Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-10-1999

US Trustee v. First Jersey Sec.
Precedential or Non-Precedential:

Docket 98-5236,98-5290




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Recommended Citation
"US Trustee v. First Jersey Sec." (1999). 1999 Decisions. Paper 153.
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Filed June 10, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 98-5236 and 98-5290

IN RE: FIRST JERSEY SECURITIES, INC.,
       Debtor

UNITED STATES TRUSTEE; SECURITIES
& EXCHANGE COMMISSION

v.

FIRST JERSEY SECURITIES, INC.
(D.C. Civil No. 95-5455)

IN RE: FIRST JERSEY SECURITIES, INC.,
       Debtor

SECURITIES & EXCHANGE COMMISSION

v.

FIRST JERSEY SECURITIES, INC.
(D.C. Civil No. 95-5456)

       Securities & Exchange Commission,
       Appellant, No. 98-5236

       United States Trustee,
       Appellant, No. 98-5290

Appeal from the United States District Court
For the District of New Jersey
(D.C. Civil Nos. 95-5455 and 95-5456)
District Judge: Honorable Mary Little Cooper
Argued March 1, 1999

BEFORE: ALITO and McKEE, Circuit Judges,
and SCHWARTZ, District Judge*

(Opinion filed June 10, 1999)

       Katharine B. Gresham (Argued)
       Securities & Exchange Commission
       450 Fifth Street, N.W.
       Washington, D.C. 20549
        Attorney for Appellant
       No. 98-5236

       Deborah R. Kant (Argued)
       William Kanter
       United States Department of Justice
       Civil Division
       10th & Pennsylvania Avenue, N.W.
       Washington, D.C. 20530
        Attorneys for Appellant
       No. 98-5290

       Walter J. Greenhalgh (Argued)
       Duane, Morris & Heckscher
       One Gateway Center, Suite 1210
       Newark, New Jersey 07102
        Attorney for Appellee

OPINION OF THE COURT

SCHWARTZ, Senior District Judge

This appeal addresses the propriety of the appointment of
counsel for a debtor in possession, where the debtor
transferred restricted securities to its counsel in payment
for pre-petition services on the eve of its filing for
bankruptcy. The United States Trustee ("Trustee") and the
_________________________________________________________________

*Hon. Murray M. Schwartz, Senior United States District Judge for the
District of Delaware, sitting by designation.

                                  2
Securities and Exchange Commission ("SEC") contend the
law firm of Robinson, St. John, & Wayne ("RSW") was
disqualified from serving as counsel for the debtor, First
Jersey Securities, because it held an interest adverse to the
debtor's estate by reason of the transfer to it of the
restricted securities. The Bankruptcy Court and the United
States District Court for the District of New Jersey held the
debtor could retain RSW as counsel. Because counsel
received a preference under Section 547 of the Bankruptcy
Code, 11 U.S.C. S 547, we will reverse and remand.

I.

First Jersey Securities, Inc.1 (the "debtor" or "First
Jersey") filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code on August 7, 1995. 11 U.S.C.
S 101 et seq. This action was prompted after the SEC
prevailed in a securities fraud action against First Jersey
and its 100% shareholder, Robert Brennan, and obtained
an order for them to disgorge $75 million in illegal
proceeds. S.E.C. v. First Jersey Securities, Inc., 

(S.D.N.Y. 1995), aff 'd in part, rev'd in part, 

(2d Cir. 1996). Obtaining that order left the SEC as
the largest unsecured creditor of the debtor.

Concurrent with the filing of the petition, the debtor filed
an application pursuant to S 327(a) of the Bankruptcy Code
to retain RSW as its counsel. First Jersey owed thefirm
approximately $389,000 for legal services rendered prior to
the filing for bankruptcy primarily for work performed in
the securities fraud litigation.2 On the same day of its
_________________________________________________________________

1. First Jersey was a discount broker-dealer specializing in the
underwriting, trading, and distribution of low-priced securities. The
company was found to have committed securities fraud by selling
securities to its customers at prices that included excessive markups,
and by failing to disclose to its customers thefirm's control over the
respective securities' trading markets.

