THOMAS L. PERKINS, Bankruptcy Judge.
This matter is before the Court on cross motions for summary judgment. The Plaintiff, A. Clay Cox (TRUSTEE), as Trustee for the Chapter 7 estate of the Debtor, Central Illinois Energy Cooperative (DEBTOR), brought this action against the Defendant, Nostaw, Inc. (NOSTAW), to avoid and recover certain payments made by the DEBTOR to NOSTAW as allegedly fraudulent transfers.
The DEBTOR was an agricultural cooperative formed under Illinois law by a coalition of farmers in the Central Illinois area in October, 2001, for the purpose of constructing and operating an ethanol facility for the processing of its members' corn into ethanol and other by-products. In March, 2004, Central Illinois Holding Company, LLC, and Central Illinois Energy, LLC (CIE), were formed, with the DEBTOR owning a 71% interest in the holding company. CIE, a wholly owned subsidiary of the holding company, was formed to construct and operate the ethanol production plant and waste-coal fired power generating facility on land adjacent to the grain handling facility. CIE retained Lurgi, Inc., as the general contractor to build the ethanol plant.
By June, 2007, both construction projects had encountered serious financial difficulties. The DEBTOR was unable to repay the Whitebox note when it matured and was significantly behind in the payment of NOSTAW'S invoices. At that time, NOSTAW was owed $2,490,537.67, and was considering ceasing work and filing a lien on the project. On June 12, 2007, as a way of addressing its financial difficulties, the DEBTOR sold, subject to a conditional repurchase obligation, substantially all of its assets, including the unfinished grain handling facility and administration building, to Green Lion Bio-Fuels, LLC, for the sum of $7,750,000 (the "Green Lion Purchase Agreement"). As an offset against the purchase price, Green Lion agreed to assume certain liabilities of the DEBTOR, including:
Despite the sale of the assets to and the assumption of liabilities by Green Lion, the DEBTOR agreed to proceed with, and be fully responsible for, the construction of the project through its completion. Construction pay requests were to be paid by Green Lion's lender, Ridgestone Bank, in accordance with the terms of its loan documents. NOSTAW was not a party to the Green Lion Purchase Agreement.
By separate agreement of the same date (the "Green Lion Payment Agreement"), for the stated purpose of "balancing" the construction loan, NOSTAW agreed to accept as full payment of its contract:
The Green Lion Payment Agreement was executed by the DEBTOR, Green Lion and NOSTAW.
Also, by separate agreement of the same date (the "Green Lion Recapitalization Agreement"), stated to be part of a recapitalization plan for CIE, Green Lion agreed to transfer title to the assets purchased from the DEBTOR to CIE for the sum of $7,750,000 plus expenses. If the plan to recapitalize CIE failed to be consummated by November 1, 2007, the DEBTOR was required to repurchase the assets from Green Lion for the same price. NOSTAW was not a party to the Green Lion Recapitalization Agreement, but it did execute a written consent, expressly acknowledging the rights of CIE and the conditional obligation of the DEBTOR to purchase the grain handling assets from Green Lion and agreeing to honor those rights and obligations in the event of any foreclosure proceedings NOSTAW might pursue against Green Lion.
Green Lion made a payment to NOSTAW on August 24, 2007, in the amount of $255,777.83. NOSTAW continued to work on the grain handling facility until sometime in September, 2007. Green Lion made no further payments to NOSTAW. In discussions with Mike Smith, the DEBTOR'S general manager, NOSTAW stated that it needed to be paid in order to complete the project. As a consequence of NOSTAW'S payment demands and Green Lion's apparent inability to pay its note, the DEBTOR agreed to assume the obligation to pay NOSTAW the remaining amounts it was owed. The DEBTOR and NOSTAW executed a written agreement (the "Second Agreement") dated September 28, 2007, whereby the DEBTOR agreed to pay NOSTAW $988,859.83, with a down payment of $300,000, and the balance to be paid "as agreed upon as work progresses."
In November, 2007, as a result of disputes arising from construction delays and cost overruns, Lurgi, Inc., ceased work on the ethanol plant and related power facility being built by CIE. CIE filed a Chapter 11 petition on December 13, 2007. Unable to obtain debtor-in-possession financing, CIE negotiated an agreement with Credit Suisse, its lead secured lender, for a section 363 sale of its assets through a credit bid to New CIE Energy Opco, LLC. The sale was approved by the Court on April 24, 2008. CIE's Chapter 11 case was thereafter converted to Chapter 7 on August 4, 2008.
A Chapter 11 involuntary petition was filed against the DEBTOR on May 1, 2009. The DEBTOR did not file an answer and an order for relief was entered on June 18, 2009. The case was converted to Chapter 7 on July 16, 2009, on the motion of the United States Trustee. The TRUSTEE brought this adversary proceeding alleging five alternative theories of recovery, in three counts, to avoid and recover the three payments totaling $900,000 made to NOSTAW on October 9, 2007, October 26, 2007, and November 23, 2007, as either actual or constructively fraudulent transfers.
