NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 17-1794
_____________
In re: AE LIQUIDATION, INC., f/k/a Eclipse Aviation Corporation, et al,
Debtors
JEOFFREY L. BURTCH, Chapter 7 Trustee
v.
PRUDENTIAL REAL ESTATE & RELOCATION SERVICES, INC.;
PRUDENTIAL RELOCATION, INC.,
Appellants
_______________
On Appeal from the United States District Court
for the District of Delaware
(D. Del. No. 1-16-cv-00252)
District Judge: Honorable Leonard P. Stark
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Submitted Under Third Circuit LAR 34.1(a)
January 12, 2018
Before: JORDAN, ROTH, Circuit Judges and MARIANI*, District Judge.
(Filed: May 4, 2018)
*
Honorable Robert D. Mariani, United States District Court Judge for the Middle
District of Pennsylvania, sitting by designation.
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OPINION
_______________
MARIANI, District Judge.
Creditors Prudential Real Estate and Relocation Services, Inc. and Prudential
Relocation, Inc. (collectively “Prudential”) appeal from a decision arising from the
bankruptcy proceeding of AE Liquidation, Inc., f/k/a Eclipse Aviation Corporation
(“Eclipse”). Prudential appeals two orders of the District Court of Delaware, which
affirmed the Bankruptcy Court’s decision to (1) deem payments made to Prudential
during the Preference Period as outside the ordinary course of business under 11 U.S.C. §
547(c)(2)(A), and (2) reduce the amount of Prudential’s new value defense under 11
U.S.C. § 547(c)(4). We will affirm.
I. Background
Prudential is a company that provides relocation benefits to its clients’ employees.
[App. at 262-263.] On May 1, 2006, Prudential and Eclipse entered into a contract
called the Relocation Services Agreement (the “Agreement”), in which Prudential agreed
to provide various relocation services for Eclipse’s employees. [App. at 2481-2509.]
Under the Agreement, Eclipse was to pay for Prudential’s services within 30 days of each
invoice issued by Prudential. [App. at 2495.]
This disposition is not an opinion of the full court and, pursuant to I.O.P. 5.7,
does not constitute binding precedent.
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From 2006 to the summer of 2007, Prudential did not encounter any problems in
its relationship with Eclipse. [App. at 276.] However, from the summer of 2007
onwards, Eclipse began to fall behind on its payment of invoices from Prudential. [App.
at 276.] By November 2007, Eclipse owed $1.7 million to Prudential in accounts
receivable that were over 60 days old. [App. at 276.] In response, Prudential imposed
special measures to reduce the accounts receivable, such as requiring a payment plan of
approximately $200,000 per week and requiring Eclipse to pay off a lump sum of
approximately $900,000 by December 2007. [App. at 276-277.] The Bankruptcy Court
referred to these measures as the “First Payment Plan.” (App. at 2.) In addition to these
measures, Prudential put Eclipse on billing review, which was described by a Prudential
witness as a procedure in which Prudential does not “accept[] any new business [from the
client], and everything is monitored before we move forward.” (App. at 276.) From
November 26, 2007 to January 2008, Eclipse made weekly payments of approximately
$200,000 under the new payment plan, as well as a lump sum payment of approximately
$900,000 on January 4, 2008. [App. at 277-279.] As a result of Eclipse reducing its
accounts receivable, Prudential took Eclipse off of billing review around mid to late
January. [App. at 286.] However, Eclipse began “to fall back again in March of 2008.”
(App. at 286.)
On August 28, 2008, Eclipse’s accounts receivable balance had grown to
$800,000, approximately $600,000 of which was overdue. [App. at 405.] Around the
same time, Prudential learned that Eclipse had discharged approximately 650 employees
and instructed those employees to submit certain pending relocation expenses to
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Prudential for reimbursement. [App. at 313.] Prudential also learned directly from
Eclipse that Eclipse would be conserving its cash for the next 8 to 12 weeks. [App. at
1177.] Prudential employees discussed the situation in numerous internal emails in the
weeks following August 28, 2008. [App. at 1175-79, 1187-89.] Prudential decided to
put Eclipse back on billing review. [App. at 288.] In addition, Prudential put Eclipse on
a new payment plan that required a weekly payment of $50,000 and requested a lump
sum payment in full from Eclipse. [App. at 289-290.] The Bankruptcy Court referred to
the new weekly payment plan and lump sum request as the “Second Payment Plan.”
[App. at 3-4.]
