John R. Stoebner v. San Diego Gas & Electric Co. , 746 F.3d 350 ( 2014 )

United States Court of Appeals
For the Eighth Circuit
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No. 12-3899
No. 12-4011
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In re: LGI Energy Solutions, Inc.; LGI Data Solutions Company, LLC
lllllllllllllllllllllDebtors
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John R. Stoebner, Trustee
lllllllllllllllllllllAppellant/Cross-Appellee
v.
San Diego Gas & Electric Company; Southern California Edison Company
lllllllllllllllllllllAppellees/Cross-Appellant
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Appeals from the United States Bankruptcy
Appellate Panel for the Eighth Circuit
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Submitted: October 24, 2013
Filed: March 20, 2014
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Before LOKEN, GRUENDER, and SHEPHERD, Circuit Judges.
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LOKEN, Circuit Judge.
John Stoebner is the bankruptcy trustee for Chapter 7 debtors LGI Energy
Solutions, Inc., and LGI Data Solutions Company, LLC (collectively, “LGI”). Prior
to bankruptcy, LGI performed bill payment services for its clients, large utility
customers such as the restaurant chains operated by Buffets, Inc., and Wendy’s
International, Inc. During the ninety days prior to bankruptcy, LGI made transfers
totaling $75,053.85 to San Diego Gas & Electric Company (“SDGE”) and transfers
totaling $183,512.74 to Southern California Edison Company (“SCE”) to pay
outstanding invoices for utility services provided to Buffets and Wendy’s restaurants.
Stoebner sued to recover these payments as avoidable preferences under § 547(b) of
the Bankruptcy Code, 11 U.S.C. § 547(b). SDGE and SCE asserted the subsequent
new value exception to preference liability found in § 547(c)(4).
In separate decisions, the bankruptcy court upheld the exceptions in part,
allowing each utility to offset payments received by LGI from the utility customers,
Buffets and Wendy’s, for utility services provided after a preference payment. In re
LGI Energy Solutions, Inc., Nos. ADV 11-4065 and 11-4066 (Bankr. D. Minn. June
11, 2012). Consolidating the cases and reversing the bankruptcy court in part, the
Eighth Circuit Bankruptcy Appellate Panel (“BAP”) allowed each utility a larger
offset for all payments by Buffets and Wendy’s made after a preference payment,
including payments for utility services performed before the preference payment.
Applying this standard, the BAP reduced SDGE’s preference liability from
$31,242.63 to zero and SCE’s preference liability from $131,267.63 to $25,625.75.
In re LGI Energy Solutions, Inc., 482 B.R. 809, 819-20 (8th Cir. BAP 2012). Trustee
Stoebner appeals, raising a § 547(c)(4) issue of first impression. SCE cross-appeals,
arguing the BAP made a clerical error in calculating SCE’s preference liability, an
argument the trustee does not contest. We affirm the BAP’s decision but reduce
SCE’s preference liability in the amount its cross appeal requested.
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I.
As provided in contracts between LGI and its utility customer clients, utilities
providing services to a utility customer sent customer invoices to LGI, rather than to
the customer. LGI periodically sent the customer a spreadsheet summarizing its
payment obligations under invoices LGI had received from the utilities serving that
customer. The customer then sent a check payable to LGI for the aggregate amount
due. LGI deposited the customer’s payment into its own commingled bank accounts
and then sent checks drawn on its accounts to the utility companies to pay their
customer invoices. The utilities had no separate contracts with LGI; they received
payments from LGI by reason of LGI’s contractual obligations to utility customers.
See In re LGI Energy Solutions, Inc., 460 B.R. 720, 722-24 (8th Cir. BAP 2011).
The preferential transfers at issue were payments made by LGI to SDGE and
SCE over a three-week period in November 2008 for utility services previously
invoiced to Buffets and to Wendy’s. After these transfers, but during the ninety-days
prior to the filing of involuntary Chapter 7 petitions on February 6, 2009, the utilities
continued to provide services to Buffets and Wendy’s and sent new invoices to LGI;
LGI continued to send invoice spreadsheets to Buffets and Wendy’s, who sent checks
totaling some $297,000 to LGI for the payment of these invoices. LGI, now in
financial trouble, passed none of this new money on to SDGE or SCE. These post-
preference customer payments are the “subsequent new value” here at issue. LGI
ceased operating as a going concern on December 10, 2008.
