Sue L. Robinson, Senior United States District Judge.
This appeal arises from a preference action filed by Pirinate Consulting Group, LLC, as trustee ("Trustee") of a creditors' litigation trust created under the confirmed Chapter 11 plan of NewPage Corporation, et al. ("NewPage" or "Debtors"). The preference action sought to avoid $765,120.68 in payments made to defendant Kadant Solutions Division ("Kadant") within the ninety days prior to September 7, 2011 ("Petition Date").
Kadant manufactures and designs accessory equipment used in the pulp and paper manufacturing industries. (R100)
Prior to the Petition Date, Debtors and Kadant entered into negotiations for the custom manufacture of six gravity drainage structures referred to by the parties and bankruptcy court as the Escanaba Mill Structures or "EDS." In connection therewith, the parties executed the "General Terms and Conditions for Contracts and Purchase Orders for Purchase of Equipment" ("General Terms") in May 2010. (R100; R106-22) The General Terms defined "Contract" as "[t]he Purchase Order to which these Terms and Conditions are attached ..., all documents incorporated by reference under the Purchase Order or under these Terms and Conditions ... and all exhibits and amendments to all such documents." (R108) The General Terms provided that the Debtors could terminate a purchase order at any time without cause on 10 days' notice to Kadant. (R118) In the event of such a cancellation, Debtors were only liable for actual costs incurred by Kadant (plus normal markups) up to the date of cancellation, not to exceed the contract price.
In July and August 2011, the parties negotiated the terms and conditions of the contract for the manufacture of the EDS, during the course of which Kadant submitted several "revised proposal[s]" for NewPage's review. (See R124-55, dated August 10, 2011, titled "Quotation Number QCEP081 rev. 4" (herein, "Revised Quote 4"); R168-98, dated September 12, 2011, titled "Quotation Number QCEP0281 rev. 5" (herein, "Revised Quote 5")) Kadant attached to each of the revised quotes three appendices: (i) a proposed "Mechanical Vibration Warranty" (Appendix A);
[
Trustee filed the preference action on November 26, 2013, and the first amended complaint sought to avoid $765,120.68 in payments made by the Debtors to Kadant, including the $351,709.20 EDS payment received on or about August 30, 2011. Kadant moved for summary judgment. (R80-236) With respect to the EDS payment, Kadant argued that it was not subject to avoidance because it was not on account of an antecedent debt. (R82) Kadant relied on the fact that the EDS payment, which represented an initial payment of 60% of the total price, occurred prior to Kadant beginning any manufacturing work or shipping anything, and that the General Terms allowed the Debtors to terminate the contract on 10 days' notice, in which
Following oral argument,
The court has jurisdiction to review the bankruptcy court's order pursuant to 28 U.S.C. § 158(a). In reviewing a bankruptcy court's grant of summary judgment, the court applies a plenary, or de novo, standard of review to legal determinations. Biase v. Congress Fin. Corp. (In re Tops Appliance City, Inc.), 372 F.3d 510, 513 (3d Cir. 2004); Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). Under that standard, courts look to whether the record demonstrates "a genuine issue of material fact and, if not, whether the moving party is entitled to judgment as a matter of law." Saldana v. Kmart Corp., 260 F.3d 228, 232 (3d Cir. 2001). Courts must view the facts in the light most favorable to the nonmoving party and draw all inferences in that party's favor. Gray v. York Newspapers, Inc., 957 F.2d 1070, 1078 (3d Cir. 1992).
