A decision issued earlier this year by a Florida bankruptcy court1 provides comfort to those who accept payment from a debtor-in-possession in return for goods or services. The court held that to invoke the jurisdiction of a bankruptcy court in a lawsuit to recover an alleged impermissible post-petition transfer by a debtor, the plaintiff must establish that the debtor's estate was diminished as a result of the transfer to the defendant. So a vendor who supplies, post-petition, goods or services equivalent in value to the payment received is protected from claw back liability even if the buyer made the payment while in bankruptcy without either court authorization or consent of the secured lender whose cash collateral was used to make the payment.  

The Facts 

Wood Treaters, LLC (the "Debtor") filed a chapter 11 case in the U.S. Bankruptcy Court for the Middle District of Florida (the "Court") on March 16, 2009. The Court entered three orders authorizing the Debtor to spend cash collateral of Debtor's secured lender over a sixteen month period.  During that period, the Debtor purchased products from a vendor ("Defendant") in eight different transactions.  On July 26, 2010, the Court entered an order terminating the Debtor's authority to use cash collateral.  After the case was converted to chapter 7, the trustee appointed in the case (the "Trustee") commenced a lawsuit seeking to recover the post-petition payments by the Debtor to Defendant as unauthorized post-petition transfers on the grounds that the Debtor was not in compliance with the terms of the operative cash collateral order when each transfer was made and because the Debtor's secured lenders were alleged not to have consented to the use of their cash collateral.

The Defendant moved for summary judgment dismissing the action, arguing that the Trustee had not properly invoked the Court's jurisdiction because she had not shown that the payments Defendant received caused an injury to the Debtor's estate.  The Defendant contended that the estate was not injured because the Debtor had received equal value--goods--in exchange for the payments.  Defendant supported its motion with an affidavit from the Debtor's principal, who stated that the goods received by the Debtor from Defendant were at least equal in value to the money Debtor paid to Defendant for them.  The Trustee countered by also moving for summary judgment and submitted her own affidavit stating that she did not believe that the goods supplied to the Debtor were equivalent in value to the cash paid out.  The Trustee also argued, based upon the ruling of the Eleventh Circuit Court of Appeals in a 2010 case that has garnered much attention2, that the Bankruptcy Code did not shield from avoidance unauthorized post-petition transfers that did not harm the estate.

The Holding

While it denied both side's motions, the Court rejected the Trustee's argument that injury to the estate need not be established in order to avoid an unauthorized post-petition transfer.  It held that any party seeking to invoke the jurisdiction of a bankruptcy court must show the following:   (i) that it suffered or will suffer an injury; (ii) the injury is fairly traceable to the defendant's conduct; and (iii) a favorable judgment is likely to redress the injury.  Without all three factors, a party lacks standing to sue in federal court.  The Court added that consideration of whether the estate suffered an injury is consistent with the underlying purpose of the Bankruptcy Code provision that empowers a trustee to avoid unauthorized post-petition transfers:  To allow a trustee to avoid such transfers which deplete the estate while providing limited protection to transferees who deal with a debtor.  According to the Court, the focus of the relevant Bankruptcy Code recovery provisions (Sections 549 and 550) is on what the bankruptcy estate lost as a result of the transfer.  The Court denied the Trustee's motion for summary judgment because the Trustee had not demonstrated that the Debtor's estate was diminished by the challenged transfers.

Why the Court Was Not Required to Follow the Eleventh Circuit's Ruling in Delco Oil 

The Court found the facts of Delco Oil to be materially different from this case.  There, the debtor paid over $1.9 million for fuel during the three-week period after its bankruptcy filing and before the bankruptcy court in that case had the opportunity to consider the debtor's motion to use cash collateral.  The bankruptcy court never authorized that debtor to use cash collateral and the case was converted to chapter 7 only two months after the chapter 11 case was filed.  The chapter 7 trustee sued the fuel seller to avoid the payments it received as unauthorized post-petition transfers.  The Court noted that, in Delco Oil, the primary issues were whether the funds paid to the defendant constituted cash collateral and whether the lender's interests were diminished by the payments made to the defendant.  Significantly, the defendant did not assert a jurisdictional challenge to the trustee's standing to sue to avoid the post-petition transfers.  Accordingly, though a Florida bankruptcy court is generally required to follow precedent set by the Eleventh Circuit, the Court here felt free to hold that a trustee must establish that the estate was diminished by the transfers sought to be avoided.

Concluding Observations 

Although the Court relied on what appears to have been a self-serving affidavit from the Trustee to deny the Defendant's motion, trade creditors dealing with chapter 11 debtors may take comfort from this decision.  The Delco Oil decision could have been understood as rejecting the defense of a recipient of an unauthorized post-petition transfer that the bankruptcy estate was not harmed by the payment.  Wood Treaters teaches that such a defense remains viable and presents a potential jurisdictional bar to recovery.