In Re: NewPage Corporation, et al.

Filing 14

MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 7/12/2017. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re:
NEWPAGE CORPORATION, et al.,
Reorganized Debtors.

Pl RI NATE CONSULTING GROUP, LLC,
AS LITIGATION TRUSTEE OF THE
NP CREDITOR LITIGATION TRUST,
Appellant,
v.
KADANT SOLUTIONS DIVISION,
Appellee.

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Chapter 11
Bank. No. 11-12804 (KG)
(Jointly Administered)

Adv. No. 13-52520 (KG)

Civ. No. 16-955-SLR

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

Dated: July ~ , 2017
Wilmington, Delaware

~<fo~strict 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.

1The

docket of the adversary proceeding, Pirinate Consulting Group, LLC v. Kadant
Solutions Division, Adv. No. 13-52530 (KG) (Bankr. D. Del.) is cited herein as "Adv. D.I. _."
2
Section 547(b) of the Bankruptcy Code provides, in relevant part:
(b)
Except as provided in subsections (c) and (i) of this section, the trustee may
avoid any transfer of an interest of the debtor in property ***
(2)
for or on account of an antecedent debt owed by the debtor before such
transfer was made.
11 U.S.C. § 547(b).
3 See 11 U.S.C. § 547(c)(2).

2

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,

4

The appendix filed in support of Trustee's opening brief (D.I. 9) is cited herein as "R_."

3

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

5

The vibration warranty set forth in Appendix A to the final agreement was a key
requirement of the EDS project. The goal of the EDS project was to supply six gravity
drainage structures that do not cause vibration issues. Appendix A set forth specific criteria
for vibration levels. The vibration warranty was a performance guarantee and was required
to be met before the Debtors accepted the equipment. (R354-55)
6 The docket of the Chapter 11 cases, In re NewPage Corporation, et al., Case No. 1112804 (KG) (Bankr. D. Del.) is cited herein as "B.D.I. _."

4

receiving the final 20% payment. (R 103; 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

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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)

Ill. 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 the facts in
the light most favorable to the nonmoving party and draw all inferences in that party's favor.

Gray v. York Newspapers, Inc., 957 F .2d 1070, 1078 (3d Cir. 1992).
''The court shall grant summary judgment if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
law." Fed. R. Civ. P. 56(a). The moving party bears the burden of demonstrating the

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Trustee filed a declaration in support of its own calculation of potential ordinary course
defenses. (R387-430)
8 See R432-487 (transcript of September 8, 2016 oral argument).
9 Based on its determination that the EDS payment was a prepayment and not subject to
avoidance, the bankruptcy court did not address other defenses asserted by Kadant with
respect to the EDS payment, which included the defense of contemporaneous exchange for
new value under§ 547(c)(1) of the Bankruptcy Code and the argument that the Debtors
assumed the agreement. (See R510)
6

absence of a genuine issue of material fact. Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 415 U.S. 475, 586 n. 10 (1986). A party asserting that a fact cannot be - or

alternatively is - genuinely disputed must be supported either by citing to "particular parts of
materials in the record, including depositions, documents, electronically stored information,
affidavits or declarations, stipulations (including those made for the purposes of the motions
only), admissions, interrogatory answers, or other materials," or by "showing that the
materials cited do not establish the absence or presence of a genuine dispute, or that an
adverse party cannot produce admissible evidence to support the fact." Fed. R. Civ. P.
56(c)(1 )(A) & (B). If the moving party has carried its burden, the nonmovant must then
"come forward with specific facts showing that there is a genuine issue for trial."
Matsushita, 415 U.S. at 587 (internal quotation marks omitted). If the moving party offers

only speculation and conclusory allegations in support of its motion, its burden of proof is
not satisfied. See Ridgewood Bd. of Educ. v. N.E. ex rel. ME., 172 F.3d 238, 252 (3d Cir.
1999).
To defeat a motion for summary judgment, the nonmoving party must "do more than
simply show that there is some metaphysical doubt as to the material facts." Matsushita,
475 U.S. at 586-87; see also Podohnik v. U.S. Postal Service, 409 F.3d 584, 594 (3d Cir.
2005) (stating party opposing summary judgment "must present more than just bare
assertions, conclusory allegations or suspicions to show existence of a genuine issue")
(internal quotation marks omitted). Although the "mere existence of some alleged factual
dispute between the parties will not defeat an otherwise properly supported motion for
summary judgment," a factual dispute is genuine where "the evidence is such that a
reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 247-48 (1986).

