KEVIN GROSS, U.S.B.J.
On March 16, 2014 (the "Petition Date"), Simplexity, LLC ("Simplexity") and its affiliates (collectively, the "Debtors") filed petitions for relief under Chapter 11 of the Bankruptcy Code. D.I. 1. On January 7, 2015, the Court entered an order (the "Conversion Order") for relief which converted the Debtors' bankruptcy cases to cases under Chapter 7 of the Bankruptcy Code and appointed a Chapter 7 Trustee (the "Trustee"). D.I. 629. On May 11, 2016, the Trustee brought this adversary proceeding against Sprint Corporation ("Sprint") alleging that payments (the "Transfers") totaling $3,842,951.86 are avoidable under 11 U.S.C. § 547(b) and recoverable under 11 U.S.C. § 550. Adv. D.I. 1. The Trustee has since modified the avoidance amount and now alleges that $958,198.58 is recoverable (the "Amended New Value Analysis"). Adv. D.I. 36.
Pending before the Court is Sprint's motion for summary judgment (the "Motion") pursuant to Federal Rule of Civil Procedure 56, made applicable to this adversary proceeding by Bankruptcy Rule 7056, seeking dismissal of the Trustee's avoidance action. Adv. D.I. 29.
The issues presented by the Motion and the Cross-Motion are: (1) has the Trustee satisfied his burden for tracing under 11 U.S.C. § 547(b)(5), i.e., demonstrated that Sprint received more by the Transfers than if the case were filed under Chapter 7; and (2) is Sprint entitled to a new value defense for two transfers — $505,151.53 and $125,000.00 — made to Simplexity?
For the reasons stated herein, the Court finds that the Trustee has satisfied his burden for tracing under Section 547(b)(5). The Court, however, will grant summary judgment in favor of Sprint for demonstrating that it is entitled to a new value defense for the $505,151.53 payment on March 12, 2014. The Court will also deny summary judgment to Simplexity and Sprint regarding Sprint's alleged new value payment of $125,000.00 on March 7, 2014. Lastly, the preference claim of $328,047.05 remains valid and outstanding. See Motion at p. 13.
The court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157(a) and 1334. This adversary proceeding is a "core" proceeding under 28 U.S.C. § 157(b)(2)(A), (B) and (F). Venue is proper pursuant to 28 U.S.C. § 1409.
Simplexity, headquartered in Virginia, was the largest independent online activator of mobile phones in the United States. Declaration of Frank C. Bennett III, dated March 17, 2014 ("Bennett Decl.") ¶¶ 5, 8; D.I. 9. Simplexity reached prominence by "simplifying the extraordinarily complex
In order to best understand the complexities of this adversary proceeding, it is necessary to discuss both the agreements entered into between Simplexity, Sprint and affiliated entities and the events as they unfolded leading up to the Petition Date.
On March 23, 2009, roughly five years before the Petition Date, Simplexity and Sprint Solutions, Inc. ("Sprint Solutions"), a Sprint affiliate, executed an Online Authorized Representative Agreement (the "OAR Agreement"). Morrow-Campbell Decl. ¶ 3; see OAR Agreement, A0001-A0036. The OAR Agreement, in part, permitted Simplexity to solicit and subscribe customers to Sprint Solutions products and services. Morrow-Campbell Decl. ¶ 3. Simplexity could either purchase products from Sprint Solutions and resell them to customers, or sell products directly from Sprint Solutions' inventory. Id.; OAR Agreement ¶ 5.2. For products Simplexity purchased on credit, Sprint Solutions received a purchase money security interest ("PMSI") in the products and proceeds from the sale of such products. Morrow-Campbell Decl. ¶ 4. Sprint Solutions recorded the PMSI with the Delaware Secretary of State on September 30, 2009, and provided properly authenticated notice to other secured parties. Id; Cross-Motion ¶¶ 7-9; OAR Agreement, Ex. B, ¶ 8.
