JAMES S. STARZYNSKI, Bankruptcy Judge.
This matter is before the Court on the Motion for Summary Judgment filed by Defendant Sun Life Insurance Company ("Sun Life" or "Defendant")(doc 50) with supporting Memorandum (doc 52) and numerous exhibits, Plaintiff's Response and Memorandum in Support (doc 70), and Defendant's Amended Statement of Material Facts in Support of Motion for Summary Judgment (doc 92), Plaintiff's Response to the Amended Statement of Material Facts (doc 97), and Defendant's Reply Brief (doc 101). Also before the Court are Plaintiff's Motion to Strike Affidavit of Gene Denison (doc 71) and Defendant's Response (doc 93)
Plaintiff filed this adversary proceeding on January 30, 2003 (doc 1), an amended complaint on February 7, 2003 (doc 3), and a second amended complaint (hereafter "Complaint") on May 12, 2004 (doc 15). Defendant filed an answer to the Complaint on February 10, 2005 (doc 21), an amended answer on March 16, 2005, and a second amended answer (hereafter, "Answer") on July 28, 2005 (doc 42). Defendant also filed a "Waiver of Ordinary Course of Business Defense" on June 29, 2005 (doc 38). Later, Defendant conceded its Priority Claim Affirmative Defense included in its Second Amended Answer to Second Amended Complaint, doc 42, p. 4, ¶ I. See Doc 125, p. 3.
Plaintiff's complaint is a straightforward preference complaint under 11 U.S.C. § 547(b)
First, the Court will decide the motion to strike.
Summary judgment is governed by Bankruptcy Rule 7056, which incorporates Fed.R.Civ.P. 56.
Thus, there are three requirements for an affidavit submitted in conjunction with a motion for summary judgment: 1) it shall be based on personal knowledge, 2) it shall set forth facts that would be admissible in evidence, and 3) it shall show affirmatively that the affiant is competent to testify to the stated facts. Giles v. University of Toledo, 241 F.R.D. 466, 469 (N.D.Ohio 2007). An affidavit that fails to satisfy these three requirements is subject to a motion to strike and will not be considered by the Court. Id. "The United States Court of Appeals for the Tenth Circuit has explicitly held that legally insufficient affidavits under Rule 56(e) are subject to a motion to strike." Servants of the Paraclete, Inc. v. Great American Ins. Co., 866 F.Supp. 1560, 1564 (D.N.M.1994) (citing Noblett v. General Elec. Credit Corp., 400 F.2d 442, 445 (10th Cir.)), cert. denied, 393 U.S. 935, 89 S.Ct. 295, 21 L.Ed.2d 271 (1968).) "Furthermore, the United States Court of Appeals for the Tenth Circuit has held that `conclusory' summary judgment affidavits are legally insufficient." Id. An affidavit is conclusory when it draws inferences. Id. at 1565. Similarly, affidavits that contain inadmissible hearsay are legally insufficient. White v. Wells Fargo Guard Services, 908 F.Supp. 1570, 1578 (M.D.Ala.1995); Giles, 241 F.R.D. at 471; compare Servants of the Paraclete, 866 F.Supp. at 1567 (out-of-court statements offered in affidavit were not hearsay because they were not offered for their truth; the affidavit was admissible.) Any defects in an affidavit are waived if not challenged. Meinhardt v. Unisys Corp. (In re Unisys Savings Plan Litigation), 74 F.3d 420, 437 n. 12 (3rd Cir.), cert. denied, 519 U.S. 810, 117 S.Ct. 56, 136 L.Ed.2d 19 (1996). And, if a statement is successfully challenged, the Court does not strike the entire affidavit; it disregards only the offending statement. Perez v. Volvo Car Corp., 247 F.3d 303, 315 (1st Cir.2001)("The rule requires a scalpel, not a butcher knife.") Finally, it is proper for the Court to consider a later deposition of the affiant to determine whether the affidavit contains impermissible material. Flair Broadcasting Corp. v. Powers, 733 F.Supp. 179, 182-83 (S.D.N.Y. 1990).
The Denison affidavit (doc 43) is the source of many of the facts in Defendant's Motion for Summary Judgment's Statement of Undisputed Facts. Plaintiff seeks to strike portions of it because it is not based on personal knowledge, does not set forth facts that would be admissible in evidence, and contains both legal conclusions and hearsay. Doc 71. Defendant replies (doc 93) that Plaintiff's motion to strike is moot because Defendant filed an Amended Statement of Material Facts in Support of Defendant's Motion for Summary Judgment (doc 92) that added additional citations to the record other than just Denison's statements. The Court disagrees that the motion to strike is moot; if the affidavit contains inadmissible statements, the filing of other and additional references to the record does not make the statements in the first affidavit admissible and the Court would prefer a clear factual record. Defendant also replies that, since filing the affidavit, Plaintiff deposed Denison on substantially all of the statements and asks the Court to consider the deposition testimony before striking anything. Finally, Defendant denies that any of the affidavit is not based on personal knowledge or is based on hearsay.
Plaintiff moves to strike paragraph 8 because Denison is expressing the intent of Debtor when it purchased the insurance, claiming that he could not possibly know Debtor's intent. The Court disagrees, and finds that based on his high position in the company and his longevity and various duties over the years, he can express an opinion on corporate intent, especially if he was familiar with the particular transaction involved. See Ondis v. Barrows, 538 F.2d 904, 908 (1st Cir.1976)(Court found it credible that an office manager would be someone in a position to have personal knowledge of business matters.) Therefore, paragraph 8 stands.
Plaintiff moves to strike entire paragraph 9 because Denison later testified that he was not very familiar with ERISA law and relied on attorneys to tell him things. See Denison Deposition, doc 71, Exh. A, Pt. 1, p. 9, ln. 2-6, 15, 20. The Court finds that this paragraph is based on hearsay statements of attorneys and will be stricken.
Paragraph 10 is admissible, but only up to and including the phrase "made by the Debtor to Sun Life." Denison's deposition, Id. at p. 88, ln. 9-25; p. 89, ln. 1-20; p. 92, ln. 14-18; p. 93, ln. 19-23; p. 96, ln. 6-13; and p. 97, ln. 1-15, shows that he had no personal first-hand knowledge of what became of amounts withheld from wages. Therefore the second half of paragraph 10, starting with "as well as the amounts" is stricken.
Similarly, paragraph 11 is admissible except for the sentence that starts "Also, the Debtor exercised said authority", which will be stricken for the same reason as stated for paragraph 10.
Plaintiff seeks also to strike the second sentence of paragraph 12 dealing with employee withholdings; the Court finds however, that Denison was in a position to know that there were employee withholdings and will not strike this sentence. In other words, the Court sees a difference between the general fact that employees had insurance withheld from their paychecks and the rather specific facts concerning tracing (if possible) the funds (if any) from withholding through payment.
Paragraphs 13 through 15 are admissible. Plaintiff seeks to strike paragraph 16, but the Court finds it credible that Denison, in his various positions with the Debtor, likely had personal knowledge of the facts stated in paragraph 16. Therefore, paragraph 16 will not be stricken. Paragraphs 17 and 18 are admissible.
The Court finds that entire paragraphs 19, 20 and 21 should be stricken as statements not made on personal knowledge, or, alternatively, statements made without establishing the requisite foundation. Paragraph 19 is clearly hearsay: how could Denison know that "Sun Life received three separate checks ..." unless someone told him that. Paragraphs 20 and 21 either are hearsay, or statements made beyond Denison's capacity to testify from personal knowledge and will be stricken. The Court notes, however, that the numbers in the affidavit agree with the numbers on the checks.
Paragraph 25 will be stricken. First, it is conclusory. Second, it draws legal conclusions which are the province of the Court. Third, nowhere does the Employee Benefits Order "retroactively" authorize anything, so the content of paragraph 25 is factually incorrect on its face. Finally, the intent of the Employee Benefits Order is obvious.
Paragraph 26 will be stricken as pure speculation. Paragraph 27 likewise is pure speculation and without foundation ("[A]s a result of the continuing benefits ... the Debtor received the continuing services of said employees.") and will be stricken. Also, the affidavit does not establish a foundation for which Denison could testify to the "value" of the services provided. Paragraph 28 also discusses the value of the insurance, without providing a basis for the testimony. Alternatively, Denison was told the value and the paragraph consists of inadmissible hearsay. Paragraph 28 will be stricken.
Paragraphs 29 through 31 are not based on personal knowledge and will be stricken. Paragraphs 32 and 33 are admissible. Paragraphs 34 through 43 are not based on personal knowledge, but consist of hearsay and will be stricken. For example, paragraphs 34, 36, 37, 41 and 42 all discuss the receipt of checks by Sun Life, which is obviously hearsay. Denison has no foundation to testify about the values discussed in paragraphs 38, 39 and 40, and must have been told those values. Denison left the employ of Debtor in June 2001, so could not personally know that Sun Life was paid through August 2001. Denison may have some knowledge of Robinson's leaving Debtor and returning two months later, but the statement regarding work falling behind in the benefits department is hearsay.
Based on the foregoing, the Court finds that Plaintiff's Motion to Strike the Denison Affidavit (doc 91) is well taken in part and will be granted in part.
Summary judgment is proper when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Bankruptcy Rule 7056
In ruling on a motion for summary judgment, the trial court views the evidence and draws reasonable inferences therefrom
New Mexico LBR 7056-1 governs summary judgment motions. It provides, in part:
In these cross-motions for summary judgment, the facts derive from four sources: (1) Defendants Second Amended Answer (doc 42) to Plaintiff's Second Amended Complaint (doc 15) (numbered herein as facts 1 through 11); (2) Defendant's Amended Statement of Material Facts (doc 92) and Plaintiff's Response thereto (doc 97)(numbered herein as facts 101 through 159); (3) Trustee's Statement of Supplemental Facts (part II of doc 70) and Defendant's Response thereto (doc 101)(numbered herein as facts 201 through 236); and (4) Trustee's Statement of Material Facts (doc 122) and Defendants Response (doc 125)(numbered herein as facts 301 through 346).
These facts are from the Second Amended Answer (doc 42) to the Second Amended Complaint (doc 15).
1. On February 8, 2001 (the "Petition Date"), Furr's Supermarkets, Inc., a Delaware corporation ("Furr's" or "Debtor")
2. On December 19, 2001, the Furr's chapter 11 bankruptcy case was converted to a chapter 7 case. The Plaintiff was appointed the trustee on that date and continues in that capacity.
3. The Defendant transacted business with Furr's in New Mexico.
4. The Court has jurisdiction over the subject matter herein and the parties to this action. This action is a core proceeding under 28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(2)(F). Venue is proper in this Court.
5. Paragraph 5 alleges that after November 9, 2000, Furr's paid the Defendant the amounts set forth in Exhibit A to the Amended Complaint (doc 3) filed on February 7, 2003 (together "the Payments") on or after the dates set forth therein. Defendant denied this paragraph, affirmatively stating that the Exhibit A was incorrect. Defendant claims that it received only three separate checks during the preference period:
Check number Date Amount #25128092 November 7, 2000 $ 44,850.65 #225132000 December 1, 2000 $ 44,570.16 #251368810 January 5, 2001 $ 90,477.43 Total $179,898.24
Defendant claims that there also may be additional errors on Exhibit A. Trustee, in her Statement of Undisputed Facts, doc 122, ¶ 2, adopts Defendant's denial. Therefore, the Court will deem this allegation withdrawn and rely on Trustee's doc 122, ¶ 2, which is duplicated as fact 302, below.
6. Each of the Payments was made for or on account of an antecedent debt owed by Furr's to Defendant (individually and collectively, the "Antecedent Debt").
7. The Antecedent Debt was not a consumer debt.
8. The Payments were made while Furr's was insolvent.
9. The Payments were made within 90 days before the Petition Date (the "Preference Period").
10. Defendant controverted paragraph 10
11. Defendant controverted paragraph 11
These facts are from the Defendant's Amended Statement of Material Facts
101-103.
104. The Debtor had approximately 2000 employees as Plan participants in any given Plan year.
105-110.
111. The Debtor's employees were paid on a weekly and/or biweekly basis.
112. At all times material herein the Debtor maintained two "controlled disbursement accounts" at First National Bank of Fairfield. Everything was paid through the controlled disbursement accounts. However, the Debtor also had other bank accounts, including a payroll account, a master operating account, a checking account used to pay vendors, landlords, and utility bills, and other accounts used to pay employee benefits, lottery payments, and money gram payments. All were "zero balance" accounts.