2. Lead counsel for RSW was Walter Greenhalgh. RSW subsequently
disbanded, and its successor firm, St. John & Wayne was substituted as
counsel. Later, Duane, Morris & Heckscher was substituted as counsel
when Greenhalgh joined that firm. At all times, Greenhalgh has been
lead counsel for the debtor in possession.

                               3
Chapter 11 filing, the debtor transferred 200,001 shares of
unregistered restricted stock in International Thoroughbred
Breeders, Inc. ("ITB") to RSW.3 This stock was to be
liquidated by RSW, with payments to be made in the
following manner: $200,000 as a retainer for representation
in the bankruptcy proceedings; $250,000 for payment on
firm invoices for representation in the securities fraud
litigation, with any excess to be returned to the debtor. The
$250,000 was to be considered full payment for the
$389,327 due for pre-petition services. The firm waived the
remaining pre-petition balance, thereby eliminating itself as
a creditor of the debtor. Apparently, shares in ITB were the
debtor's only meaningful resource, as its bankruptcy
petition listed only $22,367 in other assets. Ultimately,
RSW found a buyer for the shares, and transferred all of
the ITB stock for $600,003. RSW kept $450,000 and
returned the remainder to the debtor. While the transfer of
stock was noted in both the debtor's petition and counsel's
petition to be retained as counsel, neither party disclosed
the payment was made within 90 days of the debtor filing
for bankruptcy.

On August 11, 1995, four days after the filing of the
petition, the Trustee, joined by the SEC three days later,
objected to the appointment of RSW as counsel, arguing the
firm was not "disinterested" as is required by the
Bankruptcy Code. 11 U.S.C. S 327(a). The Trustee and the
SEC (collectively referred to as "SEC") maintained the
transfer of ITB restricted stock was a preferential payment,
thereby disqualifying RSW from acting as counsel for the
debtor because it held an interest adverse to the estate.
RSW, in response, submitted a certification asserting the
payment was made in the ordinary course of business, was
not preferential, and was deemed timely payment. It did not
disclose the date of the stock transfer. What occurred in the
Bankruptcy Court and District Court is set forth below.
_________________________________________________________________

3. Because the ITB shares were unregistered, they could only be sold
under an exemption provided by Section 4 of the Securities Act. 15
U.S.C. S 77d.

                               4
A. Bankruptcy Court

On August 24, 1995, the Bankruptcy Court held a
hearing on the debtor's application to retain RSW as its
counsel. The SEC contended the payment of RSW's pre-
petition claim was a voidable preference under the
Bankruptcy Code, 11 U.S.C. S 547(b),4 which is a cause for
disqualification under Section 327(a).5 During the hearing,
RSW acknowledged the stock transfer took place within the
90 day preference period, but contended it was made in the
ordinary course of business, and not made in exchange for
an "antecedent debt". Counsel explained the $250,000
payment was for a series of invoices from January through
May 1995, as well as for work done in June and July of
that year. He stated,

       [T]he normal course of doing business with the debtor
       for at least the past 12 months and probably going
       back a year and a half or two years, would be a method
       where we would generate an invoice, we would then
       submit a group of invoices after several months, . ..
       submit that to the debtor, discuss with the debtor a
       method of payment, and the debtor would make
       payment on those groups of invoices.

Bankruptcy Docket No. 30, August 24, 1995 Hearing at 31.

The Bankruptcy Court approved the debtor's application
to retain RSW from the bench on August 24, 1995 and
subsequently issued a written opinion. In re Brennan, 187
_________________________________________________________________

4. Section 547(b) of the Code permits a trustee to avoid certain pre-
bankruptcy transfers as "preferences" where the debtor transfers
property to a creditor for an antecedent debt made within 90 days before
filing for bankruptcy. In re Molded Acoustical Products, Inc., 

,
217 (3d Cir. 1994).