The OAR Agreement also provided a commission schedule (the "Commission Schedule") payable from Sprint Solutions to Simplexity for satisfying certain goals, such as subscribing new customers, upgrades and retaining current customers. Morrow-Campbell Decl. ¶ 5; OAR Agreement, Ex. A. The Commission Schedule was subject to amendment and was most recently amended in July 2013. Morrow-Campbell Decl. ¶ 5. Specifically, the Commission Schedule provided for Sprint Solutions to make payment to Simplexity at the end of each monthly commission period. Id. ¶ 6. Before the end-of-month reconciled payment for March 2014, Sprint Solutions paid Simplexity a mid-month estimated commission. Morrow-Campbell Decl. ¶ 6. Sprint Solutions maintained under the OAR Agreement the right to setoff or withhold commissions against any amounts previously owed by Simplexity. Id. In order to exercise this right, Sprint Solutions was required to provide Simplexity with five days' notice prior to any such set off. Cross-Motion ¶ 11; OAR Agreement ¶ 6.2.
In addition to the OAR Agreement, Sprint Spectrum L.P. ("Sprint Spectrum"), a Defendant affiliate, and Simplexity MVNO Services, LLC ("Simplexity MVNO"), a Debtor affiliate, were parties to a Private Label Services Agreement (the "PLS Agreement"), dated January 8, 2012. Morrow-Campbell Decl. ¶ 7; see PLS Agreement, A0037-A0220. The PLS Agreement provided that Simplexity MVNO would be "a limited purpose reseller to market PCS and 4G services as private label services." Morrow-Campbell Decl. ¶ 7; see PLS Agreement ¶ 2.1. Pursuant to an amended PLS Agreement, Simplexity MVNO agreed to conduct a loyalty trial program (the "Loyalty Trial Program") with certain travel-related companies, and, in return, Sprint Spectrum agreed to pay Simplexity MVNO for attaining certain eligibility requirements. Morrow-Campbell Decl. ¶ 8; see PLS Agreement, Ex. C. The Loyalty Trial Program outlined "phases" to be completed by Simplexity MVNO. Id.
On March 7, 2014, Sprint Spectrum's $125,000.00 check to Simplexity on account of Phase II of the Loyalty Trial Program cleared. Morrow-Campbell Decl. ¶ 13; Cross-Motion ¶ 16; see PLS Agreement, Ex. C, A0218. Sprint Spectrum was permitted to seek a refund of such payment, "but only if (a) Simplexity [MVNO] did not reach a certain goal by March 31, 2014, and (b) Sprint [Spectrum] made a request to Simplexity [MVNO] in writing by June 30, 2014...." Cross-Motion ¶ 17; see PLS Agreement, Ex. C, A0218. Upon such a request, Simplexity MVNO Services would be required to refund the payment to Sprint Spectrum within 10 business days. Id.
The Debtors maintained a credit agreement (the "Credit Agreement") with Fifth Third Bank ("FTB"), an Ohio banking corporation, who was their prepetition secured creditor, that provided for (i) a revolving loan commitment of up to $15 million, and (ii) a $30 million term loan. Bennett Decl. ¶ 10. Each of the Debtors were obligors under the Credit Agreement, and Adeptio I was the guarantor. Id. The Credit Agreement was secured by substantially all of the Debtors' assets, which included equipment, inventory, chattel paper, accounts, other pledged property and securities, investment related property, cash collateral accounts, intellectual property and commercial tort claims. Id.
Simplexity and Simplexity MVNO, as obligors, were also parties to a second lien credit facility with Adeptio Funding, LCC ("Adeptio Funding") as the lender. Id. ¶ 11. The intercreditor relationship among FTB and Adeptio Funding was governed by the Subordination Agreement, dated April 3, 2013. Id.; see also id. at n. 2 (noting there were additional agreements
As previously stated, the Debtors filed for bankruptcy on March 16, 2014. D.I. 1. The Petition Date was preceded by a rapid decline in cash, tightening liquidity and several forbearance agreements with FTB. Bennett Decl. ¶ 14. Ten days before the Petition Date, Simplexity received a letter from FTB which provided that FTB intended to sweep all of the Debtors' cash on deposit, including on a "go forward" basis, and to cease any advance of additional funds. Cross-Motion ¶ 3. On March 10, 2014, FTB, in fact, swept all of the Debtors' cash on deposit, including that which was marked for payroll, and ceased to advance any additional funds. Id. ¶ 4. Simplexity subsequently terminated substantially all of its workforce — approximately 219 employees and 285 full time equivalent contractors. Bennett Decl. ¶ 8.
