Supreme Court Will Not Hear Bankruptcy Case Dealing with ‘New Value’ Defense

 WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court on Oct. 7 refused to hear a case in which a Chapter 7 trustee argued that a bankruptcy estate should be permitted to recover more than $1.37 million  that an insurance company received from a debtor company because the insurer failed to show that the transfer met the “new value” standard in the Bankruptcy Code, which permitted the insurer to hold on to the property rather than return it to the bankruptcy estate (Stanley Marvin Campbell v. The Hanover Insurance Company, No. 13-16, Chapter 7, U.S. Sup.).

Bankruptcy

In 2007, ESA Environmental Specialists Inc. filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Western District of North Carolina.

Stanley Marvin Campbell was appointed the Chapter 7 trustee.

Prior to bankruptcy, ESA had regular capital requirements as part of its business operations.  One of those was to have funds on hand to pay for bonds on government construction contracts that ESA serviced.   In 2006, in exchange for a fee, Hanover provided ESA with bonds, and in 2007, ESA failed to complete the work on the government contracts pertaining to those bonds.

Hanover issues new bonds with the condition that ESA not only pay fee but also provide Hanover additional security in the form of a letter of credit, which would act as collateral in case of default on the first set of bonds as well as the new bonds.

Transfer

ESA transferred $1.375 million to Sun Trust Bank, which issued the letter of credit to Hanover as collateral for the old and new bonds.

After ESA filed for Chapter 7 bankruptcy, Campbell filed an adversary proceeding in the Bankruptcy Court, seeking to recover $1.375 million in transfers that ESA had made to  Hanover Insurance Co.  The insurer argued that it did not need to turn over the transfers because they constituted “new value” pursuant to 11 U.S. Code Section 547(c)(1).

The Bankruptcy Court agreed with Hanover and granted its summary judgment motion dismissing the trustee’s recovery action.  The trustee appealed to the U.S. District Court for the Western District of North Carolina.

‘New Value’

The District Court affirmed the Bankruptcy Court’s decision, and the trustee appealed to the Fourth Circuit U.S. Court of Appeals.

The Fourth Circuit unanimously reversed the lower courts on one part of Hanover’s defense; however, two of the three circuit judges on the panel ruled in favor of Hanover on the “new value” defense.

The trustee appealed to the Supreme Court, arguing that the statutory definition of “new value” under the Bankruptcy Code demonstrated that Congress intended courts to construe the definition of “new value” “narrowly and with precision.”

Moreover, the trustee argued that “contrary to the Fourth Circuit decision,” the majority of the Circuit Courts “require parties to prove new value with specificity.”

Consequently, the trustee said that because the federal courts employ inconsistent evidentiary standards in assessing the “new value” defense and because the decision of the Fourth Circuit “falls on the wrong side of the split,” the Supreme Court should have granted certiorari.

The trustee is represented by David R. Badger of Charlotte, N.C.,  A. Burton Shuford of The Bain Group in Charlotte and Karl C. Huth and Kenneth S. Levine of Project Administration LLC in New York.  Hanover is represented by William L. Esser IV of Parker Poe Adams & Bernstein in Charlotte.

Mealey's is now available in eBook format!

For more information about LexisNexis products and solutions connect with us through our corporate site.