In re American Intern. Airways, Inc.
| Decision Date | 23 December 1986 |
| Docket Number | Bankruptcy No. 84-02379K,Adv. No. 86-0207K. |
| Citation | 68 BR 326 |
| Parties | In re AMERICAN INTERNATIONAL AIRWAYS, INC., Debtor. Harry P. BEGIER, Jr., Esquire, Trustee, Plaintiff, v. KRAIN OUTDOOR ADVERTISING, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Harry P. Begier, Jr., Philadelphia, Pa., Trustee.
Marc N. Bell, Paul J. Winterhalter, Philadelphia, Pa., for plaintiff-trustee.
Pace Reich, Philadelphia, Pa., for debtor.
Arnold E. Cohen, Lauri Siegel, Philadelphia, Pa., for defendant-Krain Outdoor Advertising, Inc.
The facts of this case require us to explore several issues which pervade the numerous proceedings brought before our court, like all bankruptcy courts, to avoid certain pre-petition transfers of a debtor as preferential transfers, pursuant to 11 U.S.C. § 547. The issue presented, and our determinations as to each of them are as follows:
(1) When is a debt for an ongoing service to be paid in periodic installments "incurred," per 11 U.S.C. § 547(c)(2)(B), as that Code provision existed prior to the amendments effected by the Bankruptcy Amendments and Federal Judgeship Act of 1984, P.L. 98-353 (BAFJA)?
We hold that a debt is incurred upon the earlier of (a) the date of receipt of service by the debtor, pro-rated to estimate the service received within the applicable 45-day period, if necessary; or (b) Any due date established by the parties' contractual relationship;
(2) Is a "transfer," per the prior § 547(c)(2)(B) and § 547(c)(4), effected when the debtor delivers a check in payment or when the check is honored? We hold, in interpreting both sections, that a "transfer" occurs upon delivery of a check; and
(3) What must a creditor do to successfully defend against a preference, per § 547(c)(4), on the ground that he gave "new value" to the debtor? We hold that, per the "subsequent advance rule" established in this provision, which abrogates the "net result rule" which was created under the Bankruptcy Act, the creditor must show that he provided additional service to the debtor after the date of the alleged preferential transfer.
Applying these holdings to the facts in issue, as set forth hereinafter, we rule as follows: (1) The debts for outdoor advertising in issue were "incurred" as of each date that service was provided, i.e., in March, April, and May, 1984, prorated by the cost of each date of receipt of service; (2) The transfers of the Debtor occurred on the dates of delivery of the checks in issue, June 15, 1984; June 22, 1984; and July 13, 1984, respectively, and hence all dates on which the debts were incurred by the Debtor were outside of the 45-day period set forth in § 547(c)(2)(B) except those rendered on May 30th and May 31, 1984; and (3) The creditor established that it extended, as "new value," service to the Debtor from June 15, 1984, to July 19, 1984, and hence was entitled to set off the Trustee's claim for return of preferential transfers by the value of thirty-four (34) days of service, per § 547(c)(4).
The underlying bankruptcy case was filed by the Debtor, AMERICAN INTERNATIONAL AIRWAYS, INC. (hereinafter "the Debtor"), under Chapter 11 of Title 11, U.S.C., on July 19, 1984. The instant adversarial proceeding was commenced on March 26, 1986, by Harry P. Begier, Jr., Esquire, the Trustee in Bankruptcy for the Debtor (hereinafter referred to as the "Trustee"), seeking to avoid three (3) payments by check made by the Debtor to the Defendant, KRAIN OUTDOOR ADVERTISING, INC. (hereinafter referred to as "Krain"), as being preferential, per 11 U.S.C. § 547(b).1
The parties stipulated to facts which establish all of the elements necessary to demonstrate that the Debtor's payments in issue constitute preferential transfers under § 547(b). However, Krain contends that the three (3) payments fell, alternately, within the terms of 11 U.S.C. § 547(c)(2) and 11 U.S.C. § 547(c)(4),2 and that the Trustee is hence not entitled to avoid these transfers.
A trial of this proceeding took place on August 18, 1986, before the Honorable Emil F. Goldhaber, Chief Bankruptcy Judge of this court, who at that time was hearing all of the cases normally assigned to both Philadelphia judges. Prior to the commencement of testimony, the parties stipulated to certain facts which are incorporated below in our Findings of Fact. This case, being a matter originally assigned to Bankruptcy Judge William A. King, Jr., was transferred to the undersigned when he took the bench on August 27, 1986. On September 5, 1986, we ordered the Plaintiff to arrange for the preparation of the Notes of Testimony and for the parties to thereafter submit Proposed Findings of Fact and Conclusions of Law. They did so on October 6, 1986, and October 15, 1986, respectively.
