In Re: OneStar Long Distance, Inc., Debtor.
Verizon Business Global, LLC, Defendant-Appellee/Cross-Appellant. Elliott D. Levin, as Chapter 7 Trustee For OneStar Long Distance, Inc., Plaintiff-Appellant/Cross-Appellee,
November 29, 2016
from the United States District Court for the Southern
District of Indiana, Evansville Division. No.
3:15-cv-00049-RLY-DKL - Richard L. Young, Judge.
Easterbrook, and Sykes, Circuit Judges.
retailer OneStar paid MCI, one of its wholesale suppliers,
roughly $1.9 million during the 90 days before one of
OneStar's creditors forced it into bankruptcy.
OneStar's bankruptcy trustee sought to recapture those
payments under § 547(b) of the Bankruptcy Code, which
generally allows debtors to avoid (i.e., reverse) payments
made during the 90 days before bankruptcy. This is known as
the preference period.
purchased MCI and entered the action as its successor.
Verizon conceded that the payments met the requirements of
§ 547(b) but asserted two affirmative defenses under 11
U.S.C. § 547(c). It argued that the payments were
unavoidable because (1) MCI offset them by subsequently
providing OneStar with new value in the form of additional
telecommunications services, and (2) the payments occurred in
the ordinary course of business.
response to the new-value argument, the trustee contended
that OneStar had compensated MCI for its new-value services,
canceling out that new value and nullifying the defense.
Specifically, one week before the bankruptcy filing, OneStar
assigned the privileges and debt from its contract with MCI
to a newly formed affiliate in order to avoid creditors. The
trustee maintained that this effectively compensated MCI by
releasing it from its contractual obligations to OneStar. MCI
was now obligated to provide services to the affiliate, not
to OneStar itself, though the affiliate in turn relayed those
services to OneStar.
bankruptcy judge rejected Verizon's ordinary-course
defense but ruled that the new value MCI advanced during the
preference period sufficed to make OneStar's preferential
payments unavoidable under § 547(c)(4); the debt
assignment to the newly formed affiliate was irrelevant. The
district judge affirmed the new-value ruling and did not
address the ordinary-course defense. The trustee appealed.
Verizon filed a cross-appeal contesting the rejection of its
affirm. A debtor's assignment of debt and contractual
rights to an affiliate doesn't have the effect of
repaying a creditor for new value. MCI advanced subsequent
new value that remained unpaid, so OneStar's preferential
transfers are unavoidable. That conclusion makes it
unnecessary to address Verizon's cross-appeal.
April 2002 OneStar and MCI entered into a contract requiring
MCI to provide OneStar with certain telecommunications
services. MCI billed its "switched" services (those
that involved connecting calls from one line to another) at a
variable usage rate, while its "unswitched"
services (long-haul services that didn't require
switching) carried a fixed monthly charge.
December 31, 2003, a creditor filed an involuntary Chapter 7
bankruptcy petition against OneStar. MCI had provided OneStar
with switched and unswitched services throughout the 90-day
preference period preceding that date. MCI billed OneStar on
a monthly basis, invoicing approximately $1.3 million in
October, $1.3 million in November, and $1.1 million in
December (for a sum of approximately $3.7 million). During
that time, OneStar paid MCI $1, 900, 012.81 on those invoices
(the amount the trustee now seeks to recover). The total debt
OneStar owed to MCI grew from around $7.5 million at the
beginning of the preference period to more than $9.8 million
near its end.
pivotal moment in OneStar's slide into bankruptcy came in
October 2003 when its senior secured lender sent it a default
notice. At that point OneStar's principals decided to
move business to a newly formed affiliate, IceNet, in order
to avoid creditors. IceNet's management composition
mirrored OneStar's. On December 22 OneStar, MCI, and
IceNet entered into an agreement assigning OneStar's
contractual privileges and debt to IceNet. The agreement
placed IceNet in between OneStar and MCI: OneStar now owed
IceNet; IceNet owed MCI; and MCI was obligated to provide
IceNet with the services specified in its 2002 contract with
OneStar. From December 23 until December 31, IceNet received
services from MCI and relayed them to OneStar. This scheme to
avoid OneStar's creditors was foiled by the filing of the
involuntary bankruptcy petition.
bankruptcy court OneStar's trustee sought to avoid the
prepetition payments to MCI as preferential transfers under
§ 547 of the Bankruptcy Code. The parties stipulated
that the trustee established § 547(b)'s prima facie
requirements for avoidance. But Verizon asserted that the
preferential payments were unavoidable because MCI provided
OneStar with new value-the services corresponding to the fall
2003 invoices-after receiving those payments. See 11
U.S.C. § 547(c)(4). Verizon ...