Chapter 7

OPINION1

Sontchi, J.

INTRODUCTION

The Trustee seeks to recover preferential transfers from Defendant. In response, Defendant seeks summary judgment asserting that its preference exposure should be reduced by subsequent new value it provided to the Debtors; to which the Trustee filed his own motion for partial summary judgment contesting, in part, Defendant's new value defense.

The question before the Court is whether an (alleged) preferential transfer may be reduced by subsequent new value regardless of whether it was "paid" or "unpaid" prior to the Petition Date,2 or whether the defense is only to the extent that the subsequent new value remained "unpaid." As set forth below, the Court adopts the subsequent advance approach and finds that Defendant's preference exposure is reduced upon the application of paid and unpaid subsequent new value. Thus, the Court will grant Defendant's motion for partial summary judgment and will deny Trustee's cross-motion.

STATEMENT OF FACTS

A. Background and Procedural History

On July 2, 2009 (the "Petition Date"), each of the debtors (the "Debtors") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Approximately one year later, on July 14, 2010, the Court entered an Order converting these cases to Chapter 7, effective as of July 22, 2010. Upon conversion, the United States Trustee appointed George L. Miller as Chapter 7 Trustee (the "Trustee") in these cases.

Prior to the Petition Date, JNJ Logistics LLC (the "Defendant") provided freight transport services for the Debtors. More specifically, Defendant transported auto parts for the Debtor.

In July 2011, Trustee filed a complaint (the "Adversary Action") against Defendant, which Defendant answered.

In the Adversary Action, Trustee seeks return of $548,035.66 in (alleged) preferential transfers. The parties agree that Defendant is entitled to a subsequent new value defense in the amount of $49,366.28, resulting from invoices "open" (i.e. unpaid) as of the Petition Date (referred to herein as "Unpaid SNV"). The parties disagree regarding the validity of Defendant's asserted subsequent new value defense for invoices that were paid prior to the Petition Date in the amount of $222,045.11 ("Paid SNV" also referred to herein as the "subsequent advance approach").

Thereafter, Defendant filed its Motion for Partial Summary Judgment (the "Motion") regarding the validity of Defendant's Paid SNV defense to the preference action.3 The Trustee responded with his own Cross-Motion for Partial Summary Judgment (the "Cross-Motion") on the same issue.

B. Relevant Facts

The parties agree on the following: (i) in the 90-days prior to the Petition Date, the Debtors made 12 transfers totaling $548,035.66 (the "Transfers") to Defendant; (ii) the Transfers were property of one or more of the Debtors; and (iii) the Transfers were made by check or wire transfer. In addition, the parties agree that Defendant has a subsequent new value defense to the preference claims in the amount of $49,366.28, which reflects open (i.e. unpaid) invoices as of the Petition Date.

The parties contest Defendant's Paid SNV defense to the preferential Transfers in the amount of $222,045.11. The motions before the Court concern this portion of Defendant's alleged defense based on Paid SNV. This is the Court's opinion thereon.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and this Court has the judicial power to enter a final order.

STANDARD OF REVIEW

Federal Rule of Civil Procedure 56(c), made applicable to these proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment should be granted 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,"4 after considering the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits."5

In deciding a motion for summary judgment, all factual inferences must be viewed in the light most favorable to the nonmoving party.6 After sufficient proof has been presented to support the motion, the burden shifts to the nonmoving party to show that genuine issues of material fact still exist and that summary judgment is not appropriate.7 A genuine issue of material fact is present when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party."8

In order to demonstrate the existence of a genuine issue of material fact in a jury trial, the nonmovant must supply sufficient evidence (not mere allegations) for a reasonable jury to find for the nonmovant.9 The same principles apply in a bench trial where the judge is the ultimate trier of fact; the nonmovant must obviate an adequate showing to the judge to find for the nonmovant.10 In a situation where there is a complete failure of proof concerning an essential element of the nonmoving party's case, Rule 56(c) necessarily renders all other facts immaterial and mandates a ruling in favor of the moving party.11

The standards under which to grant or deny summary judgment do not change because cross-motions are filed.12 Each party still bears the initial burden of establishing a lack of genuine issues of material fact. When faced with cross-motions for summary judgment, the court must consider each motion independently.13 Moreover, although it maybe implied from the filing of a cross-motion that the parties agree that no material issues of fact exist, "the court is not bound by this implicit agreement and is not required to enter a judgment for either party."14

DISCUSSION

A. Preferential Transfers

"A preference, in simplest terms, is an eve-of-bankruptcy transfer to a creditor. The creditor that receives a preferential payment recovers 100% on its claim where, in all likelihood, other unsecured creditors receive less."15 The six requirements that the Trustee must establish to make a preference voidable are: (1) a transfer is made; (2) on account of antecedent debt; (3) to or for the benefit of the creditor; (4) while the debtor was insolvent; (5) within 90 days of the filing of the petition; (6) that left the creditor better off than it would have been if the transfer had not been made and it had asserted its claim in a chapter 7 liquidation.16

