Opinion
Case No. 01-10254-B, Adv. No. 03-80499-B.
July 13, 2005
ORDER GRANTING PLAINTIFF JUDGMENT IN PREFERENCE ACTION
This adversary proceeding came before the Court on the complaint of John K. Fort, Trustee ("Plaintiff") to recover a preferential transfer from Spartan International, Inc. (hereafter the "Debtor" or "Spartan") to Softmart pursuant to 11 U.S.C. §§ 547 and 550 of the Bankruptcy Code. This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. This proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F). A trial was held on June 8, 2005. After reviewing the evidence presented and arguments made by counsel, the Court makes the following findings of fact and conclusions of law:
All further references to the United States Bankruptcy Code, 11 U.S.C. § 101 et seq., will be by section number only.
FINDINGS OF FACT
The Court notes, to the extent any of the following Findings of Fact constitute Conclusions of Law, they are adopted as such, and, to the extent any of the following Conclusions of Law constitute Findings of Fact, they are so adopted.
1. Softmart is a licensed reseller and distributor of Microsoft Software and is a corporation properly doing business in South Carolina.
2. Softmart and the Debtor are parties to a Microsoft Select Master Agreement (the "Contract") dated December 22, 2000, pursuant to which Softmart agreed to resell a license to use certain Microsoft software to Debtor as more particularly described in the Contract.
3. To the best of the parties' knowledge, the Contract was never rescinded by the Debtor pre-petition.
4. The Debtor failed to timely make payments under the Contract and invoice dated December 28, 2000 (the "Invoice"). As a result of the Debtor's lateness on payment under the Invoice, and following several collection attempts by Softmart, Softmart proposed a new payment schedule which was confirmed by e-mail correspondence between the parties on April 20, 2001 and April 24, 2001. Softmart charged interest penalties to the Debtor due to its late payment under the Invoice.
5. Softmart never demanded the return of the Software and never demanded the Debtor cease using the Software in its attempts to collect on the past due invoice. Softmart's collection activity consisted of e-mails and telephone conversations in which Softmart demanded payment of the Invoice.
6. Softmart received $27,699.21 from Spartan on April 25, 2001 (the "Payment"). The Payment constituted the first monthly payment under the new payment schedule and was a partial payment for amounts due under the Invoice.
7. An involuntary petition was filed against the Debtor for relief under 11 U.S.C. § 101, et seq., on May 31, 2001.
8. At the beginning of the trial, the parties stipulated the requirements of 11 U.S.C. § 547(b) had been met in regards to the Payment except Defendant argued the debt owed by Spartan to Softmart was not antecedent to the Payment. The parties also stipulated to the following exhibits being admitted into evidence without objection:
a. Invoice dated December 28, 2000 (Exhibit 1).
b. Electronic Mail dated April 20, 2001 from Theresa Neal of Softmart to Rocky Mankins of Spartan (Exhibit 2).
c. Microsoft Contract dated December 22, 2000 (Exhibit 3).
d. Confirmation of download of Software (Exhibit 4).
e. All other e-mails between the parties (Exhibit 5).
f. Transcript from hearing in Northern District of Illinois, captioned, ABC-NACO, Inc. v. Softmart, Inc., Adv. No. 03-A04358 (Exhibit 6).
9. Softmart called John Byrne as a witness who testified to the following:
a. Mr. Byrne was the manager of credit and collections at Softmart since August 2002.
b. Softmart is a reseller of computer software and hardware.
c. Softmart and Spartan were parties to the Contract and Softmart had completed all its obligations under the Contract.
d. As Spartan had never complained it had not received the product from Microsoft, he had no reason to believe the product had not been delivered to Spartan.
e. The Contract included shipping information which indicated the product had been shipped by Microsoft to Spartan.
f. Softmart had prior dealings with Spartan and Spartan had historically paid invoices within 14 days of the due date.
g. The Payment at issue was not ordinary between the parties because the December invoice was not paid until April.
h. Softmart had not supplied any new goods or services to the Debtor following its receipt of the Payment.
i. Softmart had not extended any new credit or made any loan to the Debtor following Softmart's receipt of the Payment.
j. Softmart had no way of knowing if Spartan installed or used the license and software at issue.