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IV. ISSUES ON APPEAL
Trustee characterizes the issues on appeal as follows: (i) whether the bankruptcy
court erred in holding that an antecedent debt under§ 547(b) of the Bankruptcy Code only
exists when a debt is due and payable under nonbankruptcy law, as opposed to holding that
debts for which there exists a contingent liability under the Bankruptcy Code also
constitutes an antecedent debt; and (ii) whether the bankruptcy court, in holding that the
EDS payment was not made on account of an antecedent debt because it was not due and
owing, erred by failing to apply binding Third Circuit precedent under JELO-WEN, Inc. v.

Van Brunt (In re Grossman's), 607 F.3d 114 (3d Cir. 2010), and instead incorrectly applying
the overturned "accrual standard" set forth in Avellino & Bienes v. M. Frenville Co. (In re

Frenville Co.), 744 F.2d 332 (3d Cir. 1984), cert. denied, 469 U.S. 1160 (1985). (See D.I. 4)

V. ANALYSIS
A.

"Antecedent debt"

Section 547 allows the trustee or the debtor-in-possession to avoid certain
transactions between a debtor and its creditors that occurred within the ninety days prior to
the petition date. Barnhill v. Johnson, 503 U.S. 393, 394 (1992). In order to avoid a
prepetition preferential transfer of a debtor's interest in property, the plaintiff 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;

(4)

made (A)

(5)

on or within 90 days before the date of the filing of the petition; ...

that enables such creditor to receive more than such creditor would receive
if(A)

the case were a case under chapter 7 of this title;

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(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. § 547(b) (emphasis added). "Unless each and every one of these elements is
proven, a transfer is not avoidable as a preference under 11 U.S.C. § 547(b)." AP Services,
LLC v. McKesson Corp. (In re CRC Parent Corp.), 2013 WL 2149492, *2 (Bankr. D. Del.

May 16, 2013) (quotations and citations omitted). Trustee is required to establish each
element by a preponderance of the evidence. See 11 U.S.C. § 547(g). Kadant argued that
it was entitled to summary judgment with respect to the EDS payment because Trustee
could not satisfy the prima facie elements required under§ 547(b). Kadant relied on the
terms of the agreement and the facts set forth in its affidavits to show there was no genuine
issue of fact that the EDS payment was a payment in advance and, therefore, not made "on
account of an antecedent debt owed by the [Debtors] before such transfer was made" as
required under§ 547(b)(2).
The Bankruptcy Code does not define "antecedent debt." "Debt" is defined by the
Bankruptcy Code as "liability on a claim." 11 U.S.C. § 101 (12). A claim is a "right to
payment," regardless of whether that right is fixed, contingent, matured, or unsecured. See
11 U.S.C. § 101 (5). The Third Circuit has said that for a debt to be antecedent, "the debt
must have been incurred 'before the transfer was made.'" First Jersey Sec., Inc., 180 F.3d
504, 510 (3d Cir. 1999) (quoting 11 U.S.C. § 547(b)(2)). In order to determine when a debt
was incurred - and whether it was "incurred before the transfer was made" - courts look to
"when the debtor becomes legally obligated to pay." In re Philadelphia Newspapers, LLC,
468 B.R. 712, 722 (Bankr. E.D. Pa. 2012) (internal quotations omitted). "[A]n antecedent
debt owed by the debtor occurs when a right to payment arises - even if the claim is not

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fixed, liquidated, or matured." First Jersey, 180 F .3d at 511. "The right to payment
generally arises when the debtor obtains the goods or services." Id.

B.

