589 B.R. 614
Bankr. N.D. Ill.2018Background
- Network Salon, run by Anthia Hill, obtained multiple merchant cash advances (MCAs); LG Funding entered two MCA purchase agreements in Nov 2015 and Jan 2016, advancing $125,000 in exchange for a purchased amount of $176,432 recoverable via debits to a designated account.
- LG Funding debited Network Salon’s account weekly; during the 90 days before the May 20, 2016 petition date LG Funding debited $38,994 (Network Salon paid $112,979 total to LG Funding).
- Trustee (Frances Gecker, chapter 7 trustee) sued to avoid preferential transfers (11 U.S.C. §547), to avoid constructive fraudulent transfers (11 U.S.C. §548(a)(1)(B)), and to disallow LG Funding’s claims under §502(d).
- Parties stipulated many facts (including the amounts debited and that LG Funding is a non‑insider); New York law governed the agreements which characterized the transactions as sales of receivables, not loans.
- The court found Network Salon insolvent in the relevant periods, but held (1) payments fell within §547(c)(2) ordinary‑course exception and thus were not avoidable as preferences, (2) Network Salon received reasonably equivalent value so §548 claim failed, and (3) §502(d) relief was inapplicable because LG Funding had not filed a proof of claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were transfers preferential under §547(b)? | Payments within 90 days were on account of antecedent debt and should be avoided. | Transactions were ordinary‑course MCA receivable purchases; §547(c)(2) applies. | Court: Elements met but ordinary‑course exception applies; preference claim denied. |
| Did transfers qualify for §547(c)(2) ordinary‑course defense? | Trustee: debits exceeded contractual scope and funds included proceeds from other lenders, so not ordinary. | LG Funding: MCA transactions were the parties’ normal course; money is fungible; industry practice. | Court: Transactions were ordinary in both parties’ business; defense established. |
| Were transfers constructively fraudulent under §548(a)(1)(B)? | Trustee: Debtor received less than reasonably equivalent value and was insolvent. | LG Funding: Paid fair market price for receivables; transactions in good faith; reasonably equivalent value received. | Court: Network Salon received reasonably equivalent value; §548 claim fails. |
| Is §502(d) disallowance appropriate? | Trustee: Disallow until transfers returned. | LG Funding: No proof of claim filed; §502(d) inapplicable. | Court: §502(d) requires a filed claim; relief denied. |
Key Cases Cited
- Kleven v. Household Bank, F.S.B., 334 F.3d 638 (7th Cir. 2003) (ordinary‑course exception purpose and analysis)
- Barber v. Golden Seed Co., 129 F.3d 382 (7th Cir. 1997) (test for reasonably equivalent value in fraudulent‑transfer analysis)
- In re Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir. 1990) (factors for reasonably equivalent value inquiry)
- Smith v. SIPI, LLC (In re Smith), 811 F.3d 228 (7th Cir. 2016) (application of reasonably equivalent value factors)
- Martino v. Miszkowicz (In re Miszkowicz), 513 B.R. 553 (Bankr. N.D. Ill. 2014) (definition of debtor’s interest in property for §547)
- Midway Airlines v. Kriedler (In re Midway Airlines), 69 F.3d 792 (7th Cir. 1995) (burden of proof for ordinary‑course defense)