Judge Owens (Bankr. D. Del.) Issues First Avoidance Opinion in Rejecting Defendant’s Argument That Complaint Was Time-barred

In Judge Owens’s UMB Bank, N.A. v. Sun Capital Partners V, LP (In re LSC Wind Down, LLC), 2020 WL 377015 (Bankr. D. Del. Jan. 23, 2020) opinion, the Court denied Defendants’ 12(b)(6) motion to dismiss Plaintiff-Trustee’s attempt under section 544 to avoid and recover an alleged $42 million fraudulent transfer (the “Transfer”) made to Defendants more than five years prior to the Petition Date. The opinion is the first one issued by Judge Owens that pertains to avoidance actions; substantively, she found that because the Complaint alleged specific unsecured creditors of the applicable Debtor who could have avoided the Transfer as of the Petition Date, the motion to dismiss must be denied.

The Parties’ Positions
The Transfer at issue in the Complaint occurred on December 20, 2011, with the Debtors filing for bankruptcy relief on January 17, 2017. The Complaint was then filed on January 17, 2019 (referred to as the “Commencement Date” in the Opinion), two years after the Petition Date and a little over seven years after the date of the Transfer.

The issues largely revolved around the timing of the Complaint and the state law applicable to the same, given that it was brought pursuant to 11 U.S.C. § 544. Defendants argued that the Complaint was filed “well beyond the prescribed time period set forth by [the applicable] Florida state law, asserting Florida’s fraudulent transfer statute required such claims to be brought “within 4 years after the transfer was made or the obligation was incurred or, if later, within 1 year after the transfer or obligation was or could reasonably have been discovered by the claimant[.]” Since the Complaint was indisputably filed beyond the four year statute of limitations, only the one year savings clause could render it timely; Defendants argued that the savings clause could not apply, given that (i) Plaintiff had notice of the Transfer more than one year prior to the Commencement Date through its access to the Debtors’ books and records and public news reports, and (ii) the savings clause was not otherwise tolled.

In response, Plaintiff argued that the Complaint’s timeliness under the savings clause was not reliant on Plaintiff’s knowledge but rather that of the Debtors’ creditors. Because Plaintiff stepped into the shoes of the Debtors’ creditors to avoid the Transfer under section 544(b)(1), it argued that so long as one such creditor (a “Predicate Creditor”) was entitled as of the Petition Date to assert a claim against the Defendants under the Uniform Fraudulent Transfer Act (“UFTA”), then it may do so on or before two years after the Petition Date pursuant to section 546(a)(1)(A). As such, Plaintiff asserted the Complaint was timely, alleged the existence of sufficient Predicate Creditors under the savings clause, and the Complaint did not establish that every Predicate Creditor of the Debtors was time barred from bringing a state law avoidance claim against the Defendants as of the Petition Date.

The Court’s Findings
The Court began by noting the statute of limitations provided by the Bankruptcy Code under section 546(a) for causes of action brought via section 544. Judge Owens then found that despite “the Defendants’ contrary assertions, so long as an underlying state law avoidance claim is not time-barred as of the commencement of a bankruptcy case, a section 544(b)(1) claim may be brought provided that it is commenced within the time periods prescribed by section 546(a).” This approach made sense to the Court, “because it provides time for investigation and encourages value maximization.”

Against that backdrop, the Court found that Plaintiff complied with section 546(a), as the Commencement Date of the adversary proceeding was two years after the Petition Date. While it was Plaintiff’s burden to ultimately prove that a Predicate Creditor existed as of the Petition Date for 544(b) purposes, the Court found it premature to make such a ruling in addressing a timeliness defense contained in a motion to dismiss (an issue more typically raised in an answer).

Analyzing the Complaint, Judge Owens found that Plaintiff alleged that there was at least one unsecured creditor of the applicable Debtor who could have sought to avoid the Transfer as of the Petition Date, “and more specifically identifies by name over 100 of such creditors.” The Plaintiff “also alleges that these creditors did not know of and could not have reasonably known of the Transfer or its fraudulent nature prior to the Petition Date, thereby capturing the one-year savings clause under UFTA as applied by both Florida and Ohio law.” The Court highlighted the distinction between this specific naming of creditors and the case that Defendants primarily relied upon (In re Petters Co., Inc. 495 B.R. 887 (Bankr. D. Minn. 2013)), noting the latter plaintiff simply included a generalized statement with no identified creditors. Specific allegations are critical, as they “allow the Defendants ‘[t]o structure and pursue their opposition to’ the Plaintiff’s standing, a concern of the court [upon whose opinion Defendants’ relied].” Ultimately, then, the Court found Defendants’ arguments and supporting documentation more suitable for summary judgment than a motion to dismiss; accordingly, their relief was denied.

