Angell, Trustee v. Ray J. Pennington, Inc.

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
PARTITIONS PLUS OF WILMINGTON, INC., 	Case No. 04-06776-8-JRL
D/B/A PARTITIONS, INC., D/B/A STORM 	Chapter 7
PROTECTION SYSTEMS,
Debtor.
JAMES B. ANGELL, CHAPTER 7 TRUSTEE
FOR PARTITIONS PLUS OF WILMINGTON, INC.,
D/B/A PARTITIONS, INC., D/B/A STORM 	Adversary Proceeding No.
PROTECTION SYSTEMS, 	06-00148-8-AP
Plaintiff,
v.
RAY J. PENNINGTON, INC. and RAY J.
PENNINGTON,
Defendant.
______________________________________________________________________________
ORDER
This case is before the court on a motion to amend answer and a motion for summary
judgment filed by Ray J. Pennington, Inc., as well as, a motion for summary judgment filed by
the trustee. On May 21, 2007, the court conducted a hearing on these matters in Raleigh, North
SO ORDERED.
SIGNED this 11 day of June, 2007.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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Carolina.
JURISDICTION AND PROCEDURE
This court has jurisdiction over the parties and the subject matter of this proceeding
pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the
United States District Court for the Eastern District of North Carolina on August 3, 1984. This
is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), which this court may hear and
determine.
FACTS AND BACKGROUND
Partitions Plus of Wilmington, Inc. filed a chapter 11 bankruptcy petition on September
1, 2004. Thereafter, on November 9, 2004, the case was converted to one under chapter 7 and
James B. Angell was appointed the trustee. Prior to the debtor’s bankruptcy filing, Ray J.
Pennington, Inc. worked as a sub-subcontractor for the debtor on several jobs. Within the ninety
days prior to the debtor’s bankruptcy filing the defendant received three checks from the debtor
totaling $7305.48.
On July 14, 2006, the plaintiff filed this adversary proceeding, and an amended complaint
was later filed on August 23, 2006. The amended complaint alleges that the payments to the
defendant from the debtor within ninety days of the debtor’s bankruptcy filing constitute
preferential transfers. The plaintiff seeks to avoid those transfers pursuant to 11 U.S.C. § 547(b)
and recover them under 11 U.S.C. § 550(a).
STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 56(c), made applicable in bankruptcy by
Bankruptcy Rule 7056, summary judgment is proper “if the pleadings, depositions, answers to
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1As to the third element, there is a presumption that the debtor was insolvent during the
ninety days prior to the petition date. 11 U.S.C. § 547(f).
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interrogatories and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law.” The “plain language of Rule 56(c) mandates the entry of summary judgment,
after adequate time for discovery and upon motion, against a party who fails to make a showing
sufficient to establish the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.
Ct. 2548, 2552 (1986). In making this determination, conflicts are resolved by viewing all facts
and all reasonable inferences in the light most favorable to the nonmoving party. United States v.
Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994 (1962).
ANALYSIS
Preferential Transfer Elements
Pursuant to 11 U.S.C. § 547(b), the trustee may recover certain preferential transfers
made by the debtor in favor of specific creditors. In order for the trustee to avoid the transfers
made by the debtor to the defendant, he must show that the transfers (1) were to or for the benefit
of the defendant; (2) were for or on account of antecedent debts; (3) were made while the debtor
was insolvent; (4) were made on or within ninety days before the debtor filed bankruptcy; and
(5) enabled the defendant to receive more than he would have received if the transfers had not
been made. 11 U.S.C. § 547(b). The Code places the burden on the trustee to prove the
avoidability of the transfers. 11 U.S.C. § 547(g). 1 Even if the elements of a preference are
established under § 547(b) a transfer may still be nonavoidable if it falls within one of the
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categories set forth in § 547(c). The burden of proving the nonavoidability of the transfer is
placed on the creditor against whom avoidance is sought. Id.
It is not contested that the trustee has established the first four elements of a preferential
transfer under § 547(b). The defendant received at least three payments from the debtor within
ninety days of the petition date, and those transfers total $7305.48. At the time of each transfer,
the debtor was insolvent, the defendant was a creditor of the debtor, and the transfers were made
to or for the benefit of the defendant. The only contested element relates to whether the
defendant received more than he would have received if the case was under chapter 7, the
transfers had not taken place, and the creditor received payment of such debt to the extent
provided by the Code. 11 U.S.C. § 547(b)(5). The focus of the fifth element is not on whether
the defendant would have received payment from someone else for its claims. Instead, the court
must determine whether in a chapter 7 liquidation there would have been enough funds to pay
this creditor’s claim out of the estate if it had not been preferentially paid. Smith v. Creative
Financial Management, Inc. (In re Virginia-Carolina Financial Corp.), 954 F.2d 193, 199 (4th
Cir. 1992). The trustee submitted an affidavit that is sufficient to establish that there are
inadequate funds to provide a payout in full to unsecured creditors, and this fact is not contested
by the defendant. If the defendant had not been preferentially paid, it would not have received
the full amount of its claim out of the debtor’s estate. Therefore, the trustee has met his burden as
to the fifth element, and all the elements of § 547(b) are established.