"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving party bears the burden of demonstrating the absence of a genuine issue of material fact. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 n. 10, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). A party asserting that a fact cannot be — or alternatively is — genuinely disputed must be supported either by citing to "particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for the purposes of the motions only), admissions, interrogatory answers, or other materials," or by "showing that the materials cited do not establish the absence or
To defeat a motion for summary judgment, the nonmoving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586-87, 106 S.Ct. 1348; see also Podobnik v. U.S. Postal Service, 409 F.3d 584, 594 (3d Cir. 2005) (stating party opposing summary judgment "must present more than just bare assertions, conclusory allegations or suspicions to show existence of a genuine issue") (internal quotation marks omitted). Although the "mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment," a factual dispute is genuine where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Trustee characterizes the issues on appeal as follows: (i) whether the bankruptcy court erred in holding that an antecedent debt under § 547(b) of the Bankruptcy Code only exists when a debt is due and payable under nonbankruptcy law, as opposed to holding that debts for which there exists a contingent liability under the Bankruptcy Code also constitutes an antecedent debt; and (ii) whether the bankruptcy court, in holding that the EDS payment was not made on account of an antecedent debt because it was not due and owing, erred by failing to apply binding Third Circuit precedent under JELD-WEN, Inc. v. Van Brunt (In re Grossman's), 607 F.3d 114 (3d Cir. 2010), and instead incorrectly applying the overturned "accrual standard" set forth in Avellino & Bienes v. M. Frenville Co. (In re Frenville Co.), 744 F.2d 332 (3d Cir. 1984), cert. denied, 469 U.S. 1160, 105 S.Ct. 911, 83 L.Ed.2d 925 (1985). (See D.I. 4)
Section 547 allows the trustee or the debtor-in-possession to avoid certain transactions between a debtor and its creditors that occurred within the ninety days prior to the petition date. Barnhill v. Johnson, 503 U.S. 393, 394, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). In order to avoid a prepetition preferential transfer of a debtor's interest in property, the plaintiff must show that the transfer was:
11 U.S.C. § 547(b) (emphasis added). "Unless each and every one of these elements is proven, a transfer is not avoidable as a preference under 11 U.S.C. § 547(b)." AP Services, LLC v. McKesson Corp. (In re CRC Parent Corp.), 2013 WL 2149492, *2 (Bankr. D. Del. May 16, 2013) (quotations and citations omitted). Trustee is required to establish each element by a preponderance of the evidence. See 11 U.S.C. § 547(g). Kadant argued that it was entitled to summary judgment with respect to the EDS payment because Trustee could not satisfy the prima facie elements required under § 547(b). Kadant relied on the terms of the agreement and the facts set forth in its affidavits to show there was no genuine issue of fact that the EDS payment was a payment in advance and, therefore, not made "on account of an antecedent debt owed by the [Debtors] before such transfer was made" as required under § 547(b)(2).
The Bankruptcy Code does not define "antecedent debt." "Debt" is defined by the Bankruptcy Code as "liability on a claim." 11 U.S.C. § 101(12). A claim is a "right to payment," regardless of whether that right is fixed, contingent, matured, or unsecured. See 11 U.S.C. § 101(5). The Third Circuit has said that for a debt to be antecedent, "the debt must have been incurred `before the transfer was made.'" First Jersey Sec., Inc., 180 F.3d 504, 510 (3d Cir. 1999) (quoting 11 U.S.C. § 547(b)(2)). In order to determine when a debt was incurred — and whether it was "incurred before the transfer was made" — courts look to "when the debtor becomes legally obligated to pay." In re Philadelphia Newspapers, LLC, 468 B.R. 712, 722 (Bankr. E.D. Pa. 2012) (internal quotations omitted). "[A]n antecedent debt owed by the debtor occurs when a right to payment arises — even if the claim is not fixed, liquidated, or matured." First Jersey, 180 F.3d at 511. "The right to payment generally arises when the debtor obtains the goods or services." Id.
