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In One of Her Honor’s Last Decisions as a Delaware District Court Judge, The Honorable Sue L. Robinson Clarifies the Distinction Between “Advance Payments” and “Payments on Account of an Antecedent Debt”

Pirinate Consulting Group, LLC v. Kadant Solutions Division (In re NewPage Corp.), No. 16-955 (SLR), 2017 WL 2964803 (D. Del. 2017)

In this appeal to the United States District Court for the District of Delaware, Judge Sue L. Robinson examines the distinction between “advanced payments” required under a contract and payments “on account of an antecedent debt” for purposes of section 547(b) of the Bankruptcy Code.

The Litigation Trustee of the NP Creditor Litigation Trust (the “Trustee”) sought to avoid from Kadant Solutions Divisions (“Kadant”) alleged preferential transfers, including a payment in the amount of $351,709.20 (the “Transfer”) Kadant received from the Debtors about one week prior to the petition date.  Under the facts of the case, Kadant and the Debtors began negotiations for the custom manufacture of certain drainage structures referred to as “EDS.”  Prior to the petition date, the parties executed the “General Terms and Conditions for Contracts and Purchase Orders for Purchase of Equipment.”  During the course of their negotiations, Kadant submitted various revised quotes in response to which the Debtors submitted revised purchase orders.  Attached to the revised quotes were proposed “Terms of Payment” that required 60% of the contract price to be prepaid with the order while the remaining 40% were due upon the satisfaction of certain milestones.  Approximately one month prior to the petition date, Kadant submitted to the Debtors Revised Quote 4 and an invoice for payment of 60% of the contract price in the amount of $351,709.20.  In response, the Debtors issued a revised purchase order and a check that included that amount (i.e. the Transfer).  The negotiations in connection with the EDS continued after the petition date resulting in further revised quotes. Importantly, Kadant did not begin manufacturing the EDS prior to its receipt of the Transfer, a key fact in the Court’s analysis.

Kadant moved for summary judgment arguing that the Transfer constituted a prepayment and not a payment on account of an antecedent debt.  Focusing on the fact that it had not performed any work or shipped any goods prior to the Transfer, Kadant argued that the payment constituted the initial 60% of the contract price and that “there was no liability at the time of the [EDS] payment.”  In its cross-motion for summary judgment, the Trustee responded that Kadant “improperly equated ‘antecedent debt’ under § 547(b) with an immediate right to payment.”  Op. at *2.  The Trustee further argued that “a contract creates a claim at the moment of its execution and is therefore an antecedent debt.”  Id. at *7.  The Bankruptcy Court granted Kadant’s motion for summary judgment and dismissed the adversary complaint.  The Trustee’s appeal followed.

Observing that “antecedent debt” is not defined in the Bankruptcy Code, the Court began its analysis with the definitions of “debt,” i.e. “liability on a claim” and the definition of “claim,” i.e. the “right to payment” as provided for in the Bankruptcy Code.  Citing to Third Circuit precedent, the Court explained that for a debt to be antecedent, “[it] must have been incurred ‘before the transfer was made,’” which, in turn, triggers the question of “when the debtor becomes legally obligated to pay.”  Id. at *4.  The Court continued that “an antecedent debt owed by the debtor occurs when a right to payment arises,” which is generally “when the debtor obtains the goods or services.”  Id.  In contrast, the Court explained, that “advanced payments do not satisfy antecedent debt.”  Id.  Notably, the Court, citing to In re Presidential Airways, Inc., 228 B.R. 594, 596 (Bankr. E.D. Va. 1999), emphasized that an agreement between parties providing for advance payments “does not alter the conclusion that advance payments are not payments on account of antecedent debt . . . even where goods are shipped or services are provided on an ongoing basis.”  Id. at *5.

The Bankruptcy Court concluded that the payment at issue constituted a prepayment and not a payment on account of an antecedent debt primarily because Kadant had not performed any work prior to its receipt of the transfer and because the General Terms provided that the contract could be terminated at any time and without cause on 10 days’ notice.  Noting that the Bankruptcy Court followed “well settled principles” and that its analysis was “consistent with Third Circuit law,” the Court agreed with the lower court’s determination that “at the time of the EDS payment there was no legal obligation to pay” and that therefore the debt had not yet been incurred.  Id. at **6-7.  Lastly, the Court rejected the Trustee’s argument that “a contract creates a claim at the moment of its execution and is therefore an antecedent debt.”  Id. at *7.  Under this logic, “there could never be an advance payment because there would always be an antecedent debt.”  Id. Accordingly, the Court held that summary judgment in favor of Kadant was appropriate and dismissed the appeal.