Dots, LLC v. Milberg Factors, Inc. (In re Dots, LLC.)

• Decision Date: 10 January 2017
• Docket Number: Case No. 14–11016 (MBK), Adv. Pro. No. 14–01826 (MBK),Adv. Pro. No. 14–01818 (MBK)
• Citation: 562 B.R. 286
• Parties: IN RE: DOTS, LLC., Debtor. Dots, LLC, Plaintiff v. Milberg Factors, Inc., Defendant. Dots, LLC, Plaintiff v. Finance One, Defendant.
• Court: U.S. Bankruptcy Court — District of New Jersey

562 B.R. 286

IN RE: DOTS, LLC., Debtor.

Dots, LLC, Plaintiff

v.Milberg Factors, Inc., Defendant.

Dots, LLC, Plaintiff

v.Finance One, Defendant.

Case No. 14–11016 (MBK)

Adv. Pro. No. 14–01818 (MBK)

Adv. Pro. No. 14–01826 (MBK)

United States Bankruptcy Court, D. New Jersey.

Signed January 10, 2017

Filed January 11, 2017

Joseph J. DiPasquale, Esq., Joshua H. Raymond, Esq., Henry M. Karwowski, Esq., Trenk, DiPasquale, et. al., 347 Mt. Pleasant Avenue, Suite 300, West Orange, NJ 07052, Attorney for Dots, LLC.

Lucas F. Hammonds, Esq., George R. Hirsch, Esq., Sills Cummis & Gross PC, One Riverfront Plaza, Newark, NJ 07102, Attorneys for Milberg Factors, Inc. and Finance One

MEMORANDUM DECISION

MICHAEL B. KAPLAN, U.S.B.J.

I. Introduction

The matters before the Court in this these adversary proceedings are two complaints brought by Plaintiff Dots, LLC ("Dots" or "Debtor" or "Plaintiff"), against Defendants Finance One, Inc. and Milberg Factors, Inc. (collectively, "Defendants" or "Factors;" or, individually, "Finance One" and "Milberg"), seeking the recovery of prepetition transfers on the basis that the transfers were preferential transfers, recoverable under 11 U.S.C. § 547(b). Defendants assert that the transfers are not voidable because they have valid affirmative defenses under § 547(c).

II. Factual Background and Procedural History

Prior to liquidation of the business, Dots was a women's discount clothing retailer. The relationships between Dots and the Factors arise out of an arrangement between Dots, the vendors, and the Factors. Dots purchased its products from multiple vendors. Pursuant to Collection Date Factoring Agreements ("Factoring Agreements"), the vendors—as clients of the Factors—agreed to sell, assign and transfer to Factors the accounts receivable owing by Dots on pre-approval transactions.¹

The Factors agreed to purchase the vendors' accounts and maintained full authority as a "factor" to collect and otherwise deal with such accounts as the sole and exclusive owner. Dots placed orders for goods with the vendors, and the Factors approved and purchased the accounts from the vendors. The vendors then shipped goods to Dots, and Dots made payments for those goods directly to the Factors. Significantly, the Factors did not enter into any agreement directly with Dots.

Sometime in late 2012 and early 2013,² the Factors adjusted the credit lines and reduced the amount of credit made available to the vendors for sales to Dots. This credit line adjustment had the effect of reducing the amount of new inventory that Dots could purchase on credit. In order to maintain a historically consistent level of inventory purchases and expend credit availability, Dots began to anticipate payments and pay for the goods earlier than required by the terms of their invoices.³ However, the Factors never formally changed the terms of the vendors' invoices.

On January 20, 2014, Dots filed a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code in the District of New Jersey. On October 1, 2014, Dots commenced two adversary proceedings against Defendants seeking to avoid transfers made by Dots to Factors as preferential payments under 11 U.S.C. § 547(b).

After denying initial motions for summary judgment, the Court ordered the parties to participate in mediation; however, they were unable to reach a settlement. Following the unsuccessful meditation, the Court directed, and the parties agreed, to pursue a briefing schedule in an effort to narrow the legal issues and guide the course of discovery. The briefing—which is submitted in the form of Dots' motion for partial summary judgment ("Motion")—is designed to resolve limited legal issues relative to the scope and applicability of the ordinary business terms defense under 11 U.S.C. § 547(c)(2)(B), and the applicability of the new value defense under 11 U.S.C. § 547(c)(4). Additionally, to the extent the new value defense is applicable, the parties contest whether that new value must remain unpaid, whether the new value is secured by a security interest, and whether the new value should be considered in the aggregate, or by individual transaction per vendor. Finally, the parties dispute whether the affirmative defenses available under § 547(c) should be addressed in a particular order.

The parties each submitted initial papers and responsive documents. A hearing was held on November 17, 2017. The Court has considered the submissions of the parties and the arguments set forth on the record during the November 17 hearing (the "Hearing"). While the Court at the Hearing made preliminary determinations and explained its rationale, the Court expressed its intent to consider additional legal argument and reach final conclusions to be reflected in a written ruling.

