Campbell v. Hanover Insurance (In Re ESA Environmental Specialists, Inc.)
709 F.3d 388
4th Cir.2013Background
- ESA Environmental Specialists filed for Chapter 11 bankruptcy; Hanover insured and issued bonds for ESA's government contracts.
- Prospect loaned ESA funds to finance working capital and collateralize new bonds; a $1,375,000 element funded a letter of credit via SunTrust Bank for Hanover.
- ESA deposited Prospect loan proceeds into its account and later transferred $1.375 million to SunTrust to secure the Letter of Credit for Hanover.
- Hanover drew on the Letter of Credit after ESA's bankruptcy petition was filed, liquidating the collateral deposited with SunTrust.
- Trustee filed an adversary proceeding asserting a preference under 11 U.S.C. § 547(b); bankruptcy court granted summary judgment for Hanover, later affirmed on appeal.
- Bankruptcy court held earmarking and new value defenses barred avoidance; appellate courts affirmed on the new value defense while finding earmarking inapplicable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Earmarking applicability under § 547(b) | ESA trustee: funds earmarked; transfer avoided as preference. | Hanover: earmarking defense applies to pay an antecedent debt. | Earmarking does not apply; no antecedent debt paid. |
| New value defense sufficiency under § 547(c)(1) | Trustee argues Hanover failed to prove with specificity the new value and contemporaneity. | Hanover proved value of the New Contracts and contemporaneous exchange. | New value defense satisfied; New Contracts provided value at least equal to the transfer and were substantially contemporaneous. |
| Equitable defense independent of statutory defenses | Trustee argues equitable grounds support reversal. | No independent equitable defense exists under bankruptcy law. | Equitable grounds not recognized as an independent defense; not controlling. |
Key Cases Cited
- Decker, 329 F.2d 836 (4th Cir.1964) (earmarking requires payment of an antecedent debt to an identifiable creditor)
- Jet Fla., Inc. v. American Airlines, Inc., 861 F.2d 1555 (11th Cir.1988) (new value must be specific and contemporaneous)
- United Rentals, Inc. v. Angell, 592 F.3d 525 (4th Cir.2010) (defines and applies new value defense and contemporaneity)
- In re Winstar Commc'ns, Inc., 554 F.3d 382 (3d Cir.2009) (earmarking issues and burdens in preference actions)
- In re Bohlen Enters., Ltd., 859 F.2d 561 (8th Cir.1988) (earmarking defense recognized as a defense to avoidance)