B. The Subsequent New Value Defense

Defendants may invoke the "subsequent new value" defense under section 547(c)(4) to limit or eliminate its liability under section 547(b). Section 547(c)(4) states:

"New value" is defined under section 547(a)(2) as "money or money's worth in goods, services, or new credit ... that is neither void nor voidable by the debtor or the trustee under any applicable law."18 As this Court has previously stated:

In addition to these policy considerations, section 547(c)(4) "codifies the concept that the estate, and consequently the other creditors, are not harmed by the transfers. If the transfer is within this exception, it was made in exchange for new value and the new value augments the estate in the same proportion as the value of the transfer; therefore, the estate does not suffer any injury."20

C. Parties' Arguments

The Trustee argues that by Defendant raising the subsequent new value defense, Defendant is admitting that the Transfers are "otherwise avoidable" (i.e. that the Transfers are avoidable as preferential transfers). Defendant appears to respond that regardless of the avoidability of the Transfers, Defendant has an affirmative defense based on the subsequent new value affirmative defense. Although the Court appreciates the parties' arguments, in light of the fact that both parties are seeking summary judgment,21 if the Court were not to determine whether the Transfers are avoidable prior to ruling on Defendant's affirmative defense, the Court's opinion would be advisory in nature. As such, the Court cannot rule on the affirmative defense without first determining whether the Transfers are, in fact, avoidable. Such analysis will be discussed infra.

In addition, Defendant argues that its preference liability should be reduced by its subsequent new value defense. Defendant urges the Court should adopt the subsequent advance approach which would reduce Defendant's alleged preference considerably as the defense would include Unpaid SNV and Paid SNV. The Trustee argues that the Court should adopt the "remains unpaid" approach (i.e. only reduce the preferential claim by the Unpaid SNV), which would increase the Trustee's potential recovery on its preference complaint.

D. Jurisdictional Split

There is a jurisdictional split regarding the interpretation and application of section 547(c)(4)(B). Some courts conclude that section 547(c)(4)(B) should be read to mean that new value must remain unpaid at the end of the preference period in order to be used as a defense to a preferential claim. Other courts have concluded that section 547(c)(4)(B) does not contain a "remains unpaid" requirement, rather the court must determine if "subsequent advances" were made by the creditor.22

i. Remains Unpaid Approach

In New York City Shoes, Inc. v. Bently International, Inc.,23 the Third Circuit Court of Appeals stated:

Subsequently, the Third Circuit held that a portion of the above-quoted statement in New York Shoes was dicta to the extent that the Third Circuit's ruling did not rely on a specific portion of the above captioned test.25 To date, the Third Circuit has not issued an opinion germane to the "remains unpaid" portion of its statement in New York Shoes. As such, the Third Circuit has not (yet) weighed in on the remains unpaid/subsequent advance dispute.

However, in reliance and consideration of the Third Circuit's statements in New York Shoes, many Courts have held that new value must remain unpaid as of the petition date.26 Courts have held that new value that has been paid by the debtor prior to the petition date is not eligible for offset under section 547(c)(4) because paid new value does not represent the return of a preferential transfer to the estate. The Court in American International Airways27 explained why the new value must go unpaid:

Similarly, the court in In re Hancock-Nelson Mercantile Co., Inc.29 held:

ii. Subsequent Advance Approach

In In re Check Reporting Services, Inc.,31 the Court analyzed the language in section 547(c)(4)(B) — including the double-negative of "otherwise unavoidable" — and determined that the statute was unambiguous. The court concluded that the statute had four possible meanings:

The court concluded that the word "otherwise" refers to transfers that are avoidable under section 547(c)(4), and rejected the argument that "otherwise" refers to transfers that are avoidable under sections of the Bankruptcy Code other than section 547. Although the court found that the statute was unambiguous, the Check Reporting Services court continued to look at legislative history and found that the court's interpretation was harmonious with the legislative intent.33 The court then quoted the legislative history which states:

The Check Reporting Services court concluded that "the net result rule was modified [with the insertion of "otherwise"] so that new value could only be used to set off preferences received earlier. Thus, the only sure defense to a preference was to continue dealing with the debtor by supplying additional new value after receiving each preference."35