5. Section 327(a) provides: "[T]he trustee, with the court's approval, may
employ one or more attorneys . . . that do not hold or represent an
interest adverse to the estate, and that are disinterested persons, to
represent or assist the trustee in carrying out the trustee's duties under
this title." 11 U.S.C. S 327(a). Pursuant to 11 U.S.C. S 1107, the debtor
in possession has the right to seek the employment of professionals
subject to S 327(a). If, in fact, the $250,000 payment for pre-petition
services was a preference, RSW would not be a "disinterested person"
within the meaning of the statute.

                               

(Bankr. D. N.J. 1995). That Court held the SEC
did not present a prima facie case that RSW received a
voidable preference under Section 547(b) of the Bankruptcy
Code. Specifically, the Bankruptcy Court found there was
no prima facie showing of a transfer to "satisfy an
antecedent debt owed by the debtor before such transfer
was made", as is required under S 547(b)(2).6 In re 

. The Court reasoned a debt is not"owed"
within the meaning of the statute until payment is past
due, even if the debt is antecedent. It accepted RSW's
assertion that the debtor's financial obligation to the firm
was not past due, and consequently the payment was
deemed timely.

In the alternative, the Court found the transfer of stock,
even if a preference, was not a voidable preference because
it was a payment made in the ordinary course of business
under Section 547(c). If the transfer was incurred and made
in the ordinary course of business between the parties, and
made according to ordinary business terms, then the
transfer cannot be avoided by the debtor's estate. 11 U.S.C.
S 547(c)(2).7 In addition, the Court dismissed the SEC's
claim that the debtor and counsel failed to disclose
adequately the details of the pre-petition transfer of the
stock. The Bankruptcy Court concluded, "The U.S. Trustee
and the SEC therefore failed to establish that the payment
in question is probably an avoidable preference. The mere
accusation that it could be avoidable is not sufficient to
disqualify Robinson." In re 

.

B. District Court

The SEC and Trustee appealed the decision of the
Bankruptcy Court to the United States District Court for
_________________________________________________________________

6. Section 547(b)(2) provides that "the trustee may avoid any transfer of
an interest of the debtor in property . . . for or on account of an
antecedent debt owed by the debtor before such transfer was made."

7. Section 547(c)(2) provides that a "trustee may not avoid under this
section a transfer . . . to the extent that such transfer was -- (A) in
payment of a debt incurred by the debtor in the ordinary course of
business or financial affairs of the debtor and the transferee; (B) made
in the ordinary course of business or financial affairs of the debtor and
the transferee; and (C) made according to ordinary business terms."

                               6
the District of New Jersey, contending the Bankruptcy
Court erred in finding the law firm was not disqualified
under S 327(a). The District Court filed a memorandum and
order affirming the Bankruptcy Court's decision. In re First
Jersey Securities, Inc., No. 95-5455 (D. N.J.filed April 9,
1998).

The Court agreed with the Bankruptcy Court that the
transfer of ITB stock did not constitute a preference under
S 547(b), and therefore, RSW should not be disqualified.
The District Court also concluded the stock transfer was
not made on account of an antecedent debt owed by the
debtor before the transfer was made. Finally, the Court
declined to address the Bankruptcy Court's conclusion that
the stock transfer payment was made in the ordinary
course of business.

II.

The District Court exercised jurisdiction under 28 U.S.C.
S 158(a) to review the Bankruptcy Court'sfinal order
approving the debtor's application for retention of counsel.
This Court has jurisdiction under 28 U.S.C. S 158(d) to
review the District Court's final order. United States Trustee
v. Price Waterhouse, 

(3d Cir. 1994).

Our standard of review of a District Court's
determination on appeal from a Bankruptcy Court decision
has been articulated on numerous occasions. "As an
appellate court twice removed from the primary tribunal,
we review both the factual and legal determinations of the
district court for error." Universal Minerals, Inc. v. C.A.
Hughes & Co., 

, 101-2 (3d Cir. 1981). Our
vantage point is identical to that of the District Court, "so
we review the bankruptcy court's findings by the standards
the district court should employ to determine whether the
district court erred in its review." 