In addition to being Judge Owens’s first foray into avoidance litigation, her opinion is important for providing guidance to parties embroiled in a section 544 dispute, especially one involving a savings clause component. The Court found the specific naming of the creditors whose standing a plaintiff purports to use was a pivotal distinction between the instant case and the decision upon which Defendants relied. Also helpful is the Court’s overview of section 546(a)’s parameters as they apply to section 544.

A copy of the Opinion can be found here.

Judge Sontchi (Bankr. D. Del.) Holds That Bankruptcy Courts May Enter Final Judgment on Core Fraudulent Transfer Claims Against Party With No Filed Claim

Written by Daniel N. Brogan

A recent decision by Judge Sontchi for the Bankruptcy Court for the District of Delaware in Paragon Litigation Trust v. Noble Corp. plc (In re Paragon Offshore, plc, et al.), Adv. Proc. No. 17-51882 (CSS) [D.I. 168] (Bankr. D. Del. Mar. 11, 2019) (“Paragon”) holds that significant Supreme Court precedent does not preclude bankruptcy courts from entering final orders on fraudulent transfer claims brought against a defendant that has not asserted a claim against the debtor’s estate. The opinion is contrary to prior decisions in the Ninth Circuit and the Southern District of New York, creating the likelihood that the issue will be addressed on appeal. The decision also addresses a party’s potential implied consent to final determination by a bankruptcy court.

In Paragon, a post-confirmation litigation trust (the “Trust”) sued Noble Corporation plc (“Noble”) asserted several causes of action, including five fraudulent transfer claims, against Noble. The debtors commenced their bankruptcy cases in February 2016. Shortly after the petition date, the debtors proposed a plan (the “Failed Plan”) incorporating a settlement between Noble and the Debtors (the “Settlement Agreement”) that provided for broad releases of the estates’ claims against Noble. The effectiveness of the releases was conditioned on bankruptcy court approval of the Settlement Agreement and effectiveness of the Failed Plan. In November 2016, the bankruptcy court denied confirmation of the Failed Plan. The debtors then proposed a new plan (the “Confirmed Plan”) that did not incorporate the Settlement Agreement, which was confirmed in June 2017. Noble provided input into the drafting of the Confirmed Plan, and it did not object to inclusion of a provision granting the bankruptcy court exclusive jurisdiction to adjudicate claims vested in the litigation trust (the “Trust”) created under the Confirmed Plan.

Subsequently, the Trust filed an adversary proceeding against Noble and other defendants (collectively, the “Defendants”). In response, the Defendants filed a motion to determine the bankruptcy court’s jurisdiction, arguing that the bankruptcy court lacked constitutional authority to finally adjudicate the claims, including the fraudulent transfer claims. Relevantly, the Defendants argued that, under the Supreme Court’s decisions in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (“Granfinanciera”) and Stern v. Marshall, 564 U.S. 462 (2011) (“Stern”) the bankruptcy court lacked constitutional authority to issue final orders when a debtor (or its successor-in-interest) files a fraudulent transfer claim against a defendant that has not filed a claim in the underlying bankruptcy case.

As a threshold matter, Judge Sontchi held that Noble did not implicitly consent to entry of final orders by the bankruptcy court on the fraudulent transfer claims by either entering into the failed Settlement Agreement or not objecting to the Confirmed Plan’s jurisdictional retention provisions.

Judge Sontchi then focused on whether Granfinanciera and Stern controlled. In Granfinanciera, the Supreme Court held that a party with no claim against a bankruptcy estate has a right to a jury trial when sued by a trustee to recover an allegedly fraudulent transfer. Judge Sontchi distinguished Granfinanciera reasoning that the issue there was not Article III authority, but rather the right to a jury trial under the 7th Amendment. Next, he addressed Stern and concluded that it was not controlling because the issue there—a bankruptcy court’s constitutional authority to finally resolve a state law counterclaim that is not necessarily resolved in the proof of claim process—was not before the Court in Paragon. Having concluded that neither Granfinanciera nor Stern controlled, Judge Sontchi rejected the Defendants’ arguments that would have him extend—rather than apply—the holdings of those cases.

