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Trustee Avoids the Transfer as Preference As the Debtor was Insolvent at the Time the Alleged Transfers Were Made

Lanik v. Smith (In re Cox Motor Express of Greensboro, Inc.), Nos. 14-10468, 15-02023, 2017 Bankr. LEXIS 233 (U.S. Bankr. M.D.N.C. Jan. 27, 2017)

Debtor Cox Motor Express of Greensboro, Inc., was a trucking company. Defendant James W. Smith Jr. was the President of the Debtor. The Trustee brought a complaint against the Defendant, alleging that the transfers from the Debtor to the Defendant constituted preferential transfers under §547(b) and therefore he was entitled to recover these transfers. The Trustee also sought additional sanctions under FRCP 37 and §105 against the Defendant and his attorney, alleging that the Defendant made misrepresentations to the Trustee and the Court regarding the disputed payment, concealed certain real property and also defamed the Trustee and his counsel. The Court found that the Debtor was insolvent at the time of the alleged preferential transfers for purposes of §547(b)(3) because its liabilities exceeded its assets as on the petition date. The Court added that although the Debtor’s assets should properly be valued as a going concern rather than at liquidation, the Debtor’s tax return tended to show that the Debtor was in serious financial difficulty and insolvent on the date of the first transfer. The Court thus ruled that the alleged transfers from the Debtor to the Defendant constituted avoidable preferential transfers, subject to the affirmative defense of new value.

The Court then, applied the net result rule from Meredith Manor to determine the amount of new value advanced and stated that a court should consider the 90-day preference period and calculate the difference between the total preference and the total advances, provided that each advance is used to offset only prior (although not necessarily immediately prior preferences). Further, the new value amounts may not be used to offset any preferential payments made after the new value is advanced. The Court thus determined that although the loans made by the Defendant during the preference period constituted “new value” under §547(c)(4), the “new value” amounts could not be used to offset any preferential payments made after the new value was advanced. The Court ruled that under the methods dictated by the Fourth Circuit in Meredith Manor, the net avoidable preference in this case was $97,600.

The Court also denied the Trustee’s motion to impose sanctions. The Court added that although the Defendant’s conduct was liable to be sanctioned under FRCP 37, the Court declined to impose sanctions because the Trustee failed to offer any evidence of the damages directly caused by the Defendant’s conduct.


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