523 B.R. 511
Bankr. W.D.N.C.2014Background
- Cox & Schepp (debtor), a commercial general contractor, subcontracted electrical work to Palmer on three Quest Diagnostics projects; payment terms required prompt payment after Quest paid Cox & Schepp.
- Palmer executed prospective lien waivers in exchange for payment.
- Cox & Schepp made multiple payments to Palmer in 2011; two payments on October 25, 2011 totaled $36,686.96 and were made within 90 days before Cox & Schepp’s Chapter 11 petition (filed Jan 5, 2012).
- The Official Committee of Unsecured Creditors (Committee) sued to recover the two October payments as preferences under 11 U.S.C. §§ 547 and 550; both parties moved for summary judgment after limited discovery.
- The core factual disputes concern whether (a) the payments were property of the estate, (b) Cox & Schepp was insolvent during the preference period, (c) Palmer received more than it would in liquidation, and (d) Palmer’s lien waivers or payment timing constitute defenses under § 547(c)(1) (contemporaneous exchange/new value) or § 547(c)(2) (ordinary course).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to bring preference claim | Committee may pursue avoidance actions per confirmed plan grant of authority | Only trustee or debtor in possession can bring preference actions unless formally appointed | Denied Palmer’s standing challenge; Committee has standing under the confirmed plan |
| Whether transfers were "interest of the debtor in property" (547(b)) | Funds came from Cox & Schepp operating accounts and were estate property | Funds were trust or earmarked for Palmer (Florida law; criminal misapplication statute) | Payments were estate property; Palmer failed to show constructive trust or earmarking; grant for Committee |
| Insolvency during preference period (547(b)) | Debtor was insolvent; schedules/claims show liabilities exceeded assets | Selected financial line-items create a factual dispute as to solvency | Presumption of insolvency under §547(f) not rebutted; grant for Committee |
| Preference: transfers gave Palmer more than in Chapter 7 (547(b)(5)) | Transfers (~$36,687) constituted ~90% of Palmer’s claim; unsecured creditors expect small recovery | No evidence contesting Committee’s figures | Grant for Committee—Palmer would have gotten far less in liquidation |
| Contemporaneous exchange / new value (547(c)(1)) — lien waivers | Waivers may indirectly provide new value by preventing owner setoff/indemnity claims (indirect-transfer theory) | Argues distinct Florida law and disputes whether owner owed contractor sums subject to setoff; timing and intent are unclear | Denied summary judgment to both parties; material fact issues remain on intent, timing, and existence/amount of owner setoff |
| Ordinary-course defense (547(c)(2)) — timing/terms | Payments were consistent with parties’ prior course of dealing and industry norms | Payments were delayed beyond contract triggers and more delinquent than other payments | Denied summary judgment to both parties; factual disputes on baseline of dealings and industry standards remain |
Key Cases Cited
- Rossignol v. Voorhaar, 316 F.3d 516 (4th Cir. 2003) (standard for evaluating cross-motions for summary judgment)
- Begier v. I.R.S., 496 U.S. 53 (U.S. 1990) (definition of "interest of the debtor in property" for avoidance)
- In re J.A. Jones, Inc., 361 B.R. 94 (Bankr. W.D.N.C. 2007) (lien waivers as possible indirect transfers of new value)
- United Rentals, Inc. v. Angell, 592 F.3d 525 (4th Cir. 2010) (Fourth Circuit treatment of lien-waiver/new-value issues)
- In re ESA Envtl. Specialists, Inc., 709 F.3d 388 (4th Cir. 2013) (limits and narrow construction of the earmarking defense)
- AdvoSys., Inc. v. Maxway Corp., 37 F.3d 1044 (4th Cir. 1994) (burden and fact-specific inquiry for ordinary-course defense)