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In re Newpage Corp.

United States District Court, D. Delaware

July 12, 2017

In re NEWPAGE CORPORATION, et al., Reorganized Debtors. PIRINATE CONSULTING GROUP, LLC, AS LITIGATION TRUSTEE OF THE NP CREDITOR LITIGATION TRUST, Appellant,
v.
KADANT SOLUTIONS DIVISION, Appellee. Bank. No. 11-12804 (KG) Adv. No. 13-52520 (KG)

          M. Blake Cleary, Esquire, Jaime Luton Chapman, Esquire, and Andrew L. Magaziner, Esquire, of Young Conaway Stargatt & Taylor LLP, Wilmington, Delaware. Counsel for Pirinate Consulting Group, LLC, as Litigation Trustee of the NP Creditor Litigation Trust.

          Rachel B. Mersky, Esquire, of Monzack Mersky McLaughlin and Browder, P.A., Wilmington, Delaware; and Janey E. Bostwick, Esquire, of Janet E. Bostwick, P.C., Boston, Massachusetts. Counsel for Kadant Solutions Division.

          MEMORANDUM OPINION

          ROBINSON Senior District Judge.

         I. INTRODUCTION

         This appeal arises from a preference action filed by Pirinate Consulting Group, LLC, as trustee ("Trustee") of a creditors' litigation trust created under the confirmed Chapter 11 plan of NewPage Corporation, et al. ("NewPage" or "Debtors"). The preference action sought to avoid $765, 120.68 in payments made to defendant Kadant Solutions Division ("Kadant") within the ninety days prior to September 7, 2011 ("Petition Date").[1] On September 30, 2016, the bankruptcy court entered a memorandum opinion and order, Pirinate Consulting Group, LLC v. Kadant Solutions Division, Adv. No. 13-52530 (KG), 2016 WL 5787237 (Bankr. D. Del. Sept. 30. 2016), granting Kadant's motion for summary judgment and dismissing the adversary proceeding. The bankruptcy court determined that: (i) a $351, 709.20 transfer ("EDS payment") was not subject to avoidance because it was a prepayment and not a transfer on account of an antecedent debt as required for avoidance by § 547(b)[2] of the Bankruptcy Code; and (ii) the remaining transfers at issue, totaling $413, 411.48, were protected from avoidance by the Bankruptcy Code's ordinary course defense.[3] Trustee appeals the bankruptcy court's decision with respect to the EDS payment on the basis that the bankruptcy court erred in determining that it was not a transfer on account of an antecedent debt.

         II. BACKGROUND

         Kadant manufactures and designs accessory equipment used in the pulp and paper manufacturing industries. (R100)[4] Its business includes: (i) supplying standard parts and supplies on a routine basis; and (ii) custom manufacturing of capital equipment for customers. (See id.) Capital equipment orders involve customized equipment built for a customer's specific application or installation, requiring a substantial investment by the customer. (See id.) Such orders are separately negotiated and contain significant additional terms and conditions. (R354)

         Prior to the Petition Date, Debtors and Kadant entered into negotiations for the custom manufacture of six gravity drainage structures referred to by the parties and bankruptcy court as the Escanaba Mill Structures or "EDS." In connection therewith, the parties executed the "General Terms and Conditions for Contracts and Purchase Orders for Purchase of Equipment" ("General Terms") in May 2010. (R100; R106-22) The General Terms defined "Contract" as "[t]he Purchase Order to which these Terms and Conditions are attached . . ., all documents incorporated by reference under the Purchase Order or under these Terms and Conditions . . . and all exhibits and amendments to all such documents." (R108) The General Terms provided that the Debtors could terminate a purchase order at any time without cause on 10 days' notice to Kadant. (R118) In the event of such a cancellation, Debtors were only liable for actual costs incurred by Kadant (plus normal markups) up to the date of cancellation, not to exceed the contract price.

