Campbell v. Hanover Ins. Co. (In re ESA Envtl. Specialists, Inc.)

• Decision Date: 01 March 2013
• Docket Number: No. 11–2150.,11–2150.
• Parties: In re ESA ENVIRONMENTAL SPECIALISTS, INC., Debtor. Stanley Marvin Campbell, Plaintiff–Appellant, v. The Hanover Insurance Company, Defendant–Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

709 F.3d 388

In re ESA ENVIRONMENTAL SPECIALISTS, INC., Debtor.

Stanley Marvin Campbell, Plaintiff–Appellant,

v.The Hanover Insurance Company, Defendant–Appellee.

No. 11–2150.

United States Court of Appeals,Fourth Circuit.

Argued: Oct. 25, 2012.

Decided: March 1, 2013.

Allen Burton Shuford, The Bain Group, PLLC, Charlotte, North Carolina, for Appellant. William L. Esser, Parker, Poe, Adams & Bernstein, LLP, Charlotte, North Carolina, for Appellee.

Before TRAXLER, Chief Judge, and WILKINSON and AGEE, Circuit Judges.

Affirmed by published opinion. Judge AGEE wrote the majority opinion, in which Judge WILKINSON joined. Chief Judge TRAXLER wrote a dissenting opinion.

OPINION

AGEE, Circuit Judge:

The Trustee in bankruptcy of ESA Environmental Specialists, Inc. (“ESA”) appeals from the affirmance by the district court of the award of summary judgment by the bankruptcy court to The Hanover Insurance Co. (“Hanover”). The bankruptcy court concluded that ESA's transfer of $1.375 million to Hanover within 90 days of ESA's filing a petition for bankruptcy was not an avoidable preference under 11 U.S.C. § 547(b). For the reasons set forth below, we affirm the award of summary judgment to Hanover.

IBackground and Proceedings Below

ESA was an environmental and industrial engineering firm that sought and performed construction projects under contract with the federal government. Pursuant to the Miller Act, ESA was required to obtain and furnish to the government two types of surety bonds ¹ as a condition precedent “[b]efore any contract of more than $100,000 [could be] awarded for the construction, alteration, or repair of any public building or public work of the Federal Government.” 40 U.S.C. § 3131(b). These surety bonds functioned to secure ESA's obligation to complete its contract and pay its vendors and subcontractors. See id.

In 2006, Hanover issued surety bonds on behalf of ESA prior to the federal government's award of eight contracts to ESA (the “Existing Projects”). In April 2007, ESA borrowed $12.2 million from Prospect Capital Corp. (“Prospect”) to, among other things, meet current working capital needs, repay existing indebtedness, and “fund costs associated with entering into and fulfilling government contracts.” (J.A. 655.) In May 2007, ESA asked Hanover to issue additional surety bonds (the “New Bonds”) in conjunction with seven additional government contracts that ESA sought to obtain (the “New Contracts” and collectively with the Existing Projects, the “Government Contracts”). ESA could not commence work on the New Contracts until it tendered the New Bonds to the appropriate government agencies, as the New Bonds were a condition precedent to the final contract award to ESA. Hanover, concerned about ESA's financial stability, would not issue the New Bonds without additional security over and above the bond premiums. The parties agreed upon a letter of credit as the additional security by which Hanover would agree to issue the New Bonds. ESA was required to obtain an irrevocable letter of credit from SunTrust Bank (“SunTrust”) in the amount of $1.375 million with Hanover as the beneficiary (the “Letter of Credit”). The Letter of Credit would collateralize the New Bonds but also all of Hanover's existing guarantees and surety obligations on behalf of ESA. The bond premiums on the New Bonds totaled $74,624, and the face value of the New Bonds totaled $7.9 million.

As a condition precedent to issuance of the Letter of Credit, SunTrust required ESA to fund a certificate of deposit at Sun–Trust in the amount of $1.375 million (the “CD”) as security for the Letter of Credit. ESA had limited cash reserves, so it turned to Prospect for the additional capital necessary to fund the CD. Prospect and ESA then amended their existing credit agreement to increase the principal amount of Prospect's existing loan to ESA by a total of $1.575 million (the “Prospect Loan”).² On May 8 and May 17, 2007, in two separate transfers, Prospect tendered the Prospect Loan funds directly to ESA, and ESA deposited those funds into its bank account. On May 17, 2007, ESA transferred $1.375 million of the Prospect Loan proceeds to SunTrust to fund the CD to secure the Letter of Credit for Hanover.³ SunTrust then issued the Letter of Credit, and Hanover in turn issued the New Bonds, which ESA delivered to the appropriate federal government agencies for final award of the New Contracts.

