Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

This preference action was filed June 5, 2001 and sought to avoid and recover thirty-four allegedly preferential transfers amounting to $16,703,604.57, pursuant to sections 547 and 550 of the Bankruptcy Code. UFP and Hechinger thereafter filed competing motions for summary judgment.

UFP asserted in its Motion that, of the $16,500,445.00 at issue, summary judgment was appropriate as to $13,125,822.00 because that amount of the allegedly preferential transfers were actually advance payments made by Hechinger to UFP. They argued the remaining $3,374,623 is protected by the ordinary course of business defense under section 547(c)(2), the contemporaneous exchange for new value defense under section 547(c)(1), or the new value defense under section under 547(c)(4).

Hechinger proved several of the elements under section 547(b). However, UFP contended that Hechinger was not entitled to recover $13,125,822.00 as preferences because those monies were advance payments, and therefore not on account of antecedent debt. Hechinger admitted that at the end of the preference period it was prepaying for product that it thought it was purchasing on credit. The Court found, and the parties agreed, that at least $6,576,603.36 was paid in advance and therefore was not preferential. The Court granted summary judgment as to that amount of advance payments in favor of UFP.

As to UFP’s ordinary course of business defense, Hechinger contended that UFP applied unusual collection pressure by limiting Hechinger's available credit, shortening the payment terms between the parties, and requiring Hechinger to use wire transfers to remain at or below their credit limit, making the course of dealing during the preference period very different than in years prior. Additionally, Hechinger claimed that it had never previously paid in large even sum wire transfers. Because the Court found genuine issues of material fact as to whether the transfers were made within the ordinary course of business, it denied summary judgment. The Court also found genuine issues of material fact as to whether the transfers were intended to be contemporaneous exchanges for new value and whether the exchanges were, in fact, substantially contemporaneous, and therefore denied summary judgment.

Finally, UFP asserted that most of the transfers were protected by the new value defense pursuant to 11 U.S.C. §547(c)(4), and urged the Court to follow the decision of Check Rep. Serv., Inc. v. The Water Doctor (In re Check Rep. Serv., Inc.), 140 B.R. 425 (Bankr. W.D. Mich.1992) and the overwhelming trend of courts that have held new value need not remain unpaid. UFP contended that the case was similar to the fact situation in Check Reporting Services because there were several payments at issue where new value was subsequently transferred to Hechinger by UFP. UFP argued that the Court should enter summary judgment in its favor based on policy reasons behind the defense and the overwhelming trend of courts to reject the "remain unpaid" rule.

Hechinger cited In re New York City Shoes, Inc., 880 F.2d 679 (3d Cir.1989) for the proposition that the Third Circuit requires that new value remain unpaid. The Court, however, noted that in Check Reporting Services the court undertook a detailed analysis of the relevant case law and the specific language of section 547(c)(4)(B) to conclude that the clear import of the statute would be defeated if it is held that the new value must remain unpaid. The Court distinguished New York City Shoes from the instant case by noting that there were thirty-four allegedly preferential transfers at issue during the preference period; therefore, this case was more akin to the running account or rolling account analysis of Check Reporting Services than to New York City Shoes, which dealt with just one transfer at issue in the preference period. Based on the language of section 547(c)(4)(B) and the policy reasons of the code section, the Court found that New York City Shoes was distinguishable on its facts and adopted the reasoning of Check Reporting Services. The Court announced it was inclined to grant summary judgment in favor of UFP in the further amount of $8,856,126.72; however, it could not do so, absent a waiver of the other asserted defenses under section 547(c), or a stipulation by the parties as to that amount, because a calculation under section 547(c)(4) must be prefaced by a determination of whether the transfers made on account of new value are "otherwise avoidable," as required by the language of the statute.

UPDATE:  Following trial, in a June 16, 2005 Memorandum Opinion, Judge Lindsey entered judgment for the Plaintiff in the amount of $1,004,216.00, the amount conceded to remain "at issue" for trial purposes.  The Court rejected UFP's remaining defense of contemporaneous exchange under Section 547(c)(1) of the Bankruptcy Code, finding that the transactions were credit transactions and were not intended to be contemporaneous exchanges for new value.  The Court also rejected UFP's argument that the payments were made in the ordinary course of business within the meaning of Section 547(c)(2), finding that changes in credit terms and UFP's institution of a credit limit on the eve of the preference period (and evidence that such credit policies were "very rarely imposed" on large "Big Box" retailers (and had never previously been imposed on Hechinger), took such payments outside the ordinary course "safe harbor."