Prior to the Petition Date, Simplexity and Sprint maintained a long business relationship. Morrow-Campbell Decl. ¶ 9. Based on the substantial business conducted between the parties, Sprint provided Simplexity generous financing, which included 60-day payment terms and a $12 million line of credit. Id. Sprint was protected by its PMSIs and revolving product supplied, payments received and commissions earned (i.e., the terms of the OAR Agreement and PLS Agreement). Id.
In 2012 and 2013, Simplexity paid Sprint a total of approximately $57.1 million and $49.1 million, respectively. Id. ¶ 10. Between 2013 and the Petition Date, Sprint continued to provide Simplexity with high volumes of product, resulting in an outstanding balance due to Sprint between $6 million and $10 million. Id. Sprint did not file a proof of claim in the Debtors' bankruptcy but was scheduled with the largest general unsecured claim of $7,084,990.66. Cross-Motion ¶ 19.
Sprint asserted objections to Simplexity's first day motions to approve debtor-in-possession financing (the "DIP Financing Order") and to approve bid and sale procedures (the "Bid Procedures Order"). Morrow-Campbell Decl. ¶¶ 16-17; D.I. 145, 109. Sprint's objections resulted in additional language to both the DIP Financing Order
After the tolling period, the Trustee filed this adversary action against Sprint. Adv. D.I. 1. The Trustee — initially — sought to avoid and recover the following Transfers pursuant to 11 U.S.C. §§ 547, 548 and 550 and to disallow claims pursuant to § 502:
Date Amount 12/23/2013 $2,745,219.63 1/31/2014 $96,596.30 2/28/2014 $1,001,095.20 3/4/2014 $40.73 Total $3,842,951.86
Adv. D.I. 1; see Morrow-Campbell Decl. ¶ 20. However, as the Court previously stated, the Trustee has provided the Court with an Amended New Value Analysis, reducing the amount sought from $3,842,951.86 to $958,198.58. Cross-Motion ¶ 39. The Transfers were made on account of an antecedent debt and not prepayment for goods on services subsequently received. Morrow-Campbell Decl. ¶ 21; Cross-Motion ¶ 31.
Before filing the Motion and Cross-Motion, the parties conducted limited discovery and, in February 2017, engaged in a failed mediation session. Cross-Motion at p. 2; Adv. D.I. 22. The Court entered a scheduling order that extended the written fact discovery deadline to June 2, 2017, limiting such discovery to the issues involved in the Motion. Cross-Motion at p. 2; Adv. D.I. 20. On May 2, 2017, Simplexity served its written discovery requests on Sprint. Cross-Motion at p. 3; Adv. D.I. 24. Sprint served its written responses to Simplexity's discovery on June 1, 2017. Cross-Motion at p. 3; Adv. D.I. 25. The parties, pursuant to a stipulation, extended the discovery period through June 23, 2017, and Sprint was provided until July 3, 2017, to revise its Motion. Cross-Motion at p. 3; Adv. D.I. 26-27. Defendant filed its revised Motion on June 30, 2017. Cross-Motion at p. 3; Adv. D.I. 29.
A bankruptcy court must grant summary judgment where "there is no genuine issue as to any material fact and that [each of] the moving part[ies] is entitled to a judgment as a matter of law." In re Kiwi Int'l Air Lines, Inc., 344 F.3d 311, 316 (3d Cir. 2003) (quoting Fed. R. Civ. P. 56(c)). In evaluating the evidence, the court must view the inferences to be drawn from the underlying facts in the light most favorable to the party opposing the motion. Id. (citation omitted). If the moving party meets the burden, the non-moving party then bears the burden of proving that a material fact exists that makes summary judgment inappropriate. IT Litigation Trust v. Alpha Analytical Labs (In re IT Group, Inc.), 331 B.R. 597, 600 (Bankr. D. Del. 2005).
Sprint advances multiple arguments to dispel this adversary proceeding and, in particular, Count I, Avoidance of Preference Period Transfers. The Court will address each argument in turn.
Section 547(b) provides that:
Sprint does not dispute that the Trustee has successfully established the first four factors of Section 547(b). See Cross-Motion ¶ 45. Sprint does, however, contend that the Trustee has failed to satisfy Section 547(b)(5), arguing he cannot establish that Sprint received more through the preferential payments than it would have in a Chapter 7 liquidation. Motion at p. 3.