Judge Sontchi did acknowledge that other courts, including the Ninth Circuit and three judges in the Southern District of New York, have reached the opposite conclusion and held that Stern extended Granfinanciera to the Article III context. In disagreeing, Judge Sontchi noted that in Executive Benefits Insurance Agency v. Arkison, 573 U.S. 25 (2014), the Supreme Court indicated ambiguity on the issue by expressly assuming, without deciding, that fraudulent transfer claims were Stern claims.

The Paragon opinion provides litigants with important takeaways on how Stern issues may be addressed by bankruptcy courts in Delaware. First, parties entering into a settlement agreement and submitting it for approval do not necessarily implicitly consent to the bankruptcy court’s final adjudication of claims addressed by the settlement agreement. Likewise, the failure to object to an exclusive jurisdiction provision in a plan does not constitute implicit consent to the bankruptcy court’s constitutional authority—even where a party is an active participant in formulating the plan. Finally, the Paragon decision opens the door, for the time being, for fraudulent transfer claims to be finally adjudicated by bankruptcy courts in Delaware, even where the defendant has not filed a proof of claim. Given that the decision creates a split in authority, the ruling may see further clarification or possible reversal on appeal; a motion for leave to appeal is presently pending in the United States District Court for the District of Delaware as Case No. 19-00078 (LPS).

A copy of the opinion can be found here.

Judge Gross (Bankr. D. Del.) Grants Insider’s Motion to Dismiss Chapter 7 Trustee’s Claims to Avoid Prepetition Setoffs

In Judge Gross’s Miller v. D&M Holdings US Inc. (In re Digital Networks N.A. Inc.) opinion, the Court granted Defendant’s 12(b)(6) motion to dismiss Plaintiff-Trustee’s attempt to avoid prepetition setoffs which accrued to Defendant, yet denied the Motion as it pertained to other non-setoff transfers.  Notable in this case is the fact that Defendant is the Debtor’s parent company, thus rendering the transfers subject to the one-year lookback period attributable to insiders.

Background and Holding

The complaint sought avoidance of three buckets of transfers (note: little detail on the transfers is provided in the opinion): (i) Prepetition Setoffs; (ii) Payroll Transfers; and (iii) Expense Transfers.  With respect to the Prepetition Setoffs, Defendant argued that a setoff governed by section 553 is not avoidable under section 547, while Plaintiff relied upon Pardo v. Pacificare of Texas, Inc. (In re AFP Co.), 264 B.R. 344 (Bankr. D. Del. 2001) in countering that setoffs can still be avoidable if they are found to be invalid or otherwise unavailable in bankruptcy.  The Pardo court found that section 553(a) recognized setoffs where (i) the creditor holds a prepetition claim against the debtor; (ii) the creditor owes a prepetition debt to the debtor; (iii) the claim and debt are mutual; and (iv) the claim and debt are both valid and enforceable.  That opinion further noted that section 553(b) protects an otherwise preferential setoff excluding any insufficiency.

In the present case, Judge Gross found that Plaintiff, despite correctly citing the 553/547 dynamic (i.e. that a setoff can be avoided if it is invalid or otherwise impermissible), failed to actually show there was anything impermissible about the Prepetition Setoffs.  The Court found that if Plaintiff had any claim to avoid the Prepetition Setoffs, then his claim should have been brought under section 553, not section 547; yet Plaintiff asserted no counts under section 553.  As such, the count attacking the Prepetition Setoffs under section 547 was dismissed without prejudice.

The Court denied Defendant’s motion to dismiss the Payroll Transfers, which motion was grounded in the fact that the complaint provided little insight as to the Payroll Transfers’ purpose, scope, or mechanics.  Plaintiff replied, and the Court agreed, that the Debtors’ amended schedules of assets and liabilities and statement of financial affairs indicate the transfers were for “payroll,” thereby addressing the only potential deficiency the Court noted—section 547(b)(2) (transfer must be made for or on account of an antecedent debt).

