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IN RE KMART CORPORATION

United States District Court, N.D. Illinois, Eastern Division


September 30, 2004.

In re: KMART CORPORATION, et al., Debtor, KMART CORPORATION, Plaintiff,
v.
UNIDEN AMERICA CORPORATION, Defendants.

The opinion of the court was delivered by: AMY J. ST. EVE, District Judge

MEMORANDUM OPINION AND ORDER

Defendant Uniden America Corporation ("Uniden") seeks leave to immediately appeal an interlocutory order entered by United States Bankruptcy Judge Susan Pierson Soderby on July 7, 2004. (In re Kmart Corp., et al., No. 02-B0274, R. 40-1, Mem. Op. and Order, July 7, 2004 ("Bankruptcy Order").) For the reasons stated herein, Uniden's motion for leave to appeal is denied.

LEGAL STANDARDS

  Uniden may appeal the Bankruptcy Court's interlocutory order only if it obtains leave of this Court. 28 U.S.C. § 158(a). It is within the Court's discretion to decide whether to allow the appeal. Fruehauf Corp. v. Jartran, Inc. (In re Jartran, Inc.), 886 F.2d 859, 866 (7th Cir. 1989). Although the Bankruptcy Code does not provide an explicit standard for assessing the appropriateness of such an appeal, courts in this district have applied the standard set forth in 28 U.S.C. § 1292(b) — which governs interlocutory appeals from the district court to the court of appeals — to the bankruptcy context. In re OBT Partners, 218 B.R. 418, 419-20 (N.D. Ill. 1998).

  Section 1292(b) provides that an interlocutory appeal may be taken if the underlying order "involves a controlling question of law as to which there is substantial ground for difference of opinion" and if "an immediate appeal from the order may materially advance the ultimate termination of the litigation." 28 U.S.C. § 1292(b). "There are four statutory criteria for the grant of a section 1292(b) petition to guide the district court: there must be a question of law, it must be controlling, it must be contestable, and its resolution must promise to speed up the litigation." Ahrenholz v. Board of Trs. of Univ. of Ill., 219 F.3d 674, 675-76 (7th Cir. 2000) (emphases in original). The party seeking leave to appeal must meet each of these requirements. Id. A court will not grant leave to appeal an interlocutory order absent "exceptional circumstances." Pullman Constr. Indus., Inc. v. Boockford and Co. (In re Pullman Constr. Indus.), 143 B.R. 497, 498 (N.D. Ill. 1992).

  BACKGROUND

  On January 22, 2002 (the "Petition Date"), Kmart Corporation and thirty-seven affiliates (collectively, "Kmart") filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. On May 2, 2003, Kmart filed a one-count adversary complaint against Uniden (the "Preference Complaint"), seeking to recover approximately $5.6 million in transfers that Kmart made to Uniden within ninety days of the Petition Date. Kmart contends that these payments constitute "avoidable preferences" under 11 U.S.C. § 547(b). In response, Uniden filed eleven affirmative defenses to the Preference Complaint.

  Kmart filed a motion to strike certain affirmative defenses.*fn1 The Bankruptcy Court granted the motion in part, and struck all affirmative defenses that were not specifically enumerated in Section 547(c) of the Bankruptcy Code and that did not constitute "threshold defenses."*fn2 (Bankruptcy Order at 8-12.) Specifically, the Bankruptcy Court struck Uniden's Third Affirmative Defense (unclean hands), Sixth Affirmative Defense (fraud), and Eleventh Affirmative Defense (setoff and/or recoupment) (collectively, the "Non-Statutory Defenses"). The Bankruptcy Court held that "the only defenses to the substance and merits of a preference action available to a defendant are those enumerated in the Code." (Bankruptcy Order at 7.)

  Uniden filed a motion in this Court for leave to immediately appeal the Bankruptcy Court's interlocutory order. The Court has jurisdiction to consider Uniden's motion pursuant to 28 U.S.C. §§ 158(a)(3) and 1292(b).

  ANALYSIS

  In this case, the parties do not dispute that there is a controlling question of law: "[w]hether the Bankruptcy Court erred in construing the defenses set forth in Section 547(c) of the Bankruptcy Code as the exclusive defenses to the substance and merits of the Preference Complaint brought by Kmart against Uniden." The parties focus on whether the question of law is contestable and whether the immediate resolution of the question would materially advance the litigation.

  I. The Bankruptcy Court's Ruling

  Section 547(b) of the Bankruptcy Code empowers a bankruptcy trustee to avoid any transfer that meets certain requirements. Section 547(c) of the Code sets forth a number of exceptions to the trustee's power to avoid such transfers.*fn3

  In this case, the Bankruptcy Court ruled that "the only defenses to the substance and merits of a preference action available to a defendant are those enumerated in [Section 547(c) of] the Code." (Bankruptcy Order at 7.) The Bankruptcy Court explained that "[t]he rationale is that under rules of statutory construction, where Congress enumerates exceptions to a general prohibition, additional exceptions are not to be implied, absent a contrary legislative intent." (Bankruptcy Order at 6 (quoting Official Unsecured Creditors Comm. of Intrastate Elec. Servs. v. Intrastate Sheet Metal, Inc. (In re Intrastate Elec. Servs., Inc.), Nos. 95 B 20173, 98 A 1923, 98 A 1925, 98 A 1926, 2000 WL 1346696, at *5 (Bankr. N.D. Ill. Sept. 8, 2000).) The Bankruptcy Court further ruled that a party may assert "threshold defenses" that are not specifically enumerated in Section 547(c): "`Threshold defenses' are those defenses that would bar recovery, before even opening the door to consider the substantive nature of the claim. Examples of threshold defenses include, `lack of in personam jurisdiction, service of process, standing, and the like.'" (Bankruptcy Order at 7 (quoting Raleigh v. Mid Am. Nat'l Bank and Trust Co. (In re Stoecker), 131 B.R. 979, 983 (Bankr. N.D. Ill. 1991).)

