In re 360NETWORKS (Usa) Inc.

• Decision Date: 19 December 2005
• Docket Number: Adversary No. 03-03127 ALG.,Bankruptcy No. 01-13721 ALG.
• Citation: 338 B.R. 194
• Parties: In re 360NETWORKS (USA) INC., et al., Debtors. The Official Committee of Unsecured Creditors of 360networks (USA) Inc., et al., and 360networks (USA) Inc., by and through the Official Committee of Unsecured Creditors of 360networks (USA) Inc., et al., Plaintiffs, v. U.S. Relocation Services, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

338 B.R. 194

In re 360NETWORKS (USA) INC., et al., Debtors The Official Committee of Unsecured Creditors of 360networks (USA) Inc., et al., and 360networks (USA) Inc., by and through the Official Committee of Unsecured Creditors of 360networks (USA) Inc., et al., Plaintiffs, v. U.S. Relocation Services, Inc., Defendant.

Bankruptcy No. 01-13721 ALG.

Adversary No. 03-03127 ALG.

United States Bankruptcy Court, S.D. New York.

December 19, 2005.

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Dreier LLP, By Norman N. Kinel, Esq., Terence D. Watson, Esq., Timothy Solomon, Esq., New York City, for the Plaintiffs.

Dombroff & Gilmore, By Raymond L. Mariani, Esq., Dennis French, Esq., Karen Berberich, Esq., Cecilia Littleton, Esq.. Lake Success, NY, for Defendant SIRVA Relocation LLC, successor by merger to U.S. Relocation Services, Inc.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy Judge.

Before the Court is a motion for summary judgment filed by defendant U.S. Relocation Services, Inc., now known as SIRVA Relocation LLC ("USRS"), and a cross-motion for summary judgment filed by plaintiffs 360networks (USA), Inc. and the Official Committee of Unsecured Creditors of 360networks (USA), Inc. and affiliated debtors (collectively, the "Debtors"). The parties dispute whether certain payments made by one or more of the Debtors to USRS may be avoided and recovered preferential transfers pursuant to §§ 547 and 550 of the Bankruptcy Code.

Background

The Debtors were providers of telecommunications services. USRS is a relocation management company that handles the relocation of approximately 15,000 employees of client companies each year. In September 2000, USRS and one of the Debtors entered into an Agreement for Relocation Services (the "Agreement") pursuant to which the Debtors retained USRS to administer their employee relocation benefits plan. Under the Agreement, the Debtors designated employees for whom USRS agreed to provide a specific range of relocation services, including services relating to home marketing, mortgage financing, temporary living, buying and renting assistance, and household goods management. Under the Agreement, USRS could not make any independent determinations as to the benefits an employee was entitled to receive or the nature of the services that the Debtors specified for their eligible employees.

In furtherance of its obligations under the Agreement, USRS performed some of the services itself and hired vendors to carry out other aspects of the relocation process. It charged the Debtors service fees related to its subcontracts with these vendors. In addition, the Agreement provided for the Debtors to pay USRS a specified fee for relocating each employee. The terms of the Agreement provided that USRS could advance relocation benefits to the employees or pay vendors for the benefits, and then invoice the Debtors for reimbursement. The Agreement recites, "It is expressly understood that USRS shall be advancing on behalf of the Company significant sums of money under this Agreement," and that if USRS deemed itself "insecure concerning the repayment the Company of monies under this Agreement," it could suspend any further advances until it received evidence of financial security. (Agreement, sec. 7.)¹

The Debtors' employees continued to perform throughout the period that the Debtors were making payments to USRS on their behalf. The names of the same employees show up on multiple invoices as recipients of relocation benefits, indicating that USRS would (for example) advance or pay the costs of an employee's house-hunting trip to a new location and later advance or pay the costs relating to the employee's sale of a former residence. It appears that employees were obligated to work for the Debtors for one year after their relocation or to repay all or a part of the expenses incurred to relocate them. (Aff. of Jeffrey Margolis, Senior Counsel at USRS, ¶ 18.)² If USRS advanced certain costs to an employee — an advance in contemplation of the sale of the employee's old residence, for example — it would be entitled to reimbursement from the proceeds of the sale of that residence, which it was contractually obligated to return to the Debtors if they had already fronted the expense. (Agreement, Ex. A, sec.D.)