"It is well established that advance payments are prima facie not preferences because the transfer from the debtor to the creditor is not for or on account of an antecedent debt." In re Hechinger Inv. Co. of Del., Inc., 2004 WL 3113718, *2 (Bankr. D. Del. Dec. 14, 2004). For example, in Hechinger, Universal Forest Products, Inc. ("UFP") supplied Hechinger with treated wood products for sale in Hechinger's home improvement stores. Id. at *1. In its chapter 11 proceedings, Hechinger sought to avoid payments made to UFP during the preference period. UFP moved for summary judgment on the basis that certain of the alleged preferential transfers were advance payments for products later shipped to Hechinger. Hechinger conceded that, toward the end of the preference period, it had prepaid for products which it believed it was purchasing on credit. See id. at *3. The bankruptcy court granted UFP's motion for summary judgment because these amounts were "paid in advance and therefore ... not preferential." Id.; see also In re Hechinger Inv. Co. of Del., Inc., 489 F.3d 568, 572 (3d Cir. 2007) (noting that payments made prior to the shipment of goods "were advance payments and therefore,
Importantly, the existence of an agreement between the parties for payment in advance does not alter the conclusion that advance payments are not payments on account of antecedent debt. This is true even where goods are shipped or services are provided on an ongoing basis. For example, in Presidential Airways, an aviation insurance broker ("RHH") entered into an agreement with Presidential, pursuant to which RHH agreed to obtain aviation insurance for Presidential and set up an installment payment plan between Presidential and various insurance companies. See In re Presidential Airways, Inc., 228 B.R. 594, 596 (Bankr. E.D. Va. 1999). The payment plan required Presidential to make monthly payments to cover both the insurance premiums and a commission to RHH for services rendered. See id. Presidential later initiated bankruptcy proceedings and sought to avoid certain payments made to RHH as preferential transfers. RHH argued that the payment plan required payments into a fiduciary account before any debts were due; no creditor existed nor were the payments made on account of an antecedent debt. See id. at 597. Conversely, Presidential argued that an antecedent debt for ongoing services is incurred on the date that the contract calls for payment — when payments were "due" under the agreement's payment plan. See id. at 598. The court rejected Presidential's argument, finding no antecedent debt where the payments were made in advance, regardless of the agreement. See id.
Similarly, in Vanguard, a software development company ("AAI") entered into a master services agreement with Vanguard which required payment in advance of each month's estimated charges; at the end of the month, the amount owed would be reconciled with the estimated amount paid at the beginning of the month based on Vanguard's actual service usage, and Vanguard would be billed for the difference or receive a credit. In re Vanguard Airlines, Inc., 295 B.R. 329, 331-32 (Bankr. W.D. Mo. 2003). The parties later amended the master services agreement to require weekly payments equal to 25% of the amounts on the monthly invoices, rather than making monthly payments as it previously had been doing. Id. at 332. Following its bankruptcy filing, Vanguard sought to avoid the weekly payments as preference payments made to AAI. Based on the existence of the master services agreement, Vanguard argued that it had a legal obligation to pay the estimated charges for a particular month when it received an invoice at the beginning of that month, and that its payments were made to satisfy antecedent debt in four weekly installments. Id. at 334. The bankruptcy court rejected this argument; holding that the debt did not arise at the time of the invoice but rather at the time AAI provided the services it had contracted with Vanguard to provide. See id. at 334-35. Payments made in advance of these services, therefore, were not on account of an antecedent debt, regardless of the agreement.
In Dots, the debtor and Capstone were parties to a master services agreement for media services, with individual projects set forth in a separate statement of work defining the project and costs and requiring payment in advance. The court found the challenged payments were not made on account of antecedent debt:
In re Dots, LLC, 533 B.R. 432, 439 (Bankr. D.N.J. 2015) (emphasis in original). The court rejected the debtors' argument that an antecedent debt was created pursuant to the master services agreement; although it generally governed the parties' relationship, the statements of work were the critical agreements which dictated the terms of each deal and required payment in advance. See id. at 440.
