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General Release By Debtors Bars Preference Action By Chapter 7 Trustee Against Releasee

By GianClaudio Finizio

On November 26, 2012, Judge Mary F. Walrath, granted defendant Avnet Inc.’s (“Avnet”) motion to dismiss a preference action by a chapter 7 trustee based on the language of general release of all claims given to Avnet by the chapter 11 debtors in In re Managed Storage International, Inc. 2012 WL 5921723 (Bkrtcy.D.Del.).

During the pendency of the chapter 11 cases, Avnet, Managed Store International, Inc. and its affiliates (the “Debtors”), and the purchaser of all of the Debtors’ assets entered into a stipulation (the “Stipulation”) which provided for, among other things,(i) payment to Avnet from sale proceeds in connection with Avnet’s purchase money security interest in certain of the Debtors’ assets,(ii) a release of the Debtors by Avnet, and (iii) a release of Avnet and its predecessors, successes, and assigns by the Debtors and their predecessors, successors and assigns from any and all claims relating to the Debtors and their chapter 11 cases (the “Release”). The cases were subsequently converted to chapter 7 and the chapter 7 trustee (the “Trustee”) initiated a preference action against Avnet seeking to recover over $5 million as an alleged preference.1

In rejecting the Trustee’s argument that the Trustee is not bound by the Release, the Court relied upon the plain reading of the Release and on established case law for the general rule that a debtor in possession can enter into a binding agreement with a secured creditor which will be enforceable against a subsequently appointed chapter 7 trustee. The Court also found that the Trustee’s asserted exceptions to this general rule, including prejudice to the estate, lack of consideration and lack of notice to all creditors; did not apply in these cases.

Specifically, the Court noted that the mere fact the Release bars the prosecution of a potential $5 million preference is insufficient to establish prejudice to the estate to overcome the general rule that the Trustee is bound by the Release. The Court also observed that there was valid consideration for the Release based upon the circumstances in these cases which included Avnet’s request for contempt against the Debtors for their failure to comply with a prior Court order regarding payment of proceeds to Avnet. With respect to notice, the Court cites to Rules 9006(c) and 2002(a)(3) to support the Court’s decision to shorten notice of the Stipulation for cause. The Trustee, therefore, was bound by the Release provision which bars the prosecution of the preference action against Avnet. Accordingly, the Court granted Avnet’s motion to dismiss.

A copy of the bankruptcy court’s opinion is available here.

1 The Trustee also commenced a preference action against Bell Microproducts, Inc. (“Bell”) which was acquired by Avnet through merger following the entry into the Stipulation.  The Bankruptcy Court declined to apply the Release provision to preference claims against Bell stemming from payments made while Bell and Avnet were separate legal entities.

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