Eclipse filed its bankruptcy petition on November 25, 2008. [App. at 4.] Within
the 90 days preceding the petition date (the “Preference Period”), Eclipse made twelve
payments to Prudential totaling $781,702.61. [App. at 489.] These payments included
five payments made in September 2008 of approximately $50,000 each, pursuant to the
Second Payment Plan. [App. at 489.] On September 24, 2008, Prudential requested an
increase of the weekly payments to $75,000. [App. at 338-339.] When Prudential did
not hear back from Eclipse, it emailed Eclipse again on September 30, 2008 stating: “[i]t
is critical that we receive a response to our request to increase the weekly payments or to
bring the account current. If we do not receive a response by close of business tomorrow,
10/1/08, Prudential will need to re-evaluate our options, up to and including termination.”
(App. at 1648.) That same day, Eclipse agreed to pay $75,000 a week. [App. at 1645.]
The Bankruptcy Court defined this increased payment plan as the “Amended Payment
Plan.” [App. at 4.] In addition to the Amended Payment Plan, Prudential also began
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sending a weekly billing summary to Eclipse and required payment in full based on the
summary; Prudential only issued the complete invoice to Eclipse after Eclipse paid in full
the charges on the summary. [App. at 358-359.] This procedure had never been
imposed by Prudential before the Preference Period. [App. at 353.] In October and
November of 2008, Eclipse made seven more payments of approximately $75,000 each
to Prudential. [App. at 489.] In its appeal, Prudential argues that these twelve payments
made during the Preference Period were in the ordinary course of business and therefore
were not preferential transfers under 11 U.S.C. § 547(c)(2). [Opening Br. at 14-24.]
Separately, Prudential appeals the Bankruptcy Court’s order on remand reducing
its new value defense. [Opening Br. at 24-26.] In the original proceeding before the
Bankruptcy Court, Prudential asserted two defenses: “(i) that the Transfers were made in
the ordinary course of business under section 547(c)(2), and (ii) that Prudential gave new
value after the Transfers to or for the benefit of Eclipse under section 547(c)(4).” (App.
at 9.) With respect to the second defense, the parties agreed at the outset “that new value
exist[ed] and only dispute the amount.” (App. at 26.) 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. [App. at 25-28.]
On September 10, 2015, the District Court of Delaware affirmed the Bankruptcy Court’s
ruling on the ordinary course of business issue, but remanded on the new value issue.
[App. at 76-88.] Citing this Court’s reasoning in In re Friedman’s Inc., 738 F.3d 547
(3d Cir. 2013), the District Court noted that “only services provided prior to the petition
5
date [should be] included in the § 547(c)(4) new value defense.” (App. at 86.) Because
the Bankruptcy Court’s original opinion “[did] not distinguish between pre-petition and
post-petition payments for the purpose of calculating Prudential’s new value defense,”
the District Court directed the Bankruptcy Court to recalculate the new value defense.
(App. at 86.) 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 “Remand Order”). [App. at 95.] On March 30, 2017, the District
Court affirmed the Bankruptcy Court’s Remand Order. [App. at 101.] Prudential argues
that the Bankruptcy Court erred in its decision on remand, because the Court denied
Prudential’s request to reopen the record before proceeding with the recalculation of the
new value defense. [Opening Br. at 25-26.] Upon review of this appeal, we will affirm
on both issues.
II. Discussion1
A. The Ordinary Course of Business Defense
1
The District Court had jurisdiction over the appeal of the Bankruptcy Court’s
orders pursuant to 28 U.S.C. § 158(a)(1). We have jurisdiction to review the District
Court’s decision pursuant to 28 U.S.C. § 158(d)(1). “Our review of the District Court’s
decision effectively amounts to review of the bankruptcy court’s opinion in the first
instance,” In re Hechinger Inv. Co. of Del., 298 F.3d 219, 224 (3d Cir. 2002), because
our standard of review is “the same as that exercised by the District Court over the
decision of the Bankruptcy Court,” In re Schick, 418 F.3d 321, 323 (3d Cir. 2005).
We review the Bankruptcy Court’s findings of fact for clear error and exercise
plenary review over questions of law. In re Fruehauf Trailer Corp., 444 F.3d 203, 209-
10 (3d Cir. 2006).
6
We agree with the Bankruptcy Court’s analysis and conclusion that Prudential
failed to prove that the twelve payments made in the Preference Period fell within the
ordinary course business affirmative defense under 11 U.S.C. § 547(c)(2). That provision
states:
(c) The trustee may not avoid under this section a transfer—
…
(2) to the extent that such transfer was in payment of a debt incurred by the
debtor in the ordinary course of business or financial affairs of the debtor
and the transferee, and such transfer was—
(A) made in the ordinary course of business or financial affairs of the
debtor and the transferee; or
(B) made according to ordinary business terms.