Accordingly,
the Bankruptcy Court's findings of fact are reviewable for
clear error. In re Continental Airlines, 

, 128 (3d
Cir. 1997). Legal determinations are subject to plenary
review. 

Court's exercise of discretion is
reviewed for abuse thereof. In re Engel, 

, 571
(3d Cir. 1997).

                               7
III.

The SEC urges this Court to reverse the District Court's
decision approving the retention of RSW as counsel for the
debtor. It argues the Court erred in finding the stock
transfer was not a voidable preference under 11 U.S.C.
S 547, and that error led it to conclude RSW was qualified
to serve as counsel to the debtor under 11 U.S.C.S 327.
The SEC also urges the transfer of the ITB restricted stock
was not made in the ordinary course of business as
outlined in 11 U.S.C. S 547(c)(2). Finally, the SEC asserts
the District Court erred in finding RSW's disclosures
concerning the stock transfer payments were sufficient
under S 327(a). Because we conclude the stock transfer was
a preferential payment not made in the ordinary course of
business, we need not address whether RSW adequately
disclosed the stock payments to the Bankruptcy Court.

A. Stock Transfer as Preferential Payment

Section 327(a) of the Bankruptcy Code provides for the
trustee (or the debtor in possession), with the Court's
approval, to employ attorneys "that do not hold or represent
an interest adverse to the estate," and that are
"disinterested persons." 11 U.S.C. S 327(a); 11 U.S.C.
S1107. In order for counsel to be retained, "counsel must
`not hold or represent an interest adverse to the estate' and
must be a `disinterested person.' " In re BH&P Inc., 

, 1314 (3d Cir. 1991) (citing In re Star
Broadcasting, Inc., 

, 838 (Bankr. D. N.J. 1988)).

A "disinterested person" is defined as one who does not
have an interest materially adverse to the interest of the
estate, by reason of any direct or indirect relationship with
the debtor, or for any other reason. 11 U.S.C. S 101(14)(e).
The standards regarding adverse interests underS 327(a)
are outlined in In Re Marvel Entertainment Group, Inc., 

, 476 (3d Cir. 1998). In that case, we held:

       (1) Section 327(a), as well as 327(c), imposes a per se
       disqualification as trustee's counsel of any attorney
       who has an actual conflict of interest;

       (2) the district court may within its discretion--
       pursuant to S 327(a) and consistent with 327(c) --

                               8
       disqualify an attorney who has a potential conflict of
       interest and

       (3) the district court may not disqualify an attorney on
       the appearance of conflict alone.

may consider an interest adverse to the estate
when counsel has "a competing economic interest tending
to diminish estate values or to create a potential or actual
dispute in which the estate is a rival claimant." In re
Caldor, Inc., 

, 171 (Bankr. S.D.N.Y. 1996)
(where Trustee objected to retention of counsel by official
committee of unsecured creditors in Chapter 11 case); In re
Star Broadcasting, Inc., 

, 838 (Bank. D.N.J.
1988) (where Bankruptcy Court held law firm held actual
conflict of interest in representing both debtors in
possession).

In summary, S 327(a) mandates disqualification when
there is an actual conflict of interest, allows for it when
there is a potential conflict, and precludes it based solely
on an appearance of conflict. In the situation where the
debtor in possession seeks to retain counsel, as is the case
here, the Code provides, "[A] person is not disqualified for
employment under S 327 of this title by a debtor in
possession solely because of such person's employment by
representation of the debtor before the commencement of
the case." 11 U.S.C. S 1107(b). Where there is an actual
conflict of interest, however, disqualification is mandatory.
In re Marvel Entertainment 

. A
preferential transfer to RSW would constitute an actual
conflict of interest between counsel and the debtor, and
would require the firm's disqualification. In re 

.

