transfer that is not "otherwise avoidable" as required by § 547(c)(4)(B). In other words, Defendants treat all utility service subsequent to a preferential transfer as if it replenished the estate and was not paid for by the Debtors with a subsequent payment that the Defendants keep because it is not avoidable. At oral argument, Plaintiff further criticized Defendants' accounting for failing to disqualify from new value, services provided within the preference period that were paid for by transfers rendered unavoidable by § 547(c)(4) itself.
Plaintiff's critique is accurate, in part. 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 provide 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" as a preference from the creditor. 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 supported by no theory 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 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). 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).
Defendants' calculations fail to disqualify all "new" services (per diem charges) supplied during the preference period that were paid for by the Debtors with transfers that cannot be otherwise avoided. For example, Defendants plead the ordinary course of business defense of § 547(c)(2) in this adversary proceeding but did not move for summary judgment with respect to that defense. Until the § 547(c)(2) defense is adjudicated, it cannot be said with certainty whether transfers by the Debtors to these Defendants during the preference period are "otherwise unavoidable." Because it is possible that some payments by the Debtors during the preference period will be protected by other defenses, the math necessary to do the temporally sensitive calculation in § 547(c)(4) cannot be performed on a summary judgment motion that only addresses § 547(c)(4).
III. Conclusion
Defendants' Motions for Partial Summary Judgment will be denied by separate order.