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In Re: ESA Environmental Specialists

Decided: March 1, 2013

The Fourth Circuit Court of Appeals affirmed the district court’s award of summary judgment by the bankruptcy court to The Hanover Insurance Co. (“Hanover”).  The court found that ESA’s transfer of money to Hanover within 90 days of ESA’s filing for bankruptcy did not constitute an avoidable preference under the bankruptcy code.

ESA performed construction projects for the federal government and was required to obtain surety bonds before contracts were awarded. In 2006, Hanover issued bonds on behalf of ESA prior to the government awarding eight contracts. Additionally ESA took out a $12.2 million loan from Prospect Capital Corp. (“Prospect”).  ESA also received money from Prospect to put into a CD. In 2007 ESA was awarded additional contracts, however filed for bankruptcy on August 1, 2007. The bankruptcy court sold all of ESA’s assets to Prospect. The bankruptcy trustee filed an adversarial proceeding against Hanover, because it claimed that Hanover was an indirect beneficiary of ESA’s transfer of its loan proceeds into a CD. The bankruptcy court ultimately granted Hanover’s motion for summary judgment.

The court of appeals held that the bankruptcy court erred in holding that the earmarking defense applied to Hanover. The court noted that the funds in this case were not used to pay an antecedent debt which is a crucial element of the defense.  The court of appeals held, however, that the bankruptcy court correctly held that Hanover proved all of the necessary elements to establish the new-value defense under § 547(c)(1) of the bankruptcy code. The court determined that there was no error by the bankruptcy court in concluding that the earmarking defense applied because the new-value defense did apply.

Judge Traxler dissented stating that Hanover was not entitled to summary judgment because it did not have a valid new-value defense. He argued that a receipt of a conditional promise for payment in the future does not constitute “new value.”

Full Opinion

-Samantha James