The Bankruptcy Code's avoidable preference provision,
11 U.S.C. S 547(b), allows a bankruptcy trustee to recover
certain transfers a debtor made prior to filing a petition in
bankruptcy. The trustee must show that the transfer was:

       1) to or for the benefit of a creditor;

       2) for or on account of an antecedent debt owed by   the
       debtor before such transfer was made;

       3) made while the debtor was insolvent;

                               9
       4) made -- on or within 90 days before the date of the
       filing of the petition; . . .

       5) that enables such creditor to receive more than
       such creditor would receive if --

       A) the case were a case under Chapter 7 of this ti tle;

       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

11 U.S.C. S 547(c)(2). The Bankruptcy Court and District
Court held the SEC did not make a prima facie showing the
stock transfer likely satisfied the requirement that the
transfer be "for or on account of an antecedent debt owed
by the debtor before such transfer was made." 11 U.S.C.
S 547(b)(2). The Courts below found all other elements of
Section 547(b) were established, a conclusion with which
we are in accord.

The Bankruptcy Court reasoned that not only must the
debt be antecedent, but also the payment of a debt must be
past due, as a prerequisite for establishing a voidable
preference under S 547(b)(2). RSW certified the transfer of
the securities was in the ordinary course of business
dealings between the two parties, and was deemed timely
payment. It further represented the invoices submitted by
the firm did not constitute a final bill of an amount owed to
the firm. Rather, the firm would negotiate with the debtor
over several months worth of invoices, and adjust the bill
accordingly. An invoice was not finalized until after
negotiations. With respect to the final bill with First Jersey,
the debtor agreed to pay $250,000 for legal services
rendered from January to July 1995 almost simultaneously
with the conclusion of negotiations over the final bill. The
parties agreed the $250,000 was in settlement of the
invoices presented by RSW for legal work performed from
January to May 1995 (which totaled $314,327), as well as
for work performed in June and July 1995 for which RSW
had not yet generated an invoice ($75,000). RSW thus
argues the payment was made before the debt was actually
past due. The Bankruptcy Court agreed, reasoning the debt
was not due prior to the time the payment was made. The

                               10
District Court concurred with this conclusion under the
same legal reasoning.

The District Court's legal interpretation of S 547(b)(2) is
reviewed de novo. Under the language of the statute, in
order to constitute a preferential payment, First Jersey
must have owed an antecedent "debt" to RSW, and that
debt must have been incurred "before the transfer was
made." 11 U.S.C. S 547(b)(2). The Bankruptcy Code defines
a debt as a "liability on a claim." 11 U.S.C.S 101(12). In
turn, the Code defines a claim broadly. A "claim" means: (A)
right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured. 11 U.S.C. S 101(5). Under
this broad definition of claim, "all legal obligations of the
debtor, no matter how remote or contingent, will be able to
be dealt with in the bankruptcy case." Senate Report at 22,
1978 U.S. Code Cong. & Admin. News 5787, 5808. In
addition, as debt is defined as a liability on a claim, it is
coextensive with the definition of a claim, and both are
construed broadly. Pennsylvania Dep't of Pub. Welfare v.
Davenport, 

, 

, 

(1990). It follows "when a creditor has a claim against a
debtor -- even if the claim is unliquidated, unfixed, or
contingent -- the debtor has incurred a debt to the
creditor." In re Energy Cooperative, Inc., 

, 1001
(7th Cir. 1987).

The SEC contends First Jersey incurred a debt to RSW
when the law firm performed legal services on the debtor's
behalf. We agree. Courts which have considered this issue
have concluded, consistent with the statutory definitions,
that an antecedent debt owed by the debtor occurs when a
right to payment arises -- even if the claim is not fixed,
liquidated, or matured. See 11 U.S.C. S 101(5); In re
Bennett Funding Group, Inc., 

, 742 (2d Cir.
B.A.P. 1998) (debt occurs "when the debtor previously
obtained a property interest in the consideration provided
by the creditor that gave rise to the debt"). The right to
payment generally arises when the debtor obtains the goods
or services. See, e.g., Id; In re Futoran, 

, 267
(9th Cir. 1996); In re Cybermech, Inc., 

, 821
(4th Cir. 1994); In re Energy Co-op, 

.

