Angell, Trustee v. United Rentals, 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, 	06-00152-8-AP
Plaintiff,
v.
UNITED RENTALS, INC.,
Defendant.
______________________________________________________________________________
ORDER
This case is before the court on the complaint of James B. Angell, chapter 7 trustee for
Partitions Plus of Wilmington, Inc., against defendant United Rentals, Inc., to avoid certain
preferential transfers and to recover such transfers for the benefit of the estate. On February 28,
2008, a trial was held in Raleigh, North Carolina.
SO ORDERED.
SIGNED this 31 day of March, 2008.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1United Rentals argues that it possessed lien rights and a security interest on property of
the debtor. However, United Rentals presented no evidence that it ever perfected the lien.
Pursuant to Precision Walls, Inc. v. Crampton, 196 B.R. 299 (E.D.N.C. 1996), however, United
Rentals was an unsecured creditor since it never perfected its lien. Therefore, it possessed no
security interest or lien claim that could be extinguished in exchange for the preferential
payment.
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FACTS AND BACKGROUND
Partitions Plus of Wilmington, Inc. filed a chapter 11 bankruptcy petition on September 1,
2004. 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 filing bankruptcy, United Rentals supplied rental
equipment to the debtor for use on certain construction projects.
On July 14, 2006, the trustee filed this adversary proceeding. The complaint alleges that
Partitions Plus made preferential transfers to United Rentals in the amount of $75,849.40, and that
these transfers are avoidable pursuant to 11 U.S.C. § 547(b) and recoverable under § 550(a). Both
parties filed motions for summary judgment. By order dated June 4, 2007, the court concluded that
the trustee established that the payments in question constituted preferential payments. The court
also concluded that United Rentals was entitled to a minimum credit of $8,885.66 based on its new
value defense, and that it could increase that amount upon an appropriate showing at trial.
Therefore, the sole remaining issue is the extent of United Rentals’s new value defense.
ANALYSIS
United Rentals argues that the contemporaneous exchange for new value in this case was the
discharge of lien rights, bond rights, and a security interest in exchange for the preferential
payments. It contends that it is irrelevant whether it would have perfected its security interests or
enforced its lien and bond rights. 1 However, as the court noted in Angell v. Pennington et al., Adv.
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Pro. 06-00148-8-AP (Bankr. E.D.N.C. March 20, 2008), the problem with presuming that the
existence of inchoate rights is equivalent new value to the preferential transfer is that it effectively
relieves United Rentals of its burden under 11 U.S.C. § 547(g) of establishing the actual value of
the transfer. 	Under its theory, it would be nearly impossible for a trustee ever to maintain a
preference suit against a subcontractor who possessed any sort of inchoate or hypothetical lien or
bond claims.
In Pennington, this court set forth the elements of a new value defense using an “indirect
transfer” theory in a case involving a subcontractor’s release of a potential bond claim. A defendant
must show that (1) it would have timely filed a claim against the project’s payment bond and been
paid in full had it not received payment from the debtor, and (2) at the time, the debtor was still
owed funds by the general contractor on which the bonding company could have asserted a lien.
Id. at 5-6. In establishing the first element, a subcontractor must present more than a mere modicum
of evidence to support its contentions. 	Id. at 7-8. 	For example, the defendant in Pennington
presented sufficient evidence in the form of convincing testimony that he would have filed a bond
claim, his stated policy of addressing all overdue invoices in a manner that protected his ability to
file a bond or lien claim, and the fact that he filed a bond claim and was paid in full in the only other
instance of nonpayment. Id.
In this case, however, there is no similarly corroborative evidence that United Rentals would
have filed a bond claim and been paid in full had it not received the preferential payment. In fact,
the only evidence that United Rentals presented at trial related to the second prong of the test, i.e.,
whether there were sufficient funds owing to the debtor general contractor on which the bonding
company could have asserted a lien. Despite United Rentals’s argument that the court can presume
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that the existence of potential bond and lien claims is sufficient to establish equivalent new value,
Pennington dictates otherwise, and the failure to produce any evidence that it would have filed a
bond claim and been paid in full is fatal to United Rentals’s new value defense.
CONCLUSION
Accordingly, United Rentals has successfully established a new value defense with respect
to $8,885.66 of the preferential payments. Therefore, the trustee is entitled to recover $66,963.74
of the preferential payments for the benefit of the estate. The clerk is directed to enter judgment
accordingly.
“END OF DOCUMENT”
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