Bank Held a Valid Security Interest in Debtor's Collateral and Thereby Qualified for a Contemporaneous Exchange of New Value Exception Under 547(c)(1) and Repayment on Loan was not a Fraudulent Conveyance Under 548
In re: J. Silver Clothing, Inc., Chapter 7, Case No. 05-10522 (PJW); Burtch v. Connecticut Community Bank, N.A. d/b/a The Greenwich Bank, Adv. Pro. No. 07-50814 (KG) (April 29, 2011) (J. Gross)
Summary:
The Chapter 7 Trustee (the “Trustee”) filed a Complaint seeking, inter alia, to avoid Debtor’s transfer of a security interest in substantially all of its assets to Connecticut Community Bank, N.A. d/b/a The Greenwich Bank & Trust Company (the “Bank”), which occurred with the preference period. The Court was first asked to determine whether the transfer met the requirements of section 547(c)(1). The Court determined that the transfer met both of the requirements of the subsection as the transfer was intended by the debtor and the creditor to be a contemporaneous exchange and was, in fact, a contemporaneous exchange.
Discussion:
The during the fall of 2004, the Debtor entered into a revolving credit loan in an amount that would not exceed $1 million (the “Loan”). The Loan closed on December 1, 2004. Debtor entered into a Loan and Security Agreement (the “Loan Agreement”) with the Bank and Debtor executed a Credit Agreement and Commercial Revolving Loan Note (the “Note”). The Bank required a first lien on all of Debtor’s business assets, excluding real estate. The Bank also required a guarantee from co-defendant James Fuld (“Fuld”). The guarantee provided a more timely closing, a lower interest rate and more favorable repayment terms.
The Bank’s first lien covered substantially all of the Debtor’s assets. To ensure its first lien position, the Bank caused Debtor to file UCC-3’s cancelling prior recorded security interests in Debtor’s assets and certificate that no liens existed in Delaware. The Bank also required Fuld to subordinate his notes. However, problems ensued when the Bank attempted to perfect its security interest in the Collateral. Bank’s counsel mailed its UCC-1 to the Delaware Division of Corporations on December 3, 2004, one day after the Bank made its first distribution under the Loan. The Division of Corporations rejected the First UCC-1 and on December 20, 2004, counsel mailed a second, corrected UCC-1. The Debtor filed its own UCC-1 on December 30, 2004. The Bank’s Second UCC-1 was filed on January 4, 2005.
Thereafter, in mid-January 2005, the Debtor sold 29 stores for $1.4 million to Hoffman Acquisition Corp. (“Hoffman”). Hoffman required the Bank to release its lien on the Debtor’s assets. The sale closed on February 16, 2005 and as required by the Loan Agreement, Hoffman, on Debtor’s behalf, paid the Bank $485,569.95 (the “Repayment”) which the Debtor owed, thereby enabling the Bank to release its lien. Debtor then filed its petition under chapter 11 of the Bankruptcy Code on February 25, 2005. The case was subsequently converted to a chapter 7. The Trustee’s claims arise from the Loan and the Repayment.
The Court granted summary judgment in favor of defendants. The Court found that the Debtor’s transfer of the security interest in the Collateral to the Bank was intended by the parties as a contemporaneous exchange for the Bank’s $1 million credit loan to Debtor (under section 547(c)(1)(A)) and was in fact, substantially contemporaneous (under section 547(c)(1)(B)). First, the Court determined that the documents underlying the Loan supported a finding that the parties intended for the exchange to be contemporaneous. Not only did the Bank offer evidence that the Loan was contemplated only with a first priority lien on the Collateral and Fuld’s Guarantee, the Defendants also provided direct evidence that the Debtor intended and took action to provide the Bank with a first lien on the Collateral. The Debtor was required to file a UCC-3 and also filed a UCC-1.
Next, under section 547(c)(B), the Court refused to adopt a bright-line rule in interpreting section 547(e). The Court concluded that Section 547(e) does not inform the “substantially contemporaneous” requirement of section 547(c). Rather, the Court noted that the modifier “substantial” makes it clear that contemporaneity is a flexible concept which requires a case-by-case inquiry into all relevant circumstances. The Court looked to the totality of the circumstances, including reasons for the delay, the intent of the parties, and the possibility of fraud.
The Court also dismissed the remaining causes of action, including these alleging a fraudulent transfer. The Court concluded that the Bank had a valid, perfected security interest and was over secured. Therefore, there was no question that the Debtor received reasonably equivalent value for the repayment on the Loan.
