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District Court Affirms Bankruptcy Court Decision on Ordinary Course of Business and Remands Subsequent New Value and Prejudgment Interest Rulings for Further Findings

Prudential Real Estate v. Burtch (In re AE Liquidation, Inc.), Civ. Nos. 13-1504 & 13-1505 (LPS), 2015 WL 5301553 (D. Del. Sept. 10, 2015), aff’g in part, rev’g in part Burtch v. Prudential Real Estate (In re AE Liquidation, Inc.), Nos. 08-13031 & 10-55543 (MFW), 2013 WL 3778141 (Bankr. D. Del. July 17, 2013)

In this appeal and cross appeal to the Delaware District Court, Judge Leonard P. Stark affirmed a Bankruptcy Court ruling that payments made an average of 17 days faster during the preference period were not eligible for the ordinary course of business defense under section 547(c)(2) of the Bankruptcy Code.  Judge Stark also ruled that, under the Third Circuit’s Opinion in In re Friedman’s, Inc., subsequent new value cannot include post-petition new value, and that bankruptcy judges must provide reasons for denying prejudgment interest in preference cases.  He remanded the latter two issues to the Bankruptcy Court for further findings.

Under the facts of the case, the Chapter 7 Trustee for AE Liquidation, Inc. (the “Trustee”) sought to avoid and recover as preferences a total of $781,702.61 from Prudential Real Estate and two affiliated entities (“Prudential”).  Prudential had provided relocation services to the debtors in the two years prior to the bankruptcy.  The parties’ historical relationship had been marked by periods where the debtors fell behind and were put on payment plans, and the payments at issue were made under one such plan.

Prudential contested the Trustee’s claims on grounds of ordinary course of business and subsequent new value under sections 547(c)(2) and (4) of the Bankruptcy Code.  In the ruling below, Judge Walrath recognized Prudential’s subsequent new value in the amount $128,379.40.  However, she denied that the transfers were within the ordinary course of business.  She noted, among other things, a 17-day acceleration of the average payment timing during the preference period (roughly 40% faster), and the fact that Prudential put the debtors on a payment plan as a result of their deteriorating financial condition.  Accordingly, she awarded judgment to the Trustee in the amount of $653,323.20 (i.e. $781,702.61 minus the $128,379.40 subsequent new value).

Both parties appealed.  Prudential challenged the lower court’s denial of the ordinary course of business defense.  It asserted, among other things, that the acceleration of payments during the preference period was not material, and that the payments at issue were within the parties’ historical course of dealings because the debtors had been on a similar payment plan prior to the preference period.  In his cross appeal, the Trustee claimed the Bankruptcy Court miscalculated subsequent new value by including post-petition amounts and erred by failing to provide an explanation on the record for its denial of prejudgment interest.

Judge Stark affirmed the inapplicability of the ordinary course of business defense to the facts of the case, agreeing that the record supported finding a 40% acceleration in the average timing of payments was a significant deviation from the parties’ historical course of dealing, and that the efforts Prudential made to collect from the Debtors during the preference period were not ordinary.  Despite the parties’ history of payment plans, the parties did establish a baseline relationship with normal payment terms and returned to it following the debtors’ satisfaction of imposed stricter repayment terms when implemented by Prudential.

With respect to the Trustee’s cross appeal, the District Court agreed that the Third Circuit’s ruling in In re Friedman’s, Inc., 738 F.3d 547 (3d Cir. 2013) mandates that subsequent new value must be determined as of the petition date, and that post-petition new value may not be used to calculate new value under section 547(c)(4).  However, Judge Stark remanded the issue of subsequent new value to the Bankruptcy Court for clarification as to whether its ruling included post-petition amounts.  In a similar vein, he held that under the Third Circuit’s ruling in In re Hechinger Inv. Co. of Delaware, Inc., 489 F.3d 568 (3d Cir. 2007), a denial of prejudgment interest in a preference case must be supported by a record, and remanded the issue to the Bankruptcy Court so it could explain its rationale for denying prejudgment interest, or, alternatively, award it.