588 B.R. 661
Bankr. E.D.N.Y.2018Background
- Debtors PCD and Holdings filed Chapter 11 on August 19, 2013; PCD used third‑party repair vendors for >97% of warranty repairs. KMT (d/b/a CynergyHitech) was one such vendor.
- During the 90 days before the petition Debtors paid KMT $3,824,194.36 (the Transfers).
- Debtors filed a Customer Programs Motion (CPM) asking authorization to continue customer programs and to honor related prepetition obligations to customers and vendors; the Interim and Final Orders authorized (but did not require) such payments and did not identify or waive preference liability for any vendor.
- Debtors sold substantially all assets to Quality One and later confirmed a liquidating plan that created the Devices Liquidation Trust (Plaintiff), which filed this adversary complaint to avoid and recover the Transfers under §§ 547–550.
- KMT moved for summary judgment arguing it should be insulated from preference liability as a critical vendor; Plaintiff opposed with creditor declarations asserting they would have objected to any preference‑waiver. The court denied summary judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KMT is entitled to summary judgment on preference claims based on "critical vendor" protection | Trust: CPM/orders authorized but did not waive preferences; payments do not bar avoidance | KMT: as a de facto critical vendor, payments would have been approved postpetition and preference liability should be precluded | Denied — movant failed to show no genuine dispute; court will not speculate what it "would have" approved absent an actual motion or waiver |
| Whether the CPM/Interim/Final Orders effectively released or waived §547 claims | Trust: orders were permissive, reserved rights, and did not include any explicit waiver | KMT: argues hindsight shows those orders implied consent to pay and thus preclude preference recovery | Held for Trust — orders did not identify vendors, did not require payments, and expressly preserved rights to contest claims |
| Whether a hindsight or hypothetical‑approval analysis can preclude a preference action at summary judgment | Trust: creditors would have objected; speculative to infer universal approval | KMT: court should analyze record and conclude it would have approved waiver/payment | Court rejects hindsight extrapolation as speculative and inappropriate on summary judgment; factual findings on hypothetical reactions are required at trial |
| Whether genuine issues of material fact exist about criticality and likely objections | Trust: creditor declarations show they would have objected; disputes as to who would consent | KMT: presented affidavits asserting its services were essential to sale and continuity | Court: genuine factual disputes exist; KMT did not meet its initial burden for summary judgment |
Key Cases Cited
- Miltenberger v. Logansport, 106 U.S. 286 (1882) (articulating the "doctrine of necessity" permitting payment of prepetition claims essential to continued operation)
- Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment burdens and standards)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) (materiality and genuine issue standards for summary judgment)
- In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989) (discussing necessity-of-payment/critical vendor doctrine)
- Osborne v. Howell Electric Motors (In re Fultonville Metal Prod. Co.), 330 B.R. 305 (Bankr. M.D. Fla. 2005) (cautioning that critical vendor orders do not automatically eliminate avoidance claims absent explicit release)
- Zenith Indus. Corp. v. Longwood Elastomers, Inc. (In re Zenith Indus. Corp.), 319 B.R. 810 (Bankr. D. Del. 2005) (striking critical‑vendor defense where order was permissive and did not name vendor)
- Kimmelman v. Port Authority of N.Y. & N.J. (In re Kiwi Int'l Air Lines, Inc.), 344 F.3d 311 (3d Cir. 2003) (assumption/assignment under §365 may require cure and affect preference claims)
- AFA Inv. Inc. v. Trade Source, Inc. (In re AFA Inv. Inc.), 538 B.R. 237 (Bankr. D. Del. 2015) (denying recovery where prepetition claim was paid postpetition pursuant to court‑approved agreement)