Section 547(b)(5) is a fundamental element of any case asserting a preference claim, so the Court must carefully consider the issue. In re Radnor Holdings Corp., 353 B.R. 820, 846-47 (Bankr. D. Del. 2006). This is a matter of first impression, as the Court has yet to determine the relevant inquiry under Section 547(b)(5) when applied to a PMSI.
The Court must first determine who among the parties bears the burden of establishing the elements of Section 547(b). According to the Trustee, because PMSIs are a creature of state law, the inquiry turns on whether "the underlying state law[, Virginia in the instant case,] places the burden on the creditor asserting a secured status to prove it is secured, [thereby shifting the burden to Sprint]." Cross-Motion ¶ 47.
The Court finds that the burden under Section 547(b) is on the Trustee. Section 547(g) provides:
(emphasis added); see In re Radnor Holdings Corp., 353 B.R. at 846-47 (citing Mellon Bank, N.A. v. Metro Commc'ns, Inc., 945 F.2d 635, 642 (3d Cir. 1991)) (highlighting the Trustee has the burden under Section 547(b)(5)); see also Golden v. The Guardian (In re Lenox Healthcare, Inc.), 343 B.R. 96, 107 (Bankr. D. Del. 2006) (same). The Supreme Court has stated, on numerous occasions, "when the statute's language is plain, the sole function of the
see also In re Lease-A-Fleet, Inc., 151 B.R. 341, 348 (Bankr. E.D. Pa. 1993) ("It is therefore an unfortunate fact of life that a preference plaintiff must effectively prove a negative (that the defendant is not a totally secured creditor), even though the secured creditor is the party with most access to proof of the validity of its own security interests."). In fact, the Trustee's reading would effectively nullify the burden structure as outlined in Section 547(g).
Having determined that the Trustee bears the burden of proof under Section 547(b)(5), the Court must answer the difficult question of whether he has satisfied his burden. What largely drives the issue before the Court is the answer to the following question: is secured status assessed at the time of the transfer or the petition date? Courts have grappled with this issue and remain at odds. Compare In re Falcon Products, Inc., 381 B.R. 543, 546-48 (8th Cir. BAP 2008) (holding the petition date is proper for a Section 547(b)(5) analysis) with Forman v. IPFS Corp. of the South (In re Alabama Aircraft Indus.), 2013 WL 6332688, at *3 (Bankr. D. Del. 2013) (holding transfer date is proper for a Section 547(b)(5) analysis); see also Rafael I. Pardo, On Proof of Preferential Effect, 55 ALA. L. REV. 281, 303 (2003) ("The concept of when a transfer occurs for purposes of preference analysis has been one aspect of congressional efforts to harmonize the tension between protecting transfers to individual creditors during the preference period and increasing the distribution made to unsecured creditors."). The question is important because prepetition payment made on the basis of a secured claim normally provides a creditor only that to which it was entitled in a Chapter 7 case, i.e., eliminating the potential for a preference under Section 547(b)(5). In re S. Air Transport, Inc., 511 F.3d 526, 534 (6th Cir. 2007); see also In re El Paso Refinery, 171 F.3d 249, 254-55 (5th Cir. 1999)
Sprint asserts that, due to its PMSI in both the inventory under the OAR Agreement and the proceeds from the sale of such inventory,
Motion at p. 14. Complicating the issue is the fact that Simplexity kept funds in a commingled account,
Simplexity begins its argument in favor of measuring secured status as of the petition date by invoking the oft-cited Supreme Court decision of Palmer Clay Products Co. v. Brown, 297 U.S. 227, 56 S.Ct. 450, 80 S.Ct. 655 (1936). In a short opinion, Justice Brandeis held that the petition date — not the transfer date — was the proper date for determining a creditor's treatment in a preference action. Id. at 228-29, 56 S.Ct. 450. The Supreme Court was addressing Section 60a of the Bankruptcy Act, a predecessor to Section 547(b), and noted that:
Id. at 229, 56 S.Ct. 450. The seemingly clear proposition expressed in Palmer Clay has sparked controversy. The basis for this controversy stems from the fact that the creditor in question in Palmer Clay was unsecured. See In re Rocor Intern., Inc., 380 B.R. 567, 571-72 (10th Cir. BAP 2007). This has led some courts to believe, as Sprint argues, that Palmer Clay is inapplicable to situations where creditors are, for example, secured. Sprint Reply at p. 9; Adv. D.I. 48.
