Avoidance Action Update

Covering the latest news with respect to preference actions, fraudulent transfers and everything else under the bankruptcy code's avoidance statutes

Revised on Remand: Judge Walrath Reduces Defendant’s New Value Defense and Awards the Trustee Prejudgment Interest in Remanded Proceeding

By Gregory J. Flasser, Esq.

On March 29, 2016, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued an opinion reducing the new value defense of Prudential Real Estate and Relocation Services, Inc., and Prudential Relocation, Inc. (collectively, “Prudential”) and awarding the chapter 7 trustee (the “Trustee”) prejudgment interest in Prudential Real Estate v. Burtch (In re AE Liquidation, Inc.), Adv. Proc. No. 10-55543 (MFW), 2016 WL 1238848 (Bankr. D. Del. Mar. 29, 2016).  The matter was remanded from the United States District Court for the District of Delaware (the “District Court”) on appeal of the Court’s July 17, 2013 Order (the “Order”) granting judgment in favor of the Trustee’s Complaint to avoid and recover preferential transfers against Prudential.

On November 25, 2008, AE Liquidation, Inc., EIRB Liquidation, Inc., and Eclipse Aviation Corporation filed for voluntary relief under chapter 11 of the Bankruptcy Code.  On March 5, 2009, the case was converted to chapter 7 and the Trustee was appointed.  On November 23, 2010, the Trustee filed a Complaint against Prudential asserting that certain pre-petition transfers were preferential and avoidable under § 547(b) of the Bankruptcy Code.  On July 17, 2013, the Court entered the Order finding: (i) $781,702.61 of pre-petition transfers to Prudential were preferential; (ii) Prudential had a new value defense totaling $128,379.40; and (iii) the Trustee was not entitled to prejudgment interest.  On appeal, the District Court remanded the matter for the Court to reconsider: (i) the amount of Prudential’s new value defense; and (ii) whether the Trustee was entitled to prejudgment interest.*

*A blog post on this earlier opinion was published on December 1, 2015, available here.

 The Trustee argued that $71,808.83 of the new value defense was not eligible for new value credit because it related to post-petition services.  Prudential responded that the post-petition invoices were prepared solely to support its proof of claim and did not reflect the actual date the underlying services were performed.  Prudential also claimed the Trustee waived the argument by failing to raise it until post-trial briefing.  The Court found that the testimony of Prudential’s Director of Accounting was contrary to Prudential’s assertions and that the District Court already rejected Prudential’s waiver argument.  Accordingly, the Court reduced Prudential’s new value defense to $56,571.37, to reflect only services provided pre-petition.

With regard to prejudgment interest, the Trustee argued that the estate should be able to recover prejudgment interest beginning on the date the last preferential transfer was made.  Prudential contended that the Court reasonably exercised its discretion in denying prejudgment interest in the Order.  In granting prejudgment interest, the Court relied on the decision in Peltz v. Worldnet Corp. (In re USN Communications., Inc.), 280 B.R. 573, 602 (Bankr. D. Del. 2002), for the proposition that prejudgment interest is routinely granted in avoidance actions.  The Court disagreed, however, with the amount of prejudgment interest sought by the Trustee.  Relying again on USN Communications, the Court held that the prejudgment interest should be calculated from the date the action was commenced, not the date of the last avoidable transfer; further, the Court found that the appropriate rate for prejudgment interest is the federal judgment interest rate, for the calendar week preceding the filing date of the Complaint.  Therefore, the Court awarded the Trustee $5,186.97 in prejudgment interest.

A copy of the Court’s opinion is available here.

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