Farnan, Jr. v. Vista Analytical Laboratory Inc.

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

) Chapter 11

) Case No. 16-11501 (CSS)

MAXUS ENERGY CORPORATION, )

etal., ) Jointly Administered

)

Debtors. )

oo)

JOSEPH J. FARNAN, JR, in his capacity )

as LIQUIDATING TRUSTEE OF THE _ )

MAXUS LIQUIDATING TRUST, )

)

Plaintiff, )

) Adv. Pro. No.: 18-50521 (CSS)

)

VISTA ANALYTICAL LABORATORY, )

INC,, )

)

Defendant. )

__________)

OPINION!

BALLARD SPAHR LLP GELLERT SCALI BUSENKELL &

Tobey M. Daluz BROWN, LLC

Chantelle D. McClamb Michael G. Busenkell

919 North Market Street Amy D. Brown

11% Floor 1201 N. Orange Street, Suite 300

Wilmington, DE 19801 Wilmington, DE 19801

Counsel for Defendant Vista Counsel for Plaintiff Joseph J. Farnan, Jr.

Analytical Laboratory, Inc. in his capacity as the Liquidating

Trustee of the Maxus Liquidating Trust

Dated: May 12, 2020 □

Sontchi, C.J. (Lies 5-6

1 This Opinion constitutes the Court's findings of fact and conclusions of law under Rule 7052.

INTRODUCTION

This is a preference action. Defendant has filed a motion for summary judgment

arguing that there is no genuine issue of material fact as to whether it would have been

paid the full amount of the purportedly preferential transfers in a hypothetical

liquidation under Chapter 7 and, thus, Plaintiff cannot prove its prima facie case under

section 547(b)(5) of the Bankruptcy Code. Defendant bases its argument on the assertion

that it was a “critical vendor” of the Debtors and had it not received its pre-petition

payments it would nonetheless have received payment in full post-petition under the

Court’s critical vendor order.

The Court finds that Defendant has failed to meet its burden on summary

judgment to show there is no genuine issue of material fact as to whether Defendant

would have received payment in full for its preferential transfers in a hypothetical

Chapter 7 liquidation due to its status as a critical vendor. Even though there is no

question the Debtors considered Defendant to be a critical vendor that is not enough. The

Debtors were not required to pay Defendant in full for its pre-petition invoices.

Thus, Defendant’s motion must be denied.

JURISDICTION & VENUE

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334.

Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core

proceeding pursuant to 28 U.S.C. § 157(b)(2).

STATEMENT OF FACTS

Vista Analytical Laboratory, Inc. (“Vista” or “Defendant”) operates an

environmental laboratory and services customers by determining the presence of organic

contaminants in bottled samples through the use of an analytical method developed in

1993.2 Maxus Energy Corporation (“Maxus”) is an exploration and production company

in the petroleum industry.3 Tierra Solutions, Inc. (“Tierra”) manages certain

environmental remediation obligations owed by Maxus to third parties.4 Pursuant to the

Analysis Services Agreement dated November 2, 1992 (the “Services Agreement”), Vista

provided Maxus with its aforementioned contaminant determination service.5 Maxus

subsequently assigned the Services Agreement to Tierra.6

Under the Services Agreement, Vista and Tierra executed multiple work order

agreements, including Work Order No. 1610006VAL00300 at the Diamond Alkali

2 Declaration of Martha Maier in Support of Defendant Vista Analytical Laboratory Inc.’s Motion for Summary

Judgment (“Decl. of M. Maier”), Adv. Proc. No. 18-50521 [D.I. 36], at ¶ 2–3. See Decl. of M. Maier, at Ex. A.

3 Declaration of Javier Gonzalez in Support of Chapter 11 Petitions and Requests for First Day Relief (“Decl. of J.

Gonzalez”), Case No. 16-11501 [D.I. 2], at ¶ 5.

4 Id. at ¶ 12.

5 Decl. of M. Maier, at ¶ 4.

6 Id.

Superfund Site on Lister Avenue in Newark, New Jersey (the “Lister Site”) dated

December 15, 2015 (the “Lister Agreement”) and Work Order No. 5313-VISTA-002-0 for

the Newark Bay Study Area in Newark, New Jersey (the “Newark Bay Site”) dated

September 28, 2014 (the “Newark Bay Agreement”).7

Under the Lister Agreement, Vista sent bottles to Tierra each month, which Tierra

used to collect samples from the groundwater treatment plant at the Lister Site.8 After

Tierra filled the bottles, Tierra shipped them back to Vista for analysis.9 Upon receipt of

the filled bottles, Vista performed certain analyses requested in the Lister Agreement and

prepared a report stating its findings.10 Thereafter, Vista submitted the report to Tierra,

along with an invoice, and to a third-party validator selected by Tierra to validate Vista’s

analyses.11 The third-party validator then requested any additional information needed

to validate the data and approve Vista’s report.12 Upon validation, Tierra paid Vista on

account of the related invoice.13

Under the Newark Bay Agreement, Vista sent bottles to Tierra to collect samples

from the Newark Bay Site.14 Similarly, Tierra filled and returned the bottles to Vista for

