Sponsorship Payments Were Made in Ordinary Course of Business
January 11, 2022, Northern District of Texas – Plaintiff Trustee Dennis Faulkner of Debtor Reagor-Dykes Auto Group Creditors Liquidating Trust brought a lawsuit against Broadway Festivals, Inc. for avoidance and recovery of a preferential transfer under §§ 547 and 550 of the Bankruptcy Code.
As regards the facts – Broadway, a 501(c)(3) charitable organization, annually hosts the Fourth on Broadway Independence Day fireworks show and celebration in Lubbock, Texas. Reagor-Dykes sponsored the fireworks in 2017. Broadway invoiced Reagor-Dykes for sponsorship that the Trustee argued was paid during the preference period. Broadway’s main objection to the Trustee’s substantive preference claim was that the transfer was not made on account of an antecedent debt because the transfer and the services provided to Reagor-Dykes were “substantially contemporaneous,” thus allowing Broadway a defense to avoidance under § 547(c)(1).
The Court found that Broadway’s argument conflates the ‘antecedent debt’ requirement of § 547(b)(2) with the ‘contemporaneous exchange’ exception of § 547(c)(1). The Court opined that finding that a transfer is substantially contemporaneous does not necessarily mean that the transfer was not on account of an antecedent debt. Citing Ramba, 416 F.3d at 399, the Court stated that the possibility that the latter might apply in this case does not affect the analysis of the former. The Court further found that the undisputed material facts revealed that Reagor-Dykes became obligated to pay Broadway for its sponsorship benefits no later than July 4, 2018, when the various benefits were conferred upon Reagor-Dykes. Accordingly, the Court ruled that since Reagor-Dykes paid the debt on July 13, 2018, the payment to Broadway was made on account of an antecedent debt.
Next, Broadway asserted the defenses that the transfer was made as part of a contemporaneous exchange under § 547(c)(1) or made in the ordinary course under § 547(c)(2). On contemporaneous exchange defense, the Court held that the transfer was not substantially contemporaneous but instead was asynchronous and, at least by July 4, 2018, resulted in the creation of debt and of a debtor-creditor relationship.
However, the Court ruled in favor of Broadway on the ordinary course defense. The Court found that payment to Broadway was made in the ordinary course of Reagor-Dykes and Broadway’s affairs in planning and preparing for the annual Fourth on Broadway event in Lubbock. The Court found that Reagor-Dykes made the payment at the end of the week following the event, and its bankruptcy filing two and a half weeks later was sudden and unexpected. The Court further found that the timing of the payment was normal when compared to other significant contributors; Broadway never demanded payment; the manner, amount, and form of payment were normal under the circumstances, and nothing about the transaction was unusual.
Accordingly, the Court denied the Trustee’s motion for summary judgment and ruled in favor of Broadway.
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