Sprint points to Forman v. IPFS Corp. of the South (In re Alabama Aircraft Indus.), 2013 WL 6332688, at *3 (Bankr. D. Del. Dec. 5, 2013) for support, arguing it illustrates courts' "misplaced" reliance on Palmer Clay. Sprint Reply at p. 9. Specifically, Sprint argues that Alabama Aircraft Industries provides that a transfer date analysis is the "common-sense approach." Id.
In Alabama Aircraft Industries, the court was tasked with determining the preference liability of a creditor pursuant
Simplexity responds to Sprint by citing In re Falcon Products, Inc., claiming:
381 B.R. 543, 548-49 (8th Cir. BAP 2008). Perhaps most damning to Sprint, as Simplexity argues, is the fact that cases Sprint cites for the transfer date argument fail to detail the "very fact-specific exceptions [in each case], mainly involving premium financing situations or diminishing lien value." Simplexity Reply ¶ 18; Adv. D.I. 50; see In re Alabama Aircraft Indus., 2013 WL 6332688, at *3 (Bankr. D. Del. Dec. 5, 2013) (dealing with a premium financing arrangement); In re Schwinn Bicycle Co., 200 B.R. 980, 981 (Bankr. N.D. Ill. 1996) (same); In re 360Networks (USA) Inc., 327 B.R. 187, 193 (Bankr. S.D.N.Y. 2005) (dealing with inchoate liens); see also Paul Cohen & Lucian B. Murley, Secured Status of Premium Finance Company Is "Abundantly Clear", 33-FEB AM. BANKR. INST. J. 46 (Feb. 2014) (detailing the complex nature of calculating insurance premium financing). Simplexity argues that, "[i]n the instant case, there is no inchoate or diminishing lien value, and accordingly ... no special circumstance warranting a deviation from the general rule that even a secured creditor's status is examined as of the petition date." Simplexity Reply ¶ 18.
The Court agrees with the Trustee and finds that the proper date for determining Sprint's secured status is the Petition Date. The Court's decision today is particularly influenced by the fact that Sprint maintained a PMSI. Morrow-Campbell Decl. ¶ 4. It is hornbook law that the scope of a PMSI is less than that of a floating lien. Compare U.C.C. §§ 9-103 with 9-204. Because Sprint had limited interest in Simplexity's inventory — beyond that which was identified and returned to Sprint (see Morrow-Campbell Decl. ¶ 18) — the Court is not persuaded that such an arrangement warrants deviating from analyzing Sprint's secured status as of the Petition Date.
Subsumed within the issue of when to determine the secured status of a creditor is the issue of when to perform the liquidation analysis — the transfer date or the petition date. See James J. White & Daniel Israel, Preference Conundrums, 98 COM. L.J. 1, 11-16 (1993) (noting "[t]here is some law on this question, but it is not completely satisfactory"). Once this issue is resolved, the Court must then determine what is the proper tracing methodology — "add-back" or otherwise.
Sprint primarily relies on Batlan v. Transamerica Commercial Fin. Corp. (In re Smith's Home Furnishings, Inc.), 265 F.3d 959 (9th Cir. 2001), for the proposition that it is the Trustee's burden to establish inventory value and trace proceeds. Motion at p. 15. In Smith's Home Furnishings, a preference defendant financed a debtor's inventory purchases pursuant to a $25 million secured line of credit. 265 F.3d at 961-62. At the end of each day, the inventory sale proceeds were deposited into a commingled bank account and swept by the debtor's bank. Id. at 961. The bank would advance new funds the following day, assuming the debtor had sufficient collateral. Id. In the months leading to bankruptcy, the preference defendant reduced the line of credit from $25 million to $13 million. Id. at 961-62. After the case was converted to a Chapter 7, the trustee sought to avoid and recover over $12.8 million that the preference defendant received during the preference period. Id. at 962. The Ninth Circuit ultimately held that the Trustee had the burden of tracing the funds used to make the preferential payments. Id. at 966-68. The court's decision was largely driven by the plain language of Section 547(g), holding that "the language of the statute places the burden of demonstrating the source of such preferential payments squarely on the trustee." Id. at 967. The court also addressed the standard for tracing proceeds, stating that the trustee's use of the "add-back" method was insufficient to meet his burden under Section 547(b)(5). Id. at 963-64. As described by the court, the add-back method consists of adding the amount of alleged preferences to the amount of unpaid balance at the petition date to find the creditor's secured status. Id. at 963.
