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In re OneStar Long Distance Inc.

United States Court of Appeals, Seventh Circuit

September 22, 2017

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,

          Argued November 29, 2016

         Appeals 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.

          Before Posner, [*] Easterbrook, and Sykes, Circuit Judges.


         Telecommunications 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.

         Verizon 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.

         In 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.

         The 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 ordinary-course defense.

         We 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.

         I. Background

         In 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.

         On 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.

         A 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.

         In 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. ยง 547(c)(4). Verizon ...

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