Preference Defendants, Rejoice! Services Billed in a Lump Sum Can Be Allocated Per Diem, for Your New Value Defense
May 4, 2016
Authored by: Mark Duedall
Preference actions are, for the most part, insanity. We won’t go on a tirade here. But recently, a ruling brings common sense to the “new value” defense.
Specifically, all bankruptcy lawyers know that any “new value” must come after the allegedly preferential transfer. This can be problematic for service providers, especially services provided daily, or over time. The debtor may, for instance, pay a prior invoice on April 10, and then file for bankruptcy on April 20, or 30, before the service provider generates an invoice for all of April’s services. A crafty trustee may thus argue that there is no evidence of new value provided after April 10, and hence no new value defense.
The recent case of Levin v. Verizon Business Global, LLC (In re OneStar Long Distance, Inc.), 3:15-cv-00049 (S.D. Ind. March 28, 2016) is a perfect example of this. The defendant provided telecommunications services to the debtor, some at fixed monthly charges and some based on the debtor’s actual usage. The debtor made $300,000 in payments to the service provider in mid-December, and then filed for bankruptcy in late December, before a December bill could be rendered. The evidence was clear that the December bill would have been over $1.1 million, but the trustee alleged that the service provider had to go further, and break down this huge bill, covering millions of transactions, into what was actually provided each day. (We note as well that the transactions in question took place in 2003 – this case is still going on a baker’s dozen years later – pretty hard to nail down evidence of this type after such a delay.)
The court rejected this, wisely. It used a per diem approach, meaning the debtor had received about $35,000 of new value each and every day ($1.1 million divided by 31 days equals about $35,000). Thus, nine days after the $300,000 in payments at issue, over $315,000 of new value would be provided (that is, 9 multiplied by the per diem estimate of $35,000), resulting in a complete defense.
(The court did note that if the Trustee could show the services had been cut off, or some other evidence to show that the $1.1 million in December services were very front-loaded, and hence before the payments, and not after, the result might be different. There was no such evidence here.)
We applaud this logical approach. The burden of proof for any affirmative defense lies with the defendant, but to require a defendant providing regular, daily services to show the exact day and minute for every dollar of value over a given month is really too much. Let’s all sleep better tonight, until we come across the next preference opinion that makes our blood boil (like those cases holding that post-petition payment of a Section 503(b)(9) claim reduces the vendor’s new value defense, even though these were the very creditors providing goods on credit that were trying to help the debtor stay out of bankruptcy, and even though the tense of Section 547(c)(4)(B) makes it clear that post-petition payments don’t count at all in the new value analysis, and even though . . . ok, enough ranting, read this and this if want to ignore the good feelings of this blog post and get back to preference law insanity.)