Shubert v. Mull (In Re Frey Mechanical Group, Inc.)
446 B.R. 208
| Bankr. E.D. Pa. | 2011Background
- This is a bankruptcy adversary proceeding where the Chapter 7 Trustee seeks avoidance and recovery of transfers totaling $740,000 to defendants Stanley Mull and Joan Mull as insider transfers under 11 U.S.C. §547(b) and §550.
- Defendants admit the transfers but contend they fall within ordinary-course exemptions or are offset by new value under §547(c)(2) and §547(c)(4).
- The debtor Frey Mechanical Group, Inc. originally had secured credit issues leading to an unsecured line of credit from the Mull defendants, secured by the defendants themselves.
- Loans consisted of a $400,000 Line of Credit (Line Note), plus Balloon Notes totaling $500,000 (Mr. Mull $300k; Mrs. Mull $200k), with interest-only payments and principal due later.
- The transfers occurred during the Insider Preference Period (Jan 18, 2009 – Jan 18, 2010) after the Susquehanna Bank declined to renew a line of credit.
- The court found the debtor insolvent for the last ten years and treated the Mull defendants as insiders under 11 U.S.C. §101(31).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether transfers are exempt as ordinary course under §547(c)(2) | Shubert argues no ordinary-course defense; the debt was not incurred or paid in ordinary course by a non-lender insider. | Mulls contend the transfers were in the ordinary course of business and within ordinary terms. | No ordinary-course exemption; not incurred in ordinary course by defendant, thus not exempt. |
| Whether new value offset under §547(c)(4) reduces recoverable transfers | Trustee contends advances do not qualify as new value offsetting an avoidable transfer. | New value advances can offset the transfers, even if repayments occurred, given not an otherwise unavoidable transfer. | Defendants may offset $400,000 of the transfers with new value under §547(c)(4). |
Key Cases Cited
- In re Molded Acoustical Products, Inc., 18 F.3d 217 (3d Cir. 1994) (test for ordinary-course exemption under §547(c)(2))
- In re Pioneer Technology, Inc., 107 B.R. 698 (9th Cir. BAP 1988) (debt incurred in ordinary course; insider loans may fail ordinary-course test)
- In re New York City Shoes, Inc., 880 F.2d 679 (3d Cir. 1989) (new value defense and its purposes; stay in line with 547(c)(4))
- Pillowtex Corp., 416 B.R. 123 (Bankr. D. Del. 2009) (interpretation of §547(c)(4) regarding subsequent advances and new value)
- Toyota of Jefferson, Inc., 14 F.3d 1090 (5th Cir. 1994) (subsequent-advance approach in revolving credit contexts)