New Value Defense
The court must next consider the affirmative defense raised by the defendant pursuant to
547(c)(1). Section 547(c)(1) provides that a preferential transfer may not be avoided to the extent
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the 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[.]” 11 U.S.C. § 547(c)(1). For the purpose of § 547
“new value” is defined 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[.]
11 U.S.C. § 547(a)(2).
The defendant establishes that the three post-petition payments were made on account of
work performed at nine different locations, as evidenced by its job invoices. These jobs fall into
three categories: 1) government projects with government required payment bonds, 2) public
projects with surety bonds, and 3) materialman’s lien right projects.
As to the third category, the defendant argues that if it did not receive payment for its
work it had a right to file a materialman’s lien against the underlying property. The defendant
maintains that by accepting payment from the debtor it gave up its right to file such a lien.
Accordingly, the debtor asserts that giving up its rights equates to new value. The United States
District Court for the Eastern District of North Carolina confronted a similar issue in Precision
Walls, Inc. v. Crampton, 196 B.R. 299 (E.D.N.C. 1996). In that case, a subcontractor claimed
that by accepting payments from the contractor it provided new value by giving up its inchoate
right to file a mechanics and materialman’s lien. Id. at 301. The court in Precision Walls rejected
this argument. Id. at 303. Instead, the court found that N.C. Gen. Stat. § 44A-18(1) provides a
subcontractor the right to a lien upon funds owed to the contractor arising out of the relevant
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improvements. Id. at 302. In order to be entitled to priority status over the interests or claims of
others in the funds, the creditor must perfect its lien by filing written notice with the obligor. Id.
If the creditor fails to perfect its lien, it is not entitled to the status of a secured creditor. Id. at
303. Thus, perfection of the lien is required, and a creditor’s contention that its receipt of
payment should excuse its failure to perfect because it could have perfected the lien had it not
received payment was rejected. Id.
The defendant in the present case had no lien rights with respect to the property of the
debtor because it never perfected its lien and gave up nothing by accepting payment. Based on
controlling law in this district, the court rejects the defendant’s argument that giving up its rights
to file a materialman’s lien against the underlying property constitutes new value.
The jobs involving government payment bonds and surety bonds require an analysis
distinguishable from the third category. With respect to categories one and two, the defendant
contends it released its rights against the project funds and thus gave new value to the debtor.
The defendant maintains that if it had not received payment from the debtor, it would have
immediately filed a claim against the bond on the project. In those situations, the bonding
company would have immediately asserted a lien on funds that were still owed to the debtor but
were in the hands of the general contractor. This would have prevented the debtor from ever
obtaining the money.
This “indirect transfer” theory was discussed by the United States Bankruptcy Court for
the Western District of North Carolina in, In re Lockwood Greene Engineers, Inc. v. Binsky &
Snyder, Inc. (In re J.A. Jones, Inc.), 361 B.R. 94 (Bankr. W.D.N.C. 2007). In re J.A. Jones, Inc.,
involved a chapter 11 creditor committee which sought to avoid a number of preferential
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transfers made by the debtor, the general contractor, to the subcontractors. Id. at 97-98. The court
took a close look at the division in the case law on the issue of whether the release of inchoate
lien rights provides new value to the debtor. Id. at 102-03. The court recognized the primary
variant of the cases involved was whether the owner owed money to the debtor on the project at
the time the preference payment was made. “If the owner still owes the debtor, then its
indemnity claim can be setoff and is secured. In this context, most courts consider the ‘indirect
transfer’ to provide new value. If there is no debt to be setoff, however, then the owner’s claim
for indemnification is simply an unsecured debt and there is no ‘new value.’” Id. at 103.
The facts in this case are slightly different then those of In re J.A. Jones, Inc. but the
analysis is the same. Partitions Plus was a subcontractor on the bonded projects and the
defendant was a sub-subcontractor. In order to have a new value defense, the defendant must
show that had it not received payment from the debtor, it would have immediately filed a claim
against the bond on the project. It must then show that at that time the debtor was still owed
funds by the general contractor on which the bonding company could have asserted a lien.
At this time, the court finds the defendant has not presented sufficient evidence to
determine that its release of its claim against the project funds in exchange for payments
constitutes equivalent new value so as to provide a § 547(c)(1) defense. However, the court does
find that such a release could constitute new value, provided the requisite showing is made.
CONCLUSION
Based on the forgoing, the plaintiff’s motion for summary judgment is ALLOWED in
part and DENIED in part. The plaintiff has met his burden of establishing that the defendant
received a preferential transfer under § 547(b). However, there is a material issue of fact as to the
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defendant’s new value defense, and the defendant’s motion for summary judgment is DENIED.
The defendant’s motion to amend its answer to correct a typographical error is ALLOWED.
“END OF DOCUMENT”
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