506 B.R. 461
Bankr. W.D. Tex.2014Background
- KLN Steel filed Chapter 11 on Nov. 22, 2011; Michael Ciesla was appointed liquidating trustee under the confirmed Plan empowered to pursue avoidance actions.
- Harney Management Partners was retained as a restructuring consultant beginning Feb. 2011 under a series of engagement letters and amendments; KLN paid a $20,000 retainer and numerous invoices pre-petition.
- Twelve payments to Harney were made during the 90-day preference period; most were wire transfers made 2–10 business days after invoice (avg. 6.25 days); earlier payments averaged seven business days.
- Plaintiff sought to avoid approximately $218,594.85 in transfers (including a $50,000 day‑of‑bankruptcy payment); Harney asserted ordinary-course and new‑value defenses.
- At summary judgment the court held most payments were protected by the ordinary‑course defense, but reserved three payments (Sept. 24 and Oct. 8 invoices totaling $42,994.19) and the $50,000 day‑of‑bankruptcy payment for trial.
- At trial the court found Harney failed to prove the subjective ordinary‑course prong for those three payments and the $50,000 payment; Harney proved $2,280 of post‑transfer new value; net recovery to trustee: $90,714.19.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to recover $50,000 day‑of‑bankruptcy payment | Trustee preserved avoidance claims in Plan/Disclosure and may pursue the $50,000 transfer | Harney: Plan/Disclosure lists omitted the $50,000, so trustee lacks standing and pleadings were insufficient | Trustee has standing; omission was not fatal given disclosure language, pretrial orders, and trial by consent |
| Whether debts were "incurred in the ordinary course" | Restructuring services are not the debtor’s ordinary business (furniture maker), so debts were not "ordinary" | Harney: debts for consulting were incurred consistently pre‑petition and thus were ordinary course | Debts were incurred in the ordinary course as between the parties |
| Whether transfers were "made in the ordinary course" (subjective prong) | Several payments (esp. checks, day‑of filing) were idiosyncratic, coercive, or indicative of preferential treatment | Harney: timing, manner, and amounts were consistent with prior conduct; multiple amendments were routine | Harney proved ordinary course for most transfers, but failed as to the Sept. 24/Oct. 8 payments (checks/partial payments) and the $50,000 day‑of‑bankruptcy payment |
| New‑value defense (11 U.S.C. §547(c)(4)) | Trustee: any post‑transfer services must be proven and unsecured to offset recovery | Harney: provided uncompensated services on filing date and should receive credit | Harney established $2,280 of new value unsecured and entitled to credit |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (limits bankruptcy court constitutional authority over certain core matters)
- Gulf City Seafoods, Inc. v. Ludwig Shrimp Co., Inc., 296 F.3d 363 (5th Cir. 2002) (purpose of ordinary‑course defense to encourage continued dealing)
- G.H. Leidenheimer Baking Co. v. SGSM Acquisition Co., 439 F.3d 233 (5th Cir. 2006) (interpretation of ordinary‑course prong after 2005 Code amendments)
- Barnhill v. Johnson, 503 U.S. 393 (U.S. 1992) (policy behind avoiding preference transfers)
- Spicer v. Laguna Madre Oil & Gas II, L.L.C. (In re Tex. Wyo. Drilling, Inc.), 647 F.3d 547 (5th Cir. 2011) (specific and unequivocal retention of claims standard)
- Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351 (5th Cir. 2008) (post‑confirmation claim retention; standing analysis)