Advance Payments Do Not Satisfy Antecedent Debt

"It is well established that advance payments are prima facie not preferences
because the transfer from the debtor to the creditor is not for or on account of an
antecedent debt." In re Hechinger Inv. Co. of Del., Inc., 2004 WL 3113718, *2 (Bankr. D.
Del. Dec. 14, 2004). For example, in Hechinger, Universal Forest Products, Inc. ("UFP")
supplied Hechinger with treated wood products for sale in Hechinger's home improvement
stores. Id. at *1. In its chapter 11 proceedings, Hechinger sought to avoid payments made
to UFP during the preference period. UFP moved for summary judgment on the basis that
certain of the alleged preferential transfers were advance payments for products later
shipped to Hechinger. Hechinger conceded that, toward the end of the preference period, it
had prepaid for products which it believed it was purchasing on credit. See id. at *3. The
bankruptcy court granted UFP's motion for summary judgment because these amounts
were "paid in advance and therefore ... not preferential." Id.; see also In re Hechinger Inv.
Co. of Del., Inc., 489 F.3d 568, 572 (3d Cir. 2007) (noting that payments made prior to the
shipment of goods "were advance payments and therefore, by definition, not recoverable
under§ 547 as payments for or on account of an antecedent debt") (emphasis added); see
also CRC Parent, 2013 WL 2149492, *4 (determining that wire transfer payments always

cleared prior to shipment and were advance payments that did not satisfy antecedent debt).
Importantly, the existence of an agreement between the parties for payment in
advance does not alter the conclusion that advance payments are not payments on account
of antecedent debt. This is true even where goods are shipped or services are provided on
an ongoing basis. For example, in Presidential Airways, an aviation insurance broker
("RHH") entered into an agreement with Presidential, pursuant to which RHH agreed to
10

obtain aviation insurance for Presidential and set up an installment payment plan between
Presidential and various insurance companies. See In re Presidential Airways, Inc., 228
B.R. 594, 596 (Bankr. E.D. Va. 1999). The payment plan required Presidential to make
monthly payments to cover both the insurance premiums and a commission to RHH for
services rendered. See id. Presidential later initiated bankruptcy proceedings and sought
to avoid certain payments made to RHH as preferential transfers. RHH argued that the
payment plan required payments into a fiduciary account before any debts were due; no
creditor existed nor were the payments made on account of an antecedent debt. See id. at
597. Conversely, Presidential argued that an antecedent debt for ongoing services is
incurred on the date that the contract calls for payment - when payments were "due" under
the agreement's payment plan. See id. at 598. The court rejected Presidential's argument,
finding no antecedent debt where the payments were made in advance, regardless of the
agreement. See id.
Similarly, in Vanguard, a software development company ("AAI") entered into a
master services agreement with Vanguard which required payment in advance of each
month's estimated charges; at the end of the month, the amount owed would be reconciled
with the estimated amount paid at the beginning of the month based on Vanguard's actual
service usage, and Vanguard would be billed for the difference or receive a credit. In re
Vanguard Airlines, Inc., 295 B.R. 329, 331-32 (Bankr. W.D. Mo. 2003). The parties later

amended the master services agreement to require weekly payments equal to 25% of the
amounts on the monthly invoices, rather than making monthly payments as it previously had
been doing. Id. at 332. Following its bankruptcy filing, Vanguard sought to avoid the
weekly payments as preference payments made to AAI. Based on the existence of the
master services agreement, Vanguard argued that it had a legal obligation to pay the
estimated charges for a particular month when it received an invoice at the beginning of that
11

month, and that its payments were made to satisfy antecedent debt in four weekly
installments. Id. at 334. The bankruptcy court rejected this argument, holding that the debt
did not arise at the time of the invoice but rather at the time AAI provided the services it had
contracted with Vanguard to provide. See id. at 334-35. Payments made in advance of
these services, therefore, were not on account of an antecedent debt, regardless of the
agreement.
In Dots, the debtor and Capstone were parties to a master services agreement for
media services, with individual projects set forth in a separate statement of work defining
the project and costs and requiring payment in advance. The court found the challenged
payments were not made on account of antecedent debt:
It is evident that Capstone would not carry out its Media Buying/Placement
services on Debtors' behalf until such services had pre-planned approval and
were paid in advance. Indeed, Capstone could not make media buys unless
it had the funds to do so based on the pre-approved budget sanctioned by the
Debtors. It follows, therefore, that Capstone was not entitled to compensation
until the agreed upon services under each [statement of work] were
performed.
In re Dots, LLC, 533 B.R. 432, 439 (Bankr. D.N.J. 2015) (emphasis in original). The court

rejected the debtors' argument that an antecedent debt was created pursuant to the master
services agreement; although it generally governed the parties' relationship, the statements
of work were the critical agreements which dictated the terms of each deal and required
payment in advance. See id. at 440.
C.