7 Id. at ¶¶ 4–5.

8 Id. at ¶ 5.

9 Id.

10 Id. at ¶ 6.

11 Id.

12 Id.

13 Id.

14 Id. at ¶ 7.

analysis and third-party validation, and Vista issued Tierra an invoice.15 The United

States Environmental Protection Agency (the “EPA”) also required Vista to conduct

certain analyses pertaining to the Newark Bay Site.16 After the EPA reviewed and

approved the reports, Tierra paid Vista on account of the related invoice.17

On June 17, 2016 (the “Petition Date”), Maxus, Tierra, and certain other entities

(collectively, “Debtors”) filed for chapter 11 relief under the Bankruptcy Code.18 The

Debtors’ chapter 11 cases were jointly administered.19 Within the 90 days preceding the

filing of the Debtors’ chapter 11 petitions (the “Preference Period”), Tierra made six

transfers to Vista on account of invoices Vista issued Tierra under the Services Agreement

in an aggregate amount of approximately $217,410.00 (the “Transfers”).20

On July 11, 2016, Vista’s Laboratory Director, Martha Maier, engaged in a

conversation via email with Tierra’s Paul J. Bluestein and Brian Mikucki regarding notice

of the bankruptcy.21 The emails were sent in the following order:

1:16 PM (from Maier to Bluestein & Mikucki): “Hello Brian and Paul,

we just received the notice today that we will not be receiving payment for

our work. I assume will [sic] not need to analyze the Lister samples we just

received, but just wanted to confirm. Martha.”

15 Id. at ¶¶ 8–9.

16 Id. at ¶ 7.

17 Id. at ¶ 9.

18 Chapter 11 Voluntary Petition, Case No. 16-11501 [D.I. 1].

19 See Order Directing Joint Administration of Chapter 11 Cases, Case No. 16-11501 [D.I. 34].

20 See Complaint for Avoidance and Recovery of Preferential Transfers Pursuant to 11 U.S.C. §§ 547 & 550 and

Objection to Claim Pursuant to 11 U.S.C. § 502(d) (“Plaintiff’s Complaint”), Case No. 16-11501 [D.I. 2063], at ¶

16, Ex. A.

21 Decl. of M. Maier, at ¶ 11, Ex. B.

3:19 PM (from Bluestein to Maier): “Martha, I’m still waiting to get

some guidance on the Newark Bay Invoices, which I should have

tomorrow. In the interim, if we were to pre-pay for the Lister samples

currently in hand by weeks end would you be willing to go ahead and start

the extraction/analyses tomorrow? Paul J. Bluestein, P.E., PMP[.]”

6:28 PM (from Maier to Bluestein): “Paul, Yes, that would be fine. I

really appreciate your help on this. Martha.”

6:42 PM (from Bluestein to Maier): “Thanks Martha. I’ll start making

the arrangements for payment. Please go ahead and send me an invoice for

those samples. Paul J. Bluestein, P.E., PMP[.]”22

After the Petition Date, on July 19, 2016, Vista filed a proof of claim against Tierra

for an amount of $233,840.00, reflecting at least fourteen unpaid invoices owed to Vista

by Tierra.23 In a document dated August 2, 2016 (the “Critical Vendors Listing”), Debtors

calculated that they owed an aggregate of $1,553,488.00 to critical vendors.24 The Critical

Vendors Listing also provided the following summary description of Vista:

Project operates under an old administrative order that utilizes an old

methodology. The technology provided by the vendor would be difficult

or impossible to get from another vendor as other vendors will have

switched to a new methodology. Changing methodologies would require

approval from regulatory agency as it would be a change from the

governing administrative order. Change would take time and require

significant cost. Works at Newark Bay and Lister.25, 26

22 Id.

23 Id. at ¶¶ 7–9, 12, Ex. C.

24 Id., at Ex. H.

25 Id.

26 At footnote 2 of Plaintiff’s Response to Defendant’s Motion for Summary Judgment and Memorandum of Law in

Support Thereof (“Plaintiff’s Response”), Adv. Proc. No. 18-50521 [D.I. 42], Plaintiff sates the following

regarding the materials found in Decl. of M. Maier, at Ex. H:

During discovery in this litigation, the Trustee turned over certain records

given to him by the Debtors, including an internal document, marked

8/2/2016 DRAFT /Highly Confidential For Professional Eyes Only/Not

for Distribution /Maxus Energy Corporation et al. Critical Vendors

Listing. See Maier Decl., Exhibit H. This draft document was prepared by

On August 17, 2016, Debtors moved for entry of an order authorizing, but not

directing, Debtors to pay pre-petition claims of certain critical vendors up to a $2 million

cap (the “Critical Vendor Motion”).27 The Critical Vendor Motion included the following

language at paragraph 18:

