United States District Court, E.D. Pennsylvania
IN RE VCW ENTERPRISES, INC. d/b/a M&W PRECAST, f/k/a MODERN PRECAST CONCRETE, INC. UNITED CONCRETE PRODUCTS, Appellant/Defendant,
VCW ENTERPRISES, INC. d/b/a M&W PRECAST, f/k/a MODERN PRECAST CONCRETE, INC. Appellee/Plaintiff. Bankruptcy No. 13-00224.
JUAN R. SNCHEZ, District Judge.
Appellant United Concrete Products, Inc. (United) appeals from a June 23, 2014, Order and Judgment of the Bankruptcy Court in the amount of $95, 409.70. This amount represents the combined total of one pre-petition payment of $6, 827.58 and two post-petition payments totaling $88, 582.12 made by Appellee VCW Enterprises, Inc. (Debtor) to United. In its appeal, United argues the pre-petition transfer was not avoidable and the post-petition transfers were authorized by the Bankruptcy Court in the bankruptcy proceeding underlying this action. The Court addresses these specific issues on appeal: (1) whether the pre-petition transfer was avoidable pursuant to 11 U.S.C. § 547(b)(5); (2) whether the pre-petition transfer was made within the ordinary course of business, rendering it unavoidable pursuant to 11 U.S.C. § 547(c)(2); and (3) whether the two post-petition transfers were authorized by the Bankruptcy Court's Customer Programs Order.
This dispute arises out of a Chester County Solid Waste Authority (CCSWA) construction project to expand Area E of the Lanchester Landfill. The project was bonded through CCSWA. Debtor is a manufacturer and supplier of precast concrete structures, pipes, and related products. On August 23, 2012, Kinsley Construction, Inc., a general contractor on the project, hired Modern Precast Concrete (now Debtor) as a subcontractor. Debtor then hired United as a supplier. Prior to the petition date of December 6, 2012 (the day Debtor filed for protection under chapter 11), all products purchased by Debtor from United were delivered to Debtor. As of October 31, 2012, Debtor was overdue in its payment obligations to United by $95, 409.70. Between October 25 and October 31, 2012, the parties discussed entering into a joint check agreement to ensure United would be paid for its already overdue invoices. On October 31, 2012, United threatened via email to repossess products it had delivered to Debtor but which had not yet been shipped to Kinsley if a joint check agreement was not signed. United also began seeking payment on the construction bond for the unpaid debts.
Between November 5 and November 10, 2012, Kinsley, Debtor, and United entered into a Joint Check Agreement (the Agreement) dated October 31, 2012. The Agreement allowed Debtor to submit invoices it received from United to Kinsley. Kinsley would then pay these invoices by negotiable check to United and Debtor in an amount not to exceed $95, 409.70. Although the checks would be made to both Debtor and United, the Agreement stipulated that Debtor would hold the checks in trust for the benefit of United. The Agreement further set forth that, in the event of death, dissolution, liquidation, insolvency, business failure, default, or filing of bankruptcy petition by Debtor, Kinsley could, in its sole discretion, pay United directly for all unpaid invoices related to the project. United received three payments by joint check from Kinsley in execution of the Joint Check Agreement: $6, 827.58 on November 26, 2012 (pre-petition), $63, 996.49 on December 12, 2012 (post-petition), and $24, 585.63 on December 31, 2012 (post-petition).
On December 6, 2012, Debtor filed for protection under chapter 11. Debtor asserts that as of the petition date, it was substantially under water with its primary secured lender, M&T Bank. Debtor also filed a Motion for Customer Programs Order,  which was granted by the Bankruptcy Court. Debtor's purpose in requesting the Customer Programs Order was to allow it to continue to fill orders and avoid having to list hundreds of one-time orders on its bankruptcy schedule.
During the course of its bankruptcy case, Debtor sold its Easton facility to Oldcastle Precast, Inc., and included the accounts receivables (A/R) on Debtor's books, for which Oldcastle paid a specified percentage. After the closing of the sale to Oldcastle, Debtor was informed by Oldcastle that it was unable to collect the Kinsley A/R because Kinsley had already satisfied its obligation to Debtor by making payments directly to United pursuant to the Joint Check Agreement. Oldcastle demanded a refund from Debtor for the amount it paid for the Kinsley A/R. On April 9, 2013, Debtor filed in the Bankruptcy Court a Motion for an Order Approving Settlement Agreement with Oldcastle Precast, Inc. Regarding Accounts Receivable of Kinsley Constructing, Inc. Under this settlement agreement, Debtor was required to file an action seeking to avoid the Joint Check Agreement and pursue avoidance recovery against United to recoup the money Kinsley directly paid to United. Any proceeds it collected from United were only to be used to pay either professional fees or Oldcastle.
