Legal Updates /

Judge Sontchi Applies Third Circuit’s Friedman’s Holding in Granting Summary Judgment for Preference Defendant

By Evan T. Miller

In the first Delaware Bankruptcy Court application of the Third Circuit’s recent holding in In re Friedman’s Inc., Case No. 13-1712, 2013 WL 6797958 (3d Cir. Dec. 24, 2013) (“Friedman’s II”, opinion and summary of which are available here), Judge Christopher S. Sontchi issued a Memorandum Order in Stanziale v. Car-Ber Testing, Inc. (In re Conex Holdings, LLC), Adv. No. 12-51132 (CSS), granting Car-Ber Testing, Inc.’s (“Defendant”) motion for summary judgment (the “Motion”).  In so doing, the Court concluded that Friedman’s II’s holding defeated the chapter 7 trustee’s (“Plaintiff”) argument that Friedman’s Inc v. Roth Staffing Co., L.P. (In re Friedman’s, Inc.), Adv. No. 09-50364 (CSS), 2011 WL 5975283 (Bankr. D. Del. Nov. 30, 2011) (“Friedman’s I”) was wrongly decided and limited in scope.

On February 20, 2011 (“Petition Date”), an involuntary chapter 7 case was commenced against Conex Holdings, LLC (“Debtor”).  Debtor was a general mechanical contracting and industrial services firm.  Among Debtor’s clients was Motiva Enterprises, LLC (“Motiva”), for whom the Debtor provided services at Motiva’s refinery.  In providing these services, Debtor used Defendant as a subcontractor.  Defendant filed a mechanics lien (the “Lien”) against the refinery for its unpaid invoices as of the Petition Date (the “Subsequent New Value”); post-petition, the Subsequent New Value was paid in full by Motiva in exchange for a release of the Lien.

Plaintiff, the Chapter 7 trustee of the Debtor’s estate, sued Defendant for avoidance of a preference under section 547 of the Bankruptcy Code.  Plaintiff’s expert asserted that Defendant was liable, after applying all available affirmative defenses, for $82,229.27.  However, Plaintiff’s expert did not reduce Defendant’s preference exposure for the Subsequent New Value because Defendant was ultimately paid in full by Motiva.

Conversely, Defendant asserted that after application of all its Subsequent New Value, it had a complete defense to the preference action.  Defendant argued that Friedman’s I indicated that it is irrelevant whether the Subsequent New Value Amount was paid post-petition.  Plaintiff responded by asserting that Friedman’s I was either wrongly decided or not controlling and limited to wage orders.

The Court agreed with Defendant.  First, Judge Sontchi noted that Friedman’s II affirmed Friedman’s I, which rendered Plaintiff’s “wrongly decided” argument meritless.  Second, he rejected Plaintiff’s limited scope assertion because the “Third Circuit broadly held that where ‘an otherwise unavoidable transfer’ is made after the filing of a bankruptcy petition, it does not affect the new value defense.”  The Court found that only two exceptions were addressed in Friedman’s II, neither of which apply here: (i) the In re Kiwi Air exception, which holds that where a trustee assumes an executory contract, it cannot bring a preference action to recover prepetition payments made pursuant to the contract; and (ii) the reclamation claim exception, about which the Third Circuit discussed in dicta but expressly withheld an opinion.

Thus, the Court found there was no genuine issue of material fact and that Defendant was entitled to judgment as a matter of law.  A copy of the opinion can be found here.

Scroll to top