Pennsylvania: Favorable Judgment in Bankruptcy Case, U.S. Bankruptcy Court, Western District of PA
July 13, 2012

W. P. Hickman Systems, Inc. v. V & R Sheet Metal LLC, U.S. Bankruptcy Court, Western District of Pennsylvania, Adv. No. 10-2289-JAD

Rawle & Henderson LLP received a favorable judgment on behalf of a client, V&R Sheet Metal, after a two-day bench trial of a bankruptcy preference case brought by the debtors. In a straightforward 13-page decision, signed July 13, 2012, Judge Jeffery A. Deller of the Western District of Pennsylvania Bankruptcy Court dismissed the Chapter 11 debtors’ preference Complaint seeking recovery of more than $700,000 on the grounds that the plaintiffs failed to establish an element of their prima facie case at trial.

The court affirmed that the burden of proving all five elements of the preferential transfer case falls upon the debtors. Here, the debtors were unable to establish that the creditor received more than it would have received if the case were in a Chapter 7. No evidence was presented regarding the debtors’ financial condition, the assets of the debtors, the amounts available for distribution to creditors (either including or without the transfers in question) or any other aspect of the debtors’ bankruptcy. Rather, at the trial, the debtors asked the court to take judicial notice of 18 documents in the bankruptcy court’s records and facts contained therein to establish that V&R Sheet Metal received more as a result of the transfers than it would have if the Debtors were in Chapter 7 and V&R had not received the transfers.

The court acknowledged that bankruptcy courts are reluctant to use judicial notice as a complete substitute for the presentation of evidence of an element of a preference claim. The court upheld the objections to its use and found that judicial notice of the numerous documents and facts is not appropriate in this instance. Accordingly, the debtors failed to prove that V&R Sheet Metal received more than it would have under a hypothetical Chapter 7 liquidation and the court dismissed the complaint.

For trade creditors, preference claims filed by debtors or trustees in bankruptcy represent the final harm in a series of damage flowing from a customer’s financial demise. First, vendors lose a customer to bankruptcy. Second, they will likely be out any sums due and owing at the time the bankruptcy is filed. Then, they must defend against a lawsuit that aims to claw back any payments the insolvent company may have made just prior to the bankruptcy filing. This last harm is all the more troubling because of the delayed launch and protracted nature of most preference law suits. Preference claims are usually launched two years after the initial bankruptcy is filed, just before the preference claim statute of limitation expires—often taking the trade creditor by surprise.

Small companies often feel the pain more than big companies. Once the claim is launched, a vendor can be tied up in court or mediation for years. For instance, the preference claims were filed against V&R Sheet Metal in 2010, in debtors’ bankruptcy cases which were commenced in 2008, for payments that dated as far back as 2007. The court’s decision was recently released.

Preference lawsuits are a constant source of anguish in the creditor community. But there is nothing more gratifying than winning a preference lawsuit and depriving a debtor-in-possession of any recovery on the claim. Judge Deller’s decision is an important reminder for trade creditors that these claw-back cases are defensible based on attacks on the prima facie case as well as the statutory affirmative defenses.

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