         In July and August 2011, the parties negotiated the terms and conditions of the contract for the manufacture of the EDS, during the course of which Kadant submitted several "revised proposal[s]" for NewPage's review. (See R124-55, dated August 10, 2011, titled "Quotation Number QCEP081 rev. 4" (herein, "Revised Quote 4"); R168-98, dated September 12, 2011, titled "Quotation Number QCEP0281 rev. 5" (herein, "Revised Quote 5")) Kadant attached to each of the revised quotes three appendices: (i) a proposed "Mechanical Vibration Warranty" (Appendix A);[5] (ii) proposed "Terms of Payment" requiring prepayment in the amount of 60% of the contract price ("60% with order"), 20% "with Certified Drawings, " and the final 20% "prior to shipment" ("payment must be received before the equipment leaves manufacturing plant") (Appendix B); and (iii) the executed General Terms (Appendix C). Regarding the parties' transaction, there appears no dispute that, following continued negotiations in early August, these events occurred:

August 10, 2011 Kadant submitted Revised Quote 4 to NewPage. (R101; R124-55)
August 12, 2011 Kadant issued Invoice M10593 for payment of the 60% due "with order" in the amount of $351, 709.20 pursuant to Revised Quote 4 (the "Invoice"). (R102; R157)
August 15, 2011 NewPage issued a revised purchase order regarding Revised Quote 4 (the "Purchase Order"). (R158)
August 25, 2011 NewPage issued check no. 2048460 dated August 25, 2011 to Kadant, which included the $351, 709.20 EDS payment. (R102)
August 30, 2011 On or about August 30, 2011, Kadant received check no. 2048460 from NewPage, which included the $351, 709.20 EDS payment. (R102; R165)
September 7, 2011 NewPage files for protection under Chapter 11. (B.D.I. 1)[6]
September 12, 2011 Continued negotiations lead to Kadant's issuance of Revised Quote 5. (R102; R168-98)
October 2011 Kadant begins manufacturing the EDS only after the receipt of required payments in September and October 2011. (R355)
December 2011 Kadant shipped the equipment to the Debtors in late December after receiving the final 20% payment. (R103; R355) December 14, 2012 Debtors confirmed a plan and appointed Trustee. (B.D.I. 2945)
2012-2014 Following the shipment of the equipment, Kadant provided further work and services on the EDS project, including work needed to meet the conditions of the vibration warranty included in the parties' agreement. (R355)
May 2014 NewPage gives final acceptance of the equipment. (R356)

         Trustee filed the preference action on November 26, 2013, and the first amended complaint sought to avoid $765, 120.68 in payments made by the Debtors to Kadant, including the $351, 709.20 EDS payment received on or about August 30, 2011. Kadant moved for summary judgment. (R80-236) With respect to the EDS payment, Kadant argued that it was not subject to avoidance because it was not on account of an antecedent debt. (R82) Kadant relied on the fact that the EDS payment, which represented an initial payment of 60% of the total price, occurred prior to Kadant beginning any manufacturing work or shipping anything, and that the General Terms allowed the Debtors to terminate the contract on 10 days' notice, in which case they would only be liable for costs. (R335-36) Kadant argued these facts demonstrated that "there was no liability at the time of the [EDS] payment." (R334) In support of its summary judgment motion, Kadant filed the Affidavit of Brad Kruzan, Kadant's Vice President of Finance, which, among other things, set forth the history of the negotiations and transaction. (R99-236) Trustee opposed the motion on the basis that Kadant had improperly equated "antecedent debt" under § 547(b) with an immediate right to payment, and filed a cross-motion for summary judgment. (R23-83) Kadant opposed the cross-motion (R329-57) and filed a further affidavit in support of its opposition (R352-56). Trustee set forth no contradictory evidence and there appears to be no dispute as to the history of the transaction set forth in Kadant's affidavits.[7]

         Following oral argument, [8] the bankruptcy court issued the memorandum opinion and order, determining that the EDS payment was a prepayment and not a transfer on account of an antecedent debt, [9] and that the remaining payments were protected by the ordinary course of business defense. (R505, 508, 510) On October 14, 2016, Trustee timely filed a notice of appeal. (D.I. 1)

         III. JURISDICTION AND STANDARD OF REVIEW

         The court has jurisdiction to review the bankruptcy court's order pursuant to 28 U.S.C. § 158(a). In reviewing a bankruptcy court's grant of summary judgment, the court applies a plenary, or de novo, standard of review to legal determinations. Biase v. Congress Fin. Corp. (In re Tops Appliance City, Inc.),372 F.3d 510, 513 (3d Cir. 2004); Am. Flint Glass Workers Union v. Anchor Resolution Corp.,197 F.3d 76, 80 (3d Cir. 1999). Under that standard, courts look to whether the record demonstrates "a genuine issue of material fact and, if not, whether the moving party is entitled to judgment as a matter of law." Saldana v. Kmart Corp.,260 F.3d 228, 232 (3d Cir. 2001). Courts must view ...


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