Sprint argues that Smith's Home Furnishing largely mirrors the instant case (see generally Motion at pp. 16-18), particularly the fact that Simplexity's accounts — consisting of proceeds belonging to various creditors — were swept by FTB days before bankruptcy. Motion at p. 16. Sprint further claims that the Trustee's use of the add-back method, as rejected in Smith's Home Furnishing, is similarly inappropriate here. Sprint Reply at pp. 10-12. Sprint devotes considerable effort to addressing the Trustee's alleged tracing flaws.
Simplexity, in a summary fashion, rebuts Sprint's claims by noting that:
Simplexity Reply ¶¶ 6-7 (citing Eberhardt Decl. ¶ 6). Simplexity notes that the Forensic Report reveals that, during February 2014, the Debtors' combined bank account balances dropped from $606,917.05 to $257,054.93. Cross-Motion ¶ 65. The Forensic Report also shows that the primary source of cash inflows was from Simplexity's lenders, namely FTB, and $990,000.00 from Adeptio Funding. Id. In light of this lending arrangement, Simplexity asserts that it "defies logic" to believe "that the source of the inflows from the Debtors' revolving line of credit could have been cash proceeds from the sale of Sprint's collateral or Sprint accounts receivable and inventory in the borrowing base." Id. Simplexity notes that once payment was made by the Debtors to repay asset based lenders, or any other creditor, such payment no longer constitutes "proceeds" subject to Sprint's lien. Id. Simplexity further relies on U.C.C. Section 9-332, highlighting that "a purchaser or other transferee of money or funds from a deposit account takes free of a perfected security interest in proceeds, unless the transferee acts in collusion with the debtor in violating the rights of the secured party." Simplexity Reply ¶ 8; see Va. Code Ann. § 8.9A-332 (West). Because no collusion has been asserted in this case, Simplexity believes the
In accordance with Falcon Products, 381 B.R. 543 (8th Cir. BAP 2008), the Trustee performed a liquidation analysis using the add-back method
Cross-Motion ¶ 52. Using the figures listed in the Debtors' Schedule F, the Trustee "performed a liquidation analysis as of the Petition Date without regard for post-petition expenses, liens, priorities, or other consideration." Id. ¶¶ 53-54. Simplexity notes that had they considered such postpetition expenses, "the valuation would be substantially less." Id. ¶ 54. Before walking the Court through their add-back analysis, Simplexity notes that, as a practical matter, because FTB and other senior secured creditors were unable to be paid in full, "it is difficult to imagine that [Sprint] could have been fully collateralized...." Id.
Step one of the add-back method requires the liquidation analysis to account for the outstanding debt owed to Sprint as of the Petition Date. Here, the amount is $7,292,167.55.
The Court finds that the Trustee's add-back method is acceptable in the instant
The fact that a PMSI is a narrower type of security interest than a floating lien is significant. See Norton Bankr. L. & Prac. 3D DICT. OF BANKR. TERMS § F160 (highlighting that a floating lien "effectively creates a lien against a constantly changing mass of collateral for a loan value that will change as payments are received and further advances made"). In fact, it makes sense that the Ninth Circuit would shun the add-back method in floating lien scenarios because of the potential for jumbling the allocation of proceeds (particularly in a commingled account). However, the PMSI does not avail itself to the same concerns. Thus, the Court finds that the Trustee has satisfactorily traced the payments through the add-back method.
Under Section 547(c)(4), a defendant may offset its total preference exposure to the extent that it later provided a debtor with "new value." More specifically, Section 547(c)(4) provides that a transfer may not be avoided to the extent that:
Although courts addressing preferences have commonly held that Section 547(c) defenses "should be narrowly construed," see, e.g., Hassett v. Altai, Inc. (In re CIS Corp.), 214 B.R. 108, 119-20 (Bankr. S.D.N.Y. 1997) (quotation and citations omitted), courts have taken an expansive approach to defining "new value," noting it is:
7 Collier on Bankruptcy ¶ 547.04[4] (16th ed. 2014) (quoting Ogle v. Advent, Inc. (In re HDD Rotary Sales, LLC), 2013 WL 1316750, 2013 Bankr. LEXIS 1447 (Bankr. S.D. Tex. Apr. 2, 2013)); see also 11 U.S.C. § 547(a)(2) (codifying this definition). Section 547(c)(4) further
The thrust of Sprint's new value argument is that the Trustee's Amended New Value Analysis fails to account for two payments: (i) a $505,151.53 mid-month commission cash payment on March 12, 2014, and (ii) a $125,000.00 advance payment from Sprint on March 7, 2014 (due to Simplexity on account of the Loyalty Trial Program) (collectively the "Alleged New Value Payments"). Motion at pp. 12-13. Sprint claims that the Alleged New Value Payments fall squarely within Section 547(c)(4) and that the Amended New Value Analysis ought to reflect the Alleged New Value Payments. Id.