In another instance, one of the Projects operates under an old

administrative order that requires use of an older and now obsolete

methodology to analyze samples of soil, sediment, water, crabs, clams, and

fish. The environmental laboratory that tests samples under this specific

administrative order provides technology that would be difficult if not

impossible to replace because vendors have switched to a newer

methodology. In addition, the Debtors would need to apply to and obtain

approval from regulatory authorities to modify the terms of the

administrative order if the Debtors were forced to find a new vendor that

only utilizes the newer methodology. This process would be time

consuming and very costly to the Debtors.28

On September 2, 2016, the Court entered an order granting the Critical Vendor

Motion and set the cap at $2 million (the “Critical Vendor Order”).29 The Critical Vendor

Order includes the following language at paragraph 5:

one of Debtors’ professionals, a financial advisor. It is in draft format, and

it is neither affixed to the Critical Vendor Motion, the Critical Vendor

Order, nor incorporated by reference into any documents filed with this

Court. See Kirchner Decl. Para. 12. As such, it is irrelevant as evidence.

Nevertheless, the Court considers the Critical Vendors Listing as relevant evidence. The fact that “it is

neither affixed to the Critical Vendor Motion, the Critical Vendor Order, nor incorporated by reference into

any documents filed with this Court” may go to the weight of the evidence but not its admissibility.

27 Debtors’ Motion for Entry of an Order Authorizing, But Not Directing, the Debtors to Pay Pre-petition Claims of

Certain Critical Vendors (“Critical Vendor Motion”), Case No. 16-11501 [D.I. 252], at ¶ 9 (“Following this

analysis, the Debtors identified the Critical Vendors, which represent approximately 5% of the Debtors’

vendors. As of the Petition Date, the Debtors estimate that they owe the Critical Vendors no more than $2.0

million, which has or will become payable in the ordinary course of the Debtors’ business.”).

28 Id. at ¶ 18.

29 Order Authorizing, But Not Directing, the Debtors to Pay Pre-petition Claims of Certain Critical Vendors

(“Critical Vendor Order”), Case No. 16-11501 [D.I. 321].

The Debtors are authorized, but not directed, to condition the payment of

Critical Vendor Claims upon such Critical Vendor’s agreement to continue

supplying goods or services on Customary Trade Terms or Negotiated

Trade Terms for the duration of these chapter 11 cases by executing trade

agreements (each a “Trade Agreement”). Such Trade Agreements, once

agreed to and accepted by a Critical Vendor, shall be legally binding

contractual arrangements between the parties governing the commercial

trade relationship as provided therein.30

At no time did Debtors enter into a Trade Agreement with Vista.31

On September 16, 2016, after entry of the Critical Vendor Order, Tierra paid

thirteen of the fourteen outstanding invoices in the total amount of approximately

$225,030.00.32 On October 10, 2016, Tierra paid the final outstanding invoice (hereinafter,

the September 16 and October 10, 2016 payments will be referred to collectively as the

“Invoice Payments”).33 As of November 25, 2016, Debtors paid approximately $1.4

million in total on account of pre-petition claims of critical vendors.34

On April 19, 2017, Debtors filed their Disclosure Statement and liquidation plan

(the “Plan”).35 The Disclosure Statement included a Hypothetical Liquidation Analysis,36

and the Plan included the creation of the Liquidating Trust (the “Trust”), under which

30 Id. at ¶ 5.

31 Declaration of Aine Kirchner in Support of Plaintiff’s Response to Defendant’s Motion for Summary Judgment

and Memorandum of Law in Support Thereof (“Decl. of A. Kirchner”), Adv. Proc. No. 18-50521 [D.I. 43], at ¶ 11.

32 Decl. of M. Maier, at ¶ 14.

33 Id.

34 Amended Disclosure Statement for the Amended Chapter 11 Plan of Liquidation Proposed by Maxus Energy

Corporation, et al. and the Official Committee of Unsecured Creditors (“Disclosure Statement”), Case No. 16-11501

[D.I. 1232], at Art. IV.B.9.

35 Amended Chapter 11 Plan of Liquidation Proposed by Maxus Energy Corporation, et al. and the Official Committee

of Unsecured Creditors, Case No. 16-11501 [D.I. 1231].

36 Disclosure Statement, at Ex. D.

the Liquidating Trustee (as appointed by the Liquidating Trust Oversight Board), would

have the authority to administer the Trust through certain means, including the ability to

prosecute Causes of Action.37 On April 19, 2017, the Court approved the Disclosure

Statement38 and on May 22, 2017, the Court entered an order confirming the Plan.39 On

July 14, 2017, the Plan became effective.40

On June 14, 2018, Joseph J. Farnan Jr. (“Plaintiff”), in his capacity as the Liquidating

Trustee of the Trust, filed a complaint against Vista.41 Plaintiff’s Complaint seeks to avoid

and to recover $217,410.00 paid in the Transfers as preferential.42

On February 8, 2019, Vista responded to each claim in Plaintiff’s Complaint and

raised twelve affirmative defenses.43 On July 1, 2019, Plaintiff and Vista attempted to

reach a settlement in mediation, but no settlement was reached.44 Thereafter, on

37 Id. at Art. I.A.16 (defining “Causes of Action”); Id. at I.A.117 (defining “Liquidating Trustee”); Id. at Art.

I.A.118 (defining “Liquidating Trust Oversight Committee”); Id. at Art. VI.A (creating the “Liquidating

Trust”); Id. at Art. VI.C. (transferring certain Causes of Action to the Trust); and Id. at Art. VI.G (vesting the

Liquidating Trustee with the authority to prosecute certain Causes of Action).