113. At all times material herein (2000 and 2001), at the time the Debtor issued and mailed or delivered checks to its employees, the Debtor had no money set aside in any specific bank account to "cover" said checks, and the Debtor had no money set aside in any specific bank account in regard to the monies "withheld" from its employees' pay checks. Similarly, at the time the Debtor issued and mailed checks to Sun Life the Debtor had no money set aside in any specific bank account to "cover" said checks. Rather, each business day the Debtor would take the income from sales and draw on its line of credit with Fleet (and later Heller) as necessary to meet the day's requirements, and wire transfer funds from its main operating account to the controlled disbursement accounts at First National Bank of Fairfield (to cover the checks clearing said bank that day). Ultimately, all of the Debtor's income from sales went directly to Heller (because it had a lien on all of the debtor's accounts), and Heller would then wire transfer funds to the Debtor's main operating account, which the Debtor then wired to one or both of the controlled disbursement accounts at First National Bank of Fairfield.
114. During the preference period the officers of the Debtor had discretionary authority regarding the disbursement of corporate funds, subject to obligations and limitations imposed by the secured creditors and by law. Gene Denison had authority to approve invoices for payment. However, nothing went out the door (nothing was paid) without the express approval of Tom Dahlen (CEO) or Steve Mortensen (CFO).
115. The Debtor filed a Chapter 11 Petition in bankruptcy on February 8, 2001, and continued as a debtor in possession until December 19, 2001.
116. As of the Petition Date the Debtor was a leading regional supermarket chain, with operations in New Mexico and western Texas. The Debtor employed approximately 4900 individuals, and operated 71 stores. The Debtor's work force consisted of approximately 4320 hourly employees and approximately 500 salaried employees. More than 3400 of the employees were part time employees.
117. Many of the Debtor's employees were unionized. The Debtor's collective bargaining agreements with its unions established pay rates, overtime pay, holiday pay, and other benefits. Said collective bargaining agreements required that the Debtor contribute certain amounts to the
118.
119. Duplicate of fact 302.
120.-122.
123. As of the Petition Date, the Debtor considered its ability to rely on its employees to be a key component of the potential success of its business and its ability to reorganize and continue as a going concern. As of the Petition Date, the Debtor believed that its employees relied on their wages and salaries to pay basic living expenses, and that they relied on the employee benefits provided by the Debtor to secure the health and financial welfare of themselves and their families. As of the Petition Date, the Debtor believed that any failure to pay Pre-Petition employee benefit obligations would create extreme personal hardship for many employees, destroy employee morale, and result in an unmanageable employee turnover.
124. On February 8, 2001, the Debtor filed its Motion for Order Authorizing (A) Payment of Pre-Petition Employee Obligations and (B) Continuation of Employee Benefit Plans and Programs Postpetition (main case, doc. 12)("Employees Benefits Motion.")
125. On February 8, 2001 the Court entered an Order Authorizing (A) Payment of Pre-Petition Employee Obligations and (B) Continuation of Employee Benefit Plans and Programs Postpetition (main case, doc 28)("Employee Benefits Order.")
126.-133.
134. From 1991 forward Lana Booth, now known as Lana Robinson ("Robinson"), an employee of the Debtor, was initially the Debtor's health benefits coordinator, then it's health benefits administrator, then its health benefits manager. Periodically the Debtor's employees filled out and submitted benefits enrollment forms to Robinson.
135. Sun Life did not bill or invoice the Debtor. Rather, toward the end of each month the Debtor's payroll department would run a "census" on the number of the Debtor's current employees.
136. During the middle of each month Robinson would submit "self bills" to the head of the Administrative Department of the Debtor (and beginning in early 2000 to the head of the Human Resources Department of the Debtor instead of to the Administrative Department). Upon approval by the applicable department head, Robinson would write the date of approval and the word "Approved," and her name, "Lana Booth, Health Benefits Manager," on the self bills and submit them to the Debtor's accounting department.
137.
138. In December of 1999, as head of the Debtor's Administrative Department (as the Chief Administrative Officer), Gene Denison filled out and signed an Application for Group Insurance (the "Application") with Sun Life, and tendered a check in the amount of $38,071.31 for the estimated premium for January 2000. The date of the Application was December 30, 1999, and the "Effective Date" written on the Application was January 1, 2000. Subsequently, the check from the Debtor tendered with the Application was replaced by a check received by Sun Life on or about May 6, 2000. A January 6, 2000 letter was
139. Summarized in table at fact 327.
140. Robinson left the Debtor's employment on approximately June 7th of 2000 and came back to work for the Debtor in the last part of August 2000, on a consulting basis at first, and then full time in September of 2000. During the period of Robinson's absence much of the work fell behind in the benefits department.
141. Summarized in table at fact 327.
142. Summarized in table at fact 327.
143.-145.
146. Summarized in table at fact 327, and duplicate of fact 222.
147. Summarized in table at fact 327.
148. Summarized in table at fact 327.
149. Sun Life was paid in full for all insurance benefits provided to the Debtor and its employees (including spouses and children of employees) from January 1, 2000 through August 31, 2001.
150. Summarized in table at fact 327.
151.
152. As a result of the insurance coverage benefits provided by Sun Life to the Debtor and its employees (and dependents), Sun Life made the following payments to said employees, dependents, and beneficiaries for claims made as of August 31, 2001: Employee Basic Life claims totaling $72,000: Dependent Basic Life claims totaling $2000; Employee Optional Life claims totaling $25,000; Dependent Optional Life claims totaling $10,000; AD & D claims totaling $10,000; Long-Term Disability claims totaling $42,318.60; and Short-Term Disability claims totaling $196,974.85.
153. In addition to the above described claims paid for claims made on or before August 31, 2001 (for the time period from January 1, 2000 through August 31, 2001), Sun Life will continue to make long-term disability payments to two former employees of the Debtor (one in the amount of $130 per month through January 2, 2022, and the other in the amount of $1,185 per month through October 23, 2027), so long as said employees continue to be totally disabled (within the meaning of the terms of the amended Policy), and are otherwise entitled to continuing benefits.
154. According to the Debtor's Schedules filed on March 26, 2001 the Debtor had $5,415,846.77 in unsecured priority claims.
155. As of November 8, 2005 the total amount received by the Trustee in all of the Trustee's Section 547 preference actions totaled $10,875,361.06. Additionally, as of said date the amount claimed in outstanding complaints and amounts awarded but uncollected totaled $2,268,443.23.
156.
157. If this Case had been filed as a Chapter 7, Michael Caplan (the Trustee's
158. During the Chapter 11 the Debtor's employees created a preference screen and maintained the Debtor's computer system in operation. However, based on the assumption that without access to the Chapter 11 the Debtor's computer system (and the preference screen performed postpetition) would not have been available to the Trustee, Mr. Caplan is of the opinion that it is possible that the preference recovery would have been significantly less than $8 million.
159. In a hypothetical chapter 7 analysis virtually all of the recovery on preference and avoidance claims would have gone to priority tax claimants, employees, and other priority claims. After those payments it is possible there would have been nothing left to pay general unsecured creditors. But even if there were anything left to pay general unsecured creditors, it would be in the nature of pennies on the dollar.
These facts are from the Trustee's Statement of Supplemental Facts (part II of doc 70) and Defendant's Response thereto (doc 101).
201. Fact 307 is more comprehensive.
202. The policy premium payments from Debtor to Defendant were due and payable monthly on the first day of each month.
203. Duplicate of fact 6.
204. Duplicate of fact 8.
205. Duplicate of fact 1.
206. Duplicate of fact 9.
207. Duplicate of fact 2.
208. Debtor and Debtor's bankruptcy estate do not owe Defendant any amount for unpaid insurance premiums.
209. Defendant was paid in full for all insurance coverage provided to Debtor or to Debtor's employees during the Preference Period.
210. Summarized in table at fact 327.
211. Duplicate of fact 149.
212. Duplicate of fact 211.
213. Debtor and Debtor's employees received all the benefits due to them under the terms of the insurance policy with Defendant and Defendant does not owe any product, service or performance to any of Debtor's former employees under the terms of the insurance policy, except to the extent that Defendant may continue to pay a long-term disability benefit claim approved while the insurance policy was in force. In response to this proposed fact, Sun Life asserts that, in fact, there are two long term claims. The Court finds the dispute not material.
214. Duplicate of fact 4.
215. In a hypothetical Chapter 7, the trustee would almost certainly abandon all encumbered assets, including the debtor's cash, inventory, store leases, equipment leases, warehouse lease, store fixtures, equipment, and liquor licenses, and/or the leases would be rejected by operation of law under the Bankruptcy Code, as there would be no equity in the assets that could be realized by the estate, and there would be no funds available to pay rent for the leased stores, for the leased warehouse in El Paso, or for leased equipment. The trustee would have no way to operate the debtor at all, much less for long enough to sell the assets, or to preserve the assets until a sale could be accomplished.
221. In Furr's chapter 11 case, there was never a deadline set or noticed for filing prepetition claims.
222. Debtor's payments to Sun Life made postpetition were authorized under the Code or by the Court, pursuant to 11 U.S.C. §§ 363, 1107 & 1108. They may also have been authorized by the Employee Benefits Order or some other order(s).
223.-224. The parties agree these are no longer relevant.
225. As of the Petition Date, Furr's employee payroll was outstanding and owed; there were outstanding payroll checks from the prior week; and there were employment taxes owed on the outstanding payroll. The total of these amounts outstanding as of the Petition Date was approximately $3.5 million. As of the Petition Date, Furr's owed at least approximately $2.4 million in self-insured employee medical claims.
226. The Policy provided that the "Grace Period means the 45 days following a premium due date during which premium payment may be made." "If the Policyholder fails to pay any premium within the Grace Period, this Policy will terminate on the last day of the Grace Period." "The Grace Period is 45 days following a premium due date during which premium payment may be made. During the Grace Period the Policy shall continue in force, unless the Policyholder has given Sun Life written notice to discontinue this Policy. In any event, premiums are payable for any period of time the Policy remains in force." Sun Life could terminate this Policy on any premium due date by giving written notice to the Policyholder at least 60 days in advance. Sun Life admitted this fact was not disputed, but added that Sun Life had agreed to a 60-day grace period and issued an amended policy on May 16, 2001, and it was attached to Dewar deposition as Exhibit 11.
227. Duplicate of fact 113.
228. Duplicate of fact 113.
229. Duplicate of fact 113.
230. Duplicate of fact 113.
231. The checks to Sun Life were drawn on the First National Bank at Fairfield account. With respect to checks to Sun Life, on the day the check was presented to Furr's bank, First National Bank of Fairfield, it would notify Furr's of the aggregate amount of all checks presented and Furr's would wire transfer that amount to the bank from the main operating account. Ms. Dunlap would make the calculations of inflows versus outflows and how much additional cash Furr's would need to meet that day's requirements and call Furr's lender and ask it to wire funds to the main operating account. In turn, Furr's would wire the funds from the main operating account to the bank in Fairfield.
232. All sales proceeds went into a main account each day. There was one collective pot [of money] for everything to go into and out of. There wasn't any one-to-one correlation of anything. All receipts from all stores, regardless of where it came from and regardless of where that money would ultimately be used for all went into one pot.
233. Furr's had systems in place that would transfer all funds collected in the stores into the main operating account every day. When Heller became Furr's lender, they settled up on a daily basis. This meant that all of the funds incoming were wired to Heller daily. Heller wired back the amount that was required to make all the payments on any given day.
234. Furr's relationship with its lender required that it settle up at the end of every day so that a minimal amount of
235. Ms. Dunlap was Furr's cash manager. She would project the incoming amount of funds, basically the collections from the store accounts, and project the outflow of funds, be it payroll or benefits or taxes, et cetera, on a daily basis and what would be left, if any, at the end of the day, or what Furr's requirements for cash would be at the end of the day. Furr's was a net borrower. This meant that Furr's didn't have any cash of its own, and that all of the money in Furr's bank accounts, including cash, was pledged to a lender. But, Sun Life commented that Furr's owned the cash it received from customers. This is probably true for every day until the funds were swept.
236. There were meetings held almost daily with Mr. Mortensen to decide which of Furr's vendors was going to get paid. Once a decision had been made about who was going to get paid, then checks were sent out to those entities. Ms. Dunlap prepared cash flow projections in part so that Furr's knew how much money was available so that Mr. Mortensen could then decide what checks to send out. Mr. Mortensen was the chief financial officer during the 90 days before the bankruptcy. He had the authority not to issue a check to any particular person or entity.