III. Jurisdiction

Jurisdiction over these actions is found under 28 U.S.C. §§ 1334(a) and 157(a), as well as the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(F), and "arises under" title 11. Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. As outlined by the Third Circuit, bankruptcy jurisdiction extends to four types of title 11 matters: (1) cases "under" title 11; (2) proceedings "arising under" title 11; (3) proceedings "arising in" a case under title 11; and (4) proceedings "related to" a case under title 11. In re W.R. Grace & Co. , 591 F.3d 164, 171 (3d Cir. 2009) ; In re Combustion Eng'g, Inc ., 391 F.3d 190, 225 (3d Cir. 2005). " ‘[A]rising under’ jurisdiction includes any proceeding which invokes a substantive right under the Bankruptcy Code." In Re Revel AC, Inc. , No. 14–22654, 2016 WL 6155903, at *5 (Bankr. D.N.J. Oct. 21, 2016) (citing In re Bell , 476 B.R. 168, 175 (Bankr. E.D.Pa. 2012) ); In re Winstar Commc'ns, Inc. , 554 F.3d 382, 405 (3d Cir. 2009). A proceeding that "arises under" title 11 is also described as one involving a cause of action created by, or a substantive right determined by, a provision of title 11. Stoe v. Flaherty , 436 F.3d 209, 217 (3d Cir. 2006), as amended (Mar. 17, 2006).

The current actions concern preferential transfers under § 547 and, thus, qualify as matters "arising under" title 11. See Stern v. Marshall , 564 U.S. 462, 497, 131 S.Ct. 2594, 2617, 180 L.Ed.2d 475 (2011) ("A preferential transfer claim can be heard in bankruptcy when the allegedly favored creditor has filed a claim, because then the ensuing preference action by the trustee become[s] integral to the restructuring of the debtor-creditor relationship.") (citation and internal quotations omitted).

IV. Discussion

Dots argues that partial summary judgment in its favor is appropriate because the transfers at issue are preferential payments to which no affirmative defenses apply. The Factors respond that the transfers at issue are not recoverable because they fall within one of the exceptions to the general preference rule, as listed in § 547(c)(2) and § 547(c)(4). Accordingly, the Factors assert that Dots' Motion should be denied in its entirety.

A. Standard of Review

Summary judgment is proper if there is no genuine dispute over any material fact and if, viewing the facts in the light most favorable to the non-moving party, the moving party is entitled to judgment as a matter of law. FED. R. CIV. P . 56(a) ; FED. R. BANKR. P . 7056 ; see also Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is material when it could "affect the outcome of the suit." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 252, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986). The movant bears the burden of establishing that no genuine dispute as to any material fact exists. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 585 n.10, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986). Once the moving party establishes a prima facie case in its favor, the opposing party must go beyond the pleadings and identify specific facts showing more than a scintilla of evidence that a genuine dispute of material fact exists. See, e.g.,Anderson, 477 U.S. at 252, 106 S.Ct. 2505 ; Matsushita, 475 U.S. at 585–86, 106 S.Ct. 1348 ; Wiest v. Tyco Elecs. Corp. , 812 F.3d 319, 328 (3d Cir.), cert. denied , ––– U.S. ––––, 137 S.Ct. 82, 196 L.Ed.2d 198 (2016).

At the summary judgment stage, the judge's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Anderson, 477 U.S. at 249, 106 S.Ct. 2505 ; see also Aleynikov v. Goldman Sachs Grp., Inc ., 765 F.3d 350, 363 (3d Cir. 2014). The application of summary judgment in bankruptcy adversary proceedings in particular is an often efficient means to preserve limited estate assets. It "is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy and inexpensive determination of every action.’ " Celotex Corp., 477 U.S. at 327, 106 S.Ct. 2548 (quoting FED. R. CIV. P . 1 ); see also In re Bayonne Med. Ctr. , 429 B.R. 152, 173–74 (Bankr. D.N.J. 2010). For purposes of this Motion, there is no genuine dispute as to a material fact which serves as a bar to resolving the legal issues addressed herein.

Under § 547(g), the trustee bears the burden of proof by a preponderance of evidence for the five elements of an avoidable preference set forth in § 547(b). In re Bayonne Med. Ctr. , 429 B.R. at 174 (citing J.P. Fyfe, Inc. of Fla. v. Bradco Supply Corp., 891 F.2d 66, 71 (3d Cir. 1989) ). Likewise, the party contending that the transfer falls under the exceptions in § 547(c) bears the burden of proving that assertion. 11 U.S.C. § 547(g) ; see also In re Bayonne Med. Ctr. , 429 B.R. at 174. "In the context of a motion for summary judgment, the burden of proof remains with the party asserting the...