Lastly, the Court found that Plaintiff adequately plead the components of avoiding the “Expense Transfer,” which purportedly was made by the Debtor to its “tax-affiliated” group in order to pay Debtor’s share of its federal corporate tax expense.  In finding that the allegations were sufficient, the Court made the finding that, with respect to Defendant’s opposition to Plaintiff’s assertion of insolvency at the time of the transfers, it had “no issue with inferring insolvency beyond 90 days on the basis of the Debtor’s financials upon the Petition Date.”  The presumption of insolvency under 547(g), of course, is only applicable to the ninety (90) days prior to the petition date.


The opinion provides guidance for both plaintiffs and defendants alike where prepetition setoffs are at issue in a preference complaint; quite simply, such complaints must address setoff insufficiency under 553.  The opinion likewise provides an interesting finding regarding insolvency, which Judge Gross—albeit briefly and without elaboration—held that he had “no issue” inferring insolvency beyond 90 days on the basis of the Debtor’s financials upon the Petition Date.  It will be interesting to see if this “inference of insolvency beyond 90 days” based upon the Debtor’s petition date financials will find any application beyond the facts and procedural posture of the instant case.

A copy of the Opinion can be found here.

Judge Walrath (Bankr. D. Del.) Denies Motion to Transfer Venue of Preference Action Notwithstanding Defendant’s Forum Selection Clause

In Judge Walrath’s RCS Creditor Trust v. Schulte Roth & Zabel LLP (In re RCS Capital Corp.) opinion, the Court found that the presence of a forum selection clause (“FSC”) was not enough to trump the bankruptcy court’s ability to maintain venue for an avoidance action.  In so finding, the judge agreed with the Trustee-Plaintiff’s argument that the Debtors’ creditors were the ultimate parties-in-interest in the action, and thus were not bound by any FSC between the Debtors and Defendant (the Debtors and Defendant hereafter the “Parties”).  On that and other bases, the Court denied Defendant’s motion to transfer venue (the “Motion”) to the Southern District of New York (“SDNY,” the venue required by the FSC) under 28 U.S.C. § 1412 and Fed. R. Bankr. P. 7087.

Background and the Twelve Factor Jumara Test

Plaintiff sought to recover approximately $580,000 pursuant to 11 U.S.C. §§ 547 and 548(a)(1)(B).  Defendant, a law firm, responded by filing the Motion.

Courts in the Third Circuit consider a variety of factors in deciding whether to grant a motion to transfer venue, including:

(1) plaintiff’s choice of forum,

(2) defendant’s forum preference;

(3) whether the claim arose elsewhere,

(4) location of books and records,

(5) convenience of the parties based upon their relative physical and financial condition,

(6) convenience of the witnesses

(7) enforceability of the judgment,

(8) practical considerations that would make the trial easy, expeditious, or inexpensive,

(9) congestion of the courts’ dockets,

(10) public policies of the fora,

(11) familiarity of the judge with the applicable state law, and

(12) local interest in deciding local controversies at home.


See Jumara v. State Farm Ins. Co., 55 F.3d 873 (3d Cir. 1995) (the “Jumara Factors”).  The Court found only three Jumara Factors (2, 3, and 6) weighed in Defendant’s favor here, as briefly summarized in the chart below.


Factor Arguments Ruling


D: deference to a plaintiff’s choice of forum is lessened when suing in a representative capacity. The rationale for less deference to a representative plaintiff is inapplicable to a bankruptcy trustee.


D: prefers SDNY. True, but D’s preference given less weight than P’s.


D: all facts occurred in the SDNY.  Also, the Parties’ engagement letter (the “Agreement”) included the FSC, requiring resolution in the SDNY.


P: avoidance actions arise by statute and are separate from an underlying contract. Also, the Debtors’ creditors are the parties-in-interest in an avoidance action, and thus are not bound by the Parties’ FSC.

Performance of the legal services is not at issue, although payments made in SDNY militates towards transfer.


Regarding the FSC, the Court agreed with Plaintiff’s argument (derived from AstroPower Liquidating Trust v. Xantrex Tech. Inc. (In re AstroPower Liquidating Trust), 335 B.R. 309 (Bankr. D. Del. 2005) and Charys Liquidating Trust v. McMahan Sec. Co., L.P., (Charys Holding Co., Inc.), 443 B.R. 628 (Bankr. D. Del. 2010)).



D: Books and records are all in SDNY. Discovery in this case will be largely electronic.


D: D is based in NYC, plus P’s counsel has a NYC office as well.