The Bankruptcy Court Applied the Correct Standard

In ruling on Kadant's summary judgment motion, the bankruptcy court framed its
analysis with well settled principles, recognizing that an "antecedent debt" is "incurred prior
to the alleged preferential transfer" and "a debt is incurred when the debtor becomes
obligated to pay." (R509 (citing In re USDigital, Inc., 443 B.R. 22, 36 (Bankr. D. Del. 2011)
(antecedent debt is incurred prior to alleged preferential transfer) and Philadelphia
12

Newspapers, 468 B.R. at 722 (debt is incurred when debtor becomes legally obligated to

pay)) The bankruptcy court also noted that an invoice alone does not create an obligation
to pay because "a debt arises when a debtor receives goods or services and not when
invoiced." (R509 (citing Dots, 533 B.R. at 438)) The bankruptcy court further observed that
an advance payment is not a payment on account of an antecedent debt. (R509 (citing
CRC Parent, 2013 WL 2149492, *4 (wire transfers that cleared before delivery of product

were advance payments and were not payments on account of antecedent debt))
The bankruptcy court concluded that the EDS payment was "an advance payment"
and "was not for or on account of an antecedent debt." (R510 (citing Hechinger, 2004 WL
3113718, at *3) In reaching this conclusion, the bankruptcy court considered the terms of
the agreement and the uncontroverted facts set forth in Kadant's affidavits to determine
when the Debtors became legally obligated to pay and whether there was an enforceable
obligation at the time of the EDS payment. See Philadelphia Newspapers, 468 B.R. at 722.
The bankruptcy court observed that "a series of events [were] relevant to the dispute,"
including that further "[n]egotiations in late August 2011" led to the issuance of "the Final
Contract," Revised Quote 5, after the EDS payment. (R506) The bankruptcy court further
found that the EDS required custom manufacturing (R51 O); that Kadant "was to be paid for
the EDS before it began to manufacture the equipment" (id.); that Kadant performed no
work prior to its receipt of the EDS payment and further progress payments in October 2011
(R506); and that Kadant "provided nothing before it received [the EDS] payment" (R510).
Additionally, the bankruptcy court observed that, pursuant to the General Terms, the
"Debtors had the right to terminate the order for the EDS at any time and without cause on
10 days' notice to Kadant" and, at the time of payment, "could have cancelled without any
liability since [Kadant] had not started to manufacture the EDS." (Id.) Based on the

13

foregoing, the bankruptcy court determined that the EDS payment was "an advance
payment" and "was not for or on account of an antecedent debt." (Id.)
To determine whether a debt was "incurred before the transfer was made," the
bankruptcy court properly considered "when the debtor [became] legally obligated to pay,"
and determined that at the time of the EDS payment there was no legal obligation. Kadant
presented unrefuted evidence establishing that the parties' agreement required prepayment
and that the EDS payment was made prior to Kadant beginning manufacture or providing
any services. Because the contract required prepayment, no right to payment was triggered
until after Kadant began work. The bankruptcy court's analysis was consistent with Third
Circuit law, and summary judgment was appropriate. Trustee failed to identify any genuine
issue of material fact with respect to the EDS payment as a payment in advance, and
advance payments are "by definition" not recoverable under§ 547 as payments for or on
account of an antecedent debt. Hechinger, 489 F.3d at 572; see also CRC Parent Corp.,
2013 WL 2149492, at *4. It is undisputed that the EDS payment was made, not only in
advance of any services being rendered by Kadant, but before the exact specifications for
EDS had even been finalized by the parties. (R102; R168-98) Trustee failed to come
forward with specific facts showing that there is a genuine issue for trial with respect to the
prepayment. Summary judgment as to the EDS payment may be affirmed on this basis
alone.

D.

