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In re Friedman's Inc.

United States Court of Appeals, Third Circuit

December 24, 2013

IN RE: FRIEDMAN'S INC., Debtor
v.
ROTH STAFFING COMPANIES LP FRIEDMAN'S LIQUIDATING TRUST, Appellant

Argued October 17, 2013

Appeal from the United States District Court for the District of Delaware (District Court No. 1-12-cv-00306) District Judge: Honorable Richard G. Andrews

John D. Demmy, Esquire (Argued) Maria Aprile Sawczuk, Esquire, Nicholas F. Kajon, Esquire Stevens & Lee, P.C. Counsel for Appellant

Peter M. Sweeney, Esquire, Blakeley & Blakeley, LLP, Johnny White, Esquire Bradley D. Blakeley, Esquire (Argued) Blakeley & Blakeley, LLP, Counsel for Appellee

Before: RENDELL, JORDAN and LIPEZ [*] , Circuit Judges

OPINION

RENDELL, Circuit Judge

This appeal presents an issue of first impression in our Court: can a post-petition payment to a creditor pursuant to a Wage Order entered at a debtor's request reduce the creditor's new value defense—and thereby increase preference liability—the same as it would if the payment had been made pre-petition?

Under the Bankruptcy Code, the trustee may avoid certain preferential transfers made by a debtor to a creditor in the 90 days before its bankruptcy petition was filed. See 11 U.S.C. § 547(b) (2006). A creditor who gives the debtor new value subsequent to a preference payment, however, may use what is referred to as the "new value" defense to offset an otherwise avoidable preference. See id. § 547(c)(4). The new value defense is not applicable to the extent that, thereafter, the debtor makes "an otherwise unavoidable transfer" to the creditor on account of the value received. Id. § 547(c)(4)(b). We hold that where "an otherwise unavoidable transfer" is made after the filing of a bankruptcy petition, it does not affect the new value defense. For this reason, we will affirm the order of the District Court affirming the Bankruptcy Court.

I. Background

The facts giving rise to this appeal are undisputed. Friedman's, Inc. ("the Debtor") filed for bankruptcy under Chapter 7 of the Bankruptcy Code on January 22, 2008, and thereafter the case was converted to one under Chapter 11 of the Bankruptcy Code. In the 90 days prior to filing for bankruptcy ("the preference period"), the Debtor made payments for personnel to Roth Staffing ("Appellee") totaling $81, 997.57. After these preferential transfers, but before the petition was filed, Roth Staffing provided services valued at $100, 660.88 to the Debtor. The money owed for these services remained unpaid as of the date the bankruptcy petition was filed.

On January 25, 2008, the Debtor filed a motion in Bankruptcy Court seeking authority to pay its employees and independent contractors (collectively, "Employees"), pre-petition wages, compensation, and related benefits. It stated that as of the petition date, it had approximately 3, 500 Employees and outstanding obligations to them in the amount of approximately $4 million. The Debtor represented to the Court, inter alia, that if its Employees were not compensated at least in part for the services that had been provided, there would likely be "an epidemic of Employee departures" and/or a "deterioration in morale." Mot. of Debtors and Debtors in Possession for an Order Authorizing the Debtors To Pay Prepetition Wages, Compensation, and Employee Benefits Pursuant to Sections 105(a) and 363(b) of the Bankruptcy Code ¶¶ 39-40, In re: Friedman's Inc., No. 08-10161 (Bankr. D. Del. Jan. 25, 2008). It argued that this would "substantially and adversely impact [its] businesses and result in immediate and irreparable harm to the creditors and estates." Id. ¶ 40.

The Debtor asked the Court to invoke its power under § 105(a) of the Bankruptcy Code to enable the Trustee to make the payments to Employees pursuant to § 363(b)(1). Section 105(a) states, in relevant part: "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a). Section 363(b)(1) provides that a "trustee, after notice and a hearing, may use, sell or lease, other than in the ordinary course of business, property of the estate." Id. § 363(b)(1).

The Court granted the Debtor's motion ("the Wage Order"). Pursuant to the Wage Order, and after filing its bankruptcy petition, the Debtor paid $72, 412.71 to Roth Staffing on account of pre-petition staffing services.

On March 5, 2009, Friedman's Liquidating Trust ("FLT" or "Appellant"), the successor in interest to the Debtor, commenced this action in Bankruptcy Court, seeking to avoid and recover transfers made to Roth Staffing as preferences, pursuant to § 547(b) of the Bankruptcy Code. This section states:

Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2)for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3)made while the debtor was insolvent;
(4)made—
(A)on or within 90 days before the date of the filing of the petition; or
(B)between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5)that enables such creditor to receive more than such creditor would receive if—
(A)the case were a case under chapter 7 of this title;
(B)the transfer had not been made; and
(C)such creditor received payment of such debt to the extent provided by the ...

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