The TRUSTEE'S motion seeks partial summary judgment only as to the allegations of constructive fraud in Counts I, II and III, the fraudulent transfer counts pled under section 548(a)(1)(B) of the Bankruptcy Code and sections 5(a)(2) and 6(a) of the IUFTA. NOSTAW filed a cross motion for summary judgment on all counts of the complaint. At issue on the claims of constructive fraud is whether the DEBTOR received reasonably equivalent value in exchange for its payments to NOSTAW. The absence of reasonably equivalent value is a necessary element of proof for the TRUSTEE; failure of such proof would warrant judgment for NOSTAW. The TRUSTEE asserts that the DEBTOR, having sold its assets to Green Lion and Green Lion having assumed the obligation to NOSTAW, received no value in exchange for paying the obligation owed by Green Lion. The TRUSTEE maintains that the Green Lion Payment Agreement, executed in connection with the Green Lion Purchase Agreement, was a novation, releasing the DEBTOR from liability under the general contract with NOSTAW. The TRUSTEE also argues that NOSTAW cannot show that the DEBTOR received an indirect benefit from the transfer which is identifiable and fairly concrete.
Under Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings in bankruptcy by Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In order to prevail on a motion for summary judgment, the moving party must establish there is no genuine issue of material fact as to any essential element of the claim. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When a moving party has met its initial burden of showing there is no genuine issue of material fact, the burden shifts to the nonmovant to go beyond the pleadings and come forward with specific facts showing that there is a genuine issue for trial. Inferences to be drawn from underlying facts must be viewed in the light most favorable to parties opposing the motion. In re Chambers, 348 F.3d 650 (7th Cir.2003). A material factual dispute is sufficient to prevent summary judgment only when the disputed fact is determinative of the outcome under applicable law.
Resolution of the constructive fraud claims turns on whether the DEBTOR was obligated to NOSTAW for the three payments of $300,000 each it made in October and November, 2007, so that the payments discharged its liability, thereby providing equivalent value. As a matter of statutory law, "value" includes satisfaction of a present or antecedent debt of the debtor. 11 U.S.C. § 548(d)(2)(A); 740 ILCS 160/4(a). Therefore, a debtor's transfer of funds in satisfaction of its own debt is not constructively fraudulent. In re Southeast Waffles, LLC, 702 F.3d 850, 857 (6th Cir.2012); B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474, 478 (7th Cir. 2005); HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir.1995); In re Crucible Materials Corp., 2012 WL 5360945 (Bankr. D.Del.2012); In re Michigan Machine Tool Control Corp., 381 B.R. 657, 668 (Bankr.E.D.Mich.2008)(the constructive fraud statutes do not prohibit a debtor from paying contractual obligations, even where the continued payment of those obligations contributes to a debtor's insolvency).
It follows that while a debtor's payment may be preferential or it may be constructively fraudulent, it cannot be both. See B.E.L.T., Inc., supra. Since the DEBTOR'S payments to NOSTAW were all made well before the applicable preference period, as defined by Bankruptcy Code section 547(b)(4), attempting to avoid the payments as preferences was not an option for the TRUSTEE, so he was limited from the outset of this case to the fraudulent transfer theories. In order to prevail on the constructive fraud theories, the TRUSTEE must prove that at the time of the payments, the DEBTOR was not contractually liable to NOSTAW for the amounts paid.
The parties spend a great deal of effort arguing about the effect of the Green Lion Payment Agreement in June, 2007, which the TRUSTEE contends constituted a novation, substituting Green Lion as the sole party liable for NOSTAW'S construction charges and discharging the DEBTOR from that liability. NOSTAW denies that it intended to release the DEBTOR from liability, contending that in the absence of such intent, the Payment Agreement operated to add Green Lion as an additional party liable for the charges, with the DEBTOR remaining liable.
The Green Lion Payment Agreement does not address whether the DEBTOR'S liability to NOSTAW is to be retained or released, so it is ambiguous on that point. It is not necessary to resolve that ambiguity, however, since even if the DEBTOR was released from liability via the Green Lion Payment Agreement, the DEBTOR subsequently re-obligated itself to pay NOSTAW. The TRUSTEE admits that the DEBTOR agreed to pay NOSTAW and executed the Second Agreement dated September 28, 2007, evidencing the obligation. The Second Agreement provides that the DEBTOR would pay NOSTAW the total amount of $988,859.83. After its Board of Directors approved a $1.0 million loan, the DEBTOR made the three payments to NOSTAW of $300,000 each on October 9, 2007, October 26, 2007, and November 23, 2007.
The TRUSTEE correctly acknowledges that the incurrence of a debt by a debtor may be avoidable as fraudulent. Under the applicable statutes, it is not only transfers of money or property that may be avoided as fraudulent; obligations incurred by a debtor may also be avoided as fraudulent if the same elements of avoidance are proved. See 740 ILCS 160/5(a), 6(a); 11 U.S.C. § 548. The problem for the TRUSTEE is that he has not filed a complaint seeking to avoid the Second Agreement as fraudulent and the time for doing so has long since expired.
Because the TRUSTEE is barred from seeking to avoid the Second Agreement as a fraudulently incurred obligation, it is not necessary to address whether its avoidance would have had the retroactive effect sought by the TRUSTEE. This Court is not aware of any reported opinion that holds that avoidance of a contractual payment obligation means that the payments made in satisfaction of the obligation were, ipso facto, not made for value, even though at the time of the payments the debtor received a dollar for dollar discharge of a valid contractual debt.
Under the Second Agreement, the DEBTOR undertook the obligation to pay NOSTAW $988,859.83. The Second Agreement is not subject to avoidance. The DEBTOR subsequently made three payments of $300,000 each to NOSTAW thereby discharging its debt to the extent of $900,000. The dollar-for-dollar discharge of indebtedness is "value" for purposes of the constructive fraud analysis. NOSTAW is entitled to the entry of judgment on the TRUSTEE'S constructive fraud claims.
With respect to the alternative causes of action for actual fraud, set forth in Counts I and II of the complaint, the TRUSTEE concedes that he has produced no evidence
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.