P: D often travels to Delaware for other cases.

While transfer would be more convenient for D, pursuing actions in multiple fora creates temporal and financial burdens on P.  Also, Delaware is nearby, D often appears in Delaware, and Delaware counsel has already been retained by P.


D: all witnesses are in the SDNY, beyond the Court’s subpoena power.


P: avoidance actions rarely go to trial, are typically short.

No indication that any witness won’t voluntarily appear.


Judgments in either court are entitled to full faith and credit.


P: keeping the avoidance action in the same venue as the main case is more economical due to the Court’s familiarity with the case and the other, similar actions taking place. Agreed with P.


This case does not overburden the Court.


P: transferring this case creates a slippery slope. Agreed with P, as P is pursuing multiple avoidance actions, and transfer of one could result in transferring hundreds of others.


No state law issues.


Purely federal bankruptcy issues predominate here, offsetting any potential interest the SDNY may have.


In sum, the Court found Defendant had not carried its burden to show that transfer was appropriate by a preponderance of the evidence.


The presence of the FSC in this case provides an interesting wrinkle, especially since the Jumara case itself instructs a court to “place considerable weight on the parties’ original choice of forum, as expressed in a contractual forum selection clause.” Jumara, 55 F.3d at 882.  The Jumara case, however, was a non-bankruptcy case brought under state law by insureds against an insurer.  Given that the instant case was (i) rooted in federal bankruptcy law, not the performance of the Agreement, and (ii) brought for the benefit of parties-in-interest who were not parties to the Agreement, the Court distinguished the FSC’s relevance here.  The extent to which this rationale could be used in the context of other types of clauses or agreements remains to be seen.  In addition, one wonders if the Court would find the “slippery slope” concerns of Factor 10 to be mitigated were the instant case the only one filed, and not one of “multiple actions” filed instead.

A copy of the Opinion can be found here.

Delaware Bankruptcy Judge Addresses Issue of First Impression Regarding Section 547(b)(5): Must a Preference Defendant Be Secured on the Transfer Date or the Petition Date?

By Evan T. Miller, Esq.

In Stanziale v. Sprint Corp. (In re Simplexity, LLC), 578 B.R. 255 (Bankr. D. Del. 2017), Delaware Bankruptcy Judge Kevin Gross addressed an issue of first impression: which was the proper date for determining the secured status of a creditor in a preference dispute under 11 U.S.C. § 547(b)(5), the petition date or the transfer date?  Ultimately, Judge Gross decided that the petition date was most proper, at least with respect to creditors secured by a purchase money security interest (“PMSI”).  Nevertheless, this aspect of the analysis under section 547(b)(5) remains highly fact-specific.


The Debtors, formerly independent online activators of mobile phones, filed for bankruptcy protection under Chapter 11 on March 16, 2014.  Prior to that time, the Debtors and Defendant were parties to an agreement that let the Debtors solicit and subscribe customers to Defendant; to that end, the Debtors could either purchase products from Defendant and resell them to customers, or sell products directly from Defendant’s inventory.  Defendant received a PMSI in products the Debtors purchased on credit and proceeds from the sale of such products.  Following conversion to Chapter 7, the Chapter 7 Trustee (the “Trustee”) initiated the instant adversary proceeding to recover these payments to Defendant; the parties’ motions for summary judgment ultimately followed, raising section 547(b)(5) and subsequent new value arguments.

Must a preference defendant be secured on the transfer date or the petition date for section 547(b)(5) purposes?

In light of the PMSI, Defendant argued that the Trustee could not satisfy his burden under section 547(b)(5)’s hypothetical liquidation test.  The Trustee first countered that the burden was not on him to do so in this instance; rather, Defendant had to prove it was truly secured given its reliance upon state law.  The Court rejected this reasoning based upon the plain language of section 547(g) (placing the burden on the Trustee to establish the elements under section 547(b)).