The first payment at issue is a $505,151.53 payment from Sprint Spectrum to Simplexity on March 12, 2014. Morrow-Campbell Decl. ¶ 14. The Trustee alleges that "[Sprint] has provided no explanation as to why it made this seemingly random mid-month estimated advance commission payment; why instead of offsets, [per the Commission Offset Agreements,] it was making advances." Simplexity Reply ¶ 20 (emphasis omitted). Simplexity further contends that, with regard to this payment, the new value defense fails because: (i) Sprint was acting as a debtor and not a creditor, and (ii) Sprint merely substituted one asset of the Debtor for another (i.e., an account receivable for cash). Cross-Motion ¶¶ 75-76.
Sprint asserts that the Commission Offset Agreements resulted in them providing money not owed to the Debtor under the OAR Agreement. Sprint Reply at p. 13. In particular, Sprint claims that the "commission payment was not due under the [OAR Agreement] until the end of the month and Sprint was entitled ... to offset the commission against the millions of dollars it was due under the OAR Agreement and the Commission Offset [ ] Agreements." Motion at p. 13.
Simplexity claims that the $505,151.53 payment constituted a "pre-existing deb[t] owed by Sprint to Simplexity and Simplexity [MVNO], and Sprint was merely paying its debts." Cross-Motion ¶ 75. This fact, Simplexity claims, means "[the $505,151.53] paymen[t] w[as] not money or money's worth in goods, services or new credit provided by a creditor." Id. (emphasis omitted).
Sprint claims that the Trustee's argument that the $505,151.53 payment merely substituted one asset of the Debtor for another ignores the fact that "the account receivable would never have been collected" due to Sprint's rights under various agreements and 11 U.S.C. § 553. Sprint Reply at p. 13.
The Debtor and Defendant do not contest that they were parties to the OAR Agreement and the Commission Offset
The OAR Agreement's Commission Schedule is written clearly and provides that Sprint would make "[r]easonable efforts... to pay Commissions by the last business day of the month following the end of the Commission Period." Ex. A., ¶ 2.1. The Commission Schedule does not reference alternative payment dates, such as a mid-month estimated commission; thus, under the plain language of the Commission Schedule, Sprint was not yet obligated to pay Simplexity. Because the payment was not yet due, the Court must consider what effect this has on the Trustee's argument that Sprint was acting as a debtor — not a creditor.
As stated above, the Trustee adamantly asserts that Sprint's status at the time of the $505,151.53 payment was that of a debtor — merely paying an obligation to Simplexity, its creditor. Cross-Motion ¶ 75. Such a status would — in and of itself — warrant the Court to reject the $505,151.53 payment as new value. However, the OAR Agreement's plain language provides guidance on this issue. An end-of-the-month obligation, as prescribed in the OAR Agreement's Commission Schedule, is not the same as a mid-month payment. The Court does not deny that Sprint had a debtor-like stance, but this stance was not solidified at the time of payment.
The Trustee's second argument for declining new value — that Sprint substituted one asset for another — is critical to consider. Cross-Motion ¶ 76. Under Section 6.2 of the OAR Agreement, Sprint had the "Right to Set Off" if Sprint gave Simplexity five days' notice. See id. The Trustee highlights that there is no proof that Sprint complied with the five-day notice requirement, but the Court does not find this issue dispositive. Because the payment was an advance, as opposed to a regularly scheduled payment, it is evident that Sprint was attempting to augment the Debtors' estate. Similarly, the Court finds persuasive Sprint's argument that the account receivable would have been uncollectable.