38 Order (A) Approving Disclosure Statement; (B) Establishing Voting Record Date, Voting Deadline, and Other

Dates; (C) Approving Procedures for Soliciting, Receiving, and Tabulating Votes on Plan and for Filing Objections

to Plan; (D) Approving Manner and Forms of Notice and Other Related Documents; and (E) Granting Related Relief,

Case No. 16-11501 [D.I. 1237].

39 Order Confirming Amended Chapter 11 Plan of Liquidation Proposed by Maxus Energy Corporation, et al. and

the Official Committee of Unsecured Creditors Pursuant to Chapter 11 of the Bankruptcy Code, Case No. 16-11501

[D.I. 1460].

40 See Notice of (I) Entry of Order Confirming Amended Chapter 11 Plan of Liquidation, (II) Occurrence of Effective

Date, and (III) Related Bar Dates, Case No. 16-11501 [D.I. 1701], at ¶ 2.

41 See Plaintiff’s Complaint.

42 Plaintiff’s Complaint, at ¶ 16, Ex. A.

43 Answer of Vista Analytical Laboratory Inc. to Complaint for Avoidance and Recovery of Preferential Transfers

Pursuant to 11 U.S.C. §§ 547 & 550 and Objection to Claim Pursuant to 11 U.S.C. § 502(d) (“Vista’s Answer”),

Adv. Proc. No. 18-50521 [D.I. 11].

44 Mediator’s Certificate of Completion, Adv. Proc. No. 18-50521 [D.I. 26].

November 27, 2019, Vista moved for summary judgment on Plaintiff’s Complaint,

arguing that Plaintiff cannot sustain the burden of demonstrating that he is entitled to the

relief sought under his Complaint.45, 46

LEGAL DISCUSSION

A. Standard of Review

Summary Judgment is a mechanism used to ascertain the existence of a genuine

factual dispute between the parties that would necessitate a trial. Summary judgment is

appropriate “if the pleadings, the discovery and disclosure materials on file, and any

affidavits show that there is no genuine issue as to any material fact and that the movant

is entitled to judgment as a matter of law.”47

When seeking summary judgment, the movant bears the initial burden of

“establishing the absence of a genuine issue of material fact.”48 A genuine issue is not

simply based on opposing opinions or unsupported assertions but rather on conflicting

factual evidence over which “reasonable minds could disagree on the result.”49

Furthermore, a fact is material if it could “alter the outcome of a case.”50 In other words,

45 Defendant Vista Analytical Laboratory Inc.’s Motion for Summary Judgment, Adv. Proc. No. 18-50521 [D.I. 34].

46 Vista’s Motion for Summary Judgment does not seek summary judgment with respect Vista’s other

affirmative defenses. Brief in Support of Defendant Vista Analytical Laboratory Inc.’s Motion for Summary

Judgment (“Brief in Support of the Motion for Summary Judgment”), Adv. Proc. No. 18-50521 [D.I. 35], at fn.2.

47 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

48 J. Aron & Co. v. SemCrude, L.P. (In re SemCrude, L.P.), 504 B.R. 39, 51 (Bankr. D. Del. 2013) (citing Celotex,

477 U.S. at 322).

49 Liquidation Tr. v. Huffman (In re U.S. Wireless Corp.), 386 B.R. 556, 560 (Bankr. D. Del. 2008) (citations

omitted).

50 Id.

the movant’s goal is “to establish an absence of evidence to support the nonmoving

party’s case.”51

If the movant meets this initial burden, the burden shifts to the nonmoving party

to defeat summary judgment by producing “evidence in the record creating a genuine

issue of material fact.”52 To demonstrate a genuine issue of material fact, the nonmoving

party “must do more than simply show that there is some metaphysical doubt as to the

material facts.”53

The nonmoving party must demonstrate “sufficient evidence (not mere

allegations) upon which a reasonable trier of fact could return a verdict in favor of a

nonmoving party.”54 This evidence “cannot be conjectural or problematic; it must have

substance in the sense that it limns differing versions of the truth which a factfinder must

resolve at an ensuing trial.”55

When considering a motion for summary judgment, “the court does not weigh the

evidence and determine the truth of the matter; rather, the court determines whether

there is a genuine issue for trial.”56 The Court must “view the facts in the light most

51 Id. (quoting Celotex, 477 U.S. at 325).

52 In re W.R. Grace & Co., 403 B.R. 317, 319 (Bankr. D. Del. 2009).

53 Matushita Elec. Indus. Co., v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).

54 Giuliano v. World Fuel Servs., Inc. (In re Evergreen Int’l. Aviation), 2018 WL 4042662, at *2 (Bankr. D. Del.

Aug. 22, 2018) (citations omitted).