                               11
Under this reasoning, RSW had a claim at the time it
performed legal services for First Jersey. Its claim was
"antecedent" for purposes of Section 547(b)(2). The payment
of $250,000 from the sale of ITB stock was to settle the
debt owed by First Jersey for past legal services rendered
between January and July 1995. We agree with our sister
circuits and other courts that legal claims arise when the
legal services are performed, not when the bill itself is
presented to the client. See, e.g., In re Florence Tanners,
Inc., 

, 447 (Bankr. E.D. Mich. 1997); In re
Investment Bankers, Inc., 

, 1018 (D. Colo.
1989), aff'd, 

(10th Cir. 1993).

In In re Florence Tanners, an attorney claimed he did not
receive a preferential transfer because he received payment
before he had sent an invoice for his services. The Court
disagreed, and held "a debt for legal services arises when
the services are performed, not when the subsequent
invoice is 

. Similarly, the
Bankruptcy Appellate Panel in In re Bennett Funding Group
concluded that, since a law firm which provided legal
services "had a claim, mature or unmatured, that it could
then assert against a debtor's bankruptcy estate if payment
was not made at the time a petition was filed . . . the debt
was `antecedent' for purposes of Section 547(b)(2)." 

, 742 (B.A.P. 2d Cir. 1998).

The policies underlying the preference section in the
bankruptcy statute cry out for the conclusion that a debt
arises when legal services are provided, not when a law firm
issues an invoice. The overriding intent in enactingS 547(b)
was to promote equal distribution among a debtor's
creditors. The preference section discourages creditors from
racing to the courthouse to dismember the debtor during
its slide into bankruptcy, and it furthers the policy of equal
distribution among similarly situated creditors. 5 Collier on
Bankruptcy, S 547-9; 1978 Code Cong. & Admin. News
5787, 6138.

The Bankruptcy Court's reasoning that a debt is not
owed until payment is past due is not found in the
preference statute, 11 U.S.C. S 547. Its absence is readily
understandable. If the Bankruptcy Court's conclusions
were permitted to stand, the preference provision of the

                               12
Bankruptcy Code would be largely vitiated. The Bankruptcy
Court's judicial gloss would allow creditors to retain a pre-
petition payment simply by asserting that the payment was
"timely," as was done by RSW. Pronouncing a payment is
"timely" does not make it so. Moreover, such an approach
would lead to inequality among similarly situated creditors,
and allow for both strategic behavior and collusion by
creditors to secure preferential treatment prior to a debtor
filing its petition. This approach would "leave to the creditor
the discretion to determine the date the obligation was
incurred, creating the possibility not only of inequality of
treatment of similarly-situated creditors (depending on the
vagaries of their billing practices), but also the opportunity
for a particular creditor, who foresees that his debtor is
approaching bankruptcy, to secure preferential treatment
for himself by the timing of the bill." Matter of Emerald Oil
Co., 

, 837 (5th Cir. 1983).

In this case, the stock transfer resulted in a large
diminution of the value of the debtor's estate, and a serious
depletion of assets of the estate available to other creditors.
Similarly situated creditors were not treated equally.
Moreover, RSW, as the debtor's counsel, was in a unique
position to secure preferential treatment for itself-- as it
knew the debtor was going to file for bankruptcy in the
imminent future. First Jersey's payment to RSW depleted
the estate of its only significant asset that would have been
available to its other creditors. This is the type of payment
Congress intended the preference section to reach. We have
no trouble concluding the stock transfer was a preference
under Section 547 of the Bankruptcy Code. As such, RSW
had an actual conflict with the debtor and was therefore
disqualified from serving as counsel under S 327, unless
payment to it was in the ordinary course of business.