The timing of the $505,151.53 payment and the Petition Date — a mere two days apart — further influences the Court's opinion in classifying this payment as subsequent new value. Sprint was already one of the largest Simplexity creditors at the time of this payment and, as discussed above, clearly had the power to setoff against preexisting Simplexity debts. However, despite all of this, Sprint still extended a substantial sum of money to the Debtors. The parties do not reference or call to the Court's attention any other occasions where Sprint made advancements or early payments of this nature. The out-of-the-ordinary nature of this mid-month payment weighs in favor of classifying it as new value.
Even when the Court construes facts in the Trustee's favor, he has failed to successfully rebut that Sprint made the $505,151.53 payment to enhance the Debtors' estate. Sprint's payment personifies the overarching principle of Section 547(c)(4) — a beacon of light in a dark time. Thus, the Court finds that the $505,151.53 payment constitutes new value.
Pursuant to the aforementioned PLS Agreement, Sprint issued a check to Simplexity for $125,000.00 due on account of Phase II of the Loyalty Trial Program. Morrow-Campbell Decl. ¶ 13; see PLS Agreement, Ex. C., A0216-0220. Sprint's $125,000.00 payment cleared on March 7, 2014, and was subject to clawback if Simplexity failed to perform its duties by March 31, 2014. Morrow-Campbell Decl. ¶ 13; see PLS Agreement, Ex. C. Specifically, Phase II's "Eligibility Condition" provides that "if [Simplexity Services] executes an agreement for a Loyalty Trial with at least one Trial Participant by March 31, 2014, [Simplexity MVNO] will be eligible to receive the Phase II Loyalty Trial Funds[, totaling $125,000.00]...." Id.
Sprint nakedly asserts that Simplexity failed to satisfy Phase II of the Loyalty Trial Program and did not refund the money. Morrow-Campbell Decl. ¶ 13; Motion ¶ 13. Simplexity, however, contends that Sprint has failed to present any evidence in support of its claim. Cross-Motion ¶ 76. Simplexity also claims that there is no indication that Sprint made a written refund request by the June 30, 2014, cutoff date. Id.; see PLS Agreement, Ex. C, Phase II Loyalty Trial Funds Advance Payment/Refund, A0218. Because the $125,000.00 payment was an advance, the pivotal question (i.e., material fact to be resolved) is whether or not Simplexity MVNO enlisted one Trial Participant by the March 31, 2014, deadline.
Bankruptcy Rule 7056(a) provides that "[t]he 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." The parties fall short of satisfying Rule 7056(a). They make little effort to address the $125,000.00 payment and have left the Court wondering if Simplexity satisfied Phase II.
The Trustee, in the alternative, has plead fraudulent conveyance to the extent that one or more of the Transfers "was not made on account of an antecedent debt or was a prepayment for goods and/or services subsequently received...." Complaint ¶ 42; Adv. D.I. 1. Both parties, however, admit that each of the Transfers was made on account of an antecedent debt and were not a prepayment for goods or services subsequently received. Morrow-Campbell Decl. ¶ 21; Cross-Motion ¶ 31. Therefore, the Court cannot decide this issue based on the current record. See Walker v. Sonafi Pasteur (In re Aphton Corp.), 423 B.R. 76, 89 (Bankr. D. Del. 2010) (citations omitted) ("Courts have held that when a transfer is made to pay an antecedent debt, the transfer may not be set aside as constructively fraudulent.").
The Trustee also asks the Court to disallow Sprint's claim in Simplexity's bankruptcy case. The Trustee's request for disallowance depends upon Section 502(d) which provides for disallowance of a claim if the claimant is liable for avoidance recoveries. Sprint may be liable for $125,000.00. Accordingly, Sprint's claim will be allowed except for $328,047.05, which Sprint concedes is a valid preference amount (see Motion at p. 13), and the $125,000.00 preference claim which remains at issue.
The Court will grant the following relief:
1. The Court will grant the Motion and holds that Sprint is entitled to a new value defense for the $505,151.53 payment. The Cross-Motion on the same issue is denied.
2. The Court will deny the Motion and Cross-Motion on the issue of awarding Sprint a new value defense for the $125,000.00 payment.
3. The Court will grant the Motion on the allowance of $505,151.53 of Sprint's claim, and will deny the Motion as to the allowance of $125,000.00 of the claim. The Court will deny the Cross-Motion as it relates to claims allowance.