The Court next addressed the issue of first impression referenced above and incidentally, one that had created a split among courts which had considered it—is secured status assessed at the time of the transfer or the petition date?  Defendant argued that it was entirely secured, notwithstanding that the Debtors kept their funds in commingled accounts which were swept only a few days prepetition.  Further, Defendant argued that a Supreme Court decision which had determined the petition date to be the proper date of reference (Palmer Clay Products Co. v. Brown, 297 U.S. 227 (1936)) was misplaced in the context of a secured creditor, as that case had been dealing with an unsecured creditor.  Thus, with that in mind and in reliance upon a decision by Delaware Bankruptcy Judge Peter Walsh (Forman v. IPFS Corp. of the South (In re Alabama Aircraft Indus.), 2013 WL 6332688 (Bankr. D. Del. Dec. 5, 2013) (holding the transfer date to be the proper one for assessing preference liability of a creditor pursuant to an insurance premium financing agreement), Defendant argued that the transfer date controlled.

The Court disagreed, finding the fact-specific distinctions in Defendant’s “transfer date” cases and the instant case to be determinative; i.e., the Court distinguished between a PMSI case and cases dealing with premium financing arrangements or cases with liens of diminishing value.  This was so because a PMSI is a decidedly limited and better defined interest compared to a floating lien; moreover, the collateral at issue here (headsets and proceeds from selling the same) was unlikely to undergo stark changes in valuation.  Thus, while the Court envisioned a factual scenario that may warrant deviating from the petition date analysis, the instant case did not contain such facts.  The PMSI vs. floating lien distinction likewise underpinned the Court’s holding on the propriety of the Trustee’s tracing method—i.e., the “add-back” method, used for determining a defendant’s position on the petition date in a hypothetical liquidation.

Does an earlier-than-usual payment by a preference defendant to a debtor constitute subsequent new value?

The Court also ruled upon part of Defendant’s subsequent new value argument under section 547(c)(4).  Specifically, Defendant argued that a payment it made to the Debtors two days before the petition date qualified as subsequent new value, as it was commission money not yet owed to the Debtors under any of their agreements; ergo, it augmented the estate.  The Trustee opposed this defense on the grounds that it was a seemingly random payment made in Defendant’s capacity as a debtor, not a creditor, and that in any event, Defendant merely substituted one asset of the Debtor for another (i.e. an A/R for cash).  To the latter point, Defendant argued that the Trustee ignored the fact that Defendant would never have paid the A/R due to Defendant’s rights under various agreements and section 553 (setoff).

The Court agreed with Defendant, finding the issue centered around determining the purposes of Defendant’s payment.  To that end, Judge Gross found that the underlying agreements and the parties’ course of dealing demonstrated that Defendant’s commission payments to the Debtors were due at the end of the month, whereas the instant payment was made mid-month; as such, Defendant was not yet a debtor, nor were the Debtors creditors of Defendant.

Furthermore, the Court found that Defendant did not merely substitute Debtor’s A/R for cash.  For one thing, the commission payment was an (out of the ordinary) advance, not a regularly scheduled payment.  For another, the A/R would have been uncollectable for the reasons argued by Defendant.  At bottom, Judge Gross found Defendant’s commission payment personified section 547(c)(4)—a “beacon of light in a dark time” that decisively enhanced the Debtors’ estate.


The Court’s opinion in Simplexity sheds light on how the analysis under section 547(b)(5) changes where a creditor is secured.  Particularly, the Court makes clear that the type of security interest at play will likely impact the Court’s analysis.  In that sense, the Court seemingly harmonized its opinion here with earlier, seemingly conflicting decisions, including those from the same jurisdiction.  Perhaps the greater point, however, is that these analyses will remain highly contextual determinations.

The opinion also provides support for interesting subsequent new value arguments, and incidentally, strategic considerations for defendants dealing bilaterally (i.e., relationships where the defendant may be acting as both a creditor and a debtor at times) with companies on the verge of bankruptcy.  Specifically, making a payment earlier than contractually obligated can inure to Defendant’s benefit, as the advance potentially prevents the creation of an A/R—and concurrently may prevent the bankrupt company becoming a creditor of the defendant.  This argument becomes stronger if the defendant likewise maintains setoff rights, as Defendant did here.

A copy of the Opinion can be found here..

D.C. Bankruptcy Court Finds Pillowtex Analysis Not Required for Retaining Section 327(e) Professional

By Evan T. Miller, Esq.

In a helpful reminder for professionals regarding the nuances of 11 U.S.C. § 327 and its intersection with preference law, the Bankruptcy Court for the District of Columbia recently overruled a creditor’s objection to a debtor’s application (the “Application”) to retain special counsel under section 327(e).  The objection, filed in In re Core Communications, Inc., Case No. 17-00258, was based in part upon the fact that the debtor and proposed counsel (the “Professional”) had not provided a “Pillowtex Analysis” in support of the Application – i.e., an analysis disclosing any debtor payments made to the Professional in the 90 days prior to the Petition Date (the “Preference Period”).  The creditor maintained this assertion, notwithstanding the fact that the Professional had waived any claims it had against the estate.