These facts are from the Trustee's Statement of Material Facts (doc 122) and Defendant's Response thereto (doc 125).
301. Duplicate of fact 1.
302. Debtor paid Defendant a total of $179,868.24 (the "Payments") during the preference period in three (3) checks on the dates in the amounts described with the check numbers, amounts, payment due dates, check dates, dates received and dates of honor set out below. Defendant received and negotiated the three checks described below.
Payment Check Date Date
Check Nos. Amounts due dates Dates Received Honored
25128092 $44,850.65 9/1/00 11/7/00 11/13/00 11/15/00
25132000 $44,570.16 10/1/00 12/1/00 12/11/00 12/14/00
25136888 $90,447.43 11/1/00 & 01/5/01 01/16/01 01/17/01
12/1/00
(But see fact 327 (more comprehensive list.))
303. The policy premium payments from Debtor to Defendant were due and payable monthly on the first day of each month.
304. Duplicate of fact 6.
305. Duplicate of fact 8.
306. Duplicate of fact 9.
307. Duplicate of fact 2.
308. Duplicate of fact 4.
309. Duplicate of fact 113.
310. Duplicate of fact 230.
311. Duplicate of fact 231.
313. Duplicate of fact 233.
314. Duplicate of fact 234.
315. Duplicate of fact 235.
316. Duplicate of fact 236.
317. Duplicate of fact 112.
318. Duplicate of fact 113.
319. Duplicate of fact 134.
320. The Debtor's purchase of life, accidental death & dismemberment ("AD & D"), and disability insurance from Defendant (and prior to that, from Unum Life Insurance Company of America ("UNUM")) was part of an insurance program providing the Debtor's employees and their dependents with several different kinds of insurance.
321. Approximately half of Debtor's employees participated in the voluntary or optional coverage program.
322. Employee basic life, dependent basic life, employee basic AD & D, and employee short-term and long-term disability insurance premiums were paid by the Debtor on behalf of its employees. Employee and dependent (spouse and child) optional life and employee optional AD & D insurance (collectively, the "optional insurance") premiums were deducted from the employees paychecks. Moneys deducted from employee's checks to pay insurance premiums to Defendant did not exist at the time the paycheck was cut. There was no mechanism in place to segregate the money deducted from the employee paychecks. On the day the employee paychecks were cut, there wasn't any money anywhere designated to cover the checks or the withholding.
323. The Defendant did not bill or invoice the Debtor. Rather, toward the end of each month the Debtor's payroll department would run a "census" on the number of the Debtor's current employees. At the beginning of each month Robinson would take the census from the end of the previous month and prepare "self bills" for the life, AD & D, and disability insurance provided by Sun Life. Preparing the self bills involved determining how many employees (plus spouses and children) were eligible for what amount and type of coverage, and calculating the premiums to be paid by the Debtor and the premiums being withheld from the employees' wages.
324. (Duplicates 136 in part.) During the middle of each month Robinson would submit the self-bills to the head of the Administrative Department of the Debtor (and beginning in early 2000 to the head of the Human Resources Department of the Debtor instead of to the Administrative Department). Upon approval by the applicable department head, Robinson would write the date of approval and the word "Approved," and her name, "Lana Booth, Health Benefits Manager," on the self bills and submit them to the Debtor's accounting department. The Debtor's accounting department would then prepare a check and print out a check stub and return the check and check stub to Robinson to mail out to Sun Life each month.
325. In preparing the self-bills, the Debtor did not know or try to determine what was deducted from employee wages. Sun Life admitted that this fact was not disputed, but added:
326. Duplicate of fact 226.
327. The following chart accurately reflects the premium payment history by Debtor to Defendant.
Premium Premium Receive Coverage Check Check Check Due Date Amount by Sun period Date Number Amount 1/1/00 $38,071.31 5/18/00 1/2000 5/11/00 25095418 $38,071.31 2/1/00 $44,414.26 3/6/00 2/2000 2/25/00 25080702 $44,414.26 3/1/00 $44,970.49 4/25/00 3/2000 4/14/00 25090140 $44,970.49 4/1/00 $44,313.36 6/6/00 4/2000 5/26/00 25098164 $44,313.36 5/1/00 $44,313.36 7/11/00 5/2000 6/30/00 See below See below 6/1/00 $44,313.36 7/11/00 6/2000 6/30/00 25104681 $88,626.72 7/1/00 $45,046.52 9/19/00 7/2000 9/8/00 25117292 $45,046.52 8/1/00 $43,991.51 9/25/00 8/2000 9/19/00 25119241 $43,991.51 9/1/00 $44,850.65 11/13/00 9/2000 11/7/00 25128092 $44,850.65 10/1/00 $44,570.16 12/11/00 10/2000 12/1/00 25132000 $44,570.16 11/1/00 $45,338.75 1/16/01 11/2000 1/5/01 See below See below 12/1/00 $45,108.68 1/16/01 12/2000 1/5/01 25136888 $90,447.43 1/1/01 $46,763.01 3/5/01 1/2001 2/27/01 See below See below 2/1/01 $46,703.78 3/5/01 2/2001 2/27/01 30000610 $93,466.79 3/1/01 $44,961.79 5/1/01 3/2001 4/25/01 30004592 $44,961.79 4/1/01 $43,555.42 6/11/01 4/2001 6/1/01 40001787 $43,555.42 5/1/01 $43,190.63 6/29/01 5/2001 6/25/01 40003341 $43,190.63 6/1/01 $41,123.41 7/30/01 6/2001 7/23/01 40005482 $41,123.41 7/1/01 $39,087.98 11/14/01 7/2001 8/15/01 See below See below 8/1/01 $38,106.17 8/22/01 8/2001 8/15/01 40006722 $77,194.15
Sun Life admitted that this fact was not disputed, but stated that in the row beginning with 7/1/01, that the "Received by Sun" date is not November 14, 2001, but August 22, 2001. Sun Life cites to Trustee's Interrogatory No. 22 and Trustee's Request for Admission No. 15 and Sun Life's responses thereto. The Court finds this not material.
328. (Duplicates 208.) Debtor and Debtor's bankruptcy estate do not owe Defendant any amount for unpaid insurance premiums.
329. (Duplicates 209.) Defendant was paid in full for all insurance coverage provided to Debtor or to Debtor's employees during the Preference Period.
330. Duplicate of fact 211.
331. Duplicate of fact 212.
332. Duplicate of fact 213.
333. Duplicate of fact 215.
334. The trustee in a hypothetical chapter 7 case would be confronted with 71 closed supermarkets located throughout New Mexico and west Texas, and no funds
335. In a hypothetical Chapter 7, the trustee would encounter a computer system that was fragile, and out-of-date, which pre-petition required frequent interaction between Debtor's development staff and Lawson's Help Desk.
336. In a hypothetical Chapter 7, the computer system would have been shut down. Because the systems were customized it would have required documentation of all the code customization in order for those working on a contingency basis for a trustee to understand all the intricacies of the system. There would have been very little documentation to assist the trustee in retrieving information from the system.
337.-340. The parties agree these are no longer relevant.
341. Duplicate of fact 221.
342. Duplicate of fact 222.
343. The parties agree this fact is no longer relevant.
344. Based on Furr's accounting records, on the Petition Date, Furr's owed at least $9,781,907.25 to its non-executive employees, capped at $4,300.00 per employee. This amount is the total, limited to $4,300.00 for each individual, of (a) wages owed but unpaid on the Petition Date, (b) severance pay owed on the Petition Date, (c) accrued, unused and uncompensated vacation as of the Petition Date, and (d) the employer's portions of the Social Security, Medicare, state unemployment and federal unemployment taxes on unpaid wages, severance and vacation pay as of the Petition Date. All of the wage and vacation amounts included in the above total were earned within 90 days before the Petition Date. The Social Security, Medicare, state unemployment and federal unemployment tax amounts are calculated on wage and vacation amounts earned within 90 days before the Petition Date and on the severance pay owed on the Petition Date; the calculation does not take into account certain federal & state excess wages per employee and does not include taxes on those excess wages.
345. As of the Petition Date, Furr's owed at least $236,707.11 to its employees that were on the executive payroll, capped at $4,300.00 per employee. This amount is the total, limited to $4,300.00 for each individual, of (a) wages and salaries owed but unpaid on the Petition Date, (b) 3.75 days estimated accrued, unused and uncompensated vacation as of the Petition Date, and (c) the employer's portions of the Social Security, Medicare, state unemployment and federal unemployment taxes on unpaid wages and vacation pay as of the Petition Date. All of the wage and vacation amounts included in the above total were earned within 90 days before the Petition Date. All of the Social Security, Medicare, state unemployment and federal unemployment tax amounts are calculated only on amounts earned within 90 days before the Petition Date; the calculation does take into account certain federal & state excess wages per employee and does not include taxes on those excess wages.
346. As of the Petition Date, Furr's owed at least approximately $2.4 million in self-insured employee medical claims.
In this adversary proceeding the Plaintiff seeks to avoid a preferential transfer under Bankruptcy Code section 547. The United States Supreme Court discussed the policies underlying that section
Id. at 160-61, 112 S.Ct. 527.
Eckles v. Pan American Marketing (In re Balducci Oil Co.), 33 B.R. 843, 845 (Bankr. D.Colo.1983). There are actually six elements, the five numbered elements plus proof that the transfer was of property of the estate. Before the Court considers whether the Trustee has met her burden of proof in this case, the Court will examine Sun Life's affirmative defenses to determine if any of them preclude the Trustee's proof of any required element.
But, before addressing the individual affirmative defenses, the Court wants to clarify a misunderstanding that pervades preference cases, including a case from this Court that may have helped create the misunderstanding. See, e.g. Gonzales v. Food Marketing Group (In re Furr's Supermarkets, Inc.), 320 B.R. 1, 6 (Bankr.D.N.M.2004) ("[Section] 547(c) is the exclusive list of defenses available to
Nor, to be accurate, are the creditor's affirmative defenses limited to section 547(c). For example, a majority of courts addressing the issue recognize a "contract assumption defense" as a complete bar to preference recovery. See Weinman v. Allison Payment Systems, LLC (In re Centrix Financial, LLC), 434 B.R. 880, 885-886 (Bankr.D.Colo.2010). Similarly, as discussed below, Sun Life has raised estoppel arguments as affirmative defenses in this adversary proceeding. Indeed, it is easy to see how affirmative defenses such as accord and satisfaction, payment, release, res judicata, statute of limitations and waiver, all identified in Rule 8(c)(1), F.R.Civ.P., incorporated into Rule 7008(a), F.R.B.P., come into play in a preference action.
Rather, the statement necessarily means that, once the elements of section 547(b) are proved and the preference established, the only "preference-specific defenses" to the trustee's recovery of that preference are those set forth in section 547(c). See section 547(c) ("The trustee may not avoid under this section a transfer....") (emphasis added); Rushton v. E & S Inter. Enter., Inc. (In re Eleva, Inc.), 235 B.R. 486, 488 (10th Cir. BAP 1999) ("Once a trustee has established that a transfer is a preference, a creditor may assert a defense as provided in 11 U.S.C. § 547(c).")
The Court will also address several issues that are common to several of Sun Life's defenses. First, it does not matter that Debtor obtained the funds used to pay Sun Life from extensions on a line of credit by Heller.
Bailey v. Big Sky Motors (In re Ogden), 314 F.3d 1190, 1199 (10th Cir.2002). See also Amdura Nat'l Distribution Co. v. Amdura Corp., Inc. (In re Amdura Corp.), 75 F.3d 1447, 1451 (10th Cir.1996)("We presume that deposits in a bank to the credit of a bankruptcy debtor belong to the entity in whose name the account is established."); Manchester v. First Bank & Trust Co. (In re Moses), 256 B.R. 641, 645 (10th Cir. BAP 2000)(When debtor borrowed money from his pension plan and paid off a bank loan, that payment diminished his subsequent bankruptcy estate. On the petition date the funds were no longer available to pay unsecured creditors.); Gray v. Travelers Ins. Co. (In re Neponset River Paper Co.), 231 B.R. 829, 834 (1st Cir. BAP 1999)(Funds transferred to a creditor came from an advance on a working capital agreement that was accounted for on debtor's financial statement as a liability. The bankruptcy appellate panel held that this was a transfer of
Second, earmarking does not apply in this case.