Trustee's Additional Arguments Lack Merit

Rather than address the prepayment, Trustee raises several arguments which are
not compelling. Trustee disputes the bankruptcy court's reference to Revised Quote 5 as
the "Final Contract," arguing that an agreement existed at the time of the EDS payment, and
that the agreement created both a contingent claim and an antecedent debt. (See D.I. 8 at
11; D.I. 13 at 2, 9) Trustee argues that the agreement was comprised of the General
14

Terms, Revised Quote 4, the Invoice, and the Purchase Order - which constituted Debtors'
acceptance of Kadant's offer - and that together, these documents represented a "mutual
exchange of promises." (See D.I. 8 at 17-18; D.I. 13 at 9-10) According to Trustee,
Revised Quote 5 was not the "Final Contract" and simply reflected additional adjustments to
specifications. (See id.) Kadant argues that the bankruptcy court properly determined that,
based on the uncontroverted evidence, no binding contract was created until after the EDS
payment was made, when Revised Quote 5 was issued; where there is no binding contract,
there is no antecedent debt. (D.I. 11 at 16) 10 Even assuming that Trustee is correct that
there was a binding agreement at the time of the EDS payment - in the form General
Terms, Revised Quote 4, the Invoice, and the Purchase Order - those documents are clear
that the parties agreed to payment in advance.
Trustee devotes a significant portion of its briefing to the argument that the existence
of any agreement between the parties gave rise to a contingent claim, without regard to the
terms of the agreement or the relationship between the parties. Trustee argues that "a
contract creates a claim at the moment of its execution and is therefore an antecedent
debt." (D.I. 8 at 11) The essence of Trustee's argument is that any agreement - including
an agreement requiring prepayment before goods and services are provided - creates a
contingent claim and therefore an antecedent debt. As set forth in the cases cited above,
entry into an agreement that requires prepayment does not alone create an antecedent debt
or change the result that a prepayment is by definition not a payment on account of an
antecedent debt. The court agrees with Kadant that, under this logic, there could never be

Kadant further argues the facts of this case are similar to USDigital. In USDigita/, the
bankruptcy court determined that, although the parties had executed a term sheet, there
was no legal obligation until the subsequent purchase agreement was executed. USDigital,
443 B.R. at 38. As a result, there was no antecedent debt for a payment made after the
term sheet but before the purchase agreement. See id.
10

15

an advance payment because there would always be an antecedent debt. Trustee cites no
authority requiring such an analysis nor any policy that would support such a result.
Trustee's argument also relies heavily on the fact that "debt" and "claim" have been
held to be synonymous. Trustee argues that, while it is true that "a debt is incurred when
the debtor becomes legally obligated to pay," the principal question under this standard is
"what sort of legal obligation is required to create a debt for purposes of section 547." (See
D.I. 8 at 9 (citing In re Enron Corp., 357 B.R. 32, 40 (Bankr. S.D.N.Y. 2006)) According to
Trustee, "the proper focus of inquiry in determining whether the [EDS payment] was made
on account of an antecedent debt is whether Kadant held a claim as defined under the
Bankruptcy Code" and that "the plain language of the Bankruptcy Code gives the term
'claim' the broadest possible meaning to encompass all of the debtor's legal obligations, no
matter how remote or contingent." (See id. at 9)
And 1indeed, the term "debt" means "liability on a claim." 11 U.S.C. § 101 (12). For
purposes of determining whether a debt is a claim, § 101 (5) (which defines "claim") should
be consulted to decide whether the debt or demand gives rise to a right of payment and can
qualify under that section. COLLIER ON

BANKRUPTCY,~

that broad definition, a debt also exists." Id.

101.12. "If a claim exists under

"[A]s debt is defined as a liability on a claim, it

is coextensive with the definition of a claim and both are construed broadly." First Jersey,
180 F.3d at 510.
Trustee cites case law observing that "[w]henever a claim arises, a debt necessarily
arises as well, and the only distinction between the terms is the party to which it applies."
(See D.I. 8 at 1 (quoting Enron, 357 B.R. at 37)) Trustee urges the court to take this
concept two steps further and hold that, because the definition of debt is tied to the
definition of claim, any contingent claim is also, as a matter of law, an antecedent debt.
(See D.I. 8 at 2 (arguing, with respect to its alleged contingent claim, that "on account of an
16

