In a 32 page opinion entered December 5, 2017 Judge Gross of the Delaware Bankruptcy Court ruled on cross motions for summary judgment concerning an avoidance action in the Simplexity bankruptcy. Judge Gross’s opinion is available here (the “Opinion”). This Opinion arises from a complaint brought by Charles A. Stanziale, Jr., as the Chapter 7 Trustee of Simplexity, LLC against the Sprint Corporation alleging that payments made by the debtor to Sprint of $3,842,951.86 were avoidable transfers. Two issues were the subject of the joint motions for summary judgment, (1) did the Trustee satisfy his burden of demonstrating that Sprint received more by the Transfers than it was entitled to under Chapter 7, and (2) is Sprint entitled to a new value defense for two transfers (of $505,151.53 and $125,000.00 respectively) made to Simplexity?
First, the analysis of Sprint’s recovery. The primary issue of contention is whether the Trustee’s use of the “Add-Back” method was appropriate.
The Trustee performed a liquidation analysis using the add-back of analyzing a defendant’s position on the petition date given a hypothetical liquidating by 1) accounting for the debt that was still owed by the Debtors to the defendant on the petition date; 2) adding back in the transfers paid in the preference period to the outstanding debt (i.e., complying with Section 547(b)(5)(B)’s requirement of analyzing the situation as if ‘the transfer had not been made’); and 3) comparing that debt to the collateral [as] of petition date.
Opinion at *22. Judge Gross held that the Trustee’s methods were appropriate, and that it was able to trace what Sprint’s recovery would have been in the chapter 7 bankruptcy both with, and without these payments as a result of Sprint’s liens. Accordingly, he granted the Trustee’s summary judgment motion on this point. He did, however, differentiate a few cases, so if you are in a similar situation, please read the entirety of this portion of the Opinion. It’s a quality lesson in distinguishing case law.
Second, Sprint’s New Value.
In this portion of the Opinion, Judge Gross looks to the spirit of the new value defense provided by 11 U.S.C. 547, describing “the overarching principle of Section 547(c)(4)” as the provision by a creditor of “a beacon of light in a dark time.” Opinion at *29. Sprint made a mid-month payment (the $505,151.53 payment), which was not contractually required. The Court determined that because this payment was not contractually required, it constituted new value, and was not a payment made on account of amounts due and owing by Sprint. Opinion at *28.
The second allegedly new value payment, however, was related to a “Loyalty Trial Program”. Opinion at *30. Since neither party provided any evidence as to the Loyalty Trial Program and whether Simplexity was entitled to the $125,000 payment, Judge Gross denied both motions for summary judgment as to this payment.
This is a compelling Opinion if you are on either side of a new value defense. This Opinion analyzes both the receipt of more than a creditor is entitled to under chapter 7, and how new value is treated in a situation when a creditor is also obligated to make a payment to the debtor.