Coral Petroleum, Inc. v. Banque Paribas-London (In re Coral Petroleum, Inc.), 797 F.2d 1351, 1356 (5th Cir.1986). See also Moses, 256 B.R. at 650 (As the bottom line, if debtor controls the proceeds of a loan and is free to use the funds in any way, there is no earmarking.); Neponset River, 231 B.R. at 835 ("This control by the debtor of the distribution of funds precludes the application of the earmarking doctrine herein.") There is nothing in the record that alleges that Heller required or instructed Debtor to pay Sun Life, and there are no allegations or evidence that Debtor was required to pay Sun Life. And, debtor had control of the borrowed funds before they were transferred because they flowed through Debtor's account. See Fact 113.
Parks v. FIA Card Services, N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir. 2008), cert. denied, ___ U.S. ___, 129 S.Ct. 2871, 174 L.Ed.2d 579 (2009).
And, finally, Sun Life argues "estoppel" several times in different contexts without specifying the exact flavor of the estoppel. Black's Law Dictionary (9th ed. 2009) lists thirty-three types of estoppel. The Court assumes that Sun Life is arguing judicial estoppel, but the Court will also consider application of collateral estoppel, equitable estoppel, and promissory estoppel.
United States v. Villagrana-Flores, 467 F.3d 1269, 1278-79 (10th Cir.2006), cert. denied, 549 U.S. 1149, 127 S.Ct. 1021, 166 L.Ed.2d 769 (2007). See also Kane v. Nat'l Union Fire Ins. Co., 535 F.3d 380, 385-86 (5th Cir.2008):
Application of judicial estoppel is within the trial court's discretion. Kane, 535 F.3d at 384; Mathews v. Denver Newspaper Agency LLP, 649 F.3d 1199, 1209 (10th Cir.2011).
When analyzing judicial estoppel, the Court examines three factors. First, the later statement must clearly be inconsistent with the party's earlier statement in litigation. See Cleveland v. Policy Mgt. Systems Corp., 526 U.S. 795, 802, 119 S.Ct. 1597, 143 L.Ed.2d 966 (1999) (The Court of Appeals ruled that claims under both the Americans with Disabilities Act and Social Security Disability Insurance were directly conflicting: namely, "I am too disabled to work" and "I am not too disabled to work." Id. The Supreme Court examined the actual language at issue and found that there were many situations where an SSDI claim and an ADA claim could comfortably exist side by side, and reversed the Court of Appeals.) Id. at 803, 119 S.Ct. 1597. See also Devan v. CIT Group Commercial Services, Inc. (In re Merry-Go-Round Enter., Inc.), 229 B.R. 337, 345 (Bankr.D.Md. 1999)(The Maryland Bankruptcy Court found that statements of solvency made by the debtor-in-possession ("DIP") in postpetition motions did not conflict with the allegations of trustee's preference complaint of preference-period insolvency because the DIP's motions did not even mention insolvency as defined by the code or the related concept of fair valuation.)
Inherent in the first factor is that the same party must make both representations, or perhaps they must be in privity with or bound by the acts and representations of the maker of the first statement. It does not impede the judicial process if two different parties make conflicting statements. See Meda v. Snell & Wilmer, L.L.P. (In re Schugg), 2009 WL 3132932, at *5 (D.Ariz.2009)(Regardless of debtor's acts or omissions, Meda, the plan trustee, never made any inconsistent statements to the Court. Judicial estoppel did not apply.); The Liquidation Committee v. Binsky
Another consideration for the first factor is whether the statements made were of "fact." Johnson v. Lindon City Corp., 405 F.3d at 1069 ("Moreover, the position to be estopped must generally be one of fact rather than of law of legal theory.") (Citing Lowery v. Stovall, 92 F.3d 219, 224 (4th Cir.1996), cert. denied, 519 U.S. 1113, 117 S.Ct. 954, 136 L.Ed.2d 841 (1997)). See also The Liquidation Committee, 361 B.R. at 105:
See also Philip Services Corp. v. Luntz (In re Philip Services (Delaware), Inc.), 284 B.R. 541, 550 (Bankr.D.Del.2002) ("[T]he position must be one of fact, rather than law or legal theory."), aff'd., 303 B.R. 574 (D.Del.2003). Compare New Hampshire v. Maine, 532 U.S. 742, 751, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001)("New Hampshire's claim that the Piscataqua River boundary runs along the Maine shore is clearly inconsistent with its interpretation of the words `Middle of the River' during the 1970's litigation."); Cleveland, 526 U.S. at 802, 119 S.Ct. 1597 ("This case does not involve ... directly conflicting statements about purely factual matters, such as `The light was red/green,' or `I can/cannot raise my arm above my head.'") (Emphasis in original.) (Holding that judicial estoppel did not apply). See also Sturm v. Boker, 150 U.S. 312, 336, 14 S.Ct. 99, 37 L.Ed. 1093 (1893):
The second factor in the judicial estoppel analysis directs the Court to examine whether the Court in fact accepted the first statement. If it has,
New Hampshire, 532 U.S. at 750-51, 121 S.Ct. 1808.
Under the third factor the Court examines whether a party would gain an unfair advantage or impose an unfair detriment if not estopped by prior statements. Id. at 751, 121 S.Ct. 1808.
Sun Life seeks to estop Plaintiff using a prior federal court order. "Federal principles of collateral estoppel apply to prior judgments that are rendered by a federal court." McCart v. Jordana (In re Jordana), 232 B.R. 469, 475 (10th Cir. BAP 1999) (citing cases), aff'd., 216 F.3d 1087 (10th Cir.2000) (Table).
Id. at 475-76 (Citation and internal quotation marks omitted.)
Spaulding v. United Transp. Union, 279 F.3d 901, 909 (10th Cir.), cert. denied, 537 U.S. 816, 123 S.Ct. 84, 154 L.Ed.2d 20 (2002) (Citations omitted.)
EDO Corp. v. Beech Aircraft Corp., 911 F.2d 1447, 1454 (10th Cir.1990).
The Court will now address Sun Life's affirmative defenses.
Sun Life claims that the payments received were authorized by the February 8, 2001 "Employee Benefits Order" (main case, doc 28) and that that order is now the law of the case. The caption of that Order is: Order Authorizing (A) Payment of Prepetition Employee Obligations and (B) Continuation Of Employee Benefit Plans and Programs Postpetition. The Order provides, in part, 1) the Debtor is authorized to pay or otherwise honor the Prepetition Employee Obligations to, or for the benefit of, the Employees; 2) the Debtor is authorized to continue postpetition the employee benefit plans and programs in effect immediately before the filing of this case; 3) the banks upon which any checks are drawn in payment of the Prepetition Employee Obligations, either before, on or after the petition date, are authorized and directed to honor such checks upon presentation any such checks; 4) the banks are authorized and directed to rely on the representations of the Debtor as to which checks are in payment of the Prepetition Employee Obligations; 5) the Debtor is authorized to pay any and all withholding taxes, social security taxes and other payroll taxes (local, state and federal), whether such taxes relate to the period before or after the Petition Date; 6) the banks upon which any checks are drawn in payment of such taxes, whether before, on, or after the Petition Date, are authorized and directed to honor such checks upon presentation any such checks; 7) neither the provisions contained in the order, nor any payments made by the Debtor under the Motion, shall be deemed an assumption of any employee benefit plan, program or contract, or otherwise affect the Debtor's rights under 11 U.S.C. §§ 365, 1113, or 1114 to assume or reject any executory contract between the Debtor, any employee, or any provider of employee services or benefits.
The caption of the Order is that it is "authorizing" Prepetition Employee Obligations and a Continuation Of Employee Benefit Plans. Black's Law Dictionary 133 (6th ed. 1990) defines "authorize" as "to empower", or "to permit a thing to be done in the future." "Approval", in contrast, is defined as "the act of confirming, ratifying, assenting, sanctioning, or consenting to some act or thing done by another." Id. at 102. Therefore, the caption makes clear that the order is dealing with things to be done in the future, i.e., postpetition, and is not pertinent to things completed prepetition. Similarly, the decretal portion authorizes 1) the Debtor "to pay" certain things now unpaid; 2) the Debtor to continue benefit plans and programs postpetition; 3) banks to honor checks upon presentation; 4) banks to rely on the representations of the Debtor as to which checks are in payment of the Prepetition Employee Obligations; 5) the Debtor to pay any taxes; and 6) banks to honor tax checks upon presentation. Everything authorized would occur postpetition.
The Order does not approve anything that happened prepetition. Specifically it does not approve or ratify payments to Sun Life, which Defendant admits is not even mentioned by name in the Order. Furthermore, the Order specifically states:
Sun Life is essentially arguing that by filing the Employee Benefits Motion Debtor was seeking to abandon or release any preference claims related to the subject matter of those motions. First, it is clear that a preference action is property of the estate, and not property of the debtor. See 11 U.S.C. § 541(a) (The estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case (except as specified) and, among other things, any interest in property that the trustee recovers under section 550 of this title.); Spicer v. Laguna Madre Oil and Gas, II, LLC (In re Texas Wyoming Drilling, Inc.), 422 B.R. 612, 632 (Bankr.N.D.Tex.2010). Once a preferential transfer action is property of the estate, unless disposed of during a chapter 11 case it is still property of the estate upon conversion to Chapter 7. Id. at 633. Disposal of such an action would require a judgment, recovery, release, transfer or the equivalent to occur during the Chapter 11. Id. at 633-34. None of these occurred. See main case docket. Furthermore, no notice of any such disposition appears in the record. Nor were the preference claims settled, which would have required notice under Bankruptcy Rule 9019(a). And, finally, the preference claims were not abandoned. Abandonment is governed by Section 544, and provides:
The docket sheet does not show any motions to abandon, notices of proposed abandonment, or orders authorizing abandonment. In summary, the Court finds that this preference action is still property of the estate and that it has not been abandoned.
Sun Life cites to several cases in support of its defense A. One is directly on point, Official Committee of Unsecured Creditors v. Medical Mutual of Ohio (In re Primary Health Systems, Inc.), 275 B.R. 709 (Bankr.D.Del.2002), aff'd, C.A. No. 02-cv-00301-SLR (D.Del. Feb. 27, 2003)(unpublished). In Primary Health
First, the Court finds that the Employee Benefits Order in this case is not the "law of the case" as to the recovery of preferences. The issue of preference liability was not raised, and definitely not decided by the order, either explicitly or by implication. The order dealt only with postpetition payments of certain outstanding employee benefit prepetition liabilities and the ability to continue making employee benefit payments postpetition.
Second, this Court rejects the reasoning set out in Primary Health. Similarly, another bankruptcy judge from the District of Delaware declined to follow Primary Health in HLI Creditor Trust v. Export Corp. (In re Hayes Lemmerz Int'l., Inc.), 313 B.R. 189, 193 (Bankr.D.Del.2004):
(Emphasis in original. Footnote omitted.) And, id. at 193-94:
(Emphasis in original.) The Court finds Hayes Lemmerz persuasive and adopts its reasoning.
Sun Life cited other cases which the Court also does not find persuasive. In Seidle v. GATX Leasing Corp. (In re Airlift Int'l, Inc.), 778 F.2d 659, 660 (11th Cir.1985), the Eleventh Circuit addressed the "tension" between section 547 (preferences) and section 1110
In this case, Debtor never entered a stipulation to cure prepetition defaults
Next, Sun Life cites Alvarado v. Walsh (In re LCO Enter.), 12 F.3d 938, 942 (9th Cir.1993), a case in which a debtor-in-possession assumed a lease of its business premises.
Id. Debtor never assumed any contract with Sun Life, so LCO is not persuasive.
Similarly, the ruling of In re Superior Toy & Manufacturing Co., Inc., 78 F.3d 1169, 1172 (7th Cir.1996), is that assumption of a contract gives the contracting party a secured interest in monies due; if the contract is not assumed, the contracting party is subject to section 547(b). Superior Toy is not applicable because Debtor never assumed a contract with Sun Life.
Finally, the Court does not understand Sun Life's citation of Neuger v. United States (In re Tenna Corp.), 801 F.2d 819 (6th Cir.1986) or Marlow v. Rollins Cotton Company (In re Julien Co.), 202 B.R. 89 (W.D.Tenn.1996), aff'd. in part, vacated in part, 146 F.3d 420 (1998) in the context of the Employee Benefits Order. Both of those cases discuss on what date the court conducts the hypothetical chapter 7 liquidation.
In summary, the Court finds that Sun Life's argument that the payments received were authorized by the February 8, 2001 "Employee Benefits Order" is not well taken.
Sun Life next argues that the prepetition payments it received were authorized by estoppel and the "necessity of payment rule".