B. Payment in the Ordinary Course of Business

Even if a payment is considered a preference under
Section 547(b), it may not be subject to avoidance if it was
made in the ordinary course of business, as defined in 11
U.S.C. S 547(c). The purpose of Section 547(c) is to leave
undisturbed normal financial relations between a debtor
and its creditors, even as a company approaches
bankruptcy. It protects "recurring, customary credit

                               13
transactions that are incurred and paid in the ordinary
course of business of the debtor and the debtor's
transferee." 5 Collier on Bankruptcy, 547-47. We conclude,
however, that the debtor's stock transfer to RSW in this
case was not made in the ordinary course of business
dealings between the two parties, nor was it made
according to ordinary business terms.

In reaching the opposite conclusion, the Bankruptcy
Court concluded the stock transfer was made in the
ordinary course of business, and was thus acceptable even
if one concluded the payment constituted a preferential
transfer under S 547(b). The Court accepted RSW's
assertion that its ordinary billing procedure with First
Jersey was to submit a number of invoices after several
months, and then negotiate the amount and method of
payment. Counsel explained, "we would go to the debtor
with the invoices in hand, submit them to the client,
discuss with the client whether the bills should be
adjusted, and in most cases they were adjusted downward,
and then work out some sort of a payment on that
particular group of invoices." Bankruptcy Docket No. 30 at
32.

A trustee may not avoid a preferential transfer to the
extent such transfer was: "(A) in payment of a debt incurred
by the debtor in the ordinary course of business or
financial affairs of the debtor and transferee; (B) made in
the ordinary course of business or financial affairs of the
debtor and transferee; and (C) made according to ordinary
business terms." 11 U.S.C. S 547(c)(2). The burden is on the
transferee to satisfy each statutory element by a
preponderance of the evidence. 11 U.S.C. S 547(g); J.P. Fyfe,
Inc. of Florida v. Bradco Supply Corp., 

, 69-70
(3d Cir. 1989).

It is undisputed the transfer of stock satisfies
S 547(c)(2)(A) -- the debt was incurred for legal services
provided by RSW to First Jersey in the normal course of
business. The conflict arises as to the other two elements.
The term "ordinary" is not defined in the bankruptcy
statute. J.P. Fyfe teaches the determination of what is "in
the ordinary course of business" is subjective, calling for
the Court to consider whether the transfer was ordinary as

                                14
between the debtor and the creditor. Factors such as
timing, the amount and manner in which a transaction was
paid are considered relevant. In re Yurika Foods Corp., 

, 45 (6th Cir. 1989).

Employing these criteria, we conclude the payment was
not made in the ordinary course of business. The timing of
the payment to RSW is clearly suspect. The transfer of
stock was made on the day the debtor filed its petition for
bankruptcy. RSW did not show that the payment date fit a
particular practice between the parties. Rather, all the
record shows is that First Jersey made periodic payments
during 1994 and 1995. These payments consisted of:

       10/28/94   $300,000
       12/07/94   $150,000
       12/22/94   $150,000
       02/10/95   $150,000
       03/24/95   $150,000
       05/31/95   $150,000

We merely note the payment of $250,000 on August 7,
1995 deviates from the pattern of $150,000 payments from
December 1994 to May 1995. However, we are very
troubled by the absence in the record of any explanation for
why the payment was made on the eve of the debtor'sfiling
for bankruptcy. As First Jersey's counsel in the securities
litigation, RSW had to know of the debtor's precarious
financial position when it accepted restricted securities in
lieu of cash payment because RSW prepared the
bankruptcy petition filed on the same day as the stock was
transferred to it.

The RSW firm also failed to produce any evidence that
the payment of legal bills by transfer of restricted stock was
in the ordinary course of business between the parties.
RSW did not assert it had ever before received payment in
the form of restricted securities. The stock in question was
unregistered, and could not be sold publicly. In fact, RSW
needed to find a sophisticated buyer for the securities --
and the shares were not sold until October 19, 1995. It
defies reason that the Robinson firm would accept payment
in an illiquid asset unless it knew the debtor was in serious
financial difficulties and could not pay otherwise. The

                               15
manner and timing of the payment in the currency of
restricted ITB stock suggests the transfer was not made in
the ordinary course of business between the parties.