II.
“In general, an avoidable preference is a transfer of the debtor’s property, to or
for the benefit of a creditor, on account of the debtor’s antecedent debt, made less
than ninety days before bankruptcy while the debtor is insolvent, that enables the
creditor to receive more than it would in a Chapter 7 liquidation. See § 547(b). If a
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transfer is avoidable under § 547(b), the creditor may escape preference liability by
proving that it falls within one of the exceptions set forth in § 547(c).” In re Jones
Truck Lines, Inc., 130 F.3d 323, 326 (8th Cir. 1997). The subsequent new value
exception in § 547(c)(4) provides that the trustee may not avoid a transfer “to or for
the benefit of a creditor, to the extent that, after such transfer, such creditor gave new
value to or for the benefit of the debtor.”1 These preference rules are intended to
discourage creditors from dismembering a debtor that is sliding into bankruptcy, to
encourage creditors to work with troubled businesses, and to further “the prime
bankruptcy policy of equality of distribution among creditors.” Jones Truck Lines,
Inc. v. Full Serv. Leasing Corp., 83 F.3d 253, 257 & n.3 (8th Cir. 1996) (quoting the
statute’s legislative history). We review the interpretation of the statute de novo. See
In re Kolich, 328 F.3d 406, 408 (8th Cir. 2003).
LGI made the preferential transfers at issue to satisfy its antecedent obligations
to utility customers Buffets and Wendy’s to pay outstanding utility invoices. The
transfers were “for the benefit of” these utility-customer creditors because the
transfers satisfied their debts to the utilities. Cf. Wolff v. United States, 372 B.R.
244, 252 (D. Md. 2007), rev’d on other grounds sub. nom., In re FirstPay Inc., 391
F. App’x 259 (4th Cir. 2010). An obvious question is, why did the trustee not sue the
utility-customer creditors who were the primary beneficiaries of the preferential
transfers? See 11 U.S.C. § 550(a)(1). The obvious answer is that the trustee knew
the utility customers would assert a § 547(c)(4) exception for their substantial post-
1
§ 547(c)(4) further provides that the exception applies only if the new value
is “(A) not secured by an otherwise unavoidable security interest; and (B) on account
of which new value the debtor did not make an otherwise unavoidable transfer to or
for the benefit of such creditor.” See In re Tenn. Valley Steel Corp., 201 B.R. 927,
939 (Bankr. E.D. Tenn. 1996). In this case, the parties stipulated that LGI made no
transfers to Buffets, Wendy’s, SDGE, or SCE on account of the payments that are
alleged to have given LGI subsequent new value, and that these creditors have not
asserted a security interest in those payments.
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preference transfers to LGI, transfers that satisfied “the relevant inquiry” under
§ 547(c)(4) -- “whether the new value replenishes the [bankruptcy] estate.” In re
Kroh Bros. Dev. Co., 930 F.2d 648, 652 (8th Cir. 1991).
Instead of suing the primary creditor beneficiaries, the trustee set out to avoid
the § 547(c)(4) exception by suing the utilities, the immediate transferees of the
preferential transfers. At the outset, it is essential to note that this approach does
fundamental violence to “the prime bankruptcy policy of equality of distribution
among creditors.” If the utilities must return the preferential transfers to the
bankruptcy estate, the estate is “doubly replenished” entirely at the expense of only
two creditors, Buffets and Wendy’s, who got no benefit for their subsequent new
value and will continue to be liable to the utilities for their unpaid invoices.2 The
question remains, is this inequitable result mandated by the statute?
The first hurdle the trustee must clear to establish his inequitable theory is that
the defendant utilities were “creditors” of LGI who received a transfer or its benefit
within the meaning of § 547(b)(1), despite the absence of any direct contractual
relationship with LGI. The bankruptcy court, defining the term broadly, concluded
that the utilities were creditors under third party and trust beneficiary principles. The
BAP agreed, and the utilities do not challenge this ruling on appeal. As the ruling
opened the door for the trustee’s inequitable application of the preference statutes, it
seems open to serious question. The issue is not before us, so we do not consider it.
But this part of the BAP decision should not be considered Eighth Circuit precedent.