Sun Life's argument is not well taken. As discussed immediately above in the section dealing with the Employee Benefits Order, the Employee Benefits Order did not pertain to anything paid before the filing of the bankruptcy. It did not immunize anyone from preference liability. And, as stated in the motion's paragraph 31, the "necessity of payment doctrine `teaches no more than, if payment of a claim which arose prior to reorganization is essential to the continued operation of the [business] during the reorganization, payment may be authorized'". It does not compel a debtor in possession to pay, it merely authorizes it. And, based on that authorization, the Debtor in fact paid some prepetition amounts due to Sun Life after the petition and entry of the Employee Benefits Order. Finally, the Court does not find that the order was law of the case. The Plaintiff in this case is not violating the Employee Benefits Order by filing this adversary.
Furthermore, the Court finds that estoppel does not apply. First, Plaintiff is not judicially estopped for several reasons. Plaintiff is the Chapter 7 trustee, a representative of unsecured creditors, and not in privity or bound by the Chapter 11 Debtor. Meda, 2009 WL 3132932, at *5; The Liquidation Committee, 361 B.R. at 104; Texas Wyoming Drilling, 422 B.R. at 635 ("Yet the creditors have not contradicted themselves in court.") (Citations omitted, emphasis in original.)(Holding that Chapter 7 trustee is not judicially estopped by the debtor-in-possession, but that, even if he were, conversion cured the defect.) Second, the Court does not find that the Debtor's earlier statement that "if payment of a claim which arose prior to reorganization is essential to the continued operation of the [business] during the reorganization, payment may be authorized" actually conflicts with the Plaintiff's current statement that during the preference period, this creditor unfairly received more than other unsecured creditors and the payment should be recovered. Finally, the Court does not find that the equities of the case require the Plaintiff to not pursue this preference. The preference arose when the case was filed, it was always there for either the Debtor in Possession or the Trustee to pursue for the benefit of all unsecured creditors, and nothing the Debtor-in-Possession did should change that. In fact, it would be inequitable for
The Court also finds collateral estoppel does not apply. The issues are simply not the same. Neither the Chapter 7 Trustee nor Sun Life were involved in the Employee Benefits Motion or its resolution and had no opportunity to litigate a position. And, finally, neither equitable estoppel or promissory estoppel apply because there are no allegations that Sun Life relied on any representation or that it was reasonable in doing so. The Court specifically finds that Sun Life would not have been reasonable relying on the Employee Benefits Motion and Order as a release of preference liability because that issue is not addressed in the motion or order.
Sun Life argues that the payments received were authorized through the course of dealing between Sun Life and Debtor after the filing and by the Employee Benefits Order. Debtor paid the January, 2001 and first 8 days of February, 2001 (i.e., prepetition) premiums postpetition pursuant to the Employee Benefits Order on March 5, 2001. Sun Life argues that this demonstrates that, had it not been paid at all in the preference period, it would have received all unpaid premiums pursuant to the Employee Benefits Order. Sun Life cites GATX, 778 F.2d at 665, for the proposition that if GATX had not been paid pre-petition it would have received payment postpetition when the bankruptcy court approved its stipulation with the debtor.
Sun Life's fanciful argument is based on pure speculation and is not susceptible to proof. The Employee Benefits Order authorized payments, but did not compel them. In this case, Debtor did not enter a stipulation with Sun Life postpetition. Therefore, GATX is inapt. Similarly, Debtor did not assume any contract with Sun Life that would have given it the contract assumption defense.
Sun Life's argument D focuses on the fact that property held in trust by a debtor does not become property of the bankruptcy estate. See 11 U.S.C. § 541(d); Cunningham v. Brown, 265 U.S. 1, 11, 44 S.Ct. 424, 68 L.Ed. 873 (1924); EBS Pension, L.L.C. v. Edison Brothers Stores, Inc. (In re Edison Brothers Stores, Inc.), 243 B.R. 231, 235 (Bankr.D.Del.2000):
And,
Id. at 238. See also Hatoff v. Lemons & Assoc., Inc. (In re Lemons & Associates, Inc.), 67 B.R. 198, 213 (Bankr.D.Nev.1986) (Same.);
Sun Life states that $64,737.02 out of the three checks constituted amounts "withheld" by the Debtor from its employees' paychecks, and $115,131.22 out of the three checks, constituted the Debtor's "employer contributions" to pay premiums for employee and dependent basic life, employee basic AD & D, and employee short term and long term disability insurance. Therefore, Sun Life argues that the funds withheld from employees' paychecks and paid to Sun Life, together with the employer contributions paid to Sun Life
Sun Life argues that Debtor was both the plan sponsor and the plan administrator.
Navarre v. Luna (In re Luna), 406 F.3d 1192, 1201 (10th Cir.2005).
In Pegram v. Herdrich, 530 U.S. 211, 224, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000), the United States Supreme Court recognized that trustees of ERISA plans have similar duties to those imposed on common law trustees. But, it noted that under the common law a trustee is prohibited from placing himself in a position where it would be in his benefit to violate his duty to the trust beneficiaries. Id. at 225, 120 S.Ct. 2143. In contrast, an ERISA fiduciary may have financial interests adverse to the beneficiaries. Id. "ERISA does require, however, that the fiduciary with two hats wear only one at a time, and wear the fiduciary hat when making fiduciary decisions." Id. (Citation omitted.) The statute defines an administrator as a fiduciary only "to the extent" that he acts in such a capacity. Id. (Citing 29 U.S.C. § 1002(21)(a).)
Therefore, in every case charging breach of fiduciary duty the threshold question is not whether someone adversely affected the plan's beneficiaries' interest, but whether the person was acting as a fiduciary when taking the action subject to the complaint. Id. at 225-26, 120 S.Ct. 2143.
The Luna case, although involving dischargeability under section 523(a)(4) for breach of fiduciary duty, is relevant to the
The Tenth Circuit disagreed that unpaid contributions were not plan assets. Id. at 1120. The Court instead found that while the ERISA plan did not have a present interest in the unpaid contributions until they were paid, it did have a future interest in the contractually owed contributions. Id. "A future interest in property is `an interest ... which is not, but may become a present interest.'" Id. at 1199 (Citing Restatement (First) of Property § 153(1)(a) (1936).) Based on this finding, the plan had a contractual right to collect the contributions. Id. at 1200.
Next, the circuit court addressed the issue of whether the Lunas were ERISA fiduciaries. Id. at 1201. The Court cited Pegram, 530 U.S. at 225, 120 S.Ct. 2143, for the proposition that ERISA trustees can "wear different hats" and an employer fiduciary can have interests adverse to employer's interests. Luna, 406 F.3d at 1202. Therefore, the court reframed the issue as whether the Lunas exercised any "authority or control respecting management or disposition of plan assets." Id.
Recall, in Pegram, 530 U.S. at 225-26, 120 S.Ct. 2143 the Supreme Court stated that the threshold issue was whether the defendant was acting as a fiduciary when taking the action subject to the complaint. In the instant case, all premiums were paid to Sun Life but the trustee is attempting to recover some of them. So, the relevant issues are 1) whether the Debtor was acting as a fiduciary when it made the payments, and/or 2) were the funds paid to Sun Life "trust funds" or had they lost that status. But, as discussed below, in the end it does not matter whether the Debtor was a fiduciary or not.
The Luna court found it obvious that it was the plan trustee who had the right to collect the unpaid contributions from the Lunas, and that the Lunas had "no say" over whether that right would be enforced or not. Id. at 1202. Consequently, the
The Luna court went further and stated that, even if the unpaid contributions themselves were plan assets, the statutory definition of an ERISA fiduciary would not be met because there were no earmarked or segregated funds.
The court also analyzed the status of the Lunas under the common law of trusts. It found that making contractually owed contributions to an ERISA plan had little to do with traditional fiduciary responsibilities. Id. It stated that the relationship between the Lunas and the plan was best characterized as contractual, not fiduciary. Id. (Citing Restatement (Third) of Trusts § 5(i) and cmt. i ("A contract to convey property does not give rise to a fiduciary relationship.")) and § 5(k) and cmt. k ("A debtor does not as such stand in a fiduciary relationship to his or her creditors. A creditor as such has against the debtor merely a personal claim, which can be enforced by judicial proceedings to reach the debtor's property.
The Court summarized by stating that a delinquent employer-contributor is merely a debtor, not a fiduciary. Id. at 1205. It found that the Lunas' decision to use their limited funds to pay other business expenses rather than to make plan contributions was a "business decision, not a breach of fiduciary duty." Id. at 1207. Accord Rahm v. Halpin (In re Halpin), 566 F.3d 286, 290 (2d Cir.2009):
(Footnote omitted.) See also Trustees of the Graphic Communications International Union Upper Midwest Local 1M Health and Welfare Plan v. Bjorkedal, 516 F.3d 719, 732 (8th Cir.2008) ("The fiduciary status applies, however, only when the individual is performing a fiduciary duty; it `is not an all-or-nothing concept'".)(Citing Darcangelo v. Verizon Communications, Inc., 292 F.3d 181, 192 (4th Cir.2002)).; id. (The threshold question is whether the defendant was acting as a fiduciary.)(Citing Pegram, 530 U.S. at 226, 120 S.Ct. 2143); id. (Corporate assets do not become plan assets simply because they are owed.); id. at 733 (Owners of company with ERISA plan failed to make contributions. "An act of omission fails to satisfy the requirement that the individual exercise discretionary authority over plan assets. See § [29 U.S.C.] 1002(21)(A)(i).")(Emphasis in original.) See also COB Clearinghouse Corp. v. Aetna U.S. Healthcare, Inc., 362 F.3d 877, 881-82 (6th Cir.), cert. denied, 543 U.S. 870, 125 S.Ct. 271, 160 L.Ed.2d 118 (2004):
The Court concludes that Debtor was not an ERISA fiduciary with respect to the employer contributions before they were paid. This conclusion is based primarily on the fact that, until the funds were paid, there were no funds; there was only an unsecured obligation to pay them. A debt is not a trust. Restatement (Third) of Trusts § 5(k) (2003). See also Halpin, 566 F.3d at 290 ("[E]mployer contributions became plan assets only after being paid.")
In Luna, the Tenth Circuit noted that the Lunas never withheld any portion of their employee's wages. Luna, 406 F.3d at 1197. However, in dicta the court advised:
Id. at 1206, n. 13. But, although the court recognized that other jurisdictions impose fiduciary obligations regarding withheld funds, it also noted that under the Restatement (Third) of Trusts § 5, cmt. k the trust arises as to the amounts deducted when they are either set aside or paid over to another person. Id. at 1205, n. 11. Until then, the employer's obligation is merely a debt. Id. "Thus, according to the Restatement, a trust arises only when an employer actually deducts and sets aside amounts from an employee's salary." Id. at 1206. Therefore, it appears that the Tenth Circuit might find a fiduciary duty with regard to withheld funds (as for, e.g., section 523(a)(4) dischargeability purposes), but be unable to find any specific trust property if the debtor chose to spend the funds instead of depositing them (setting them aside) into a trust account.
Undisputed facts 113, 232 and 322 demonstrate that employees' payroll checks were "net" checks after deductions, and when issued there were no funds in the bank to cover either the net checks or the amounts listed as withheld. All funds were commingled. The amounts withheld were not segregated and there was not even a method in place to segregate them. Debtor had to borrow money from Heller to cover each paycheck as it cleared the bank, and had to borrow from Heller to pay payroll taxes and the amounts due to Sun Life. None of the payments to Sun Life were timely in the preference period. Fact 327.
The Court finds that Debtor never set aside withheld funds. Under Luna, the funds became trust funds only when Debtor paid them to Sun Life. Until then, Debtor owed an unsecured debt to Sun Life. Also, according to the Luna court, the statutory definition of ERISA fiduciary is not met unless there are earmarked or segregated funds. Luna, 406 F.3d at 1204. Consequently, Debtor was not an ERISA fiduciary when paying Sun Life.