Despite being awarded the New Contracts, ESA's financial condition continued to deteriorate and it filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Western District of North Carolina on August 1, 2007. Hanover then drew on the Letter of Credit, receiving the $1.375 million face amount from SunTrust, which liquidated the CD.

In the course of ESA's bankruptcy proceeding, the bankruptcy court approved the sale of substantially all of ESA's assets to Prospect. As part of that sale, ESA assigned to Integrated Contract Services (“ICS”), an affiliate of Prospect, (i) its rights under the Government Contracts, (ii) all of its litigation claims or causes of action, including its preference and avoidance claims (the “Litigation Rights”), and (iii) its right to the return of any collateral remaining upon the completion of the Government Contracts. Shortly thereafter, ICS ceased operations and assigned ESA's assets, including the Litigation Rights, back to Prospect. Neither ICS nor Prospect commenced work on the Government Contracts, but Hanover remained bound by the surety bonds to provide for successful completion of those contracts.

In February 2008, the bankruptcy court entered an order allowing Hanover to take responsibility for the completion of the Government Contracts. Hanover represents, without contradiction, that “[s]ince entry of that order, Hanover fulfilled its obligations ..., including ensuring that the [G]overnment [C]ontracts were completed and subcontractors paid.” (Appellee's Br. 7.)

Also in February 2008, on Prospect's motion, the bankruptcy court entered an order converting ESA's case from Chapter 11 to a Chapter 7 proceeding and directing the appointment of a Chapter 7 trustee. Stanley Campbell was duly appointed as the Chapter 7 trustee for ESA (the “Trustee”) and took control of ESA's bankruptcy estate. In July 2009, the bankruptcy court entered an order approving a stipulation agreement between Prospect and the Trustee, under which Prospect assigned the Litigation Rights to the Trustee, and the Trustee agreed to split the proceeds from any successful actions with Prospect.⁴

Subsequently, the Trustee filed an adversarial proceeding against Hanover, alleging that Hanover was an indirect beneficiary of ESA's transfer of the Prospect Loan proceeds into the CD and that this transfer was an avoidable, preferential transfer under 11 U.S.C. § 547. Hanover asserted two affirmative defenses to the Trustee's claims in the bankruptcy court: (1) that the transfer was not a preference because the Prospect Loan proceeds were earmarked specifically for payment to Hanover, and (2) that ESA received new value in exchange for the Prospect Loan proceeds. Hanover contended either of these affirmative defenses barred the Trustee's claims as a matter of law and moved for summary judgment.

The bankruptcy court granted summary judgment in favor of Hanover, holding both the earmarking and new value defenses applied to prevent a determination that ESA's transfer of funds was a preferential transfer and avoidable by the Trustee. Further, the bankruptcy court also opined that “[i]t would be inequitable to require Hanover to return the portion of the Prospect [Loan] used to cover the costs to complete the [Government Contracts] when Hanover did the work, and paid the obligations.” (J.A. 924.) The Trustee appealed the bankruptcy court's judgment to the United States District Court for the Western District of North Carolina, which affirmed. From the district court's affirmation of the bankruptcy court's grant of summary judgment, the Trustee now timely appeals. We have jurisdiction under 28 U.S.C. §§ 158, 1291.

IIStandard of Review

When considering an appeal from a district court acting in its capacity as a bankruptcy appellate court, we conduct an independent review of the bankruptcy court's decision, reviewing factual findings for clear error and legal conclusions de novo. See Banks v. Sallie Mae Serv. Corp. (In re Banks), 299 F.3d 296, 300 (4th Cir.2002). A bankruptcy court properly grants summary judgment when no genuine issues of material fact exist and “the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a).

A trustee in bankruptcy

may avoid any transfer of an interest of the debtor in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made ... on or within 90 days before the date of the filing of the petition; ...

(5) that enables such creditor to receive more than such creditor would receive if ... the transfer had not been made.

11 U.S.C. § 547(b). The trustee bears the burden of proving the avoidability of a transfer under § 547(b). Id. § 547(g).

IIIAnalysis

Hanover does not contest that the Trustee has presented a prima facie case under § 547(b) for the avoidance of the transfer to it of the $1.375 million. Instead, Hanover contends that it has established three affirmative defenses to avoidance: earmarking, new value, and equity. First, the Trustee argues that the bankruptcy court improperly applied the earmarking defense because ESA did not use the Prospect Loan proceeds to pay an antecedent debt. Second, the Trustee argues that the bankruptcy court improperly applied the new value defense because Hanover did not prove with specificity the amount of the new value it provided ESA and the bankruptcy court clearly erred in its findings of fact. Third, the Trustee...