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8th Cir. BAP Rejects Most of Trustee’s Voidable Preference Action Against Bank

bankruptcyThe U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently affirmed a bankruptcy court’s holding that the contemporaneous exchange for new value defense to a preference action under § 547(c) applied to a creditor bank that released its liens for less than full payment.

In so ruling, the Eighth Circuit BAP held that the bankruptcy trustee could not recover two of the three payments that the debtor made to the bank during the 90-day pre-petition preference period.

A copy of the opinion in Richard S. Lauter v. Wells Fargo Bank is available at:  Link to Opinion.

The debtor and its affiliated companies owned and operated gas stations and convenience stores in multiple states.  The debtor “bounced” several checks and then entered into an agreement with its bank to pay the overdrawn amounts, including a security interest in most of the debtor’s assets.

The debtor entered into an agreement to sell all of its assets for $27 million.  The agreement required that the assets “be free and clear of any liens … and closed on April 20, 2015.”

A senior secured creditor with priority over the debtor’s bank received $14 million from the sale proceeds and released its lien in return for partial payment on the debt. The bank released its liens as required by the agreement and received separate payments of $1.3 million, $100,000 and $73,490.67 from the sale proceeds “in partial payment on its debt” during the preference period.

In July 2015, the debtor filed for relief under Chapter 11 of the Bankruptcy Code and a trustee was duly appointed.

The bankruptcy trustee “filed an adversary proceeding seeking avoidance and recovery of the $1.3 million, $100,000 and $73,490.67 payments to [the bank] as preferences.”

After a trial, the bankruptcy court held that the trustee could recover the $73,490.67 payments as preferences, but not the $1.3 million and $100,000, which “qualified for the § 547(c)(1) defense.” The bankruptcy trustee appealed.

On appeal, the Eighth Circuit BAP first explained the standard of review. “The existence of intent, contemporaneousness, and new value are questions of fact.” The “[i]interpretation of the Bankruptcy Code is reviewed de novo.”

The Court then explained that under § 547(c) of the Bankruptcy Code, the trustee can “avoid pre-petition preferential transfers. ‘In general, an avoidable preference is a transfer of the debtor’s property to or for the benefit of a creditor, on account of the debtor’s antecedent debt, made less than ninety days before bankruptcy while the debtor was insolvent, that enables the creditor to receive more than she would in a Chapter 7 liquidation.’”

However, “[s]ection 547(c)’s contemporaneous exchange for new value defense prohibits a trustee from avoiding a transfer under § 547(b) … to the extent that such transfer was—(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange.”

The creditor receiving payment bears the burden of proving the transfer is not avoidable “under subsection (c) of [§ 547].”

The Eighth Circuit BAP noted that the “Bankruptcy Code [in § 547(a)(2)] defines ‘new value’ as ‘money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation. … The release of a lien can constitute new value. … ‘Contemporaneous new value exchanges are excepted from avoidance because they encourage creditors to continue doing business with troubled debtors who may then be able to avoid bankruptcy altogether, and because other creditors are not adversely affected if the debtor’s estate receives new value.’”

The Court then addressed the first question presented: “Did [the senior creditor’s] release of its liens for less than full payment of its debt permit [the bank’s] lien releases to provide new value?”

The Eighth Circuit BAP answered “yes,” rejecting the trustee’s argument that the bank’s “release of its liens did not constitute new value[,]” and agreeing with the bankruptcy court’s decision that the bank’s “release of its liens on the Debtor’s furniture, fixtures, and equipment (FF&E) resulted in new value to the Debtor exceeding the $1.4 million in payment made to it in connection with the Sale.” The Court concluded that “[w]hen, as in this case, a senior secured lender voluntarily releases its liens, the requirement for providing new value under § 547(c)(1) by the junior creditor is satisfied.”

The next question the Court considered was whether “the IRS’s lien releases enabled [the bank’s] lien releases to provide new value to the Debtor[.]” The Court concluded that the IRS’s release of its $1.5 million tax lien in return for payment of $600,000 provided new value to the debtor and that all liens on the property sold were released, including those on the inventory and FF&E.

The third question the Eighth Circuit BAP addressed was whether “the parties inten[ded] for the [bank’s] $100,000 payment to be a contemporaneous exchange[.]” It saw no reason in the record to call into question the bankruptcy court’s decision that the $100,000 payment, even though made prior to the sale closing, was part of the same deal and the parties intended the payment “to be made as an advance for the deal already reached by the parties regarding the April 30 Sale.”

The Court then turned to the final question: whether the bank’s release of its claims against two affiliated creditors that owned certain stores managed by the debtor and supplied fuel to the debtor “result[ed] in: (a) new value to the Debtor; (b) that the parties intended to be a contemporaneous exchange[.]”

The Eighth Circuit BAP agreed with the bankruptcy court’s finding that the bank’s “release was made as a condition to a two year and two month restructuring of the Debtor’s obligation to [the fuel supplier] for past fuel purchased, and for [the fuel supplier] to extend new credit to the Debtor for fuel purchases.” Without the credit, “the Debtor would have been out of business.” The Court also agreed with the bankruptcy court’s finding that “the Debtor needed to keep its relationship with [the fuel supplier] in place because the buyer intended to assume the [fuel supplier] agreement as part of the Sale.”

The Court rejected the trustee’s argument that the debtor did not receive new value for the fuel supplier’s release “because the only deal in place as of the April 30 Sale closing was for a 90-day forbearance from collecting old debt, which is not new value.” Because the fuel supplier’s restructuring agreement “was documented in a promissory note executed 60 days after the Sale closing …,” the Court saw no clear error with the bankruptcy court’s determination that “the promissory note [was] … documentation of a deal made earlier.”

Accordingly, the bankruptcy court’s decision was affirmed.

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Hector E. Lora manages the firm’s Florida office and has substantial experience in all phases of complex commercial litigation, including bench and jury trials as well as appellate practice. Hector represents lenders, servicers, debt collectors and debt buyers in complex mortgage foreclosure actions, quiet title actions, federal TILA, RESPA, TCPA, and FDCPA actions and Florida FCCPA actions brought by borrowers or debtors. He also represents creditors in bankruptcy litigation, purchasers of accounts receivable or factoring companies that provide revenue-based financing to small and mid-sized businesses in collection actions, and landlords in commercial and residential evictions. Hector’s broad litigation experience includes over a decade of defending civil enforcement actions filed by the Federal Trade Commission as well as real estate contract disputes and partition actions, contested mortgage foreclosure and condominium lien foreclosure actions and the foreclosure of UCC Article 9 security interests. Hector also has advised a variety of types of businesses regarding their compliance with applicable federal and state consumer protection laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act (TCPA), the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida. For more information, see

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