antecedent debt" means "on account of an antecedent claim")) The authorities cited by
Trustee do not support such a conclusion.
Finally, Trustee argues that, in reaching its conclusion, the bankruptcy court
improperly relied on the fact that the agreement required payment before any work was
performed and that, until work began, Kadant could not have asserted a claim for monetary
damages. (See D.I. 8 at 3) Trustee argues that, by focusing on what rights Kadant and the
Debtors may have had under the contract - rights which are governed by state law - and
failing to consider whether, as a result of the contract, Kadant had a "claim" against the
Debtors as broadly defined in the Bankruptcy Code, the bankruptcy court impermissibly
applied Frenville's "accrual" standard, which the Third Circuit overruled in Grossman's, and
that the bankruptcy court's holding is contrary to the "obvious trend interpreting 'antecedent
debt' broadly and rejecting the proposition that debt is only incurred as it becomes due."
(See id. at 9-11) Conversely, Kadant argues that the bankruptcy court did not apply
Frenville and that Trustee's argument ignores the bankruptcy court's specific findings and
conclusions. (See D. I. 11 at 22)
In Frenville, the Third Circuit considered the appropriate standard for determining
when a "claim" arose for purposes of the automatic stay. 11 See Frenville, 744 F.2d at 333.
The Third Circuit subsequently summarized Frenville as holding that "the existence of a
valid claim depends on: (1) whether the claimant possessed a right to payment; and (2)
when that right arose" as determined by reference to relevant non-bankruptcy law. See
Grossman's, 744 F.2d at 119 (quoting Kilbarr Corp. v. Gen. Servs. Admin., Office of Supply
& Servs. (In re Remington Rand Corp.), 836 F.2d 825, 830 (3d Cir. 1988)). The Frenville

11

With certain exemptions, the automatic stay provision of§ 362(a) applies to any
"proceeding against the debtor that was or could have been commenced before the
commencement of the case ... or to recover a claim against the debtor that arose before
the commencement of the case ... " See 11 U.S.C. § 362(a) (emphasis added).
17

test for determining when a claim arises has been referred to as the "accrual test." See
Grossman's, 744 F.2d at 119. Frenville was later overruled in Grossman's, a case in which

the Third Circuit rejected the argument that an asbestos tort claim does not arise until a
cause of action accrues under state law. See Grossman's, 607 F.3d at 126. The Third
Circuit overruled Frenville on the basis that "it imposes too narrow an interpretation of
'claim' under the Bankruptcy Code" and "does not account for the fact that a 'claim' can
exist under the Code before a right to payment exists under state law." Id. at 121.
Frenville and Grossman's did not address advance payments nor did they discuss

the standard for determining when a debt is incurred for the purposes of establishing an
antecedent debt. Trustee argues, however, that the bankruptcy court's analysis
disregarded Grossman's interpretation of when a claim arises and led to its incorrect
conclusion that an antecedent debt was not incurred. According to the Trustee, under
Grossman's, the bankruptcy court should have determined that Kadant had a claim against

the Debtors, as defined by the Bankruptcy Code - not state law - and that such a
contingent claim necessarily constituted an antecedent debt.
In determining whether an antecedent debt existed at the time of the EDS payment,
the bankruptcy court did not disregard the definition of "claim" discussed in Grossman's nor
did it include any consideration of whether there was a breach or whether a cause of action
accrued under state law. Rather the bankruptcy court looked to terms of the agreement and
the unrefuted facts to determine when a right to payment arose. The bankruptcy court
determined that payment in advance was required under the agreement and there was no
right to payment at the time of the EDS payment as Kadant had not performed any services.
The bankruptcy court focused on when obligations between the parties arose under the
terms of the agreement - not when an action accrued under state law. The bankruptcy
court's analysis did not deviate from Grossman's holding that a claim under the Bankruptcy
18

Code may exist before an action accrues under state law. As the Third Circuit in
Grossman's recognized, "the determination of when a party has a claim ... seems to hinge
on the nature of the claim and the posture of the case." See id. at 126 n.11 (internal
citations omitted).
Based on the terms of the agreement and undisputed facts, the EDS payment was a
payment in advance, and Trustee cannot sustain its burden in establishing that the EDS
payment was for or on account of an antecedent debt owed by the Debtors before the
payment was made. Trustee failed to present a genuine issue of material fact that the EDS
payment was not a payment in advance, and summary judgment was appropriate.

VI. CONCLUSION
For the foregoing reasons, the bankruptcy court's opinion and order are affirmed,
and Trustee's appeal is denied. An appropriate order shall issue.

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