Alabama Bankruptcy Lawyer Blog

This very brief post involves a decision that created quite a stir when released, and again when affirmed. United Rentals has petitioned the Supreme Court for a writ of certiorari to review a decision out of the 4th Circuit affirming a preference finding in a case where both bonds and statutory liens apparently assured payment. It will be interesting to see if the Roberts' court agrees to review the case, and if so, whether its "pro-business" leanings are apparent.

The facts: Partition is a subcontractor on two jobs and had rented equipment from United. Partitions ends up in Chapter 7. Within 90 days of bankruptcy, Partition had paid United $75,800. The trustee sought avoidance as a preference.

United argued that since the jobs were bonded, the trustee could not prove it received more than it would have received in liquidation. United also argued new value, since it had released its rights to bond recovery and assertion of a statutory mechanics' or materialmans' lien under North Carolina law.

The bankruptcy court, District Court and the 4th Circuit all concurred: the payments were avoidable as preferences under Section 547. I'm going to keep a close eye on this one. As a Chapter 7 Trustee in a depressed (or "recessed") economy, I'm seeing some contractors in bankruptcy, although frankly, most of my debtor contractors aren't paying anyone within 90 days of filing. United Rentals is, however, an important case, and the Supreme Court's ruling on the petition will I'm sure be anxiously awaited.

This post involves a little bit of my creditor's counsel hat, and a little bit of my trustee's hat. Stated otherwise, I've done it to others, and, I've had it done to me.

Prior to the BAPCPA amendments in 2005, a trustee could file a complaint to recover a preference in the district in which the bankruptcy case was filed, notwithstanding the residence of the defendant. As a trustee in Chapter 7 cases, I can assure you that a perpetual home court advantage was an enormously powerful tool. Most creditors simply could not afford to come to Alabama Middle to litigate a small preference action.

Well, Congress in its infinite wisdom, and no doubt with the influence of a few lobbying dollars, changed all that in 2005. The law now reads as follows:

(b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $ 1,100 or a consumer debt of less than $ 16,425, or a debt (excluding a consumer debt) against a noninsider of less than $ 10,950, only in the district court for the district in which the defendant resides.

In a nutshell, if a trustee wants to seek recovery of a preference involving a consumer debt of less than $16,425, or, a non-consumer debt of less than $10,950, the action must be filed in the district where the defendant resides. Or, must it?

Back in 2008, in the case of In re Rosenberger, 400 B.R. 569 (Bankr. W.D. Mich. 2008), the court held that the venue limitations of 28 U.S.C. Section 1409(b) did not apply to preference actions. Here is the problem.

Section 1409(a) provides as follows: (a) Except as otherwise provided in [**3] subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.

Section 1409(b) provides as follows: (b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $ 1,100 or a consumer debt of less than $ 16,425, or a debt (excluding a consumer debt) against a noninsider of less than $ 10,950, only in the district court for the district in which the defendant resides.

Note that in (a), the statute employs the terms "arising under" and "arising in or related to." But, subsection (b) uses only the terms "arising in or related to." Since a preference action is an action "arising under" the Bankruptcy Code, and since subsection (b)'s limitations apply to cases "arising in or related to", Congress must not have intended the limitations to apply to venue actions.

The Rosenberger decision is certainly not a new development. It was not appealed, however, nor has it been cited negatively by other courts. As of this writing, I haven't had occasion to raise the argument, nor has it been raised against me. I mention it only for the purpose of pointing out that the venue limitations of 28 U.S.C. Section 1409(b), believed by many to be a protection against small preference actions, may not be much protection.

A right of set-off is simply a remedy existing under state law which allows parties mutually obligated to one another to apply their mutual debts against each other. If I owe you $100, but you owe me $80, we are square if I pay you $20.

The Bankruptcy Code does not provide a right of set-off since it would be preferential on its face, favoring one creditor over others. The Bankruptcy Code does, however, provide in Section 553 that rights of set-off existing under state law are enforceable (and hence not preferential) under certain circumstances.

What about triangular set-offs? This occurs when A, B and C agree that A may set-off amounts owed by A to B against amounts owed to A by C. The case currently "in the news" is In re SemCrude, L.P., a decision handed down by the Delaware bankruptcy court in January 2009. In a carefully reasoned opinion, the court held that triangular set-offs are not permissible under Section 553 and are avoidable.

I write to this particular subject because the decision in the bankruptcy court was appealed in April of 2009. A quick PACER check today reveals that all briefs were filed back in September of 2009, so a ruling from the District Court is probably likely in the very near future. As both a trustee with a triangular set-off case pending in Alabama Middle, and a creditor's attorney with an interest in the issue, the result of the appeal strikes me as very important. I'm not aware of any 11th Circuit authority on point, but have noticed that decisions coming out of the Bankruptcy Court for Delaware seem to be highly regarded. It will be interesting to see if the District Court agrees.

As a Chapter 7 Trustee, I have routinely attacked as preferential credit card balance transfers occurring within 90 days of the filing of bankruptcy. The 11th Circuit, in In re Egidi, 2009 WL 1684601 (11th Cir. June 2009) has affirmatively held such transfers to be avoidable preferences in an opinion rendered this past summer.

The argument was that the debtor was not actually making a transfer. It was more in the nature of a "lender to lender" transfer, and did not have a detrimental effect on the Bankrutpcy Estate. The 11th Circuit made fairly short work of the argument, holding that the transfer was subject to the debtors direction and did diminish the estate, and was hence preferential.

What interests me more than the decision is the reaction of the industry to the decision. Since Egidi was released, I've been watching to see if there was a noticeable decline in balance transfers being reported by debtors. This seems to be the case, at least in Chapter 7 cases. Since this past summer, I can't recall a single instance of a debtor reporting a balance transfer within 90 days of filing. It may be a coincidence, but I doubt it. Folks who use credit cards to make balance transfers are on presumptively shaky financial ground, and are candidates for bankruptcy. The industry has probably figured out that allowing a five or six thousand dollar balance transfer to someone in a difficult financial position is unwise. Ya think?