Opinion ID: 3011063
Heading Depth: 2
Heading Rank: 1

Heading: Stock Transfer as Preferential Payment

Text: Section 327(a) of the Bankruptcy Code provides for the trustee (or the debtor in possession), with the Court's approval, to employ attorneys that do not hold or represent an interest adverse to the estate, and that are disinterested persons. 11 U.S.C. S 327(a); 11 U.S.C. S1107. In order for counsel to be retained, counsel must `not hold or represent an interest adverse to the estate' and must be a `disinterested person.'  In re BH&P Inc., 949 F.2d 1300, 1314 (3d Cir. 1991) (citing In re Star Broadcasting, Inc., 81 B.R. 835, 838 (Bankr. D. N.J. 1988)). A disinterested person is defined as one who does not have an interest materially adverse to the interest of the estate, by reason of any direct or indirect relationship with the debtor, or for any other reason. 11 U.S.C. S 101(14)(e). The standards regarding adverse interests underS 327(a) are outlined in In Re Marvel Entertainment Group, Inc., 140 F.3d 463, 476 (3d Cir. 1998). In that case, we held: (1) Section 327(a), as well as 327(c), imposes a per se disqualification as trustee's counsel of any attorney who has an actual conflict of interest; (2) the district court may within its discretion-- pursuant to S 327(a) and consistent with 327(c) -- 8 disqualify an attorney who has a potential conflict of interest and (3) the district court may not disqualify an attorney on the appearance of conflict alone. Id. A Court may consider an interest adverse to the estate when counsel has a competing economic interest tending to diminish estate values or to create a potential or actual dispute in which the estate is a rival claimant. In re Caldor, Inc., 193 B.R. 165, 171 (Bankr. S.D.N.Y. 1996) (where Trustee objected to retention of counsel by official committee of unsecured creditors in Chapter 11 case); In re Star Broadcasting, Inc., 81 B.R. 835, 838 (Bank. D.N.J. 1988) (where Bankruptcy Court held law firm held actual conflict of interest in representing both debtors in possession). In summary, S 327(a) mandates disqualification when there is an actual conflict of interest, allows for it when there is a potential conflict, and precludes it based solely on an appearance of conflict. In the situation where the debtor in possession seeks to retain counsel, as is the case here, the Code provides, [A] person is not disqualified for employment under S 327 of this title by a debtor in possession solely because of such person's employment by representation of the debtor before the commencement of the case. 11 U.S.C. S 1107(b). Where there is an actual conflict of interest, however, disqualification is mandatory. In re Marvel Entertainment Group, 140 F.3d at 476. A preferential transfer to RSW would constitute an actual conflict of interest between counsel and the debtor, and would require the firm's disqualification. In re BH&P, 949 F.2d at 1316-1317. The Bankruptcy Code's avoidable preference provision, 11 U.S.C. S 547(b), allows a bankruptcy trustee to recover certain transfers a debtor made prior to filing a petition in bankruptcy. The trustee must show that the transfer was: 1) to or for the benefit of a creditor; 2) for or on account of an antecedent debt owed by the debtor before such transfer was made; 3) made while the debtor was insolvent; 9 4) made -- on or within 90 days before the date of the filing of the petition; . . . 5) that enables such creditor to receive more than such creditor would receive if -- A) the case were a case under Chapter 7 of this ti tle; B) the transfer had not been made; and C) such creditor received payment of such debt to the extent provided by the provisions of this title 11 U.S.C. S 547(c)(2). The Bankruptcy Court and District Court held the SEC did not make a prima facie showing the stock transfer likely satisfied the requirement that the transfer be for or on account of an antecedent debt owed by the debtor before such transfer was made. 11 U.S.C. S 547(b)(2). The Courts below found all other elements of Section 547(b) were established, a conclusion with which we are in accord. The Bankruptcy Court reasoned that not only must the debt be antecedent, but also the payment of a debt must be past due, as a prerequisite for establishing a voidable preference under S 547(b)(2). RSW certified the transfer of the securities was in the ordinary course of business dealings between