Summary:
Trustee brought a preference action against Johnson Concrete Company (“JCC”) , a subcontractor of the Debtor on several construction projects. JCC argued that the “indirect transfer” theory of the “new value” defense to preferences in § 547(c)(1), as it would have filed a claim against the payment bonds in place for the projects.
Starting from Angell v. Pennington, Inc. (In re Partitions Plus of Wilmington, Inc.), No. 06-00148-8-JRL (Bankr. E.D.N.C. Mar. 20, 2008), the bankruptcy court held that to establish a new value defense using an “indirect transfer” theory, the 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.”
Subsequently, the 4th Circuit addressed the issue of whether a supplier could assert a §547(c)(1) affirmative defense under the “indirect transfer theory” against the debtor-subcontractor, holding that the supplier must produce evidence that the transfers were intended by both parties to be part of a “contemporaneous exchange for new value.” See United Rentals v. Angell, 592 F.3d 525, 532 (4th Cir. 2010) cert. denied, ___ U.S. ____, 131 S.Ct. 121, 178 L.Ed. 2d 32 (2010). The bankruptcy court found that this was a material factual dispute for trial.
In regards to the defense under §547(c)(2) raised by JCC that the transfers were made in the ordinary course of business, the bankruptcy court similarly held that not only must the debt incurred have been in the ordinary course of business, but the payments that constituted the transfer must also have been in the ordinary course of business. The parties disagreed regarding what length of time between invoice and payment would constitute payment within the ordinary course of business. The Trustee considered appropriate gauge to be comparison of the average lag and the delay in the payments at issue. JCC instead argued that the more recent history of payments was more apt. As such, the bankruptcy court found that more information was needed and summary judgment on that point was denied.
For a copy of the opinion, please see:
Sparkman v. Johnson Concrete Company (In re Mainline Contracting, Inc.)- Indirect Transfer Theory as New Value Defense to Preference.pdf
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