In ruling on Kadant's summary judgment motion, the bankruptcy court framed its analysis with well settled principles, recognizing that an "antecedent debt" is "incurred prior to the alleged preferential transfer" and "a debt is incurred when the debtor becomes obligated to pay." (R509 (citing In re USDigital, Inc., 443 B.R. 22, 36 (Bankr. D. Del. 2011) (antecedent debt is incurred prior to alleged preferential transfer) and Philadelphia Newspapers, 468 B.R. at 722 (debt is incurred when debtor becomes legally obligated to pay)) The bankruptcy court also noted that an invoice alone does not create an obligation to pay because "a debt arises when a debtor receives goods or services and not when invoiced." (R509 (citing Dots, 533 B.R. at 438)) The bankruptcy court further observed that an advance payment is not a payment on account of an antecedent debt. (R509 (citing CRC Parent, 2013 WL 2149492, *4 (wire transfers that cleared before delivery of product were advance payments and were not payments on account of antecedent debt))
The bankruptcy court concluded that the EDS payment was "an advance payment" and "was not for or on account of an antecedent debt." (R510 (citing Hechinger, 2004 WL 3113718, at *3) In reaching this conclusion, the bankruptcy court considered the terms of the agreement and the uncontroverted facts set forth in Kadant's affidavits to determine when the Debtors became legally obligated to pay and whether there was an enforceable obligation at the time of the EDS payment. See Philadelphia Newspapers, 468 B.R. at 722. The bankruptcy court observed that "a series of events [were] relevant to the dispute," including that further "[n]egotiations in late August 2011" led to the issuance of "the Final Contract," Revised Quote 5, after the EDS payment. (R506) The bankruptcy court further found that the EDS required custom manufacturing (R510); that Kadant "was to be paid for the EDS before it began to manufacture the equipment" (id.); that Kadant performed no work prior to its receipt of the EDS payment and further progress payments in October 2011 (R506); and that Kadant "provided nothing before it received [the EDS] payment" (R510). Additionally, the bankruptcy court observed that, pursuant to the General Terms, the "Debtors had the right to terminate the order for the EDS at any time and without cause on 10 days' notice to Kadant" and, at the time of payment, "could have cancelled without any liability since [Kadant] had not started to manufacture the EDS." (Id.) Based on the foregoing, the bankruptcy court determined that the EDS payment was "an advance payment" and "was not for or on account of an antecedent debt." (Id.)
To determine whether a debt was "incurred before the transfer was made," the bankruptcy court properly considered "when the debtor [became] legally obligated to pay," and determined that at the time of the EDS payment there was no legal obligation. Kadant presented unrefuted
Rather than address the prepayment, Trustee raises several arguments which are not compelling. Trustee disputes the bankruptcy court's reference to Revised Quote 5 as the "Final Contract," arguing that an agreement existed at the time of the EDS payment, and that the agreement created both a contingent claim and an antecedent debt. (See D.I. 8 at 11; D.I. 13 at 2, 9) Trustee argues that the agreement was comprised of the General Terms, Revised Quote 4, the Invoice, and the Purchase Order — which constituted Debtors' acceptance of Kadant's offer — and that together, these documents represented a "mutual exchange of promises." (See D.I. 8 at 17-18; D.I. 13 at 9-10) According to Trustee, Revised Quote 5 was not the "Final Contract" and simply reflected additional adjustments to specifications. (See id.) Kadant argues that the bankruptcy court properly determined that, based on the uncontroverted evidence, no binding contract was created until after the EDS payment was made, when Revised Quote 5 was issued; where there is no binding contract, there is no antecedent debt. (D.I. 11 at 16)
Trustee devotes a significant portion of its briefing to the argument that the existence of any agreement between the parties gave rise to a contingent claim, without regard to the terms of the agreement or the relationship between the parties. Trustee argues that "a contract creates a claim at the moment of its execution and is therefore an antecedent debt." (D.I. 8 at 11) The essence of Trustee's argument is that any agreement — including an agreement requiring prepayment before goods and services are provided — creates a contingent claim and therefore an antecedent debt. As set forth in the cases cited above, entry into an agreement that requires prepayment does not alone create an antecedent
Trustee's argument also relies heavily on the fact that "debt" and "claim" have been held to be synonymous. Trustee argues that, while it is true that "a debt is incurred when the debtor becomes legally obligated to pay," the principal question under this standard is "what sort of legal obligation is required to create a debt for purposes of section 547." (See D.I. 8 at 9 (citing In re Enron Corp., 357 B.R. 32, 40 (Bankr. S.D.N.Y. 2006)) According to Trustee, "the proper focus of inquiry in determining whether the [EDS payment] was made on account of an antecedent debt is whether Kadant held a claim as defined under the Bankruptcy Code" and that "the plain language of the Bankruptcy Code gives the term `claim' the broadest possible meaning to encompass all of the debtor's legal obligations, no matter how remote or contingent." (See id. at 9)
And, indeed, the term "debt" means "liability on a claim." 11 U.S.C. § 101(12). For purposes of determining whether a debt is a claim,§ 101(5) (which defines "claim") should be consulted to decide whether the debt or demand gives rise to a right of payment and can qualify under that section. COLLIER ON BANKRUPTCY, ¶ 101.12. "If a claim exists under that broad definition, a debt also exists." Id. "[A]s debt is defined as a liability on a claim, it is coextensive with the definition of a claim and both are construed broadly." First Jersey, 180 F.3d at 510.