55 In re U.S. Wireless Corp., 386 B.R. at 560 (quoting Mack v. Great Atl. & Pac. Tea Co., 871 F.2d 179, 181 (1st

Cir. 1989)).

56 Argus Mgmt. Grp. V. GAB Robins, Inc. (In re CVEO Corp.), 327 B.R. 210, 214 (Bankr. D. Del. 2005) (quoting

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986) (citations omitted)).

favorable to the nonmoving party and draw all inferences in that party’s favor.”57 “If the

opposition evidence is merely colorable or not significantly probative, summary

judgment may be granted.”58 However, where the record could lead reasonable minds to

draw “conflicting inferences, summary judgment is improper, and the action must

proceed to trial.”59 Summary Judgment is proper only where one reasonable inference or

interpretation of the facts can be drawn in favor of the moving party.60

B. Analysis

Section 547(b) of the Bankruptcy Code provides:

(b) Except as provided in subsections (c) and (i) of this section,

the trustee may avoid any transfer of an interest of the debtor

in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor

before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the

petition; . . . and

(5) that enables such creditor to receive more than such

creditor would receive if—

(A) the case were a case under chapter 7 of this title;

57 Saldana v. Kmart, 260 F.3d 228, 231–32 (3d Cir. 2001).

58 Whitlock v. Pepsi Ams., No. C 08-24742 SI, 2009 WL 3415783, at *7 (N.D. Cal Oct. 21, 2009) (citations

omitted).

59 O’Connor v. Boeing N. Am., Inc., 311 F.3d 1139, 1150 (9th Cir. 2002) (quoting Munger v. City of Glasgow Police

Dep’t, 227 F.3d 1082, 1087 (9th Cir. 2000).

60 Id.

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent

provided by the provisions of this title.

The undisputed facts indicate Plaintiff has established that sections 547(b)(1) –(4)

are satisfied and Vista does not dispute that Plaintiff can carry his burden as it pertains

to these subsections. To summarize briefly, (i) section 547(b)(1) is met because Tierra paid

the Transfers for the benefit of Vista; (ii) section 547(b)(2) is met because the Transfers

were paid by Tierra on account of invoices Vista issued to Tierra under the Services

Agreement, which are “antecedent debts;”61 and (iii) sections 547(b)(3) and (4) are met as

there is no dispute as to Debtors’ insolvency during the Preference Period nor that

payment of the Transfers occurred during the Preference Period. As such, the Court is

left only to consider the import of section 547(b)(5).

The Third Circuit has stated that “[t]o satisfy the requirements of § 547(b)(5), the

trustee must establish that the transfer yielded the creditor a greater return on its debt

than it would have received if the transfer had not taken place and it had received a

distribution under a Chapter 7 liquidation.”62 In other words, “when a trustee

commences a § 547 preference action, the court is to compare ‘what the creditor actually

received and what it would have received under the chapter 7 distribution provisions of

the [Bankruptcy] Code’ in order to determine whether the creditor received more than its

61 A debt is “antecedent” for the purposes of section 547(b) if the debtor’s incurred the obligation to pay

before the challenged payment was made. AFA Inv. Inc. v. Trade Source, Inc. (In re AFA Inv. Inc.), 583 B.R.

237, 241 (Bankr. D. Del. 2015) (hereinafter, “AFA”) (citing In re Vaso Active Pharm., Inc., 500 B.R. 384, 393

(Bankr. D. Del. 2013).

62 Kimmelman v. The Port Auth. Of N.Y. & N.J. (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311, 317 (3d Cir. 2003)

(hereinafter, “Kiwi”).

fair share.”63 The Transfers Tierra paid Vista were in the amount of $217,410.00.

Therefore, for summary judgment to be granted in favor of Defendant, Defendant must

show that there is no genuine issue of material fact as to whether Vista would have

recovered the full amount of the Transfers, i.e., $217,410.00, in a hypothetical chapter 7

liquidation. If Defendant meets this initial burden, the burden will shift to Plaintiff to

defeat summary judgment by producing evidence in the record creating a genuine issue

of material fact.

