Mid Ohio Petroleum Company et al v. American Electric Power

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
MID OHIO PETROLEUM
COMPANY
Debtor-in-Possession
LEONARD Z. EPPEL OF
FINANCIAL RESOURCE
ASSOCIATES, INC., AS ESTATE
REPRESENTATIVE OF MID OHIO
PETROLEUM COMPANY
Plaintiff
vs.
AMERICAN ELECTRIC POWER
Defendant
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Case No. 02-16768
Chapter 11
Judge Hopkins
Adversary Case No. 04-1205
MEMORANDUM OF DECISION ON ORDER
DENYING DEFENDANT'S SUMMARY JUDGMENT MOTION
AND GRANTING PLAINTIFF'S MOTION
FOR LEAVE TO FILE ANSWER TO COUNTERCLAIM
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: April 14, 2006
____________________________________________________________
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Case No. 02-16768
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This action to recover alleged preferential and postpetition transfers, pursuant to 11 U.S.C.
§ 547(b) and 549(a), is before the Court on: (1) a motion for summary judgment and/or default
judgment (Doc. 20) filed by the Defendant, American Electric Power ("AEP"); and (2) a motion
filed by the Plaintiff, Leonard Z. Eppel ("Eppel"), the designated estate representative under the
plan, for leave to file an untimely answer to a counterclaim asserted by AEP. See Doc. 23.
Eppel's complaint seeks to avoid and recover: (1) alleged preferential transfers totaling
$8,046.24; and (2) alleged postpetition transfers totaling $3,533.67. 	AEP raises the preference
defenses of new value and ordinary course of business. AEP also asserts a counterclaim, requesting
a judgment for the allowance of an administrative claim for allegedly unpaid postpetition utility
service.
FACTS
AEP is the trading name for eleven separate electric power public utility companies operating
in 11 different states. AEP provides electric utility service to its customers. The Debtor maintained
three accounts with AEP. The Debtor filed a chapter 11 petition on September 10, 2002. Within
the ninety days of the Debtor filing its petition in this case, AEP received multiple payments from
the Debtor in the aggregate amount of $8,046.24. Subsequent to its receipt of each payment within
the preference period, AEP provided additional prepetition utility service to the Debtor.
AEP also provided the Debtor with utility service after the petition date. AEP received two
postpetition transfers from the Debtor in the aggregate amount of $3,533.67.
SUMMARY J UDGMENT M OTION
AEP's summary judgment motion raises two issues. The first issue addresses the validity and
extent of AEP's new value defense. The second issue addresses the validity of Eppel's action to
recover the postpetition transfers.
1. 	New Value Defense–§ 547(c)(4)
Section 547(c)(4) provides:
The trustee may not avoid under this section a transfer–
. . .
(4) to or for the benefit of a creditor, to the extent that, after such transfer,
such creditor gave new value to or for the benefit of the debtor–
(A) not secured by an otherwise unavoidable security interest;
and
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Case No. 02-16768
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(B) on account of which new value the debtor did not make
an otherwise unavoidable transfer to or for the benefit of such
creditor[.]
Relying on the § 547(c)(4) defense, AEP argues that it is entitled to summary judgment on Eppel's
preference action to the extent that it advanced, subsequent to its receipt of each preference period
payment, an aggregate of $6,926.51 in additional prepetition utility services.
Eppel, on the other hand, contends that a creditor does not possess a new value defense if
the alleged new value was "paid" by subsequent transfers from a debtor during the preference period.
Eppel further contends that the majority of AEP's new value was paid by the Debtor. AEP does not
dispute the fact that the Debtor paid for the new value. Even if a debtor pays for the new value, AEP
argues, a new value defense arises if the transfer that paid for the new value can be avoided.
There is a split of authority among courts on this issue. 	See Roberds, Inc. v. Broyhill
Furniture (In re Roberds, Inc.), 315 B.R. 443, 469 (Bankr. S.D. Ohio 2004) (Waldron, J.). 	In
Roberds, Judge Waldron adopted the position advanced by AEP on the matter. See id. at 472-73.
Finding the Roberds decision to be well-reasoned, and guided by the principle of staré decisis, this
Court will follow the precedent established in this district.
Nonetheless, because AEP asserts an ordinary course of business defense that is not at issue
on summary judgment, the new value defense is not ripe for adjudication. Courts in our Circuit
follow the well defined rule that the new value defense cannot be adjudicated until all other
affirmative defenses are. 	See Id. at 473; see also Phoenix Restaurant Group, Inc. v. Ajilon
Professional Staffing LLC (In re Phoenix Restaurant Group, Inc.), 317 B.R. 491, 499-500 (Bankr.
M.D. Tenn. 2004). In this case, it is unknown whether the Debtor's transfers that paid for AEP's new
value are subject to avoidance until AEP's ordinary course of business defense is first litigated.
Consequently, there is a genuine issue of material fact under § 547(c)(4) that precludes summary
judgment. See Phoenix Restaurant Group, 317 B.R. at 500 (denying summary judgment on new
value defense so that ordinary course of business defense could be litigated as prerequisite to new
value defense).
