On August 4, 2016, the Delaware Bankruptcy Court considered cross-motions for summary judgment in a preference action case styled as Pirinate Consulting Group, LLC v. Maryland Department of the Environment (In re NewPage Corp.), Adv. Pro. No. 13-52206 (KG).  This gem of an opinion is noteworthy in that it analyzes various defenses raised by a state agency to a preference complaint.


Pirimate Consulting Group, LLC, as litigation trustee of the NP Creditor Litigation Trust (“Plaintiff” or “Litigation Trustee”) sought to avoid three separate payments as preferences under section 547(b) of the U.S. Bankruptcy Code (the “Code”) against Maryland Department of the Environment (“Defendant” or “MDE”).

The Debtors’ subsidiary, Luke Paper Company operates a mill (the “Luke Mill”) in Maryland that is regulated by various divisions of MDE.  Defendant asserted that “the State’s operating permit program has been in place for decades” and that the Debtors have “been paying the emissions based fee of the type at issue in this case . . . at least since 1997.”  Here, the Trustee seeks to avoid three separate fees paid to MDE.

Under Maryland law, all entities that operate “fuel-burning equipment, statutory combustion turbines, or . . . wood digesters” must obtain a permit.  Accordingly, the Debtors would remit an annual permit-to-operate fee (the “Permit Fee”) in order to maintain their license. The applicable Maryland statute provides that the fee is calculated based upon a “base fee of $200.00 plus an emission-based fee for each ton of regulated emissions from all installations at the plant or facility.”

On July 6, 2011, the Debtor paid the Permit Fee in the amount of $1,597,584 to MDE.  The Debtors have been paying the Permit Fee since at least 2007, and the amount of the fee has ranged from $328,047 to $1,597,584 in 2011.  In addition to the Permit Fee, the Debtors sought to avoid an asbestos license renewal fee in the amount of $750, and a reporting fee of $1,000 under the Federal Emergency Planning and Community Right to Know Act.

In defense, MDE cross-moved for summary judgment, arguing that the Asbestos Fee was not paid on account of an antecedent debt and that the transfers did not enable it to receive more than it would have in a hypothetical liquidation. Additionally, MDE asserts three affirmative defenses under section 547(c) of the Code – the contemporaneous exchange defense, the ordinary course of business defense, and the de minimis exception. Additionally, MDE argues that 28 U.S.C. § 959(b) prohibits a trustee from recovering environmental compliance fees.  Finally, MDE argues that the doctrine of sovereign immunity insulates it from liability in these proceedings.


Asbestos Fee Not Recoverable

To start, Judge Gross found that the Asbestos was not made “on account of an antecedent debt.”  The Court explained that a transfer is deemed “on account of an antecedent debt” if the debtor incurs the liability prior to the alleged preferential transfer.” 11 U.S.C. § 547(b)(2); Stanziale v. S. Steel & Supply, L.L.C. (In re Conex Holdings, LLC), 518 B.R. 269, 277 (Bankr. D. Del. 2014). More specifically, courts have held that a debt “is deemed to have been incurred on the date upon which the debtor first becomes legally bound to pay.” Conex, 518 B.R. at 277.

The Court determined that the Debtors did not became legally bound to remit the Asbestos Fee before the Debtors’ payment of such fee.  In this regard, the Court observed that the Debtors had no obligation to renew the license before the expiration date.  The Court also found that MDE’s letter to the Debtors informing of the Debtors about the Asbestos Fee did not trigger an obligation for Debtors to make payment of that amount.  Notably, no services had been provided by MDE prior to submission of the letter.  Thus, the Court found that the Debtors’ payment was not on account of an antecedent debt, and thus not recoverable.

Transfers Protected by Ordinary Course of Business Defense

In analyzing the ordinary course of business defense under Section 547(c)(2), Judge Gross examined the following five factors: “(1) the length of time the parties engaged in the type of dealing at issue; (2) whether the subject transfers were in an amount more than usually paid; (3) whether the payments at issue were tendered in a manner different from previous payments; (4) whether there appears to have been an unusual action by the debtor or creditor to collect on or pay the debt; and (5) whether the creditor did anything to gain an advantage (such as additional security) in light of the debtor’s deteriorating financial condition.” Stanziale v. Indus. Specialists Inc. (In re Conex Holdings, LLC), 522 B.R. 480, 487 (Bankr. D. Del. 2014).

With respect to the first factor, the length of time the parties engaged in the type of dealing at issue, the record shows that MDE invoiced the Debtors for at least five (5) years prior to the Petition Date.  Thus the first factor weighed in favor of MDE.

Factor two, whether the subject transfers were in an amount more than usually paid, also weighs in favor MDE. The Asbestos Fee and the Report Fee were constant throughout the historical period – $750 and $1,000 respectively.  The Permit Fee varied considerably, but “[t]he record indicates that the formula for calculating the Permit Fee remained constant throughout the years,” which the Court concluded was the most relevant consideration with respect to this factor.

Factor three, whether the payments at issue were tendered in a different manner than the historical payments, weighed in favor of MDE as neither side has proffered any evidence to suggest payment had been made in a different manner.

Factor four, unusual actions by the debtor or creditor, also weighed in favor of MDE. There was no such evidence.  As to the fifth factor, there was no evidence that MDE attempted to exploit the Debtors’ distressed financial condition or rushed to collect its debt.  Thus, the Court found that the factors weighed in favor of MDE, and each of the transfers were shielded from recovery under the ordinary course of business defense.

Other Defenses

In addition, the Court found that the Asbestos Fee and Permit Fee were shielded by the contemporaneous exchange defense under Section 547(c)(1). Separately, the Court rejected MDE’s defense under 28 U.S.C. Section 959(b), along with MDE’s de minimis exception defense that each transfer should not be aggregated but determined separately whether they exceed the statutory floor of $5,000 under Section 547(c)(9).  Judge Gross noted the majority view that transfers should be aggregated, and there was no reason to depart from this rule especially because the Court separately found that each of the transfers were shielded from recovery under other defenses. Finally, the Court rejected MDE’s sovereign immunity defense, because the U.S. Supreme Court found that such defense is not a bar to preference actions against state agencies.  Cent. Va. Cmty. College v. Katz, 546 U.S. 356, 359 (2006).

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.