Defendant Vista argues that there is no genuine issue of material fact and Plaintiff

cannot sustain his burden under section 547(b)(5) because (1) Tierra paid Vista the Invoice

Payments pursuant to the Critical Vendor Order, (2) the cost of the Invoice Payments

exceeded that of the Transfers, (3) had the Transfers not been made, Debtors had

authority to pay the $217,410.00 without adjusting the critical vendor cap, and (4) had the

Transfers not been made, Debtors still had not reached the $2 million cap.64 In response,

Plaintiff responds that (1) there is a genuine issue of material fact as to whether Vista’s

pre-petition general unsecured claim would have been paid in full under a hypothetical

chapter 7 liquidation,65 and (2) the “[Bankruptcy] Code does not contain a critical vendor

defense to preference liability,” but “[t]o the extent such a defense exists, it applies only

in the narrowest of circumstances – none of which are present in this case.”66

63 Id. (quoting 2 Collier on Bankruptcy ¶ 547.03[7][a] (15th rev. ed.2003)).

64 Brief in Support of the Motion for Summary Judgment, at ¶ 5.

65 Plaintiff’s Response, at 2.

66 Id. at 6.

In AFA Inv. Inc. v. Trade Source, Inc. (In re AFA Inv. Inc.), the court entered a

Essential Suppliers Order,67 which permitted the AFA Debtors to pay certain essential

suppliers up to a cap of $6 million.68 Pursuant to the Essential Suppliers Order, the AFA

Debtors and creditor Trade Source executed a letter agreement, which provided that

“Trade Source was to receive payment of its pre-petition claim and, in exchange, would

continue to provide its services post-petition.”69 In the weeks following confirmation of

the AFA Debtors’ reorganization plan, the AFA Debtors filed a complaint “seeking to

avoid and recover a $24,999.99 payment made . . . to Trade Source by check dated [within

the 90 day preference period].”70 Trade Source filed an answer to the AFA Debtors’

preference complaint and the AFA Debtors moved for summary judgment.71 The AFA

Debtors argued that their Motion for Summary Judgment should be granted because

Trade Source was an unsecured creditor and, under a hypothetical chapter 7 liquidation,

“unsecured creditors [would] receive less than a 100% distribution under the debtors’

confirmation plan of liquidation.”72 Trade Source asserted that “even in a chapter 7

liquidation[,] it would have received 100% payment of its claim pursuant to the AFA

court’s Essential Suppliers Order and the parties’ related agreement.”73 The AFA court

67 AFA, 583 B.R. at 239.

68 Id. at 244.

69 Id. at 239.

70 Id. at 240.

71 Id.

72 Id. at 243.

73 Id.

found in favor of Trade Source because, pursuant to the Essential Suppliers Order, Trade

Source and the AFA Debtors executed a letter agreement under which “Trade Source

agreed to continue providing services to the Debtors in exchange for payment of its pre-

petition claim within nine months,” and therefore Trade Source would recover 100% in a

hypothetical chapter 7 liquidation.74

In reaching its decision, the AFA court considered the Third Circuit’s decision in

Kiwi.75 In Kiwi, the Third Circuit determined that “an unsecured creditor whose claim is

paid in full post-petition pursuant to a court order, or court-approved stipulation, cannot

then be compelled in a preference action to turn over amounts related to pre-petition

payments.”76 Notably, the Third Circuit so decided because it found payments made to

critical vendors pursuant to a court order to be analogous to payments made to contract

parties upon assumption of executory contracts under section 365 of the Bankruptcy

Code, which require any defaults to be cured.77

In HLI Creditor Trust v. Export Corp. (In re Hayes Lemmerz Intern., Inc.), the court

entered an order, which permitted, but did not mandate, the Hayes Lemmerz Debtors to

pay certain critical vendors up to a cap of $1.6 million (the “HLI Order”).78 After

confirmation of the Hayes Lemmerz Debtors’ reorganization plan, one of the Hayes

74 AFA, 538 B.R. at 243.

75 Id. (citing Kiwi).

76 Kiwi, 344 F.3d at 321.

77 Id. at 318.

78 HLI Creditor Trust v. Export Corp. (In re Hayes Lemmerz Intern., Inc.), 313 B.R. 189, 191–93 (Bankr. D. Del.

2004) (hereinafter, “Hayes Lemmerz”).

Lemmerz Debtors filed a complaint against creditor Export “seeking to recover certain

alleged preferential transfers . . . totaling $286,385.66.”79 Export filed a motion to dismiss

the complaint, arguing that “the pre-petition transfers at issue are greater than what

Export would have received under a chapter 7 liquidation.”80 The Hayes Lemmerz

Debtors responded that the motion to dismiss should be denied because they did not pay

Export under the HLI Order, and, even if they did, the HLI Order was “permissive—

rather than mandatory.”81 The Hayes Lemmerz court decided in favor of the Hayes

Lemmerz Debtors because it found (1) the payments were made before filing the critical

vendor motion and before entry of the HLI Order, (2) there was a factual dispute between

the parties as to whether the Debtors considered Export a critical vendor, and (3) even if

Export received “some payments” under the HLI Order, because it was permissive and

not mandatory, “it does not follow that [Export] was entitled to receive payment of all

pre-petition claims.”82 The Hayes Lemmerz court further concluded that the permissive

nature of the HLI Order distinguished it from contracts assumed under section 365 of the