the two parties, and was deemed timely payment. It further represented the invoices submitted by the firm did not constitute a final bill of an amount owed to the firm. Rather, the firm would negotiate with the debtor over several months worth of invoices, and adjust the bill accordingly. An invoice was not finalized until after negotiations. With respect to the final bill with First Jersey, the debtor agreed to pay $250,000 for legal services rendered from January to July 1995 almost simultaneously with the conclusion of negotiations over the final bill. The parties agreed the $250,000 was in settlement of the invoices presented by RSW for legal work performed from January to May 1995 (which totaled $314,327), as well as for work performed in June and July 1995 for which RSW had not yet generated an invoice ($75,000). RSW thus argues the payment was made before the debt was actually past due. The Bankruptcy Court agreed, reasoning the debt was not due prior to the time the payment was made. The 10 District Court concurred with this conclusion under the same legal reasoning. The District Court's legal interpretation of S 547(b)(2) is reviewed de novo. Under the language of the statute, in order to constitute a preferential payment, First Jersey must have owed an antecedent debt to RSW, and that debt must have been incurred before the transfer was made. 11 U.S.C. S 547(b)(2). The Bankruptcy Code defines a debt as a liability on a claim. 11 U.S.C.S 101(12). In turn, the Code defines a claim broadly. A claim means: (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. 11 U.S.C. S 101(5). Under this broad definition of claim, all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case. Senate Report at 22, 1978 U.S. Code Cong. & Admin. News 5787, 5808. In addition, as debt is defined as a liability on a claim, it is coextensive with the definition of a claim, and both are construed broadly. Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990). It follows when a creditor has a claim against a debtor -- even if the claim is unliquidated, unfixed, or contingent -- the debtor has incurred a debt to the creditor. In re Energy Cooperative, Inc., 832 F.2d 997, 1001 (7th Cir. 1987). The SEC contends First Jersey incurred a debt to RSW when the law firm performed legal services on the debtor's behalf. We agree. Courts which have considered this issue have concluded, consistent with the statutory definitions, that an antecedent debt owed by the debtor occurs when a right to payment arises -- even if the claim is not fixed, liquidated, or matured. See 11 U.S.C. S 101(5); In re Bennett Funding Group, Inc., 220 B.R. 739, 742 (2d Cir. B.A.P. 1998) (debt occurs when the debtor previously obtained a property interest in the consideration provided by the creditor that gave rise to the debt). The right to payment generally arises when the debtor obtains the goods or services. See, e.g., Id; In re Futoran, 76 F.3d 265, 267 (9th Cir. 1996); In re Cybermech, Inc., 13 F.3d 818, 821 (4th Cir. 1994); In re Energy Co-op, Inc., 832 F.2d at 1001. 11 Under this reasoning, RSW had a claim at the time it performed legal services for First Jersey. Its claim was antecedent for purposes of Section 547(b)(2). The payment of $250,000 from the sale of ITB stock was to settle the debt owed by First Jersey for past legal services rendered between January and July 1995. We agree with our sister circuits and other courts that legal claims arise when the legal services are performed, not when the bill itself is presented to the client. See, e.g., In re Florence Tanners, Inc., 209 B.R. 439, 447 (Bankr. E.D. Mich. 1997); In re Investment Bankers, Inc., 136 B.R. 1008, 1018 (D. Colo. 1989), aff'd, 4 F.3d 1556 (10th Cir. 1993). In In re Florence Tanners, an attorney claimed he did not receive a preferential transfer because he received payment before he had sent an invoice for his services. The Court disagreed, and held a debt for legal services arises when the services are performed, not when the subsequent invoice is issued. 209 B.R. at 447. Similarly, the Bankruptcy Appellate Panel in In re Bennett Funding Group concluded that, since a law firm which provided legal services had a claim, mature or unmatured, that it could then assert against a debtor's bankruptcy estate if payment was not made at the time a petition was filed . . . the debt was `antecedent' for purposes of Section 547(b)(2). 220