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Home / Case News / A Trustee Could Not Avoid a Pre-Petition Transfer Under Section 547(b)(5) Where a Debtor Had Assumed an Executory Contract Under Section 365

A Trustee Could Not Avoid a Pre-Petition Transfer Under Section 547(b)(5) Where a Debtor Had Assumed an Executory Contract Under Section 365

April 3, 2018, DelawareDebtors NewPage Corp and its affiliates comprised the largest coated paper manufacturer in North America. The Debtors operated sixteen paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota, and Wisconsin. During its business, the Debtors purchased chemicals from a variety of suppliers, including Defendant ERCO. ERCO is the second largest producer of sodium chlorate in the world and supplies to, among other customers, the pulp and paper industry.

On September 7, 2011, the Debtor NewPage filed for bankruptcy and PIRINATE Consulting Group, LLC, the litigation trustee of the NP Creditor Litigation Trust initiated a lawsuit against ERCO, alleging that payments amounting to $9,907,449.33 were recoverable according to §§ 547 and 550. ERCO argued that the bulk of the alleged transfers were made on account of pre-existing, ongoing contracts between the parties, rendering them unavoidable as a matter of law. There were two contracts at issue – the Chlorate Contract and the Soda Contract. According to ERCO, the Trustee cannot satisfy section 547(b)(5) where an executory contract is assumed under section 365, because the contract creditor whose contract is assumed would be paid in full (under section 365). The Trustee maintained that there were simply no executory contracts to be assumed under the plan on the effective date.

The Court found that the Trustee was entitled to avoid the alleged pre-petition transfer made under the Chlorate Contract to ERCO as a preference under §547(b)(5) because it was made pursuant to a contract that had expired before the effective date and therefore could not have been assumed by the Debtor under §365.

However, the Court concluded that the Trustee could not avoid as a preference the Debtor’s pre-petition transfer made under the Soda Contract because it was made based on the Defendant’s unsigned offer which was a valid contract under the applicable statute of frauds, Wis. Stat. § 402.201;  the Debtor had not rejected it within ten days, the contract had not expired before the effective date, and the Debtor had assumed it under §365.

PIRINATE Consulting Grp., LLC v. ERCO Worldwide (In re NewPage Corp.), Nos. 11-12804 (KG), 13-52435 (KG), 2018 Bankr. LEXIS 1018 (Bankr. D. Del. Apr. 3, 2018)