10. The Plaintiff called Barry Everett as a witness who testified to the following:
a. Mr. Everett was the network administrator at Spartan prior to its closure.
b. As the network administrator, Mr. Everett maintained and installed all software used by Spartan. As such, he knows Spartan never installed or used the software and license at issue in the Contract.
c. Spartan continued using the computer systems it had in place prior to December 2000 at the time it closed in May 2001.
d. Spartan had valid licenses for the computers and servers it was using prior to December 2000 and continued to use at the time of its closure.
e. Mr. Everett had no knowledge the product purchased from Softmart had been received or why the product was purchased by Spartan.
f. Mr. Everett believes the license and software purchased from Softmart had no value to Spartan because Spartan never installed or used them.
g. Mr. Everett assisted the Trustee in separating leased computer equipment from computer equipment owned by Spartan and knows the license and software at issue with Softmart was not sold by the bankruptcy estate.
h. At the time Spartan purchased the license and software, it was continuing to operate in its ordinary course on its existing systems.
CONCLUSIONS OF LAW
The issues before the Court are: (1) whether the Trustee met its burden under § 547(b) in showing the Payment related to an antecedent debt; (2) whether Softmart met its burden of showing the transfer was in the ordinary course of business pursuant to § 547(c)(2); and (3) whether Softmart met its burden of showing it provided new value following receipt of the Payment pursuant to § 547(c)(4).
I. Antecedent Debt.
Section 547(b) allows a trustee to avoid a transfer of an interest of the debtor in property. The parties stipulated the trustee had met its burden on all elements of § 547(b) except for § 547(b)(2) which requires the transfer is "for or on account of an antecedent debt owed by the debtor before such transfer was made." Softmart argued there was a question on the antecedent nature of the debt because the trustee did not concede Spartan had received the product. Based on the evidence presented, the Court finds the product had been delivered to Spartan. An e-mail presented into evidence (Exhibit 4) references delivery of the product in January 2001 and Mr. Byrne testified the Contract (Exhibit 3) included shipping information which also indicated the product had been delivered. The trustee had no evidence conclusively demonstrating no receipt of the product. Mr. Everett merely testified he had no knowledge of its delivery. Therefore, the Court finds the product was delivered and the trustee has met its burden of showing the transfer related to an antecedent debt.
Additionally the Court finds the transfer would have related to an antecedent debt even if the product had not been received because the invoice (Exhibit 1) establishing the debt was in December 2000, months before the transfer. The Bankruptcy Code defines debt as a liability on a claim. § 101(12). Claim is broadly defined by the Bankruptcy Code to include contingent, unliquidated, legal and equitable claims. § 101(5). The term debt and claim are coextensive. Sigmon v. Royal Cake Company, Inc. (In re Cybermech, Inc.), 13 F.3d 818, 822 (4th Cir. 1994). Thus, the invoice alone was sufficient to give rise to the debt.
II. Ordinary Course of Business
Softmart asserted the Payment was not avoidable under § 547(c)(2) as the transfer was made in the ordinary course of business. Mr. Byrne testified Spartan and Softmart had previous relationships prior to the Payment at issue and Spartan typically paid within 14 days of the invoice due date. Mr. Byrne acknowledged the Payment was not consistent or ordinary with Spartan's and Softmart's prior course of business. As § 547(c)(2)(B) requires the transfer was made in the ordinary course of business or financial affairs of the debtor and the transferee, Softmart cannot meet its burden of proof under § 547(c)(2).
III. New Value
Softmart asserted the Payment was not avoidable under § 547(c)(4) which provides in part that a transfer is not avoidable if after such transfer, the creditor gave new value to or for the benefit of the debtor. Mr. Byrne testified Softmart had not provided new goods, services or extension of credit to Spartan or made any loan to Spartan following receipt of the Payment. Softmart argues the new value it provided was Spartan's continued possession of the license and software under the Contract. This argument is flawed for a number of reasons. First, Mr. Byrne testified Softmart could not demand Spartan to discontinue use of the license and software, only Microsoft could. Softmart's sole remedy was the collection of the debt and it had been pursuing the debt as reflected by e-mails admitted as Exhibits 2 and 5 through dunning e-mails and collection calls. Thus, Spartan's continued possession of the license and software was not through any "forbearance" of Softmart. Moreover, this Court does not believe forbearance in this matter is sufficient to constitute new value within the meaning of § 547(c)(4). To the extent Softmart receives the benefit of Microsoft's action, forbearing on requesting the return of the product for non-payment was merely an election not to exercise a pre-existing right and not providing new value. See e.g., Airport Systems, Inc. v. Charisma Investment Company, N.V. (In re Jet Florida System, Inc.), 841 F.2d 1082, 1084 (11th Cir. 1988).
