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Home / Case News / A Nebraska Bankruptcy Court Considers Sale vs Loan Analysis of an Agreeement in a Preference Action

A Nebraska Bankruptcy Court Considers Sale vs Loan Analysis of an Agreeement in a Preference Action

January 3, 2019, NebraskaDebtor Cornerstone Tower Services, Inc. was engaged in the business of erecting and maintaining communication towers, such as cell phone towers. On March 18, 2016, 54 days prior to Cornerstone’s bankruptcy filing and within the 90-day preference period, the Debtor entered into a “Payment Rights Purchase and Sale Agreement” with Defendant Everest Business Funding, LLC. The purchase price was $75,000 for which EBF purchased 15% of the Debtor’s future receipts until EBF received a total of $105,000 from the Debtor. EBF paid the purchase price to Cornerstone and thereafter received daily amounts of $875 for 31 business days.

The agreement between the Debtor and the Defendant also contained a security agreement that secured Cornerstone’s payment and performance obligations to EBF and a guaranty by the Debtor’s principal. Cornerstone filed a Chapter 11 bankruptcy petition on May 13, 2016. On May 19, 2016, six days after the bankruptcy filing, EBF filed a UCC financing statement to perfect a security interest.

The Official Committee of Unsecured Creditors brought the adversary proceeding against EBF to recover approximately $27,000 in alleged preferential transfers under the agreement between EBF and the Debtor. The Committee asserted the matter fell squarely within the elements of § 547(b) and that the affirmative defense of § 547(c)(2) did not apply.

EBF argued that the agreement was a true sale, not a loan, and was not subject to a preference action because the receipts were not a property of the bankruptcy estate. EBF also contended that the alleged payments were made in the ordinary course of the parties’ business.

The Court found that the agreement at issue was properly classified as a sale rather than a loan because the agreement expressly referred to a sale and nothing in the agreement could be construed to be an obligation to repurchase accounts, a reserve to be released only when receivables were paid, or any other sort of recourse. Further, the Court held that since the security interest was unperfected, the Debtor retained its rights and titles to the accounts and they were the property of the bankruptcy estate, which meant the trustee’s “strong-arm” powers could be utilized to avoid pre-petition transfers of the Debtor’s property. Finally, the Court ruled that the summary judgment was not appropriate because the 11 U.S.C.S. § 547(c)(2) ordinary course defense required a factual inquiry and could not be decided on summary judgment.

Official Comm. of Unsecured Creditors v. EBF Partners, LLC (In re Cornerstone Tower Serv.), Nos. BK16-40787, A17-4050, 2019 Bankr. LEXIS 6 (Bankr. D. Neb. Jan. 3, 2019)