In In re Hechinger Investment Company of Delaware,36 Judge Lindsey, relying on the analysis in Check Reporting Services, Inc., and in an advisory fashion, stated that he was "inclined," in a running account or rolling account relationship between the debtors and the preference defendant, to adopt the "subsequent advance approach." However, Judge Lindsay did not make a ruling on the new value asserted in that case because he could not "absent a waiver of the other asserted defenses under § 547(c) or a stipulation by the parties as to that amount" of new value advanced because "a calculation under § 547(c)(4) must be prefaced by a determination of whether the transfers made on account of new value are `otherwise avoidable.'"37

Thereafter, in In re Pillowtex Corp.,38 Judge Carey considered whether new value needed to remain "unpaid" in order to be a valid defense. Judge Carey held that the "subsequent advance approach" not only comported with the plain language by section 547(c)(4)(B) but also furthered the two interrelated purposes set forth in New York Shoes: section 547(c)(4) is (i) "designed to encourage trade creditors to continue dealing with troubled businesses;" and (ii) "designed to treat fairly a creditor who has replenished the estate after having received a preference." Judge Carey also quoted the Fifth Circuit in Toyota of Jefferson, which held:

iii. Prior Rulings of this Court

In In re Sierra Concrete Design, Inc., this Court held that "[i]n order to invoke successfully the subsequent new value defense in this Circuit the creditor must establish two elements: (1) after receiving the preferential transfer, the creditor must have advanced `new value' to the debtor on an unsecured basis; and (2) the debtor must not have fully compensated the creditor for the `new value' as of the date that it filed its bankruptcy petition."40 The Court continued:

In effect, this Court adopted the subsequent advance approach with one clarification, that one cannot apply the test to give a credit for new value in excess of the preference exposure.

Thereafter in Sierra Concrete Designs, Inc., this Court continued with a descriptive chart explanation — which the Court will expand on herein:

   Date      Preference   New Value    Preference      Remains    Subsequent
                Payment                 Exposure as     Unpaid      Advance
                                        calculated     Approach     Approach42
                                         in In re
                                          Sierra
                                          Concrete
                                        Design, Inc.

January 1         $1,000           -         $1,000      $1,000        $1,000
January 5              -      $1,000             $0                        $0
January 10        $1,000           -         $1,000      $2,000        $1,000
January 15                                       $0
                       -      $2,000                                  -$1,000
                                       (not -$1,000)
January 30        $3,000           -         $3,000      $5,000        $2,000
February 5             -      $1,000         $2,000                    $1,000
February 10       $1,500           -         $3,500      $6,500        $2,500
February 15                   $1,000                                   $1,500

Results                                      $2,500      $5,500        $1,500

Editor's Note: The preceedimg image contains the reference for footnote:42

The Court re-iterated this ruling in In re Vaso Active Pharmaceuticals, Inc.43 Therein, the preference defendant received a preferential payment, provided services to the debtor, followed by a second preferential payment.44 The Court held that the defendant's preference exposure was: (i) the value of transfer #1; less (ii) the value of the services provided (i.e. new value provided); plus (iii) the value of transfer #2 (or as otherwise stated: ((value of transfer #1) — (new value provided) + (value of transfer #2))).45 Although not explicitly identified as such, the Court believes that its previous rulings have, at least by inference, adopted the subsequent advance approach.

iv. Application to the Case Sub Judice

The parties appear to agree that the Transfers were made during the 90-days prior to the Petition Date, that the transfers were property of one or more of the Debtors, and that the Transfers were made by check or wire transfer.46 Furthermore, as this is a Chapter 7 case and creditors are not being paid in full, the Court further finds that Defendant is better off as a result of the Transfers than as a claimant in a liquidating Chapter 7 case. The Trustee did not provide evidence that the Transfer were on account of antecedent debt47 — however, based on the relationship between the parties and the arguments asserted by Defendant in these motions, the Court herein finds that the Transfers were on account of antecedent debt.48 As such, the Court finds that the Paid SNV transfers are "otherwise avoidable."

Thus, the Court will follow its rulings in Sierra Concrete Design, Inc. and Vaso Active Pharmaceuticals, Inc. and adopt the subsequent advance approach in calculating the amount of Defendant's subsequent new value defense. As application of the net result of the preferential transfers and subsequent new value (paid and unpaid) never resulted in Defendant's preference exposure falling below $0, Defendant is entitled to full credit for all subsequent new value it provided to the Debtors, including Paid SNV and Unpaid SNV. Based upon the exhibits attached to the brief in support of Defendant Motion,49 application of the net result calculation that includes (or disregards the distinction between) Paid SNV and Unpaid SNV in this case reduces Defendant's preference exposure by $271,411.39.50

CONCLUSION

For the reasons set forth above, the Court will grant Defendant's partial motion for summary judgment and will deny the Trustee's cross-motion for partial summary judgment. Defendant has established that it is entitled to partial summary judgment upon application of the subsequent new value defense in the amount of $271,411.39, thus reducing Defendant's preference exposure in that amount. An order will be issued.