2. 	Postpetition Transfers–§ 549(a)
To assert a claim for avoiding and recovering a postpetition transfer under § 549(a), Eppel
must prove the following four elements: (1) a transfer; (2) of property of the estate; (3) made after
the commencement of the case; and (4) that is not authorized under the Bankruptcy Code or by a
bankruptcy court. See Devan v. Phoenix American Life Ins. Co. (In re Merry-Go-Round Enters.
Inc.), 400 F.3d 219, 224 (4th Cir. 2005); Cohen v. KDC Fin. Servs., Inc. (In re Miller Mining, Inc.),
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Case No. 02-16768
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1 Section 549(a) provides, in relevant part:
[T]he trustee may avoid a transfer of property of the estate–
(1) that occurs after the commencement of the case; and
(2)(A) that is authorized only under section 303(f) or 542(c) of this title; or
(B) that is not authorized under this title or by the court.
2 For purposes of § 549(a), when a transfer is made by check the date of transfer is the date
on which the check is honored. Guinn v. Oakwood Properties, Inc. (In re Oakwood Markets, Inc.),
203 F.3d 406, 409 (6th Cir. 2000). It is undisputed that the checks to AEP cleared on September 17,
2002, and September 24, 2002.
4
219 B.R. 219, 221-22 (Bankr. N.D. Ohio 1998).1 AEP argues that the transfers cannot be avoided
because they were authorized by the Bankruptcy Code as administrative expense payments that the
Debtor was permitted to make in the ordinary course of business.
Section 363(c)(1) permits a chapter 11 debtor to "use property of the estate in the ordinary
course of business without notice or a hearing." However, § 363(c)(2) restricts this authority if the
estate property in question is cash collateral. Weiss v. People Savings Bank (In re Three Partners,
Inc.), 199 B.R. 230, 236 (Bankr. D. Mass. 1995). 	A debtor may only use cash collateral if the
secured creditor consents or a bankruptcy court, by order, authorizes that use. § 363(c)(2).
The postpetition transfers to AEP were made with cash. Specifically, the Debtor tendered
the following checks to AEP:
Check No. 	Amount 	Date of Transfer 2
8707 	$501.45 	September 17, 2002
8798 	$3,032.22 	September 24, 2002
There is no dispute that the cash transferred to AEP also constituted cash collateral. Earlier in this
case, this Court entered an order finding PNC Bank National Association ("PNC") to be the holder
of a lien on the Debtor's cash. See Case Doc. 19 (hereafter "Cash Collateral Order"). Accordingly,
the issue here is whether the Debtor had the authority under § 363(c)(2) to use PNC’s cash collateral
to make the foregoing payments to AEP.
Under the agreed Cash Collateral Order, PNC consented to the use of its cash collateral for
payment of only those expenses itemized in an attached budget. See Cash Collateral Order at 5.
The budget, which covers the two-week period from September 16, 2002, through September 30,
2002, being the relevant period now in question, contains no line item for payment of utilities.
Therefore, at the time of the transfers to AEP, the Debtor did not have the authority under §
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363(c)(2) to use cash collateral to pay AEP for utility services. 	Consequently, the postpetition
transfers were made without Court authorization or the consent of the secured creditor. Under this
analysis, summary judgment on the§ 549(a) claim would therefore not be appropriate and the motion
will be denied.
DEFAULT J UDGMENT M OTION
AEP also moves for default judgment against Eppel on its counterclaim. Ostensibly, AEP
seeks a judgment on an administrative claim for alleged unpaid postpetition utility service provided
to the Debtor. Eppel has filed a motion for leave to file an answer out of time. For the following
reasons, AEP's motion for default judgment will be denied and Eppel's motion for leave will be
granted.
First, ECF Procedure 9(a)(1) still requires that "paper copies of a summons and complaint
under Rule 7004 . . . must be served in accordance with [Rule 7004] to effectuate service." Attached
to Eppel's motion is an uncontested affidavit from his attorney, certifying that he was never properly
served with a paper copy of the counterclaim. Second, “[i]n order to obtain a default judgment under
[Fed. R. Civ. P.] 55(b)(2), there must first be an entry of default as provided by Rule 55(a).”
Brantley v. Runyon, No. C-1-96-842, 1997 WL 373739 at *1 (S.D. Ohio June 19, 1997). AEP failed
to follow this procedure for obtaining default judgment. Finally, the Sixth Circuit has clearly
expressed its preference for trials on the merits. See Shepard Claims Service, Inc. v. William Darrah
& Associates, 796 F.2d 190, 193 (6th Cir. 1986); United Coin Meter Co. v. Seaboard Coastline R.R.,
705 F.2d 839, 846 (1983). Granting a default judgment in this instance appears to violate this well
established principle.
CONCLUSION
Based on the foregoing, AEP's motion for summary judgment and/or default judgment (Doc.
20) will be denied and Eppel's motion for leave to file an answer to the counterclaim asserted by
AEP (Doc. 23) will be granted. The Court will enter a separate order concurrently herewith setting
forth the judgment.
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Copies to:
James C. Frooman, Esq.
jfrooman@fbtlaw.com
Norman L. Slutsky, Esq.
nslutsky@fuse.net
U.S. Trustee
ustpregion09.ci.ecf@usdoj.gov
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