“Neither ‘ordinary course of business’ nor ‘ordinary business terms’ is defined in the
Bankruptcy Code.” In re Hechinger Inv. Co. of Del., Inc., 489 F.3d 568, 576 (3d Cir.
2007) (citing In re J.P. Fyfe, Inc., 891 F.2d 66, 70 (3d Cir. 1989)). “[O]rdinary terms are
those which prevail in healthy, not moribund, creditor-debtor relationships.” In re
Molded Acoustical Prods., Inc., 18 F.3d 217, 227 (3d Cir. 1994). In determining whether
payments are made in the “ordinary” course of the parties’ business, “each fact pattern
must be examined to assess ‘ordinariness’ in the context of the relationship of the parties
over time.” Id. at 576-77.
In its original opinion, the Bankruptcy Court concluded that Prudential had not
established an ordinary course of business defense, because its collection efforts during
the Preference Period, namely the Second Payment Plan and the Amended Payment Plan,
were not reflective of the parties’ dealings in the ordinary course of business. [App. at
25.] Prudential takes issue with the Bankruptcy Court’s conclusion, arguing that the
7
twelve transfers were only paid “nineteen days faster during the Preference Period,”
which was within the normal range of the historical relationship between Prudential and
Eclipse, and that there is no need to require “absolute uniformity” in payment frequency
between the Preference Period and the pre-Preference Period. (Opening Br. at 15.)
However, while Prudential is correct that no absolute consistency is required, the
fact that payments to Prudential were made nineteen days faster during the Preference
Period was only one of several salient facts considered by the Bankruptcy Court. In this
case, the parties had an original agreement in which Eclipse was to pay Prudential for its
services within 30 days of each invoice. [App. at 2495.] That term was changed by
Prudential when it requested a faster payment term, i.e. weekly payments instead of
monthly payments, and a lump sum payment in full during the Preference Period. [App.
at 289-290.] The Bankruptcy Court properly found the faster payment rate to be
“significant,” in light of the fact that Prudential only “insisted on a quicker payment
schedule as it became aware of Eclipse’s financial troubles.” (App. at 16.)
The relationship between Prudential and Eclipse became more financially stable
after the First Payment Plan. [App. at 361-362.] However, as of the start of the
Preference Period, the relationship took a turn for the worse. On August 28, 2008,
Prudential learned that Eclipse had discharged approximately 650 employees and
instructed them to submit pending relocation expenses to Prudential, and separately
learned that Eclipse would be conserving its cash for the following 8 to 12 weeks. [App.
at 313, 1177.] After learning of these changes, Prudential implemented the Second
Payment Plan which required a $50,000 payment every week and requested a lump sum
8
payment in full from Eclipse. [App. at 289-290.] Additionally, a month after initiating
the Second Payment Plan, Prudential issued an ultimatum to Eclipse via email: acquiesce
to Prudential’s request to either increase the weekly payment plan to $75,000 per week or
“bring the account current,” and, if Prudential did not receive a response by the next day,
it would consider terminating the parties’ relationship. (App. at 1648.)
The Bankruptcy Court properly found that “Prudential’s threatening Eclipse into
making increased payments to bring the [accounts receivable] current during the
Preference Period was not in the ordinary course of business,” since “[t]his type of
ultimatum never occurred in the pre-Preference Period (even in connection with the First
Payment Plan).” (App. at 19-20.) The Bankruptcy Court also found that a $75,000
required weekly payment, which was imposed during the Preference Period, was
“significantly different from the original credit terms” of the parties’ relationship, which
only required payment within 30 days of invoice. (App. at 24.) Furthermore,
Prudential’s own internal emails revealed a concern about Eclipse’s liquidity, with a
Prudential employee commenting that “[Eclipse is] in financial instability and [we are]
very concerned about our exposure. … [L]ast year they also hit hard times with us but
eventually got caught up after we cut them off, though that nearly ended our relationship
with them.” (App. at 1178.)
In other words, the Bankruptcy Court did not consider the faster payment rate in
isolation. Rather, it considered the nineteen day difference in the context of the parties’
relationship, similarity of transactions, the manner in which payment was tendered,
Prudential’s new and unusual collection efforts during the Preference Period, and
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Prudential’s actions after learning of Eclipse’s financial hardship. [App. at 12-25.] We
agree with the Bankruptcy Court’s analysis that, taken as a whole, Prudential’s conduct in
the Preference Period deviated from the parties’ ordinary course of business practices.