1. Krain is a Pennsylvania corporation and is a creditor of the Debtor.
2. An agreement was entered into between an agent of the Debtor, Innovative Travel Group (hereinafter "ITG"), and Krain whereby Krain would provide outdoor advertising to the Debtor for three (3) "pair units" and two (2) "fixed units" at certain subject locations for a period of six (6) months, with services commencing January 1, 1984.
3. The only written memorialization of this transaction was a "confirmation" letter of November 18, 1983, from ITG to Krain, a copy of which was entered into evidence as Defendant's Exhibit 1, which did not make any specific reference to when payments would be due for the services.
4. On December 30, 1983, ITG and Krain executed a further contract for an additional location not included in the original agreement, a copy of which was entered into evidence as Defendant's Exhibit 3. (This contract is referred to hereinafter as "the 2nd contract."). This transaction was memorialized by a contract which Krain's President identified as a "standard form" used in the industry. (Transcript of Testimony, August 18, 1986 (hereinafter referred to as "T."), at 35-36, 52-53). This contract states, inter alia, that "we the Debtor agree to pay you monthly, in advance," for Krain's service.
5. Since this is the only specific contract form signed by the parties, the terms of this form are found to apply to both of the parties' contracts, i.e., the contract of November 28, 1983, as well as that of December 30, 1983.
6. Pursuant to the agreements, Krain posted advertising for the Debtor during the latter part of December, 1983, and the first few days of January, 1984.
7. In January, 1984, the Debtor expressed dissatisfaction with certain of the advertising provided in the November 28, 1983, agreement.3
8. Shortly thereafter, in and around January, 1984, the parties had a number of discussions which modified the terms of the original contract and ultimately culminated in a modified agreement, which, for the purposes of this proceeding, were deemed, in relevant part, as follows:
9. Under the terms of the modified agreement, payment was due on May 1, 1984, for services rendered in March, 1984; on June 1, 1984, for services rendered in April, 1984; on July 1, 1984, for services rendered in May, 1984; and in the same fashion for the three (3) remaining months.
10. The Debtor failed to make any payments to Krain on May 1, 1984, or June 1, 1984, per the modified agreement.
11. Therefore, the Debtor and Krain arranged a meeting between Lawrence Krain, the President of Krain, and Edward T. Lack, Vice-President and Controller of the Debtor, on June 7, 1984.
12. As a result of that meeting, Krain agreed not to follow through with a threat to paint-out, relist and resell the signs which carried advertisements of the Debtor, in exchange for weekly installment payments on the amounts due to Krain. (T., at 48, 50-51).
13. In a letter dated June 11, 1984, a copy of which was admitted into evidence as Exhibit D-4, Lack confirmed that the terms of the June 7, 1984, agreement were that the Debtor's balance due to Krain was $42,840.00, and that this would be paid in weekly installments of $7,140.00 each, beginning June 15, 1984.
14. On June 15, 1984, the Debtor issued to Krain its check number OV6020 in the amount of $7,140.00, which constituted payment of the invoices dated in January, 1984, in the amount of $5,780.00, for services rendered between March 1 and March 31, 1984, on the initial contract, and $1,360.00 for services rendered on the 2nd contract between January 10, 1984, and February 9, 1984 (hereinafter referred to as "the first check").
15. The first check was honored or paid by the Debtor's bank on or about June 18, 1984.
16. On June 22, 1984, the Debtor issued check number OV6119 in the amount of $5,780.00 to Krain, representing payments against the invoice dated February, 1984, for services rendered during the period from April 1, 1984, through April 30, 1984 (hereinafter referred to as "the second check").
17. The second check was honored or paid by the Debtor's bank on or about June 17, 1984.
18. On July 13, 1984, the Debtor...
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In re Art Shirt Ltd., Inc., Bankruptcy No. 80-03418K
...and, thus, that the Defendant's § 547(c)(2) defense must fail. As we indicated in In re American International Airways, Inc. (Begier v. Krain Outdoor Advertising, Inc.), 68 B.R. 326, 331 (Bankr.E.D.Pa.1986), the following is the classic statement of when a debt is determined to be incurred,......