Verizon Business Global, LLC v. Levin

Telecommunications retailer OneStar paid its supplier, MCI, $1.9 million during the 90 days before OneStar was forced into bankruptcy. OneStar’s bankruptcy trustee sought to recapture those payments under 11 U.S.C. 547(b), which generally allows debtors to avoid payments made during the 90-day “preference period.” MCI asserted affirmative defenses under 11 U.S.C. 547(c): that the payments were unavoidable because MCI offset them by subsequently providing OneStar with new value--additional telecommunications services--and the payments occurred in the ordinary course of business. The trustee contended that the new value was canceled because, one week before the bankruptcy filing, OneStar assigned its contract with MCI to a newly-formed affiliate, releasing MCI from its contractual obligations to OneStar. MCI was now obligated to provide services to the affiliate, which then 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; the debt assignment to the newly-formed affiliate was irrelevant. The district judge and Seventh Circuit affirmed. A debtor’s assignment of debt and contractual rights to an affiliate does not 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. View "Verizon Business Global, LLC v. Levin" on Justia Law