Cf. In re Hechinger Inv., 489 F.3d at 578 (noting that the Bankruptcy Court “properly
considered” factors such as “the length of time the parties had engaged in the type of
dealing at issue, the way the payments were made, whether there appeared to be any
unusual action by either the debtor or creditor to collect or pay on the debt, and whether
the creditor did anything to gain an advantage in light of the debtor’s deteriorating
financial condition”) (citing In re Logan Square E., 254 B.R. 850, 855 (Bankr. E.D. Pa.
2000)).
Prudential also argues that the Second Payment Plan did not constitute unusual
business practice because it bore similarities to the First Payment Plan. [Opening Br. at
21-24.] However, that argument is unpersuasive. As discussed above, the Bankruptcy
Court based its ruling in part on the email ultimatum Prudential issued to Eclipse in
September 2008, which “never occurred in the pre-Preference Period (even in connection
with the First Payment Plan).” (App. at 19-20.) Furthermore, we agree with the
Bankruptcy Court’s reasoning that “the fact that Eclipse was placed on a similar
accelerated payment plan for three months at sometime in the past does not make the
payment plans ordinary. … The First Payment Plan and the Second Payment Plan were
not simply a renegotiation of the contract, they were unilateral pressure [tactics] by
Prudential on Eclipse to assure future payment.” (App. at 24-25.) Thus, the Bankruptcy
Court did not err in finding that payments made pursuant to Prudential’s collection efforts
10
during the Preference Period were outside the parties’ ordinary course of business
practices.
B. New Value Defense
Prudential also argues that the Bankruptcy Court erred in denying a request to
reopen the record before the Court ruled on the new value issue on remand. [Opening
Br. at 25-26.] A new value defense “allows a creditor to retain an otherwise voidable
preference if the creditor gave the debtor new value after the preferential transfer.” In re
New York City Shoes, Inc., 880 F.2d 679, 679 (3d Cir. 1989) (citing 11 U.S.C. §
547(c)(4)). In its original opinion, the Bankruptcy Court relied on the testimony of Rene
Williams-Varner, Prudential’s Director of Accounting, and a new value analysis chart she
created that detailed all “new services rendered during and after the Preference Period
and the corresponding invoices…totaling $128,379.40.” (App. at 26.) Crediting the
Williams-Varner testimony and the new value analysis chart, the Bankruptcy Court
“[found] that Prudential ha[d] a new value defense in the amount of $128,379.40.” (App.
at 28.) On September 10, 2015, the District Court remanded for a recalculation of the
new value defense because “only services provided prior to the petition date [should be]
included in the § 547(c)(4) new value defense.” (App. at 86.) Because the Bankruptcy
Court’s original opinion “[did] not distinguish between pre-petition and post-petition
payments,” the District Court instructed the Bankruptcy Court to “reexamine those
invoices to determine the appropriate amount of Prudential’s new value defense.” (App.
at 86.)
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Prudential argues that on remand, the Bankruptcy Court erred by denying its
request to reopen the factual record, which was necessary to clarify the record because
Prudential was not given a chance to present more thorough testimony in the original
proceeding. [Opening Br. at 25.] Prudential contends that in the original trial, the
Bankruptcy Court “expressed its preference to not go through each individual invoice in
detail” during Williams-Varner’s testimony, and thus, Prudential had “to summarize the
new value analysis without going through each individual invoice.” (Opening Br. at 25.)
However, there is no reason to believe that any additional evidence was necessary for the
Bankruptcy Court to recalculate the new value defense on remand. In the original
proceeding, there had been extensive testimony from Rene Williams-Varner regarding
the services Prudential provided to Eclipse, which the Bankruptcy Court credited as
“persuasive and uncontested.” (App. at 27.) Prudential also introduced into evidence a
new value analysis chart created by Williams-Varner, which included all invoices
reflecting the value of new services it provided to Eclipse. [App. at 2590-2652.] The
chart includes not only a summary of the invoices, but also detailed information from
each invoice. [App. at 2590-2652.] Thus, there was no reason for the Bankruptcy Court
to reopen the factual record when it had the Williams-Varner testimony and the new
analysis chart at its disposal. The District Court’s direction to the Bankruptcy Court on
remand was simple and straightforward: the new calculation of Prudential’s new value
defense should not include the value of any services rendered by Prudential after the
petition date. [App. at 86.] 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
12
chart. Thus, the Bankruptcy Court did not err in declining to reopen the factual record
after remand from the District Court.
III. Conclusion
For the foregoing reasons, we will affirm the District Court’s Orders affirming the
Bankruptcy Court’s ruling on the ordinary course of business defense and the District
Court’s order affirming the Bankruptcy Court’s Remand Order reducing the new value
defense to services rendered pre-petition.
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