Michael Lastowski
Lawrence Kotler
In a recent decision in Giuliano v. Innovative Nationwide Builders (In re Ultimate Acquisition Partners), Bankr. No. 11-10245, Adv. No. 11-52633 (Bankr. D. Del. Jan. 31, 2014), U.S. Bankruptcy Judge Mary F. Walrath of the District of Delaware, in deciding a summary judgment motion filed by the defendant in this particular adversary proceeding, addressed several issues, including the issue of subsequent new value. In particular, Walrath addressed the issue of what date controls for purposes of a subsequent new value defense, as articulated in Section 547(c)(4) of the Bankruptcy Code, and whether it is the receipt date or clearing date of a check that controls for purposes of the Section 547(c)(4) subsequent new value defense.
In this case, the defendant was a construction company that performed various construction jobs for several national retail chains, including the debtors. One of the debtors entered into a lease Jan. 26, 2010. In connection with the lease for that property, the debtor was entitled to make tenant improvements to the property, for which the landlord agreed to reimburse the debtor up to the sum of $1.16 million. The lease further provided that the landlord would reimburse the debtor for the tenant improvements once a certificate of completion and lien releases were provided to the landlord. To the extent the landlord failed to reimburse the debtor within 30 days of receipt of the certificate of completion and lien releases, the debtor was entitled to deduct the improvement costs from its rent until it was fully reimbursed.
The defendant eventually completed the project and delivered a final lien release to the debtor Dec. 14, 2010. On Jan. 26, 2011, the debtor, along with several of its related affiliates and subsidiaries, filed a Chapter 11 case that was subsequently converted to a Chapter 7 case in or around May 2011. On July 19, 2011, the trustee commenced a preference action against the defendant seeking, inter alia, to avoid three transfers made to the defendant within 90 days of the petition date totaling approximately $199,000.
Among the defendant's main defenses to the trustee's preference claim was the subsequent new value defense. In particular, the defendant argued that its provision of a lien release following the second of the three allegedly preferential payments constituted subsequent new value within the parameters of Section 547(c)(4) of the Bankruptcy Code. In contesting this defense, the trustee argued that while the check that comprised the second transfer was dated Dec. 10, 2010, and the final release was delivered Dec. 13, 2010, the date the second check was honored (i.e., cleared) was Dec. 14, and, thus, the lien release should not count as new value as it was delivered prior to the date this payment was honored.
In addressing the issue of which date controls, the court noted that this issue was "not a settled issue of law" within the U.S. Court of Appeals for the Third Circuit, citing In re New York City Shoes, 800 F.2d, 679, 683 (3d Cir. 1989). However, the court noted that New York City Shoes only dealt with the issue of post-dated checks and did not address the facts present in this case-namely, a case involving checks that were not back-dated.
As a result, the court looked to bankruptcy court decisions within the Third Circuit and found a number of cases that have held that the relevant date for determining the Section 547(c)(4) defense of subsequent new value is the delivery date of the check.
The cases mentioned include In re Contempri Homes, 269 B.R. 124, 130 (Bankr. M.D. Pa. 2001); Kellman v. P.S.E. & G. (In re Jolly N.), 122 B.R. 897, 908 (Bankr. D.N.J. 1991); and Begier v. Krain Outdoor Advertising (In re American International Airways), 68 B.R. 326, 336 (Bankr. E.D.Pa. 1986).
In addition, the court also noted that "those courts of appeals to have considered the issue are unanimous in concluding that a 'date of delivery' rule should apply to check payments for purposes of Section 547(c)," quoting Barnhill v. Johnson, 503 U.S. 393, 402 n. 9 (1992). As a result, Walrath found that the date of delivery of the check is the controlling date for a currently dated check for purposes of Section 547(c)(4)'s subsequent new value defense.
The court then addressed the issue of whether the defendant had actually provided new value to the debtor. In this particular case, it was undisputed that the defendant delivered its lien release to the debtor subsequent to the defendant's receipt of the second payment made Dec. 10, 2010. While it was undisputed that the lien release occurred after the second payment, the trustee argued that the lien release did not constitute new value because it effectuated a release of liens on property owned by the landlord, not by the debtors. In rejecting this argument, the court noted the unusual facts of this particular case-namely, that the defendant's lien release enabled the debtor to obtain reimbursement of the tenant improvement costs or, at the very least, a credit for future rent due and owing the landlord. As a result, the court concluded that the defendant had established that the debtor received new value in the form of the lien releases because these releases enabled the debtor to either receive reimbursement of the tenant improvement costs or credit for future rent.
Although the court found that the defendant had provided new value to the debtor, the court found that a material issue of fact remained open-namely, the amount of that new value. While the court found that the release of lien enabled the debtor to obtain either reimbursement of up to $1.16 million (i.e., the costs of the tenant improvements) or obtain a rent reduction in that amount, there was no evidence provided that the debtors had actually received reimbursement for the costs of the tenant improvement or received a reduction of rent.
Indeed, the court noted that the debtors had rejected the underlying real property lease effective as of April 11, 2011, only four months following the filing of the bankruptcy case. Because this issue of fact remained open, the court denied the defendant's motion for partial summary judgment on both the new value defense as well as the contemporaneous exchange for new value defense. In addition to denying the defendant's summary judgment motion on these counts, the court also denied the defendant's summary judgment motion on its ordinary course of business defense, again finding that there were issues of material fact that were still in dispute.
This decision is instructive for several reasons. First, it provides some clarity to practitioners as to the controlling date of a payment by check associated with a subsequent new value defense articulated by Section 547(c)(4) of the Bankruptcy Code. Second, the court implicitly recognized that it is not enough that the defendant provide new value; rather, the defendant must provide new value that the debtor itself actually receives. In this case, the defendant's summary judgment motion was denied because the defendant could not articulate the precise amount of new value that the debtor received as a result of the lien releases, either as reimbursement for the costs of the tenant improvements or as a rent abatement provided by the underlying lease.
Michael R. Lastowski is a member of Duane Morris and the head of its Wilmington office. Licensed to practice in Delaware, Pennsylvania and New York, he primarily represents Chapter 11 debtors. Lawrence J. Kotler is a partner at the firm who practices in the area of reorganization and finance, representing Chapter 11 debtors-in-possession, Chapter 11 trustees, Chapter 7 trustees, liquidating trustees, creditors' committees, secured creditors and large institutional unsecured creditors in all facets of bankruptcy.
Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.
