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In re Arizona Academy of Science and Technology, Inc.

United States District Court, D. Arizona

February 15, 2019

IN THE MATTER OF In re Arizona Academy of Science and Technology, Inc., Debtor.
v.
Charter Asset Management Fund LP, Appellee. Arizona Academy of Science and Technology, Inc., Appellant, ADV NO. 2:17-ap-00145-SHG BAP NO. AZ-18-01145

          ORDER

          DOMINIC W. LANZA UNITED SLATES DISTRICT JUDGE

         INTRODUCTION

         Arizona Academy of Science and Technology (“Debtor”) is a charter school that receives most of its funding from the state of Arizona. Beginning in 2015, Debtor entered into a series of factoring agreements with Charter Asset Management Fund, LP (“Creditor”), a California company in the business of making loans to charter schools. Under these factoring agreements, Creditor would provide cash advances to Debtor in return for the right to receive Debtor's future payments from the state.

         In August 2016, Debtor filed a petition for Chapter 11 bankruptcy. Afterward, Debtor pursued a preference action under 11 U.S.C. § 547 to “claw back” the $134, 745.95 in payments that Creditor had received from the state during the 90-day period preceding the initiation of the bankruptcy proceedings. Following discovery, Debtor and Creditor filed cross-motions for summary judgment. The bankruptcy court, after holding oral argument and soliciting supplemental briefing from the parties, issued a detailed order granting summary judgment to Creditor.

         Debtor now seeks review of the bankruptcy court's order, arguing that the decision to grant summary judgment to Creditor was both procedurally improper and flawed on the merits. As explained below, the Court agrees with Debtor's procedural objections. The only party that sought summary judgment on the threshold issue of whether the $134, 745.95 in payments were avoidable under § 547(b) was Debtor. Creditor, in contrast, limited its request for summary judgment to its affirmative defense, under § 547(c), that it was entitled to a $54, 000 offset against any sum that was ultimately deemed avoidable. Under these circumstances, the bankruptcy court was not authorized to, in effect, grant summary judgment to Creditor on the § 547(b) issue.

         The Court will, however, affirm the bankruptcy court's grant of summary judgment to Creditor on its § 547(c) affirmative defense. Debtor's sole objection to this ruling-that the “new value” defense is unavailable to a creditor acting in bad faith-finds no support in the case law or the text of the statute. Finally, the Court will decline to resolve Debtor's substantive objections to the bankruptcy court's analysis of its § 547(b) claim because this case is being remanded to the bankruptcy court for further analysis and fact-finding on that issue.

         BACKGROUND ON SECTION 547

         Under § 547(b) of the Bankruptcy Code, a debtor may “avoid” certain transfers of its own property that were made during the 90-day period before the bankruptcy petition was filed. A transfer constitutes an avoidable preference if five elements are shown: (1) the transfer was made to or for the benefit of a creditor; (2) the transfer was made for or on account of an antecedent debt; (3) the transfer was made while the debtor was insolvent; (4) the transfer was made on or within 90 days before the date of the filing of the petition; and (5) the transfer enabled the creditor to receive more than it would have received in a Chapter 7 liquidation of the estate. 11 U.S.C. § 547(b). The purpose of avoidance is two- fold: (1) to “facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor, ” by assuring that any “creditor that received a greater payment than others of his class is required to disgorge so that all may share equally”; and (2) to discourage creditors “from racing to the courthouse to dismember the debtor during his slide into bankruptcy.” Union Bank v. Wolas, 502 U.S. 151, 160-61 (1991) (citations omitted).

         Section 547 “has two operative subsections: § 547(b) confers the power of avoidance on the trustee, listing five elements that must be satisfied for the transfer to be avoidable. . . . Section 547(c) contains exceptions to the trustee's avoidance power. Even if a transfer meets all the requirements of § 547(b), it cannot be avoided to the extent that it fits within one of the exceptions in § 547(c).” Brian A. Blum, Bankruptcy and Debtor/Creditor § 16.1.1, at 364 (6th ed. 2014).

         Courts have emphasized that the issues of whether a transfer is avoidable under § 547(b) and whether an exception applies under § 547(c) are “analytically separate inquiries” that must be “consider[ed] . . . separately.” In re Ramba, 416 F.3d 394, 398 (5th Cir. 2005). See also In re Smith's Home Furnishings, Inc., 265 F.3d 959, 965-66 (9th Cir. 2001); In re Resler, 551 B.R. 835, 841 n.8 (Bankr. D. Idaho 2016) (“Trustee bears the burden of proving the elements of a § 547(b) preference are met and, once that is shown, [the transfer recipient] bears the burden of proving any § 547(c) affirmative defense.”).

         FACTUAL AND PROCEDURAL BACKGROUND

         A. The Preference Period

         The dispute in this case turns on the transactions between Debtor and Creditor during the 90-day period preceding the initiation of bankruptcy proceedings: May 20, 2016 to August 18, 2016. (Doc. 14-24 at 4 n.6.) This is known as the “preference period.” (Id.)

         Between February 2015 and January 2016, Debtor agreed that state distributions for the months between August 2015 and May 2016 would be paid directly to Creditor. (Doc. 14-24 at 8.) In exchange, Creditor would loan Debtor funds. (Id. at 3.) During that period, Creditor advanced to Debtor a total of $508, 102.26 and collected a total of $397, 061.93. (Id. at 8.) Thus, as of the start of the preference period, Debtor owed Creditor $111, 040.33. (Id.)

         During the preference period, Creditor collected a total of $134, 745.95 directly from the state. (Id. at 9.) Additionally, Debtor's financial situation worsened during this period, so Creditor provided an additional $54, 000. (Id.)[1] According to Debtor, Creditor “made it clear that Debtor was only to spend funds received from [Creditor] on expenses that would keep it operational-like employee wages-instead of paying other debts, and chastised Debtor if it did otherwise.” (Doc. 14 at 5.)[2]

         B. Bankruptcy Court Proceedings On August 18, 2016, Debtor filed a voluntary petition for Chapter 11 bankruptcy. (Doc. 14-24 at 2.)

         On February 14, 2017, Debtor filed a complaint in bankruptcy court seeking to avoid pre-petition distributions made to Creditor. (Doc. 15-2 at 2-15.) In Count IV of the complaint, Debtor argued that the payments Creditor received from the state during the preference period “are avoidable preferential transfers of funds under 11 U.S.C. §§ 547 and 550.” (Id. at 15.) In its answer, Debtor asserted affirmative defenses under 11 U.S.C. § 547(c)(1) and (c)(4), among other provisions. (Doc. 15-3 at 10-11.)

         On September 27, 2017, the parties filed cross-motions for summary judgment. (Doc. 14-11 [Debtor]; Doc. 14-12 [Creditor].) Notably, although Debtor sought summary judgment on the issue whether the $134, 745.95 in payments Creditor received during the preference period were avoidable under § 547(b) (see Doc. 14-11 at 2), Creditor didn't seek summary judgment on this issue. Instead, as relevant here, Creditor only sought summary judgment on its affirmative defense, under § 547(c)(4), that it was entitled to a $54, 000 offset under the “new value” doctrine against any sum that was ultimately deemed avoidable. (Doc. 14-12 at 2 [“[Creditor] moves for partial summary judgment as to Count 4 of the Complaint based on its new value defense under Section 547(c)(4). [Creditor's] subsequent advances of new value during the Preference Period totaled $54, 000.00, and limits [Creditor's] preference exposure accordingly.”].)[3] Moreover, in its opposition to Debtor's summary judgment motion, Creditor argued that the bankruptcy court couldn't ...


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