Bankruptcy Code because section 365 “mandates that all pre-petition obligations be paid

before a contract is assumed.”83

79 Id. at 191.

80 Id. at 192.

81 Id. at 193.

82 Id.

83 Id. at 194 (citing 11 U.S.C. § 365(b)(1)(A)).

In Zenith Indus. Corp. v. Longwood Elastomers, Inc. (In re Zenith Indus. Corp.), the

court entered an Essential Vendor Order on March 14, 2002, which granted the Zenith

Debtors “the right, not the obligation, to pay certain discrete pre-petition claims at

Zenith’s own discretion” up to a cap of $1 million.84 Prior to the entry of the Essential

Vendor Order, the Zenith Debtors commenced an adversary proceeding against creditor

Longwood “seeking to recover $1,317,587 of alleged § 547 preference transfers that were

made during the ninety days prior to the petition date.”85 The $1,317,587 figure

“comprises twelve separate transfers, including a $506,035 wire transfer made on the eve

of the petition date.”86 Longwood argued in its twenty-first affirmative defense the so-

called “critical vendor defense” to section 547(b)(5).87 Longwood’s argued that even if

the pre-petition transfers had not been made, Longwood would have still received

payments from the Zenith Debtors under the Essential Vendor Order because the Zenith

Debtors considered Longwood an essential vendor; and because the transfers would have

been made pursuant to the Essential Vendor Order, the pre-petition transfers cannot be

recovered as preferences.88 The Zenith court rejected Longwood’s use of the critical

vendor defense.89 Specifically, the Zenith court held that even if Longwood established

84 Zenith Indus. Corp. v. Longwood Elastomers, Inc. (In re Zenith Indus. Corp.), 319 B.R. 810, 812, 815 (Bankr. D.

Del. 2005) (hereinafter, “Zenith”).

85 Id. at 812.

86 Id.

87 Id.

88 Id. at 814–16 (citing Kiwi; also citing Official Committee of Unsecured Creditors v. Medical Mutual of Ohio (In

re Primary Health Systems, Inc.), 275 B.R. 709 (Bankr. D. Del. 2002)).

89 Id. at 819 (“[T]he twenty-first affirmative defense was properly struck.”)

through discovery that the Zenith Debtors understood it to be an essential vendor, the

defense must fail because the $506,035 figure would have drawn objections due to its size

relative to the $1 million cap under the Essential Vendor Order.90 Furthermore, the Zenith

court agreed with the holding in Hayes Lemmerz, which “rejected the analogy to a

situation where a debtor assumes a contract pursuant to § 365.”91

Importantly, the AFA court noted the disparity between the alleged preferential

transfer and the court-ordered cap for critical vendor/essential supplier payments.92 In

Zenith, the transfer was $506,035 and the Essential Vendor Order cap was $1 million (over

50% of the cap);93 whereas in AFA, the transfer was $24,999.99 and the Essential Suppliers

Order cap was $6 million (less than one-half of 1% of the cap).94 Thus, the AFA court

concluded that “unlike Zenith, the inclusion of the alleged preference payment in the

motion would not have been likely to draw an objection or result in the Court’s refusal to

enter the [Essential Suppliers] Order.”95

Regarding, Hayes Lemmerz, the AFA court distinguished its decision based on

whether the creditor-at-issue was identified as a critical vendor/essential supplier

pursuant to court order.96 In Hayes Lemmerz, Export was not identified in the HLI Order

90 Id. at 817–18.

91 Id. at 817.

92 AFA, 538 B.R. at 244.

93 Zenith, 319 B.R. at 812.

94 AFA, 538 B.R. at 244.

95 Id.

96 Id.

and that order was permissive not mandatory.97 In AFA, however, Trade Source had been

identified as a critical vendor and the AFA Debtors “executed a separate agreement

obligating themselves to pay Trade Source its pre-petition claim as long as Trade Source

continued to provide post-petition services on pre-petition terms.”98

The Court determines that there is a genuine issue of material fact as to whether

Vista would have been paid the full amount of the Transfers, i.e., $217,410.00, in a

hypothetical chapter 7 liquidation. First, the very nature of chapter 7 liquidations often

results in general unsecured creditors being paid less than 100% if they are paid anything

at all. Indeed, the Debtors in this case already considered the scenario of a hypothetical

liquidation in their Disclosure Statement.99 Therein, Debtors provided that “the recovery

for General Unsecured Claims is between 2.7-11.5%” based on recovery related to certain

litigation.100 Although Vista argues that in a hypothetical chapter 7 liquidation it would

have been paid the same $217,410.00 under the Critical Vendor Order, had the Transfers

not been paid, the Disclosure Statement dictates that were that not true Vista would have

recovered less.