Softmart's new value argument is also flawed because there is no evidence Spartan received any value from the continued possession of the license and software. Mr. Everett testified Spartan had not installed the software and had not used it. Mr. Everett also stated the license and software had no value to Spartan. The relevant inquiry under § 547(c)(4) is whether the new value replenishes the estate. In re Phoenix Restaurant Group, Inc. et al. v. Lawson Software, Inc. (In re Phoenix Restaurant Group, Inc. et al.), 316 B.R. 681 (Bankr. M.D. Tenn. 2004). There is absolutely no evidence reflecting the estate was replenished by Spartan's continued possession of the license and software. Spartan did not install it, use it or sell it. Spartan's continued possession of the unused license and software was no different than goods or services provided by other vendors which preceded their receipt of payments in the 90 days (i.e., the creditor does not receive value for goods and services provided prior to the receipt of the preferential transfer).
Softmart has pointed to In re Discovery Zone, Inc. andABC-NACO, Inc. v. Softmart, Inc., as persuasive authority that the continued possession of the license and software constitute new value. However, a review of these cases reflects they are materially different than the case at hand. In both Discovery Zone and ABC-NACO, Inc., the courts expressly found the debtors had continued to use the products at issue. "I find that PHI conveyed new value to the debtor through continued use of `property'." Discovery Zone, Inc. et al. v. Pizza Hut, Inc. (In re Discovery Zone, Inc. et al.), 300 B.R. 856, 861 (Bankr. D. Del. 2003) (emphasis added) (finding Debtor's continued use of trademarks and proprietary food products constituted new value). Similarly in ABC-NACO, the court found "ABC-Naco's continued use of Microsoft licenses and subsequent transfer of such licenses to Meridian Railway constituted new value to ABC-Naco." ABC-NACO, Inc. v. Softmart (In re ABC-NACO, Inc. et al.), Adv. No. 03-A-04358 at 92 (Bankr. N.D. Ill. 2005) (Exhibit 6) (emphasis added). The court also found the payment made by ABC-Naco avoided termination of the master agreement and allowed it to continue to use the software.Id. at 91. Here, there was no use of the product by Spartan and the payment did not result in a benefit or replenishment of the estate. Spartan would not have been harmed by the termination of the Contract or any demand for the return of the product. The testimony reflects Spartan did not know it had received the product and gained no benefit from its receipt or possession. Thus, the Court does not find the cases cited by Softmart to be persuasive as there is a material difference in facts between the cases.
Finally, Softmart has failed to meet its burden on new value because there was no evidence of what value was provided to Spartan by its continued possession of the license and software. Section 547(a)(2) provides that new value means money or money's worth in new goods, services or new credit, but does not include an obligation substituted for an existing obligation. Softmart only provided evidence it entered into a Contract with Spartan under which it had performed all of its obligations prior to receipt of the Payment. It provided no evidence of the money's worth it provided to the estate after receipt of the Payment. Softmart argues the value of the license and software is the purchase price of the license and software, but this is incorrect. The purchase price reflects the value of the license and software based on Spartan's use of the product as provided in the Contract. Softmart provided no evidence of the money's worth value provided to Spartan for the 35 days following receipt of the Payment and prior to the bankruptcy filing. Softmart had the burden of producing such evidence and failed to do so. Moreover, for the reasons stated above, the Court finds there was no replenishment or benefit to Spartan by its continued possession of the license and software. If Softmart had taken back possession or had disallowed the use of the license and software due to non-payment, it would have had no effect on Spartan because it was not using the product. The purpose of the new value defense is to allow a creditor to reduce the amount claimed by the estate as a preference to the extent it replenished the estate. There is no evidence of any new value to Spartan from Softmart following receipt of the Payment. Thus, there was a negative effect on Spartan by its transfer of the Payment with no subsequent new value provided by Softmart as required by § 547(c)(4). As such, Softmart has not met its burden of showing its extension of new value.
For all the reasons stated above, the Court finds that Softmart has failed to meet its burden of demonstrating new value.
NOW THEREFORE IT IS ORDERED THAT the Trustee's request to avoid and recover $27,699.21 is granted and Softmart shall pay to the Trustee $27,699.21 within ten (10) days of the date of this Order.
AND IT IS SO ORDERED.