2
Buffets and Wendy’s filed proofs of claim in the LGI bankruptcy for payments
made to utility providers for invoices already paid to LGI. If the trustee succeeds in
avoiding the preferential transfers here at issue, the claims of Buffets and Wendy’s
would obviously increase but would only be paid pro rata with the claims of all the
other LGI creditors who would benefit from the estate being doubly replenished.
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The lynchpin of the trustee’s theory is his assertion that, because § 547(c)(4)
limits the subsequent new value exception to new value “such creditor” gave to or for
the benefit of LGI, only subsequent new value given by the utilities, not by the utility
customers, may offset the utilities’ preference liability. The bankruptcy court agreed
and therefore limited the utilities’ offsets to the value of post-transfer utility services
they provided.3 Relying primarily on Jones Truck Lines, the BAP disagreed:
Jones Truck Lines can be harmonized with the [reference to “such
creditor” in § 547(c)(4)] by interpreting it as a recognition that in
tripartite relationships where the [preferential] transfer to a third party
[here, the utility] benefits the primary creditor [here, the utility
customer], new value can come from that [primary] creditor, even if the
third party is a creditor in its own right.
III.
In attacking the BAP’s interpretation of the statute on appeal, the trustee (like
the bankruptcy court) relies almost exclusively on In re Musicland Holding Corp.,
462 B.R. 66 (Bankr. S.D.N.Y. 2011), to support his textual argument that “such
creditor” must in all circumstances be construed as limiting subsequent new value to
that personally provided by the creditor the trustee elects to sue to recover the
preferential transfer. Musicland of course is not binding precedent, but more
importantly, it does not support the trustee’s categorical interpretation of “such
creditor” in § 547(c)(4). In Musicland, the bankruptcy court denied the preference
defendant’s claim of an offset for subsequent new value provided by another creditor
who neither received nor benefitted from the preferential transfer. See id. at 68-69,
73-74. Thus, Musicland stands only for the proposition that a preferred creditor
3
Section 547(a)(2) defines “new value” to include “money or money’s worth
in goods, services, or new credit.” Like the employee services in Jones Truck Lines,
130 F.3d at 327, utility services can be new value. See Tenn. Valley Steel Corp., 201
B.R. at 939.
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cannot offset subsequent new value provided by a non-preferred creditor. In this
case, both the utility customers and the utilities benefitted from LGI’s preferential
transfers to the utilities.
As the BAP concluded, our decision in Jones Truck Lines, if not controlling,
is persuasive authority contradicting the trustee’s inequitable interpretation of the
term “such creditor” in § 547(c)(4). In Jones Truck Lines, the Chapter 11 debtor sued
to recover as avoidable preferences employee benefit contributions the debtor paid
during the pre-bankruptcy preference period to third-party employee benefit funds
pursuant to a collective bargaining agreement. The defendant funds claimed the
protection of the two distinct exceptions found in § 547(c)(1) and § 547(c)(4).4 The
bankruptcy court and the district court ruled in favor of the debtor because the benefit
funds did not provide new value “directly to the debtor.” Focusing primarily on the
§ 547(c)(1) exception, we reversed, concluding that this approach to new value
focused on the wrong creditor and disregarded the reality of the parties’ relationship:
The flaw in the district court’s analysis was its search for new value
flowing from [the benefit funds] to Jones. . . . The “new value” Jones
received for paying current wages and benefit contributions during the
ninety-day preference period were the services its employees continued
to provide.
130 F.3d at 327. In these circumstances, we concluded that “a transfer of new value
by a third party to the debtor may satisfy the ‘new value’ requirement of” the
contemporaneous new value exception. Id. Although this ruling appeared to resolve
4
Because timing is essential in determining preference liability, § 547(c) has
three distinct exceptions that “share common goals,” Kroh Bros., 930 F.2d at 651 n.3:
§ 547(c)(1) excepts contemporaneous exchanges for new value; § 547(c)(2) excepts
payments in the ordinary course of business, even if the debtor’s payment lagged the
creditor’s performance; and § 547(c)(4) excepts payments for antecedent debts to the
extent subsequent new value was given.
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the funds’ preference liability, we went on to address the related new value issue
under § 547(c)(4):
If Jones received no contemporaneous new value for the weekly
payments [to the benefit funds], then it necessarily received subsequent
new value for each payment (except the last one) because its employees
continued working.
