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Home / Case News / Third Circuit Affirms the Bankruptcy Court’s Decision to Avoid the Transfers Because Creditors’ Conduct Deviated From the Parties’ Ordinary Course of Business Practices

Third Circuit Affirms the Bankruptcy Court’s Decision to Avoid the Transfers Because Creditors’ Conduct Deviated From the Parties’ Ordinary Course of Business Practices

May 4, 2018, Delaware Creditors Prudential Real Estate and Relocation Services, Inc. and Prudential Relocation, Inc. appealed from a decision arising from the bankruptcy proceeding of Debtor AE Liquidation, Inc., f/k/a Eclipse Aviation Corporation.

Prudential is a company that provides relocation benefits to its clients’ employees. On May 1, 2006, Prudential and Debtor entered into a contract called the relocation services agreement in which Prudential agreed to provide various relocation services for the Debtor’s employees. Under the agreement, the Debtor was to pay for Prudential’s services within 30 days of each invoice issued by Prudential.

From 2006 to the summer of 2007, Prudential did not encounter any problems in its relationship with Eclipse. However, from the summer of 2007 onwards, Eclipse began to fall behind on its payment of invoices from Prudential. By November 2007, Eclipse owed about $1.7 million to Prudential in accounts receivable that were over 60 days old. In response, Prudential imposed special measures to reduce the accounts receivable, such as devising different payment plans and putting the Debtor on billing review, etc. Eventually, the Debtor filed its bankruptcy petition on November 25, 2008. Within the 90 days preceding the petition date, the Debtor made twelve payments to Prudential totaling $781,702.61.

In its appeal, Prudential argued that these twelve payments made during the preference period were in the ordinary course of business and therefore were not preferential transfers under § 547(c)(2). In the original proceeding before the Bankruptcy Court, Prudential asserted two defenses: that the transfers were made in the ordinary course of business under section 547(c)(2), and that Prudential gave new value after the transfers to or for the benefit of the Debtor  under section 547(c)(4). Concerning the second defense, the parties agreed at the outset “that new value existed and only dispute the amount.

In its initial opinion, the bankruptcy court agreed with Prudential’s argument that it is entitled to a new value defense of $128,379.40 based on evidence that Prudential provided new services rendered during and after the preference period totaling that amount. The District Court of Delaware affirmed the bankruptcy court’s ruling on the ordinary course of the business issue but remanded on the new value issue. The court relied upon In re Friedman’s Inc., 738 F.3d 547 (3d Cir. 2013) and noted that only services provided before the petition date should be included in the § 547(c)(4) new value defense. The district court directed the bankruptcy court to recalculate the new value defense, and on remand, the bankruptcy court reduced the value of Prudential’s new value defense to $56,571.37, consistent with the district court’s ruling that services rendered after the petition date should not be taken into account in calculating the new value defense. The district court affirmed the bankruptcy court’s remand order.

On appeal to the third circuit, Prudential argued that the bankruptcy court erred in its decision on remand because it denied Prudential’s request to reopen the record before proceeding with the recalculation of the new value defense. However, the third circuit held that the bankruptcy court did not err in declining to open the record after remand from the district court before ruling on the new value issue under § 547(c)(4) because the sole issue on remand entailed applying the district court’s guidance to the dates and value of the invoices reflected in the new analysis chart.

The Third Circuit also concluded that the bankruptcy court properly deemed the alleged payments during the preference period as outside the ordinary course of business under § 547(c)(2)(A). The court opined that Prudential’s conduct, (the faster payment rate, the nineteen day difference in the context of the parties’ relationship, Prudential’s new and unusual collection efforts during the preference period, and Prudential’s actions after learning of the Debtor’s financial hardship) during the preference period deviated from the parties’ ordinary course of business practices. 

Burtch v. Prudential Real Estate & Relocation Servs. (In re AE Liquidation, Inc.), No. 17-1794, 2018 U.S. App. LEXIS 11670 (3d Cir. May 4, 2018)