Payments Made Directly From A DIP Account More Likely To Be “Unauthorized” Post-Petition Transfers

Posted by Jessica Grossarth
February 9, 2015

On December 19, 2014, The Honorable Julie A. Manning issued a Memorandum and Decision in the In re Louis Gherlone Excavating, Inc. case with respect to a Complaint filed by the Chapter 7 Trustee, Richard M. Coan (“the Trustee ”), to Avoid and Recover Unauthorized Post-Petition Transfers.  Trustee Coan sought avoidance of four transfers, all of which were made after the commencement of the bankruptcy case to MDC Corporation (“MDC”) and  its principal, Leo D. Caldarella.  Two of the transfers in the amounts of $50,000 and $30,000 were made from the debtor’s debtor in possession account (the “DIP Transfers”) and the other two transfers in the amounts of $62,500 and $111,108.37 were made by third parties (the “Third Party Transfers”.)

In accordance with Section 549 of the Bankruptcy Code, a trustee may avoid a transfer of property of the estate if the trustee proves: 1) the transfer involved property of the estate, 2) the transfer occurred after commencement of the case, and 3) the transfer was not authorized by the court or any provision of the Bankruptcy Code  11 U.S.C. §549(a).

As to Mr. Calderella, the Court found that the Trustee failed to establish that the Third Party Transfers were property of the estate, and thus, a Section 549 claim could not be sustained against Mr. Calderella.  As to MDC, the court found all of the elements of Section 549 to be satisfied, and awarded judgment in favor of  the Trustee as to the DIP Transfers.

The Trustee argued that the Third Party Transfers were accounts receivable owed to the debtor for equipment and services provided at two projects and were improperly paid to MDC.  However, the testimony provided by the debtor’s principal and MDC’s principal were at odds, and the court found the testimony of the debtor’s principal to be less credible because: 1) he testified that he wasn’t familiar with the financial affairs of the debtor but he owned and operated the company for several decades; 2) there was no documentation submitted to support the claim that the debtor’s equipment was used at the two jobs; and 3) no evidence was introduced to show the value of that work allegedly performed by the debtor.  The Trustee argued that the Third Party Transfers corresponded to amounts owed on the debtor’s accounts receivable records.  However, the court held that in the absence of additional evidence, the Trustee did not establish that the Third Party Transfers were property of the debtor’s estate.

Despite there being the same witnesses and same recipient of funds in this case for both the DIP Transfers and the Third Party Transfers, it appears that the court viewed the payments that did not directly come from the debtor’s DIP account a little differently. It was more difficult for the Trustee to convince the court that the Third Party Transfers were property of the estate, and thus, unauthorized.  A plaintiff should be prepared to produce evidence beyond testimony to establish transfers are unauthorized when they come from third parties, as opposed to when the transfers come directly from the debtor’s account.  This point would apply beyond the law of unauthorized post-petition transfers and would apply to all transfers alleged to have been property of the debtor’s estate and avoidable under other Bankruptcy Code sections.


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