In conclusion, the Court finds that Sun Life's argument that the transfers are unavoidable because the funds were all plan assets in the hands of the Debtor as fiduciary and not property of the Debtor as Debtor is not well taken. However, even if Debtor were a fiduciary as to employee withholdings, that would not end the inquiry. For, in bankruptcy court, there usually
A trust consists of three elements: 1) a trustee who holds trust property and administers it for the benefit of one or more others; 2) one or more beneficiaries to whom the trustee owes duties with respect to the trust property; and 3) trust property, which is held by the trustee for the beneficiaries. Restatement (Third) of Trusts § 2 cmt. f (2003). Either or both of elements (1) and (2) may be temporarily absent without destroying the trust or preventing its creation. Id. A trust cannot be created unless there is trust property. Id. cmt. i. The trustee has a duty to see that trust property is designated or identifiable as property of the trust, and also a duty to not commingle the trust property. Id. § 84. If a trustee wrongfully disposes of trust property and uses the proceeds to acquire other property, the beneficiary is entitled either to enforce a constructive trust of the property acquired, or to enforce an equitable lien on that property, as long as the product of the trust property is held by the trustee and can be traced. Restatement (Second) of Trusts § 202(1) (1959)
Technical trusts are those which arise by law before any wrongdoing, but not involving a traditional declaration of trust, a clearly defined trust, and an intent to create a trust relationship. Berres v. Bruning (In re Bruning), 143 B.R. 253,
There is no real dispute that ERISA creates a statutory trust. 29 U.S.C. § 1103, Establishment of trust, provides in part:
"Plan assets" in turn are defined in 29 U.S.C. § 1002(42) as: "plan assets as defined by such regulations as the Secretary may prescribe, ..." The applicable regulation appears at 29 C.F.R. § 2510.3.102(a)(1):
The Luna court noted that the definition of plan assets does not address employer contributions. Luna, 406 F.3d at 1199 n. 3.
Id. at 1199. The Court concluded:
Id. at 1199-1200 (Footnotes omitted; emphasis in original).
Putting these concepts together, the property of an ERISA trust consists of: 1) all property previously paid into or forwarded to the trust and any net earnings thereon, 2) funds that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution [to] or repayment of a participant loan from the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets, 3) a future interest
The fiduciary duties of an ERISA trustee are set forth in 29 U.S.C. § 1104. The most important for our purposes is § 1104(a)(1)(A). ("[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-(A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.") Prohibited transactions for the fiduciary are set out in 29 U.S.C. § 1106. The two most important for our purposes are § 1106(a)(1)(B)("(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect — ... (B) lending of money or other extension of credit between the plan and a party in interest.") and § 1106(b)(1) ("A fiduciary with respect to a plan shall not — (1) deal with the assets of the plan in his own interest or for his own account.")
It is undisputed that Debtor did not segregate
To summarize the analysis to this point, Sun Life argues that the funds are not recoverable because they were not "property of the debtor" because they were funds from an ERISA trust. Assuming arguendo that Sun Life need not trace its receipts to any actual funds, those receipts nevertheless consisted of the employer's share and each employee's share. The employer's share does not become a plan asset until received so at the time of the payment to Sun Life it was not yet a trust fund. The employee's share is also probably not a plan asset until paid under the Luna and Restatement (Third) theories. But, even if the employee's share was an amount held in trust, Debtor dissipated it by paying expenses with it. Once trust funds are transferred to a bona fide purchaser for value neither the trustee or the beneficiary have any further claim to them. Research Planning, Inc. v. Segal (In re First Capital Mortgage Loan Corp.), 917 F.2d 424, 427 (10th Cir.1990); see also Restatement (First) of Trusts § 74 cmt. a (1935)(Beneficiary loses interest in trust property when transferred to a bona-fide purchaser.) Rather, the beneficiary has a cause of action against the trustee for breach of its fiduciary obligations. Id.See also Kupetz, 923 F.2d at 648:
(Footnote omitted.) Finally, see Schifter v. First Fidelity Financial Services, Inc. (In re First Fidelity Financial Services, Inc.), 36 B.R. 508, 510-11 (Bankr.S.D.Fla. 1983)(When trustee of express trust fails to preserve the trust intact and commingles it with his own funds, there is a breach of fiduciary duty and the express trust no longer exists. The beneficiaries have at most an interest in a constructive trust.) This suggests that Sun Life was not paid with ERISA trust funds, but rather with borrowed funds. This defense is not well taken.
Before undertaking the determination of whether the unpaid funds were subject to a constructive trust, the Court must consider whether imposition of a trust would be equitable. Hill v. Kinzler (In re Foster), 275 F.3d 924, 927 (10th Cir.2001). To do this, the Court must weigh the claims of the other creditors before employing any equitable fictions. Id. at 928. One factor is whether other similarly situated creditors would be harmed. Id.See also Kalish v. The Landing (In re The Landing), 160 B.R. 820, 824 (Bankr.E.D.Mo.1993):
In this case, Sun Life received all amounts due, both pre-and postpetition. Fact 328. If Plaintiff is successful in this case, Sun Life would repay the preference and have an unsecured claim for the amount repaid. 11 U.S.C. § 502(h)
However, even if the Court found this to be a situation calling for an equitable adjustment to distribution, Sun Life cannot establish a trust. The claimant of an ownership interest in property that would otherwise be considered a part of the bankruptcy estate must be able to identify and trace the property to which he claims ownership. Hill v. Kinzler (In re Foster), 275 F.3d 924, 926-27 (10th Cir. 2001); Jobin v. Youth Benefits Unlimited, Inc. (In re M & L Business Machine Co.), 59 F.3d 1078, 1081 (10th Cir.1995) (Citations omitted.); Sender v. The Nancy Elizabeth R. Heggland Family Trust (In re Hedged-Investments Assoc., Inc.), 48 F.3d 470, 474 (10th Cir.1995)("It is beyond peradventure that, as a general rule, any party seeking to impress a trust upon funds for purposes of exemption from a bankruptcy estate must identify the trust funds in the original or substituted form.")(quoting First Federal of Michigan v. Barrow, 878 F.2d 912, 915 (6th Cir.1989)); Rollins v. Metropolitan Life Ins. Co., 912 F.2d 911, 915 (7th Cir.1990)(Same.) Furthermore, Begier's relaxed tracing rules do not apply to constructive trusts. Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 371 F.3d 397, 402 (8th Cir.2004)(A constructive trust contains property wrongfully obtained by another and is therefore a trust in specific property, not a trust in an amorphous amount.) (Citation omitted.); Official Committee of Unsecured Creditors v. Catholic Diocese of Wilmington, Inc. (In re Catholic Diocese of Wilmington, Inc.), 432 B.R. 135, 158 n. 81 (Bankr.D.Del.2010) (Citing MJK Clearing, 371 F.3d at 402); Rocin Liquidation Estate v. Alta AH & L (In re Rocor Int'l, Inc.), 352 B.R. 319, 329 (Bankr.W.D.Okla. 2006)(To impose a constructive trust, the preference defendant must both trace the funds and prove fraud.)
A concept entwined with tracing is the "lowest intervening balance rule." United States Dept. of Energy v. Seneca Oil Co. (In re Seneca Oil Co.), 906 F.2d 1445, 1451 (10th Cir.1990). That rule provides:
See also Cunningham, 265 U.S. at 11-12, 44 S.Ct. 424:
Cunningham strongly suggests that when an account is depleted of its fraudulently obtained funds, subsequent replenishments do not restore the tainted funds as trust funds, but replaces them free of the trust. This is also the holding in Frontier Pepper's Ferry, LLC v. Landamerica 1031 Exchange Services, Inc. (In re Landamerica Financial Group), 2009 WL 1269578, at *12 (Bankr.E.D.Va.2009):
All of Debtor's funds were swept daily. Therefore they had zero balances daily. It is not possible to trace funds because there never were any. There is no property that could be held in a constructive trust. Payment to Sun Life was not made with trust funds. Payment to Sun Life was simply late payment on a debt. The Court finds that defense D) is not well taken.
Sun Life argues that some of the payments were withheld from employee paychecks and therefore were not property of Debtor. To the extent that this argument is different from defense D, the Court responds as follows. Fact 113 states that in 2000 and 2001 when Debtor issued checks it had no money to back up the checks, and with respect to the employee's paychecks there was no money set aside for amounts withheld. All payments came from funds supplied by new borrowings. Debtor may have been breaching contracts with its employees or even possibly violating some statute or rule by not segregating withholdings, but that does not transform the fact that there was 1) no money held in trust for the withholdings, 2) no money segregated or even allocated for Sun Life, or 3) no money even available at the time of payments became due, because of the nature of the zero balance accounts. Debtor had to borrow funds from Heller to make each payment on the day the check hit the bank. See fact 322, which states in part:
Paragraph 7 of the Motion states:
Paragraph 25 of the Motion states:
Paragraph 26 of the Motion states:
Paragraph 7 requests authorization to pay any and all unpaid local, state and federal withholding and payroll-related or similar items relating to prepetition periods and continue to pay them postpetition. Debtor subsequently paid Sun Life for January and eight days of February. Paragraph 7 does not refer to payments already made prepetition. And, paragraph 7 makes no reference to Sun Life.
Paragraph 25 begins: "The Debtor routinely withholds from Employee's paychecks amounts that the Debtor is required to transmit to third parties." The remainder of the paragraph only itemizes examples of what it withheld. Paragraph 25 asserts nothing else. It does not state that the amounts withheld physically existed or are or were segregated or are or were available for payment on any particular date. It merely declares that Debtor had a duty to transmit amounts withheld. Sun Life would have the Court read "withhold" as "withhold actual identifiable funds and deposit them in a segregated account." However, the definition of "withhold" carries no such connotation. See Webster's New Collegiate Dictionary 1355 (9th ed. 1991) ("4. to deduct ... from income."); MacMillan Dictionary, http://www. macmillandictionary.com ("To deliberately not give something to someone."); Oxford Dictionary, http://oxforddictionaries.com/ ("Refuse to give (something that is due to or is desired by another")). Accord Begier, 496 U.S. at 61, 110 S.Ct. 2258 ("[T]here is no general requirement that the withheld funds be segregated from the employer's general funds"; this implies that sums are "withheld" whether or not segregated.) (Quoting Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978)). Paragraph 25 was a true statement: Debtor withheld amounts from payroll and had a duty to pay them to third parties.
Paragraph 26 states: "to the extent that [withheld funds] remain in its or it's agent's possession" they would be trust funds. This may be a true statement, especially if the funds could be traced. Compare In re College Bound, Inc., 172 B.R. 399,
Furthermore, the Court finds that judicial estoppel does not apply. First, Plaintiff is the Chapter 7 trustee, a representative of unsecured creditors, and not in privity or bound by the Chapter 11 Debtor. See supra at pp. 46-47. Second, the Court does not find that the Debtor's earlier statements that "if payment of a claim which arose prior to reorganization is essential to the continued operation of the [business] during the reorganization, payment may be authorized" actually conflicts with the Plaintiff's current statement that during the preference period, this creditor received more than other unsecured creditors and the payment should be recovered. Id. at 48. Similarly, the earlier statement that Debtor routinely withheld amounts does not conflict with the elements of a preference claim. Finally, Debtor's earlier statement that the withheld funds in its possession or its agent's possession are trust funds is a legal conclusion not creating a judicial estoppel. See, supra at p. 49.
The Court also finds collateral estoppel does not apply. The issues are simply not the same. And, neither the Chapter 7 Trustee nor Sun Life were involved in the employee benefits order motion or its resolution and had no opportunity to litigate a position. And, finally, neither equitable estoppel or promissory estoppel apply because there are no allegations that Sun Life relied on any representation or that it was reasonable in doing so. The Court specifically finds that Sun Life would not have been reasonable relying on the Employee Benefits Motion and Order as a release of preference liability because that issue is not addressed in the motion or order.
Section 547(c)(4) provides as follows:
Under section 547(b), a transfer is deemed to occur on the date that a
Section 547 is generally thought to advance two bankruptcy policies. Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228, 232 (9th Cir.1995) First, it achieves an equality of distribution ("Policy 1") of a debtor's assets among its unsecured creditors by allowing a trustee to recover payments made that favor any particular creditor on the eve of bankruptcy. Id. Second, it encourages creditors to continue to do business with financially troubled debtors with an eye toward avoiding bankruptcy altogether ("Policy 2"). Id.; see also Charisma Investment Co., N.V. v. Airport Systems, Inc. (In re Jet Florida System, Inc.), 841 F.2d 1082 (11th Cir.1988):
Id. at 1083-84 (citations and internal punctuation omitted).
The new value defense particularly serves Policy 2:
In re IRFM, Inc., 52 F.3d at 232 (citation omitted). Section 547(c)(4) is finely tuned
The text of section 547(c)(4), short and simple on its face, presents some difficulty.
For the purposes of the issues in this case, there are two lines of interpretation. The first one ("Line 1") can be summarized by this quote from an early bankruptcy case:
Pettigrew v. Trust Co. Bank (In re Bishop), 17 B.R. 180, 183 (Bankr.N.D.Ga.1982)(Emphasis added). Note that the text of the statute does not say "go unpaid." Other Line 1 cases that have followed Bishop, or at least used the same language, are set out in the margin.
