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Trustee Satisfies all Elements of §547(b) to Avoid the Transfer as a Preference

Conti v. Coastal Warranty, LLC (In re NC & VA Warranty Co.), Nos. 15-80016, A-15-9035, 2016 Bankr. LEXIS 3052 (U.S. Bankr. M.D.N.C. Aug. 18, 2016)

Prior to the petition date, Debtor NCVA was in the business of selling warranty contracts and vehicle service contracts for motor vehicles to consumers through automobile dealers. NCVA contracted with Dealers Assurance Company to have Dealers Assurance act as a re-insurer of NCVA’s obligations to customers in the event that NCVA was unable to fulfill those obligations. Defendant Coastal Warranty was formed to engage in the business of selling warranty contracts to consumers. NCVA and Defendant entered into contracts which provided that NCVA would serve as an administrator for all of Coastal Warranty’s coverage agreements. Eventually, NCVA ceased operations and filed for bankruptcy Six days prior to filing NCVA transferred $160,000 to Coastal Warranty in two separate payments. The Trustee brought an adversary proceeding stating the prima facie elements of a preference action under §547(b) were satisfied and the alleged transfers of $160,000 were preferences. The Defendant moved for summary judgment, arguing that the Trustee will be unable to prove the elements required under §547(b) to avoid the $160,000 transfers.

The Court found that NCVA had a sufficient interest in the funds transferred for purposes of § 547(b) based on the terms of agreement because not only could NCVA deduct the amounts it paid to its own creditors for expenses in determining the amount owed to Coastal Warranty as “profit,” but the agreements also contemplated that NCVA would be entitled to use the account to indemnify Dealers Assurance for any claim that Dealers Assurance paid. Next, the Court held that the Defendant was not entitled to the imposition of a constructive trust in its favor because a constructive trust is imposed by courts of equity to prevent the unjust enrichment of the holder of title to, or of an interest in, property which such holder acquired through fraud, breach of duty or some other circumstance making it inequitable for him to retain it against the claim of the beneficiary of the constructive trust. In the case at bar, there was no evidence to show that NCVA gained title to the reserve account through some wrongdoing. NCVA took legal title to the funds upon deposit into its bank account, and the Defendant conceded that the Debtor had not violated any legal duty to Coastal Warranty as of the petition date.

Next, the Court held that the Defendant was a creditor even though no claim was filed. The Court stated that the service agreement established that at the date of petition, Coastal Warranty held an unsecured, contingent claim against NCVA for whatever portion of the reserve account was not used to pay NCVA’s administrative fee or any claims and expenses related to the underlying warranty claims. Although this was a contingent claim, the Code specifically defines the term “claim” to include contingent rights to payment. Coastal Warranty would have been able to file a claim in NCVA’s bankruptcy case for the amount of any profit it was owed, thereby, making Coastal Warranty a creditor for purposes of §547.

Next, the Court held that the alleged transfer was for or on account of an antecedent debt for purposes of §547(b)(2) because NCVA owed Coastal Warranty an antecedent debt at the time of the transfers, and Coastal Warranty was entitled to file a proof of claim for this contingent and unliquidated obligation. The Court also found that the transfer of $160,000 to Coastal Warranty took place six days prior to the Debtor filing for bankruptcy, satisfying §547(b)(4). Because the transfers took place within the 90 days prior to bankruptcy the Debtor was presumptively insolvent at the time of the transfers, and the Defendant did not present any evidence to rebut the presumption, the Debtor’s insolvency under §547(b)(3) was not genuinely in dispute. The Court next concluded that the Trustee has also met her burden with respect to §547(b)(5) because the records in the case clearly demonstrated that the creditors will receive less than full payment. The Court entered judgment in favor of the Trustee and against Coastal Warranty avoiding the transfer of $160,000.00 under §547(b).


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