Second, unlike in AFA where the AFA Debtors and Trade Source executed a trade

agreement pursuant to the Essential Suppliers Order, Vista and Tierra never entered into

97 Id.

98 Id.

99 Disclosure Statement, at Art. VII.D and Ex. D.

100 Id. at Ex. D.

a separate Trade Agreement pursuant to paragraph 5 of the Critical Vendor Order.101 The

emails between Vista and Tierra, which were sent on July 11, 2016, approximately two

months prior to the Court’s entry of the Critical Vendor Order, do not satisfy the creation

of a Trade Agreement under the Critical Vendor Order.102

Third, unlike AFA but like Zenith, had the Transfers not been made, a transfer to

Vista in the full amount of the Transfers would have plausibly drawn objections. The

Transfers to Vista were in the amount of $217,410.00, which is approximately 11% of the

$2 million cap under the Critical Vendor Order. The Zenith court’s emphasis on the size

of the $506,035 transfer in that case in relation to the relief granted by the Essential Vendor

Order does not fall of deaf ears.103 At the very least there is a genuine issue of material

fact that, had the Transfers not been paid, a transfer valued at approximately 11% of the

relief requested in the Critical Vendor Order would draw no objections. In other words,

a transfer to Vista of $217,410.00 made pursuant to the Critical Vendor Order is more

similar to the transfer contemplated in Zenith (valued at over 50% of the Essential Vendor

Order cap) than to the transfer contemplated in AFA (valued at less than one-half of 1%

of the Essential Suppliers Order cap.

Fourth, and most importantly, the authority granted the Debtors under the Critical

Vendor Order was discretionary. While it is true that all of Vista’s unpaid pre-petition

101 Critical Vendor Order, at ¶ 5.

102 Supra notes 21–22.

103 See Zenith, 319 B.R. at 818.

invoices were paid under the Critical Vendor Order, the Debtors were not required to do

so and it is plausible that an additional $217,410.00 would not have been paid.

As such, the Court will deny Vista’s motion for summary judgment because there

is a genuine issue of material fact as to whether Vista would have recovered $217,410.00

in a hypothetical chapter 7 liquidation.

This conclusion holds even though there is no genuine issue of material fact as to

whether the Debtors considered Vista to be a critical vendor – they did. Defendant argues

that the Debtors considered Vista to be a critical vendor because of the stark similarities

between the language pertaining to Vista in the Critical Vendors Listing and the language

found in paragraph 18 of the Critical Vendor Motion. In support of this argument, Vista

highlights Debtors’ choice of words in the Critical Vendor Motion.104 Plaintiff argues that

Debtors did not consider Vista to be a critical vendor because (1) Debtors did not

explicitly refer to Vista by name in the Critical Vendor Motion, and (2) Debtors at no time

entered into a separate Trade Agreement with Vista.105

The Critical Vendors Listing and paragraph 18 of the Critical Vendor Motion share

similar language pertaining to Vista. In the Critical Vendors Listing, a description of

Vista begins by calling it a project that “operates under an old administrative order that

utilizes an old methodology.” 106 The Critical Vendor Motion also begins by describing

104 See Brief in Support of the Motion for Summary Judgment, at ¶¶ 18–20.

105 Plaintiff’s Response, at 2–3.

106 Decl. of M. Maier, at Ex. H (emphasis added).

a project that “operates under an old administrative order that requires use of an older

and now obsolete methodology.”107 Vista services customers through use of an

analytical method dated from January 1993.108 Moreover, the Critical Vendors Listing’s

description of Vista reads, “The technology provided by vendor would be difficult or

impossible to get from another vendor as other vendors will have switched to a new

methodology.”109 Likewise, the Critical Vendor Motion offers, “The environmental

laboratory that tests samples under this specific administrative order provides

technology that would be difficult if not impossible to replace because vendors have

switched to a newer methodology.”110

The Debtors were not hiding the ball when they described the “environmental

laboratory” that tests samples using an “older and now obsolete methodology” rather

than outright naming Vista.111 Although Debtors could have named Vista in the Critical

Vendor Motion for the avoidance of doubt, Debtors’ substantially similar descriptions of

Vista in the Critical Vendors Listing and the “environmental laboratory” in paragraph 18

of the Critical Vendor Motion more than suffices. As such, the Debtors considered Vista

to be a critical vendor. Nonetheless, the fact that the Debtors considered Vista to be a

critical vendor, in and of itself, does not mean Defendant has carried its burden on

107 Critical Vendor Motion, at ¶ 18 (emphasis added).

108 Decl. of M. Maier, at ¶ 3.

109 Id. at Ex. H (emphasis added).

110 Critical Vendor Motion, at ¶ 18 (emphasis added).

111 See Id.

summary judgment. As discussed at length above, the case law is more nuanced.

Nothing in the Critical Vendor Order required Debtors to pay Vista in full for its pre-

petition invoices. Therefore, Vista’s argument on summary judgment that if the Transfers

were not paid pre-petition it would have been paid pursuant to the Critical Vendor Order

must fail.

CONCLUSION

For the reasons set forth above, the Court finds that there is a genuine issue of

material fact as to whether Vista would have recovered the full amount of the Transfers

in a hypothetical Chapter 7 liquidation. Thus, Defendant’s motion for summary

judgment must be denied.

An order will be issued.