One branch of the Line 1 cases takes a further step by limiting the phrase "remains unpaid" to "as of the date of the bankruptcy petition." Note that the text of the statute also does not say "as of the date of the bankruptcy petition." See Energy Cooperative, Inc. v. Cities Service Co. (In re Energy Cooperative, Inc.), 130 B.R. 781, 789 (N.D.Ill.1991):
See also Grant v. Sun Bank/North Central Florida (In re Thurman Construction, Inc.), 189 B.R. 1004, 1014 (Bankr.M.D.Fla. 1995):
and McKloskey v. Schabel (In re Schabel), 338 B.R. 376, 381 (Bankr.E.D.Wis. 2005)(The Seventh Circuit had ruled that new value must remain unpaid. Bankruptcy Court dismissed trustee's preference action because new value was unpaid at the time of the petition even though later paid by the debtor.); New York City Shoes, 880 F.2d at 680 ("Third, the debtor must not have fully compensated the creditor for the `new value' as of the date that it filed its bankruptcy petition.")
The second line of cases interpreting section 547(c)(4) ("Line 2") recognizes that the text of the statute does not have a "remains unpaid" requirement. See, e.g., Valley Candle Mfg. Co., Inc. v. Stonitsch (In re Isis Foods, Inc.), 39 B.R. 645, 653 (D.Mo.1984):
Other Line 2 cases are set out in the margin.
and D.J. Management, 161 B.R. at 8 (Holding that section 549 is relevant to a section 547(c)(4) defense.) See also Friede Goldman Halter, Inc. v. Aircomfort, Inc. (In re The Consolidated FGH Liquidating Trust), 392 B.R. 648, 655 n. 11 (Bankr. S.D.Miss.2008):
This view is not unanimous in Line 2 cases. See Phoenix Restaurant Group, Inc. v. Ajilon Professional Staffing LLC (In re Phoenix Restaurant Group, Inc.), 317 B.R. 491, 496-97 (Bankr.M.D.Tenn. 2004):
See also Commissary Operations, Inc. v. Dot Foods, Inc. (In re Commissary Operations, Inc.), 421 B.R. 873, 878 (Bankr. M.D.Tenn.2010), in which a different judge from the Middle District of Tennessee Bankruptcy Court ruled that section 503(b)(9)
Id. at 878-79. But see Friedman's Inc. v. Roth Staffing Companies, L.P. (In re Friedman's Inc.), 2011 WL 5975283, at *4 (Bankr.D.Del.2011) (Court states its "serious doubts" about the dual entity theory but decided that it need not address
The Tenth Circuit Bankruptcy Appellate Panel has not stated that "remains unpaid" is an element of the defense. Gonzales v. Nabisco, 317 B.R. at 429. But there is no specific Tenth Circuit guidance on whether postpetition payments should be considered in the analysis.
To analyze this issue, this Court constructed a series of six hypotheticals that examine the various interpretations of section 547(c)(4) in light of the overall return
For all hypotheticals, assume Creditor C delivered $100,000 of goods to Debtor D before the preference period. During the preference period D paid C the $100,000. D now has a zero balance with C. Assume that the payment meets the definition of a preference. D files a Chapter 11 petition. On the petition date there are no secured debts and D's sole asset is $500,000 in cash (or less, if D makes the payments specified in the different examples). There are $75,000 of priority claims. There are $1,000,000 in unsecured debts to creditors other than C. Also assume that the estate has no administrative claims.
In Hypothetical 1, there are no other transactions between C and D pre- or post-petition. D recovers the preference. The estate will have $600,000 to distribute (the $500,000 cash plus the preference recovery of $100,000). After priority claims, $525,000 is available for $1,100,000 of unsecured claims (the $1,000,000 plus C's reinstated claim under 502(h) of $100,000). There is a 47.727% dividend to general unsecured creditors. From C's perspective, it advanced a total of $100,000 in credit. After repaying the $100,000 as a preference it receives a dividend of $47,727, placing it in the same position as if it had never been paid. All unsecured creditors are treated equally.
Hypothetical 2 is identical to number 1, except that after receipt of the $100,000 C extends $40,000 of new credit in the form of goods.
Hypothetical 3 is the same as Hypothetical 2, except it assumes that D did not pay C the $100,000 and instead of advancing the $40,000 of new goods on credit C insisted on a C.O.D. payment. In this case the estate would have $600,000 in cash (consisting of the original $500,000, plus the $100,000 it did not pay to C less the $40,000 C.O.D. payment, plus $40,000 from the proceeds from the new goods purchased on C.O.D.). C files a proof of claim for the $100,000 it was not paid. There is no preference recovery. After priority claims, $525,000 is available to pay $1,100,000 of unsecured claims (the other creditors' claims of $1,000,000 plus C's proof of claim for $100,000). There is a 47.727% dividend to general unsecured creditors. All unsecured creditors are treated equally.
Because the results of Hypothetical 2 and 3 are identical, the effect of section 547(c)(4) treatment is to lock C into its claim as an unsecured creditor that will receive equal treatment with other unsecured creditors for its claim as of the date it receives the first preferential payment, but then treats C as if it were a C.O.D. creditor that gets paid 100% of any value it advances during the preference period (up to the amount of the preference it received). See Countryman, 38 Vand. L.Rev. at 788 n. 380. This encourages a creditor to continue to deal with a debtor approaching bankruptcy because the creditor suffers no additional harm from continuing to do business with the debtor (and in fact might result in a debtor avoiding bankruptcy altogether). See Bogdanov v. Avnet, Inc. (In re Amherst Technologies, LLC), 2011 WL 4625698, at *7 (D.N.H.2011) (Unpublished):
Hypothetical 4 is identical to number 2, except that after C's extension of $40,000 of new credit, D makes a $25,000 payment to C that qualifies as an ordinary course of business payment and is therefore not avoidable. C's $40,000 section 547(c)(4) defense from Hypothetical 2 is reduced by the later $25,000 payment because D did make an "otherwise unavoidable transfer,
Hypothetical 5 is the same as Hypothetical 4, except that instead of D paying the $25,000 to C, it files Chapter 11
Assume also that the bankruptcy is filed in a jurisdiction that holds that postpetition activity is not relevant to section 547(c)(4) defenses. So, basically Hypothetical 5 is the same as Hypothetical 4 except for the timing of the $25,000 payment. But, when D sues C to recover a preference, C's section 547(c)(4) defense is for the $40,000 unpaid as of the date of the petition. In consequence D recovers $60,000 for which C has a 502(h) claim.
In hypothetical 5, the estate has only $575,000 to distribute (the $500,000 cash less the $25,000 critical vendor payment plus $40,000 from the proceeds of the new goods and the $60,000 preference recovery.) After priority claims, there is a net of $500,000 for $1,075,000 of unsecured creditors (the $1,000,000 of other claims plus C's proof of claim for $15,000 (the $40,000 of new goods less the $25,000 it received as a critical vendor
Hypothetical 6 is the same as Hypothetical 5, except that the bankruptcy is filed in a jurisdiction that holds that postpetition events are relevant to section 547(c)(4) defenses. Therefore, when D sues C to avoid the $100,000 preference, C's section 547(c)(4) defense is limited to the $40,000 of new goods less the $25,000 postpetition critical vendor payment. C must return $85,000 to D. C files a proof of claim for $15,000 and has a 502(h) claim for $85,000.
From the discussion above, the Court finds that the most reasonable interpretation of section 547(c)(4) is the one set out in Hypothetical 6. It results in absolutely equal treatment of all unsecured claims. Accord 5 Collier on Bankruptcy ¶ 547.04[4][e] at 547-68 ("[S]ection 547(c)(4) should not provide a defense to the extent that a preference transferee received `critical vendor' payments for the subsequent new value, or received administrative expense payments under section 503(b)(9).")
If a court uses the dual identity approach that determines preference liability without regard to postpetition events the unsecured creditors are harmed by postpetition payments of unsecured debt. Whether the debtor becomes a different debtor-in-possession or not, the estate does not change. The estate is defined in section 541 as including all legal or equitable interests of the debtor in property as of the commencement of the case and any interest in property that the trustee recovers under certain bankruptcy code provisions (including preferences). A postpetition payment depletes the return to unsecured creditors the same as if it were made pre-petition and not recovered as a preference. Cutting off the preference calculation at the filing of a case makes no economic sense.
During the preference period Debtor paid Sun Life the following (fact 302):
Amounts Payment due dates Check Dates Date Received $44,850.65 9/1/00 11/7/00 11/13/00 $44,570.16 10/1/00 12/1/00 12/11/00 $90,447.43 11/1/00 & 12/1/00 01/5/01 01/16/01
Sun Life's Amended Statement of Material Facts (doc 92) facts 43 to 45 (which would have been 143 to 145 above) sought to fix the value of insurance benefits following each of the above payments. Fact 43 claims that the value from receipt of the November 7 check to the receipt of the December 1 check was $25,829.92. Fact 44 claims that the value from receipt of the December 1 check to the receipt of the January 5 check was $34,344.06. Fact 45 claims that the value from receipt of the January 5 check to the date of the petition was $24,526.80. These figures, and their calculation, appear on Exhibit B of Sun Life's Amended Statement of Material Facts. Doc 92. In the calculations Sun Life lists the dates the checks were issued and received and their amounts. However, it then deducts from the amount of the check the dollar amount withheld from the employees to calculate Debtor's share of the payment. Sun Life then bases the remaining calculations on this net amount.
The Court disagrees with the theory underlying this method. It necessarily assumes that only the employer's share is subject to being a preference. This might be correct if the employer funded the withholdings, segregated them and Sun Life could trace them directly to each payment. But, as discussed above, withholdings were
The value of anything Sun Life provided after the petition was filed does not count as "new value" for purposes of section 547(c)(4). Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1284 (8th Cir.1988)(Postpetition advances are given to the estate, not to or for the benefit of the debtor.) See also Brown v. Kitchenmaster (In re Hertzler Halstead Hospital), 334 B.R. 276, 291 n. 58 (Bankr.D.Kan. 2005)(Same, and citing cases.) Sun Life agrees.
Given the Court's analysis of applying post petition payments to reduce the amount of Sun Life's new value defense, it may seem counterintuitive, or simply arbitrary and capricious, or both, not to credit Sun Life with those payments to the estate to increase its subsequent new value defense. The reasons usually given for the differing treatment are three-fold. First, there are protections for postpetition transfers to the estate. E.g., Dick Henley, 45 B.R. at 699 and n. 8 (postpetition insurance coverage that goes unpaid results in a priority administrative claim rather than addition to the amount of a section 547(c)(4) credit). See also Sharoff Food Service, 179 B.R. at 678 (trustee was also pursuing a postpetition turnover claim against creditor, and creditor should be protected against double dipping by trustee).
In this instance, Sun Life had an administrative claim for providing postpetition insurance coverage (or would have, had it not been paid), and in fact Sun Life was paid for providing that insurance coverage.
Second, some courts reason that the purpose of section 547(c)(4) is to encourage creditors to deal with the prepetition debtor, Wolinsky v. Central Vermont Teachers Credit Union (In re Ford), 98 B.R. 669, 682-84 (Bankr.D.Vt.1989), and that section does not focus on the harm to the creditor. Id.See also Sharoff Food Service, 179 B.R. at 678. Whether the statute does not focus on harm to the creditor is perhaps questionable, since the encouragement to deal with the creditor prepetition does seem to take the creditor's interests into account.
Third, allowing such a credit might also put part of the case out of the control of the debtor, the creditors and the Court. Id.
Kellman v. P.S.E. & G. (In re Jolly "N", Inc.), 122 B.R. 897, 909-10 (Bankr.D.N.J. 1991) (citations omitted).
This Court need not rule on these rationales (at least the latter two), however, since as noted Sun Life was paid for its postpetition services to the estate.
The Court will now calculate Sun Life's new value defense. At the start of the preference period, November 10, 2000, Debtor owed Sun Life the premiums for September 1, 2000 ($44,850.65), October 1, 2000 ($44,570.16) and November 1, 2000 ($45,338.75) for a total of $134,759.56.