On April 24, 2013, Debtor commenced an adversary proceeding in Bankruptcy Court against United, which is the subject of this action, as contemplated by the Oldcastle settlement agreement. A trial was held on May 19, 2014, and on June 23, 2014, the Bankruptcy Court entered judgment against United and in favor of Debtor in the amount of $95, 409.70. Specifically, the Bankruptcy Court directed the recovery of a preferential pre-petition transfer of $6, 827.58, pursuant to 11 U.S.C. § 547(b), and two unauthorized post-petition transfers of $63, 996.49 and $24, 585.63, pursuant to 11 U.S.C. § 549. On August 27, 2014, United appealed.
In reviewing a decision from a bankruptcy court, district courts evaluate factual findings for clear error, but subject legal conclusions to plenary review. See, e.g., In re Sharon Steel Corp., 871 F.2d 1217, 1223 (3d Cir. 1989). As to the factual findings, "[a] finding is clearly erroneous' when although there is evidence to support it, the reviewing [body] on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Concrete Pipe & Products of Ca., Inc. v. Constr. Laborers Pension Trust for S. Ca., 508 U.S. 602, 622 (1993) (alteration in original) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). A bankruptcy court's conclusions of law, however, are considered de novo by the reviewing court. See In re Int'l Wireless Commc'ns Holdings, Inc., 279 B.R. 463, 466 (D. Del. 2002), aff'd, 68 F.App'x 275 (3d Cir. 2003); see also United States v. Roberts, 552 F.App'x 136, 138 (3d Cir. 2014) (explaining "de novo" is also known as plenary review).
A. Issue One: Pre-petition Transfer as an Avoidable Preference Payment
The first issue on appeal is whether the $6, 827.58 pre-petition transfer is an avoidable preference payment. A transfer is avoidable if the creditor receives more than it 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 provisions of this title." 11 U.S.C. § 547(b)(5). The parties disagree on whether the relevant comparison amount (the amount a creditor would have received if the hypothetical situation described in subsections (A), (B), and (C) occurred) is calculated solely from liquidation of the debtor's estate in a chapter 7 proceeding or if it can include what the creditor might have recovered from some other source outside of the estate. United asserts the comparison value can include payment from alternative sources, and had the pre-petition transfer not been made, it would have recovered the amounts it was owed by making a claim on the construction bond or by filing a mechanics' lien; therefore, it did not receive more from Kinsley's direct payments than it would have had this case been a case under chapter 7.
The Court agrees with the Bankruptcy Court's holding, and finds that the value of the hypothetical payment under § 547(d)(5) is based on what the transferee could have recovered from the Debtor's estate only. The point of the statute is to ensure creditors receive their fair share of the estate in the event of a bankruptcy. This finding is most consistent with case law and the language of the statute. The statute explicitly states that the relevant inquiry is what the creditor would have received " to the extent provided by the provisions of this title. " 11 U.S.C. § 547(b)(5)(C) (emphasis added). During oral argument, United argued that collection from an outside source is not disallowed by Title 11, and therefore is provided by the provisions of that Title. The statute is clear, however, and "provisions of this title" means that which is expressly dealt with in Title 11. Because Title 11 deals only with a debtor's estate, the comparison value does not include alternative sources of payment like a surety bond or mechanics' lien on a third party's property.
Other courts agree with this reading of § 547(b)(5). "[T]he relevant inquiry focuses not on whether a creditor may have recovered all of the monies owed by the debtor from any source whatsoever, ' but instead on whether the creditor would have recovered 100% of the debt from the debtor's estate." In re N.A. Flash Found. Inc., 298 F.App'x 355, 359 (5th Cir. 2008) (alteration in original) (quoting In re Virginia-Carolina Fin. Corp., 954 F.2d 193, 199 (4th Cir. 1992)); see also In re J.A. Jones, Inc., 361 B.R. 94, 101 (Bankr. W.D. N.C. 2007) (explaining that the "focus of the preference statutes is on the effect of a transfer on the debtor, not on the transferee, " and therefore, "parties holding liens on third party property (but not that of the debtor) [are] unsecured creditors" not shielded by § 547(b)(5) from preference attack); In re Pameco Corp., 356 B.R. 327, 336 (Bankr. S.D.N.Y. 2006) ("[A] prepetition transfer to a creditor that is fully secured by property of a third party in which the debtor holds no interest is subject to avoidance and does not come within the § 547(b)(5) exception."). The Bankruptcy Court found that the general unsecured creditors' claims totaled almost $9 million but in a chapter 7 liquidation, those creditors would have received a total distribution of ...