Trustee cites case law observing that "[w]henever a claim arises, a debt necessarily arises as well, and the only distinction between the terms is the party to which it applies." (See D.I. 8 at 1 (quoting Enron, 357 B.R. at 37)) Trustee urges the court to take this concept two steps further and hold that, because the definition of debt is tied to the definition of claim, any contingent claim is also, as a matter of law, an antecedent debt. (See D.I. 8 at 2 (arguing, with respect to its alleged contingent claim, that "on account of an antecedent debt" means "on account of an antecedent claim")) The authorities cited by Trustee do not support such a conclusion.
Finally, Trustee argues that, in reaching its conclusion, the bankruptcy court improperly relied on the fact that the agreement required payment before any work was performed and that, until work began, Kadant could not have asserted a claim for monetary damages. (See D.I. 8 at 3) Trustee argues that, by focusing on what rights Kadant and the Debtors may have had under the contract — rights which are governed by state law — and failing to consider whether, as a result of the contract, Kadant had a "claim" against the Debtors as broadly defined in the Bankruptcy Code, the bankruptcy court impermissibly applied Frenville's "accrual" standard, which the Third Circuit overruled in Grossman's, and that the bankruptcy court's holding is contrary to the "obvious trend interpreting `antecedent debt' broadly and rejecting the proposition that debt is only incurred as it becomes due." (See id. at 9-11) Conversely, Kadant argues that the bankruptcy court did not apply Frenville and that Trustee's argument ignores the bankruptcy court's specific findings and conclusions. (See D.I. 11 at 22)
In Frenville, the Third Circuit considered the appropriate standard for determining when a "claim" arose for purposes
Frenville and Grossman's did not address advance payments nor did they discuss the standard for determining when a debt is incurred for the purposes of establishing an antecedent debt. Trustee argues, however, that the bankruptcy court's analysis disregarded Grossman's interpretation of when a claim arises and led to its incorrect conclusion that an antecedent debt was not incurred. According to the Trustee, under Grossman's, the bankruptcy court should have determined that Kadant had a claim against the Debtors, as defined by the Bankruptcy Code — not state law — and that such a contingent claim necessarily constituted an antecedent debt.
In determining whether an antecedent debt existed at the time of the EDS payment, the bankruptcy court did not disregard the definition of "claim" discussed in Grossman's nor did it include any consideration of whether there was a breach or whether a cause of action accrued under state law. Rather the bankruptcy court looked to terms of the agreement and the unrefuted facts to determine when a right to payment arose. The bankruptcy court determined that payment in advance was required under the agreement and there was no right to payment at the time of the EDS payment as Kadant had not performed any services. The bankruptcy court focused on when obligations between the parties arose under the terms of the agreement — not when an action accrued under state law. The bankruptcy court's analysis did not deviate from Grossman's holding that a claim under the Bankruptcy Code may exist before an action accrues under state law. As the Third Circuit in Grossman's recognized, "the determination of when a party has a claim ... seems to hinge on the nature of the claim and the posture of the case." See id. at 126 n.11 (internal citations omitted).
Based on the terms of the agreement and undisputed facts, the EDS payment was a payment in advance, and Trustee cannot sustain its burden in establishing that the EDS payment was for or on account of an antecedent debt owed by the Debtors before the payment was made. Trustee failed to present a genuine issue of material fact that the EDS payment was not a payment in advance, and summary judgment was appropriate.
For the foregoing reasons, the bankruptcy court's opinion and order are affirmed, and Trustee's appeal is denied. An appropriate order shall issue.
At Wilmington this
IT IS ORDERED that the bankruptcy court's memorandum opinion and order, Pirinate Consulting Group, LLC v. Kadant Solutions Division, Adv. No. 13-52530 (KG), 2016 WL 5787237 (Bankr. D. Del. Sept. 30. 2016), are affirmed, and Civ. No. 16-955 (SLR) is closed.
11 U.S.C. § 547(b).