The Court rejected the creditor’s argument.  Judge S. Martin Teel began with a recitation of professional retention guidelines and jurisprudence, noting that “[a] court authorizing the retention of professionals under 11 U.S.C. § 327(a) must determine whether the professional is disinterested, including whether the professional is the recipient of a preferential transfer.” In re Core Commc’ns, Inc., 2017 WL 5151674, at *3 (Bankr. D.D.C. Nov. 5, 2017) (citing In re Pillowtex, Inc., 304 F.3d 246 (3d Cir. 2002)).  While the Application did not disclose whether the debtor made any payments to the Professional during the Preference Period, the Court found the Application was made pursuant to 11 U.S.C. § 327(e), and as such, “adverse interests that would disqualify an attorney from being retained under § 327(a) are distinguishable from adverse interests that would disqualify an attorney from being retained under § 327(e).” Id. (quoting Giuliano v. Young (In re RIH Acquisitions NJ, LLC), 551 B.R. 563, 569 (Bankr. D. N.J. 2016).  Under section 327(e), “the attorney being retained only needs to be disinterested with respect to the matter on which such attorney is to be employed.” Id. (internal quotations omitted).  As a result, there was no need to “disclose the existence of any preferences incident to the Application.Id.

A copy of the Opinion can be found here.




Defining Ordinary: Judge Walrath (Bankr. D. Del.) Surveys Ordinary Course of Business Methodologies in In re Powerwave Technologies

  Thankfully, Judge Walrath recently issued a very helpful opinion, Stanziale v. Superior Technical Resources, Inc. (In re Powerwave Technologies, Inc.), Adv. No. 15-50085 (MFW) (Bankr. D. Del. Apr. 13, 2017), which touches upon all of those issues.  While the decision’s ultimate utility may be limited by the fact that the judge was merely addressing a summary judgment motion (the “Motion”) and found factual disputes precluded a decision on the merits, the opinion should still prove useful.


The Powerwave cases began in January 2013 and the instant adversary proceeding was initiated approximately two years later.  Defendant in the adversary proceeding provided workforce solutions to the Debtors pursuant to an agreement, and during the Preference Period, received approximately $383,336.55 in transfers (the “Transfers”).  During the Preference Period, Defendant sent the Debtors correspondences about the Debtors’ aging accounts and ultimately changed payment terms from net 45 to net 7.  Defendant further demanded payment in full during this time.

The Parties’ Positions

            While Defendant did not contest that the predicate elements of the Transfers had been met, it argued the defenses under 11 U.S.C. §§ 547(c)(2) and (4) abrogated or eliminated its exposure.  It based these defenses on several assertions:

  • All of the Transfers were protected from avoidance by the subjective and objective OCOB defenses
    • For 547(c)(2)(A) purposes, Defendant argued in favor of using the “Range” and “Batch” Methods
  • Any portion not protected by OCOB were subject to reduction by applying the subsequent new value defense under 547(c)(4)

Plaintiff-Trustee disagreed, of course, and argued instead:

  • Defendant’s method for determining which Transfers were OCOB created factual disputes
    • Specifically, Plaintiff-Trustee argued Defendant used a Historical Period (“Historical Period”) that was almost 50% narrower than the one espoused by the Plaintiff-Trustee
    • Moreover, Plaintiff-Trustee argued the “Range” and “Batch” Methods for determining ordinariness are inappropriate, favoring instead the “Days Sales Outstanding” (“DSO”), “Inter-quartile”, and “Standard Deviation” methods.
  • Defendant engaged in unusual collection activity during the preference period
  • Subsequent new value defense cannot be decided before the Court determines OCOB applicability

The Court’s Decision

In denying Defendant’s Motion, the Court addressed each of the foregoing arguments and counterarguments in turn, but in sum, Judge Walrath found too many facts in dispute to render a decision at the summary judgment stage.  Nevertheless, her opinion is instructive.

