Levin v. Verizon Business Global, LLC (In Re OneStar Long Distance, Inc.)
872 F.3d 526
| 7th Cir. | 2017Background
- OneStar received telecommunications services from MCI under a 2002 contract and paid MCI roughly $1.9 million during the 90-day preference period before an involuntary Chapter 7 petition on December 31, 2003.
- MCI billed monthly (switched services variable; unswitched fixed), invoicing about $3.7 million for Oct–Dec 2003 while OneStar’s total debt to MCI grew from ~$7.5M to ~$9.8M.
- On December 22, 2003 OneStar, MCI, and a new affiliate IceNet executed an assignment/assumption putting IceNet between OneStar and MCI; IceNet received services from MCI Dec 23–31 and relayed them to OneStar.
- The bankruptcy trustee sued to avoid the prepetition payments under 11 U.S.C. § 547(b); MCI (successor Verizon) conceded prima facie preference elements and invoked § 547(c)(4) (new-value defense) and § 547(c)(2) (ordinary-course defense).
- The bankruptcy court held MCI had advanced sufficient subsequent new value (using a per diem allocation of monthly invoices) and that the debt assignment to IceNet did not constitute payment; it rejected the ordinary-course defense. The district court affirmed the new-value ruling. The trustee appealed; Verizon’s cross-appeal on ordinary-course was not reached.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Verizon/MCI) | Held |
|---|---|---|---|
| Whether assignment of OneStar’s debt to IceNet repaid MCI’s subsequent new value so as to defeat § 547(c)(4) | The assignment effectively discharged OneStar’s obligation and thus compensated MCI, canceling the new-value defense | The assignment merely placed IceNet as a pass-through; it did not constitute a transfer to or for MCI and left new value unpaid | Assignment did not repay MCI; new value remained unpaid and § 547(c)(4) applies to bar avoidance |
| Whether MCI advanced sufficient subsequent new value after each preferential payment (timing / per diem allocation) | Trustee: Per diem allocation improperly dates new value; MCI cannot prove new value after Dec 9 and Dec 17 payments | MCI: Per diem method reasonably allocates monthly billed services across days; it advanced enough subsequent new value to cover transfers | Per diem method was reasonable; highly unlikely services were so front-loaded — MCI advanced enough new value to cover all preferential transfers |
| Whether payments were protected as ordinary-course transfers under § 547(c)(2) | Trustee: Payments were preferences not in ordinary course | Verizon/MCI: Payments were in ordinary course | Bankruptcy court rejected ordinary-course defense; appellate decision affirmed new-value holding and did not reach ordinary-course cross-appeal |
Key Cases Cited
- In re Kempff, 847 F.3d 444 (7th Cir. 2017) (standard of review for bankruptcy appeals)
- Tolona Pizza Prods. Corp. v. NLRB, 3 F.3d 1029 (7th Cir. 1993) (policy rationale for avoiding preferential transfers)
- In re Milwaukee Cheese Wis., Inc., 112 F.3d 845 (7th Cir. 1997) (avoidance reduces creditor race and inequitable distributions)
- Unsecured Creditors Comm. of Sparrer Sausage Co. v. Jason’s Foods, Inc., 826 F.3d 388 (7th Cir. 2016) (new-value reduces preference exposure; payments that offset new value defeat the defense)
- Mass. Mut. Life Ins. Co. v. Ludwig, 426 U.S. 479 (U.S. 1976) (prevailing party may defend judgment on preserved arguments on appeal)
- Bank of Am. Nat’l Tr. & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434 (U.S. 1999) ("on account of" requires causal relationship)