Id. at 328. In other words, we concluded that transfers the debtor made to the benefit
funds to satisfy its obligations to pay employee pension and welfare benefits, if
otherwise preferential, were excepted from preference liability to the extent the
employees provided the debtor post-transfer new value by working. This is directly
contrary to the trustee’s contention that the reference to “such creditor”in § 547(c)(4)
means that only new value provided by the preference defendant may offset its § 547
preference liability. Though there are not many reported decisions addressing the
issue, other courts have rejected the trustee’s restrictive interpretation of the term
“such creditor” in similar three-party transactions. See In re H&S Transp. Co., 939
F.2d 355, 358-60 (6th Cir. 1991) (boat owner as subrogee can assert fuel suppliers’
new value to maritime transport debtor); accord In re Fuel Oil Supply & Terminaling,
Inc., 837 F.2d 224, 231 (5th Cir. 1988) (“under these circumstances, new value
received by a debtor need not be provided by the creditor to whom the [preferential]
transfer was made but may be provided by the fully secured third party”).
Because the debtor’s preferential transfers to the benefit funds in Jones Truck
Lines were based upon the debtor’s contractual obligations to its employees, who
benefitted from those transfers, we counted the employees’ labor, rather than the
funds’ fringe benefits, as the new value for § 547(c) purposes. This case is closely
analogous. LGI’s preferential transfers to the utilities were based upon its contractual
obligations to the utility customers, who benefitted from those transfers by having
their utility bills paid. Applying the reasoning in Jones Truck Lines, each utility may
offset all new value Buffets and Wendy’s transferred to LGI subsequent to an
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avoidable preference if the transfer of new value satisfied the conditions in
§ 547(c)(4)(A) and (B).
In addition to avoiding the inequitable treatment of utility-customer creditors
that would result from adopting the trustee’s theory, the BAP’s interpretation of
§ 547(c)(4) is consistent with the statutory purpose of “encourag[ing] creditors to deal
with troubled businesses.” Kroh Bros., 930 F.2d at 651. Either the utilities or the
utility customers could have stopped using LGI as a bill-paying middleman at any
time. The utility customers continued to make utility bill payments to LGI after the
preferential transfers -- the subsequent new value at issue -- because the utilities and
the customers continued to deal with a troubled business, not because the utilities
continued to provide utility services to their customers.
For these reasons, we conclude that the BAP resolved an issue not clearly
addressed by the text of § 547(b) and (c) in a manner that is consistent with the
statute’s purposes. Our decision is limited to the circumstances presented by this
case, for the statute is complex. We hold that, in three-party relationships where the
debtor’s preferential transfer to a third party benefits the debtor’s primary creditor,
new value (either contemporaneous or subsequent) can come from the primary
creditor, even if the third party is a creditor in its own right and is the only defendant
against whom the debtor has asserted a claim of preference liability. As § 547(b)
makes avoidable a transfer “for the benefit of a creditor,” it both serves the purposes
of § 547 and honors the statute’s text to construe “such creditor” in the § 547(c)(4)
exception as including a creditor who benefitted from the preferential transfer and
subsequently replenished the bankruptcy estate with new value. Therefore, the BAP
correctly concluded that SDGE and SCE may each offset subsequent new value that
Buffets or Wendy’s paid to LGI for that utility’s services, regardless of when those
services were provided.
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IV.
In its cross-appeal, SCE contends the BAP, in calculating SCE’s preference
liability for payments made on behalf of Buffets, erroneously counted two preference
payments of $4,178.52 and $4,224.86 that LGI made on behalf of Wendy’s. The
trustee agrees, and after careful review of the record, so do we. The table in the
BAP’s opinion reflecting the calculation of SCE’s preference liability includes these
two payments in both the “SCE - Wendy’s New Value Analysis” and the “SCE -
Buffets New Value Analysis.” But the record reflects only two LGI payments in
these amounts on behalf of Wendy’s. The BAP’s opinion correctly states that LGI
made 22 transfers to SCE on behalf of Buffets, but its table includes 24 transfers.
The double-counting of these two payments appears to be an inadvertent
clerical error, understandable in a case involving a large number of transactions and
multiple parties. But the error wrongly inflated SCE’s preference liability because
preferential transfers on behalf of Wendy’s cannot increase SCE’s preference liability
for transfers on behalf of Buffets. Therefore, we direct the BAP to enter a modified
judgment reducing SCE’s preference liability to $17,222.37. The judgment of the
BAP is otherwise affirmed.
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