There is no evidence nor is there an allegation that the insurance contract between the Debtor and Sun Life was anything other than an arms length transaction. This suggests that each party valued the services to be provided as equal to the amount of the premiums to be paid. See Webster v. Harris Corp. (In re NETtel Corp., Inc.), 319 B.R. 290, 295 (Bankr. D.D.C.2004) ("Presumptively, the increase in value to the estate arising from a subsequent performance of services will be measured by the contract price of the services.") (Citing In re Jones Truck Lines Inc., 130 F.3d 323, 328 n. 4 (8th Cir. 1997) and In re Molten Metal Technology, Inc., 262 B.R. 172, 176 (Bankr.D.Mass.2001)). The Court therefore computes the values of the services as follows:
Month Premium Days in Month Per Diem November 2000 $45,338.75 30 $1,511.29 December 2000 $45,108.68 31 $1,455.12 January 2001 $46,763.01 31 $1,508.48 February 2001 $46,703.78 28 $1,667.99
The Court further finds that each individual payment Debtor made to Sun Life during the preference period was a preference. For example, the November 13, 2000 payment was for an antecedent debt (the September 2000 premium). It was not a contemporaneous exchange. It was late. It was not an ordinary course of business payment. This is true also for the December 11, 2000 payment (for October) and the January 16, 2001 payment (for November and December). Therefore, each of the payments are avoidable by the Trustee under section 547(b). The postpetition critical vendor payment is unavoidable by the Trustee because it was authorized under section 549.
In Exhibit B attached hereto, the Court performs the section 547(c)(4) calculations. It starts on November 13, 2000, by noting the first preferential payment of $44,850.65. It then deducts the value of new services provided from November 13, 2000 to December 11, 2000 when the next payment is received, leaving a running preference balance of $3,152.40. It then adds the next preferential payment of $44,570.16 to bring the running balance to $47,722,56. After December 11, 2000 Sun Life provided new value of $53,238.08 before the next payment on January 16, 2001. Of that amount, however, only $47,722.56 can be applied to previous payments
As a reconciliation of this number, one can analyze the overall picture. As of the start of the preference period Debtor owed Sun Life $134,759.56 (consisting of $44,850.65 for September 2000; $44,570.10 for October 2000; and $45,338.75 for November 2000). To date the Trustee expects this bankruptcy will not pay a dividend to non-priority unsecured creditors. Therefore, to receive equal treatment with all other unsecured creditors Sun Life should receive nothing for that $134,759.56
Sun Life was then owed $45,108.68 for the December 2000 payment, $46,763.01 for the January 2001 payment and $13,343.93 for the first 8 days of February 2001 (total, $105,215.62). Therefore, if no payments had been made from November 10 to the petition, Sun Life would have been owed $239,975.18.
But, Sun Life received $179,868.24 during the preference period and received $60,106.93 on March 5, 2001 as a critical vendor payment. The total receipts, $239,975.18, equal the total amount that would have been due on the petition date if no payments had been made in the preference period. In other words, Sun Life was paid in full, unlike other prepetition unsecured creditors; this suggests that a preference recovery is due.
The subsequent new value defense treats a creditor as being paid C.O.D. on subsequent new value during the preference period up to the amount of the preference balance. Therefore, we allow Sun Life credit against its preference for the new value of services for November 14 to 30, 2000 ($25,691.93), December 2000 ($45,108.68), January 2001 ($46,763.01) and February 1 to 8, 2001 ($13,343.93) in the total amount of $130,907.55. But, we must subtract the $5,515.52 that Sun Life lost by advancing new value in excess of the running preference balance. See fn. 54. Therefore, Sun Life should be allowed a new value defense of $125,392.03.
When Sun Life pays the $114,583.24 preference, it will have ended up with a
Bankruptcy Code section 547(c)(1) provides:
In Official Unsecured Creditors Committee v. Airport Aviation Services, Inc. (In re Arrow Air, Inc.), 940 F.2d 1463, 1465-66 (11th Cir.1991) the Eleventh Circuit discussed the application of section 547(c)(1):
The checks that Plaintiff claims are preferential are as follows (fact 302):
Due date Coverage period Amount Check date Date received 09/01/00 9/2000 $44,850.65 11/07/2000 11/13/2000 10/01/00 10/2000 $44,570.16 12/01/2000 12/11/2000 11/01/00 11/2000 $45,338.75 01/05/01 01/16/01 12/01/00 12/2000 $45,108.68 01/05/01 01/16/01
Each check was dated at least two months after the services were provided by Sun Life. The checks and services were not contemporaneous. The checks could not have been intended as contemporaneous exchanges because Sun Life had already provided its services and Debtor was simply paying bills late. And, in fact the exchanges were not contemporaneous. Compare Jones Truck Lines, Inc. v. Central States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323, 327 (8th Cir. 1997):
(Footnote omitted.) This defense is not well taken.
This defense was withdrawn.
Paragraph 36 of the Benefits Motion states:
This statement is a bare legal conclusion. While it is true that priority claims must be paid as a condition of confirmation, see 11 U.S.C. § 1129(a)(9)(A)-(B)
The Benefits Motion does not otherwise state or infer that unsecured creditors will be paid in full. It does not refer to preferential transfers. It does not refer to Sun Life. It promises nothing to anyone; all it does is seek authority to pay a certain type of claim. All paragraph 36 does is to state the obvious; whether the priority claims are paid now or later, payment should not prejudice general unsecured creditors because the priority claims need to be paid before the non-priority unsecured claims in all events.
As for the estoppel argument, the Debtor-in-Possession's statement was a legal conclusion which does not estop later claims. Second, the fact that priority claims are paid before unsecured claims does not contradict the elements of a preference claim nor the allegations of the complaint against Sun Life that it was preferred to other unsecured creditors. Collateral estoppel does not apply because the issues are not the same. And, finally, there are no allegations that anyone misstated facts or that Sun Life relied on misstated facts.
The Court finds defense J not well taken.
Having found that none of Sun Life's affirmative defenses are meritorious, the Court finds that Trustee has, in fact, shown that she is entitled to summary judgment.
Element Proof any transfer of property of the debtor — Borrowed funds belong to debtor. Bailey, 314 F.3d at 1199. Debtor had dominion and control over its checking account. Fact 114. Parks, 550 F.3d at 1255. (1) to or for the benefit of a creditor; Fact 142. (2) for or on account of an antecedent debt Fact 6. owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; Fact 8. (4) made — Fact 9. (A) on or within 90 days before the date of the filing of the petition; (5) that enables such creditor to receive more Facts 159 & 215. See Still v. Rossville Bank than such creditor would receive if — (In re Chattanooga Wholesale Antiques, Inc.), 930 F.2d 458, 465 (6th Cir.1991) ("Unless the estate is sufficient to provide a 100% distribution, any unsecured creditor (as the bank must be treated prior to confirmation of the plan) who receives a payment during the preference period is in a position to receive more than it would have received under a Chapter 7 liquidation.") (Citation omitted.) See also Elliott v. Frontier Properties/LP 102 (In re Lewis W. Shurtleff, Inc.), 778 F.2d 1416, 1421 (9th Cir.1985) ("[A]s long as the distribution in bankruptcy is less than one-hundred percent, any payment `on account' to an unsecured creditor during the preference period will enable that creditor to receive more than he would have received in liquidation had the payment not been made."); Rocor Int'l, Inc., 352 B.R. at 330 (Same.) (A) the case were a case under Chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.
In sum, Plaintiff has established the preferential transfer and Sun Life has established its subsequent new value defense, in part.
In the Tenth Circuit, if a statute does not prohibit the award of prejudgment interest, prejudgment interest may generally be awarded if: "1) the award of prejudgment interest would serve to compensate the injured party, and 2) the award of prejudgment interest is otherwise equitable." Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556, 1566 (10th Cir.1993), cert. denied, 510 U.S. 1114, 114 S.Ct. 1061, 127 L.Ed.2d 381 (1994) (Citations omitted.) Bankruptcy judgments traditionally award prejudgment interest on preference recoveries unless the amount of the contested payment is undetermined until judgment. Id. (Citations omitted.)
The Court commends the parties on the high quality and originality of the arguments and the depth of details in support of their respective positions. On the other hand, the number of issues and voluminous details in support of the facts required an extensive amount of time to absorb, analyze, organize and decide. Therefore, the Court also accepts some responsibility for the delays in this case.
An award of prejudgment interest would obviously compensate the estate for the loss of use of the preferentially transferred funds. However, in this case the Court finds that the award would not be equitable to Sun Life. Sun Life's defenses were not unreasonable. Its arguments were creative, logical and based on a good faith belief that it might prevail, at least on some theories. And, Sun Life was ready to proceed when it filed its motion.
The request for prejudgment interest will be denied.
The Court will enter an Order in conformity with this Memorandum Opinion granting Plaintiff's Motion for Summary Judgment, awarding Plaintiff a Judgment but denying Plaintiff's request for Prejudgment Interest, and denying Defendant's Motion for Summary Judgment.
Exhibit A to Memorandum Opinion in Gonzales v. Sun Life Insurance Co., Adv. 03-1072.
Exhibit A: Hypothetical applications of section 547(c)(4)
1 2 3 4 5 6
assets
petition $500,000 $500,000 $560,000 $475,000 $500,000 $500,000
new goods $0 $40,000 $40,000 $40,000 $40,000 $40,000
crit vendor $0 $0 $0 $0 $(25,000) $(25,000)
§ 547 $100,000 $60,000 $0 $85,000 $60,000 $85,000 subtotal $600,000 $600,000 $600,000 $600,000 $575,000 $600,000 priority $(75,000) $(75,000) $(75,000) $(75,000) $(75,000) $(75,000) net $525,000 $525,000 $525,000 $525,000 $500,000 $525,000 claims petition $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 502(a)claim $0 $40,000 $100,000 $15,000 $15,000 $15,000 502(h)claim $100,000 $60,000 $0 $85,000 $60,000 $85,000 total $1,100,000 $1,100,000 $1,100,000 $1,100,000 $1,075,000 $1,100,000 % dividend 47.727 % 47.727 % 47.727 % 47.727 % 47.727 % 47.727 %
Exhibit B to Memorandum Opinion in Gonzales v. Sun Life Insurance Co., Adv. 03-1072
The section 547(c)(4) analysis follows:
Date Payment for New Number Per diem New Value Increase Running Amount month value of Amount -Deduction Preference of dates days Amount 11/13/00 $44,850.65 9/00 $44,850.65 $44,850.65 New value after 11/13/10 11/14 to 17 $1,511.29 $25,691.93 11/3C 12/1 to 11 $1,455.12$16,006.32 12/11 New value reduction $-41,698.25 $3,152.40 12/11/00 $44,570.16 10/00 $44,570.16 $47,722.56 New value after 12/11/10 12/12 to 20 $1,455.12 $29,102.40 12/31 1/1 to 16 $1,508.48$24,135.68 1/16 New value reduction $-53,238.08 $0.00 1/16/01 $45,338.75 11/00 $45,338.75 $45,338.75 1/16/01 $45,108.68 12/00 $45,108.68 $90,447.43 New value after 1/16/01 1/17 to 15 $1,508.48 $22,627.20 1/31 2/1 to 8 $1,667.99$13,343.92 2/8
New value reduction $-35,971.12 $54,476.31 2/8/01 PETITION 3/5/01 $46,763.01 1/01 $46,763.01 $101,239.32 3/5/01 $46,703.78 2/01 for entire month. $46,703.78 / 28 * 8 = $13,343.92 $114,583.24
Philip Services Corp., 284 B.R. at 552 n. 10.
The Court questions whether changing insurance companies or terminating the plan altogether is the type of behavior that would classify Debtor as a fiduciary. It is not alleged that Debtor had any influence on Sun Life's internal administration of benefits, eligibility, investment policy, etc.
Therefore, Sun Life's argument that Plaintiff cannot recover trust funds fails.
Professional Helicopter Pilots Ass'n v. Denison, 804 F.Supp. 1447, 1452-53 (M.D.Ala. 1992).
(Citations omitted); Columbia Packing Co., 44 B.R. at 615 ("The claims of the creditors are not to be diminished by more than any payments they are allowed to retain and for which they have not already given credit.") See also Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand. L.Rev. 713, 790 (1985) ("Countryman") (citing Columbia Packing as the correct analysis.)
In other words, D cannot avoid the transfer to C to the extent that, after the transfer C provided new value to D that is a) not secured by an unavoidable security interest and b) that because of that new value D did not make an otherwise unavoidable transfer to C. Since D did make the $25,000 "otherwise unavoidable transfer" (unavoidable due to the ordinary course defense) the requirements of section 547(c)(4)(B) are not satisfied, so the defense fails to the extent of that otherwise unavoidable transfer.