The Proper Historical Period

The Court noted the Parties’ dispute over the proper Historical Period – specifically, whether Defendant’s proposed Historical Period captured enough of its history with the Debtors.  Noting that that “the Historical Period should encompass the time period when the debtor was financially healthy,” the Court found that Defendant did “not include a sustained period when the Debtor was financially sound.”  As such, a factual dispute existed.

Subjective OCOB Methodologies

Judge Walrath addressed the following five OCOB methodologies, although the lack of agreement on the Historical Period prevented her from applying any of them at this time:

  • Range
    • The Court noted that without the proper historical baseline, the Range method (in which a defendant asserts that if a given preferential transfer fell within the days to pay range seen in the Historical Period, it should be excluded from avoidance) could inappropriately include outlier payments that do not accurately reflect the Parties’ OCOB. The judge noted that simply citing to other cases that use the range method isn’t sufficient, and Defendant’s citations were factually much narrower in any event (comparing the 34-371 historical range here to other cases with ranges of 7-67 days, 35-73 days, 0-33 days, 65-168 days, 0-31 days, 28-76 days).
  • Batch
    • The Court found the Batch method (which derives a standard deviation range by taking the average age of invoices paid in each batch) likewise inappropriate, as the number of invoices paid per batch ranged from 1-133, with higher amounts paid during the Preference Period than in the Historical Period.
  • DSO
    • The DSO Method involves multiplying the total amount of an invoice by the number of days that it took to be paid. That number is then divided by the total amount of the invoices in that batch.  Defendant argued that even if the DSO method results in the 23-day spread between the historical and preference periods alleged by Plaintiff-Trustee, 23 days is not out of the ordinary between the Parties.  Again, the absence of a proper Historical Period foreclosed this method’s application.
  • Inter-quartile
    • The Plaintiff-Trustee’s proposed Inter-quartile range found that 50% of invoices were paid within a 15-day spread, with anything falling outside of that range allegedly not OCOB. Defendant objected that the Inter-quartile method has no precedent in Delaware, but the Court dismissed “lack of acceptance” of a given method as a means for precluding its use.  Judge Walrath noted that “courts may consider a variety of mathematical formulas when deciding the consistency among payments.”
  • Standard Deviation
    • The Plaintiff-Trustee’s Standard Deviation analysis resulted in a range of approximately 75 days (roughly 37 days on either side of the Historical Period average). Defendant did not address the argument, and as with the other methodologies, factual issues precluded application at this time.

As to Plaintiff-Trustee’s assertion that Defendant’s Preference Period collection activity (i.e. calling/emailing about late payments, change of payment terms, etc.) was unusual, the Court found there was a factual dispute as to whether such behavior was in fact normal between the Parties.

Objective OCOB Approaches

Defendant also asserted a defense under section 547(c)(2)(B), arguing it was classified as an employment agency in the administrative and waste management services industry; Plaintiff-Trustee countered that its classification was unclear, and thus the proper “industry” for 547(c)(2)(B) purposes was in dispute.  The Court found that while “a creditor has “considerable latitude in defining what the relevant industry is” and “expert testimony is not required”, a “sufficiently detailed basis is needed to establish the relevant industry.”  Given the classification dispute, the Court found summary judgment inappropriate.

The Sequencing of 547(c) Defenses

Lastly, Defendant argued that its subsequent new value defense under 547(c)(4) eliminated any remaining exposure it may still have from the Transfers.  Plaintiff-Trustee argued, however, that analysis under 547(c)(4) is premature until the 547(c)(2) OCOB review is confirmed.  The Court sided with Plaintiff-Trustee, finding Defendant’s

new value calculations were based on the remaining Transfers being “otherwise unavoidable” according to its calculations under the ordinary course of business defense. However, the Court has found that there are disputes as to material facts regarding the ordinary course of business defense. Therefore, the Court must deny the Defendant’s Motion for Summary Judgment as to the new value defense until the ordinary course of business defense is determined.

In sum, the Motion was denied.


Even without any application of the various OCOB methodologies discussed above, this opinion provides preference practitioners (on either side) with a section 547(c)(2) road map.  Moreover, the decision reaffirms that a viable “Historical Period” should capture an ample ‘healthy period’ of a debtor’s history, though what constitutes “healthy”, of course, should remain subject to intense dispute.  In addition, the Court advises – on these facts, at least – that subsequent new value should not be applied before resolution of what constitutes OCOB.

A copy of the Opinion can be found here.