USRS' relationship with the Debtors lasted from September 2000 until April 2002, during which time USRS administered relocation benefits for approximately 100 employees. (Aff. of John Buckley, Senior Accountant at USRS, ¶¶ 6.) USRS billed the Debtors on a monthly basis, issuing a total of ten invoices. During the 90 days preceding the Debtors' voluntary bankruptcy filing on June 28, 2001, the Debtors made six payments to USRS under the Agreement in the aggregate sum of $2,684,090. Of this sum, $1,984,090 constituted payment of eight invoices that the Debtors had issued in that amount.³ In addition, at the insistence of USRS, on May 20, 2001, the same day it paid the February and March invoices, the Debtors advanced $700,000 to prepay the purchase price of a home of a high-level employee and, apparently by mistake, advanced an additional $121,048.91, which was applied to the payment of subsequent invoices. In the complaint, the Debtors are seeking to recover $1,836,014.09 (the "Payments"), which nets out the additional $121,048.91 that was advanced on May 20, 2001. The Debtors are thus not attempting to recover either the advance of $121,048.91 or the advance of $700,000.⁴ USRS has calculated that of the $1,984,000 paid on the eight invoices, $1,820,315.03 reimbursed USRS for funds paid or advanced on behalf of the Debtors' employees, while $128,783.41 constituted fees charged by USRS and $34,991.56 constituted interest charged by USRS on the funds that it had previously advanced to or for the benefit of the employees and the Debtors.

There is clear evidence in the record that during the period prior to the Debtors' bankruptcy, USRS put pressure on the Debtors, including commencing collection efforts, in an attempt to induce the Debtors to pay the invoices that were overdue. For example, prior to the first of the contested invoice payments on April 24, 2001, USRS demanded that payments be made by wire transfer and required the Debtors to fax copies of checks so that USRS could verify that payments were en route. By email dated April 26, 2001, the USRS controller confirmed its refusal to advance funds for the purchase of the home of a high-level Debtor officer based on "payments from 360 having not occurred in a timely manner" and "the recent financial news surrounding 360." Later, on June 6, 2001, USRS sent an email to the Debtors stating, "I hope that we can wrap up the financial issue to a mutually agreeable plan as soon as possible, so that services are not disrupted for too long." (Aff. of Jayne Hart, Exs. C, D, E.) (emphasis added).

After the Debtors' chapter 11 petitions were filed, the parties continued to perform under the Agreement. There is no indication in the record that the Debtors' employees failed to relocate in accordance with their commitments or to provide valuable services to the Debtors. It also appears that during the post-petition period USRS, in accordance with the Agreement, refunded to the Debtors $689,598 that represented the proceeds of the sales of the residences of three executives who had relocated. On October 2, 2002, the Debtors confirmed a plan of reorganization that provided, among other things, that certain executory contracts not previously assumed would be rejected. In accordance therewith, the Agreement was rejected as of the confirmation date.

On May 6, 2003, the Plaintiffs commenced this adversary proceeding seeking the avoidance, recovery and turnover of the Payments as preferential transfers under Bankruptcy Code §§ 547 and 550.

Discussion

In accordance with Bankruptcy Rule 7056, which incorporates Fed.R.Civ.P. 56, summary judgment may be granted "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact arid that the moving party is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Morenz v. Wilson-Coker, 415 F.3d 230, 234 (2d Cir.2005). The moving party bears the burden of demonstrating the absence of any genuine issue of material fact, and all inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); see also Ames Dep't Stores, Inc. v. Wertheim Schroder & Co., Inc., 161 B.R. 87, 89 (Bankr.S.D.N.Y 1993). A fact is considered material if it might affect the outcome of the suit under governing law. See Anderson, 477 U.S. at 248, 106 S.Ct. 2505. "Summary judgment will not lie if the dispute about a material fact is `genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. The fact that both parties have moved for summary judgment does not establish that there are no material facts in dispute. See Kam Hing Enters., Inc. v. Zheng Zhang USA, Inc., 2003 WL 22966313, at *7 (S.D.N.Y. 2003); Hachtel v. Citibank, N.A., 334 F.Supp.2d 315, 321 (E.D.N.Y.2004).

It is the Debtors' position that the Payments constitute preferential transfers that prima facie may be avoided under § 547 and recovered under § 550 of the Bankruptcy Code. USRS has raised three defenses: (i) USRS, acting as an agent of the Debtors in paying relocation expenses, functioned as a mere "conduit" in passing the Payments along to the Debtors' employees and cannot be deemed an "initial transferee" for purposes of § 550(a)(1); (ii) the Debtors received contemporaneous new value within the meaning of § 547(c)(1) for each Payment in the form of...