Moreover, the payment was not made "according to
ordinary business terms", as is required by S 547(c)(2)(c).
This phrase has been interpreted as encompassing"the
practices in which firms similar in some general way to the
creditor in question engage." In re Molded Acoustical
Products, Inc., 

, 224 (3d Cir. 1994)."Only
dealings so idiosyncratic as to fall outside that broad range
should be deemed extraordinary and therefore outside the
scope of subsection C." 

of Tolona Pizza
Prods. Corp., 

, 1033 (7th Cir. 1993)). This Court
emphasized, moreover, that "the more cemented [as
measured by duration] the pre-insolvency relationship
between the debtor and the creditor, the more the creditor
will be allowed to vary its credit terms from the industry
norm yet remain within the safe harbor of S 547(c)(2)." 

While this test is deferential, it is not non-existent. The
general practice of law firms is to receive cash in return for
services, not restricted securities. See, e.g., In re Florence
Tanners, Inc., 

, 448 (Bankr. E.D. Mich 1997)
(questioning "whether in the ordinary course of the legal
business, clients pay lawyers with merchandise"). While law
firms have begun to accept equity positions as payment
from "start-up" companies with strong growth potential, the
reasoning in these situations is the expectation by the law
firm that the stock of the client will appreciate in value. In
contrast, here the restricted stock is not of a client with
growth potential, but of a third party. Moreover, the record
reflects it was common practice for First Jersey to pay RSW
only in cash. In fact, up until the day the Chapter 11
petition was filed, there is no evidence in the record that
First Jersey ever transferred securities, much less restricted
securities, to RSW as payment for legal services.

Finally, it very much appears that on August 7, 1997,
First Jersey recognized its need for counsel to shepherd it
through the chapter 11 proceedings. The obvious choice
was RSW since it had continuously represented First Jersey
as its legal troubles mounted. But there was a problem.

                                16
First Jersey owed RSW a substantial amount of money.
Turning over the ITB stock to RSW was the only solution,
especially since RSW represented ITB in the past, and
presumably was familiar with the company. Be that as it
may, payment of legal bills in restricted stock as a prelude
to filing a bankruptcy Chapter 11 petition can hardly be
construed as a payment "made according to ordinary
business terms."

Viewed in its totality, it is clear this payment was not
made in the ordinary course of business. Accordingly, the
preferential payment was a preference, creating an actual
conflict of interest, and thus, disqualifying RSW as counsel
for the debtor.8

IV. Conclusion

For the reasons set forth above, we find the District
Court erred in holding that the stock transfer was not a
preference under 11 U.S.C. S 547. The stock transfer
created an actual conflict of interest, and therefore
disqualification is mandatory. In addition, wefind the
Bankruptcy Court erred in finding the transfer was exempt
under S 547(c)(2) as a payment made in the ordinary course
of business.

Accordingly, we will reverse the District Court's order and
direct the District Court to remand to the Bankruptcy
Court with instructions to disqualify RSW and successor
firms as counsel for First Jersey, and to take such further
action as is consistent with this opinion.9
_________________________________________________________________

8. Because we conclude the $250,000 payment constituted a preference,
and counsel is disqualified, we do not reach the question of whether the
debtor and RSW adequately disclosed information in RSW's application
for employment as required by Rule 2014(a) of the Federal Rules of
Bankruptcy Procedure and 11 U.S.C. S 327.

9. We note the Bankruptcy Court warned RSW at the hearing that if the
transfer is avoided as to the payment of the pre-petition debt, "[RSW] is
subject not only to disgorgement of the preference, but also to the
possible denial or reduction of compensation under Code section 328(c)
as well." In re 

.

                                17
A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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