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Home / Case News / Case Summaries / The Statutory Language of § 547(c)(4) Limits the New Value Defense to a “Benefitting Creditor” in a Tri-Party Transaction

The Statutory Language of § 547(c)(4) Limits the New Value Defense to a “Benefitting Creditor” in a Tri-Party Transaction

August 4, 2019, Southern District of Texas– The case revolves around the dispute that arose from a series of three-party transactions between Black Elk Energy Offshore Operations, LLC, The Grand, Ltd, and Freedom Well Services, LLC (“FWS”) somewhere in 2015. The net result of these transactions was the transfer of payment of $700,000.00 from Black Elk to The Grand. However, rather than satisfy Black Elk’s debts, these payments were credited against the invoices FWS owed The Grand.

Debtor Black Elk Energy Offshore Operations, LLC was founded in 2007 and was involved in the production of oil and gas from abandoned oil wells. The 2008 financial crisis and a rapid decline in oil prices led to financial difficulty for Black Elk, and it succumbed to its financial struggles. Eventually, on August 11, 2015, several creditors filed an involuntary Chapter 7 bankruptcy petition against Black Elk.  Freedom Well Services, LLC (“FWS”) was an affiliate of Black Elk, which was founded in April 2011 by former Black Elk officers. FWS performed decommissioning, plugging, and abandonment work on offshore wells. Defendant The Grand, Ltd provided support vessels to the offshore oil and gas industry.

Both Black Elk and FWS independently contracted for the use of The Grand’s vessels to perform offshore work. After the vessels performed the required work and returned to port, The Grand issued invoices to the contracting party to collect payment for services provided. From November 2014 to July 2015, The Grand performed offshore support work for Black Elk. In December 2014, The Grand issued seven invoices to Black Elk for a portion of work completed that totaled $100,000.00. The Grand also contracted to provide FWS with lift boats between February and April 2015 to assist with FWS’s decommissioning work. In March and April 2015, The Grand issued twenty-nine invoices to FWS, which totaled $700,000.00 in requested payments.

A contractual relationship also existed between Black Elk and FWS. As a result, Black Elk also had separate debts to FWS for decommissioning work performed and to The Grand for its vessel support. The Court next found that on May 29, 2015; Black Elk paid The Grand $100,000.00. The Grand credited this payment to the balances of the seven invoices issued in December 2014 to Black Elk that totaled $100,000.00. Between June 10 and July 24, 2015, Black Elk remitted three separate payments to The Grand, which totaled $700,000.00. However, these payments did not satisfy debts Black Elk owed The Grand. Instead, each payment was credited towards debts that FWS owed The Grand. The result of these payments was the simultaneous reduction of (i) $700,000 of debt FWS owed The Grand; and (ii) $700,000 of debt Black Elk owed FWS.

Richard Schmidt, Trustee of the Black Elk Litigation Trust, initiated an adversary proceeding to recover the alleged payments made to The Grand by Black Elk. The Trustee initially sought to recover all $800,000.00 Black Elk paid The Grand as avoidable transfers under the Bankruptcy Code. The Trustee claimed that these payments satisfy the statutory requirements of preferential transfer under 11 USC. § 547(b) or fraudulent transfers under § 548(a)(1)(B).  

The Grand claimed that, as a matter of law, Black Elk’s payments were not fraudulent transfers. The Defendant reasoned that Black Elk received a reasonably equivalent value for the payments after FWS reduced Black Elk’s debt in exchange for the payments Black Elk made to The Grand. Next, the Defendant asserted that the alleged payments were not preferential transfers because: (i) The Grand was not Black Elk’s creditor, (ii) the payments did not satisfy an antecedent debt (iii) the alleged transfer failed the hypothetical liquidation test.

The Defendant also asserted that the alleged payments were subject to the new value defense in 11 USC. § 547(c)(4). The Grand also argued that the Trustee’s failure to join FWS was so prejudicial to its interests that dismissal of the suit was warranted under Federal Rule of Civil Procedure 19(b).

The Trustee countered that the statutory requirements of preferential transfers under § 547(b) were satisfied because the Bankruptcy Code does not distinguish between a direct transferee and the creditor who benefitted from the transfer (in this case, FWS). The Trustee also disputed The Grand’s new value defense against the avoidance of Black Elk’s payments.

The Court found the following:

1.       Under Rule 19(a)(1)(A) and (B)(i), FWS’s joinder was not required. The Court held that the stipulated facts indicated that Black Elk transferred $700,000.00 to The Grand and the Trustee’s complaint sought to recover this $700,000.00 as an avoidable preference. Thus, the dispute focused solely on Black Elk and The Grand. The Grand did not allege that FWS controlled any portion of the money the Trustee sought to recover, nor did FWS claim any right to the $700,000.00 in question. Accordingly, the Court concluded that complete relief could be provided to the parties without a joinder as FWS had no interest that would be impeded by a final verdict in this suit.

2.       Next, the Court found that the parties had stipulated that FWS was Black Elk’s creditor when the transfers were made. FWS had provided Black Elk with goods and services, which Black Elk was obligated to pay for. As a result, FWS held a claim against Black Elk before the petition date, falling within the Bankruptcy Code’s definition of “a creditor.” § 101(10). Thus, the transfer to The Grand extinguished debts FWS owed The Grand. This satisfied § 547(b)(1) ‘s requirement that the alleged preference was transferred “to or for the benefit of a creditor.”

3.       Next, The Grand maintained that even if the reduction in Black Elk’s debt to FWS was considered, an antecedent debt did not exist because the transfer to The Grand did not reciprocally satisfy debts The Grand owed Black Elk. The Court held that the payment to The Grand simultaneously reduced the obligations of two parties: FWS’s debt to The Grand, and Black Elk’s debt to FWS. Accordingly, the transfers from Black Elk to The Grand satisfy the requirement of “an antecedent debt owed by the debtor” under § 547(b)(2).

4.       On The Grand’s 547(b)(5) argument, the Court stated that FWS filed a proof of claim for $6,348,633.81 of unsecured debt in Black Elk’s bankruptcy case. Further, under Black Elk’s confirmed plan of liquidation, general unsecured creditors would receive “less than full value or recovery on account of their allowed claims against [Black Elk’s] estate. It followed that Black Elk’s unsecured creditors would also receive less than a 100% distribution in a chapter 7 liquidation. Thus, as an unsecured creditor, the $700,000.00 benefit that FWS received from Black Elk’s payments, would allow FWS to recover more than it would in a hypothetical liquidation. As a result of which § 547(b)(5) stands satisfied.

5.       The Court next found that Black Elk made the alleged transfers to The Grand, which resulted in a simultaneous reduction of FWS’s debt to the Grand, and Black Elk’s debt to FWS. However, the Court added that these transfers did not alter Black Elk’s indebtedness to The Grand. Accordingly, allowing The Grand to assert a new value defense, given the fact that FWS was the benefitting creditor, fails to align with the plain text of the statute. The Court highlighted that the benefitting creditor, in this case, was FWS. The statutory language requires that “such creditor” provide new value, which only FWS may assert in this case as the benefitting creditor. Accordingly, the Court ruled that the Defendant may not argue a § 547(c)(4) defense against the alleged preferential transfers because it was only the conduit for the benefitting creditor (FWS) who was the only one that could assert such defense.

The Court ruled in favor of the Trustee and against the Defendant. The judgment for $700,000.00 was awarded against The Grand, Ltd.