  Uniden seeks leave to appeal this ruling.

  II. There Is No Significant Difference of Opinion As To Whether Section 547(c) Provides The Exclusive Substantive Defenses To An Action Under Section 547(b)

  The parties dispute whether the question of law is contestable. "A question of law is contestable if there are substantial conflicting decisions regarding the claimed controlling issue of law, or the question is not settled by controlling authority and there is a substantial likelihood that the district court ruling will be reversed on appeal." United States v. Moglia, No. 02 C 6131, 2004 WL 1254128, at *3 (N.D. Ill. June 7, 2004).

  Uniden argues that there is a substantial difference of opinion as to whether a preference defendant can assert affirmative defenses other than those specifically enumerated in Section 547(c) and other than "threshold defenses." Uniden acknowledges that there is authority supporting the Bankruptcy Court's ruling, but argues that an immediate appeal is warranted because there is substantial authority contradicting Kmart's position and supporting Uniden's position. Kmart argues that it is unlikely that a court would reverse the Bankruptcy Court's ruling on appeal and that the cases that Uniden cites do not contradict the Bankruptcy Court's ruling. The Court agrees with Kmart.

  Uniden contends that "[s]everal courts (including courts in this District) have held that preference defendants are not limited to raising only those defenses specifically enumerated under § 547(c) of the Bankruptcy Code." In support, Uniden cites three cases: Philip Servs. Corp. v. Luntz (In re Philip Servs. (Del.), Inc.), 267 B.R. 62, 70-71 (Bankr. D. Del. 2001); Dubis v. Heritage Bank and Trust Co. (In re Kenosha Liquidation Corp.), 158 B.R. 774, 777 (Bankr. E.D. Wise. 1993); and Steinberg v. NCNB Nat'l Bank of N.C. (In re Grabill Corp.), 135 B.R. 101, 108 (Bankr. N.D. Ill. 1991). None of these cases, however, contradicts the Bankruptcy Court's ruling.

  In Phillips, the court noted that a preference claim, like any other claim in federal court, is subject to statute of limitations, res judicata, and collateral estoppel-type threshold defenses. This ruling is consistent with the Bankruptcy Court's ruling that the only affirmative defenses allowed are those specifically enumerated in the statute and threshold defenses, such as "in personam jurisdiction, service of process, and standing, and the like."*fn4

  In Kenosha and Grabill, the courts allowed a preference defendant to assert the "ear-marking doctrine." The ear-marking doctrine, however, is not an affirmative defense. Rather, "[b]y invoking the ear-marking doctrine, [the creditor] merely challenges the Trustee's ability to establish all the prima facie elements of a preference, not the applicability of one or more of the statutory defenses under Section 547(c). . . ." Grabill, 135 B.R. at 108. These cases do not suggest that preference defendants may assert non-statutory affirmative defenses other than threshold defenses. Thus, the cases cited by Uniden comport with the Bankruptcy Court's ruling.

  Overwhelming authority supports the Bankruptcy Court's ruling. In re Stoecker, 131 B.R. at 983 ("Although threshold challenges on issues such as lack of in personam jurisdiction, service of process, standing, and the like, can be raised by preference defendants, same are not defenses on the merits of the subject transfers involved in the preference litigation. Several courts have held that the substantive exceptions outlined in Section 547(c) not involving such threshold defenses are exclusive. The Court finds these authorities persuasive."); In re Intrastate Elec. Servs., 2000 WL 1346696, at *5 ("Although defenses such as lack of jurisdiction can be raised by preference defendants, it is well established that the exceptions under § 547(c) are the exclusive substantive defenses to liability under § 547(b)."); Sterling Die Casting Co. v. Local 365 UAW Welfare and Pension Fund (In re Sterling Die Casting Co.), 118 B.R. 205, 207 (Bankr. E.D.N.Y. 1990) (striking affirmative defense of lack of good faith because that defense is not specifically enumerated in the statute); Pulaski Highway Express, Inc. v. Central States Southeast and Southwest Areas Health and Welfare and Pension Funds (In re Pulaski Highway Express, Inc.), 41 B.R. 305, 310 n. 9 (Bankr. M.D. Tenn. 1984) ("The enumerated exceptions to the recovery of preferences outlined in § 547(c) are exclusive and a bankruptcy court is without authority to judicially create additional exceptions."); McColley v. M. Fabrikant & Sons, Inc. (In re Candor Diamond Corp.), 26 B.R. 850, 851 (Bankr. S.D.N.Y. 1983) ("This court finds no indication that Congress intended the enumerated exceptions of 11 U.S.C. § 547 to be non-exclusive."). No substantial difference of opinion exists as to whether a preference defendant can assert affirmative defenses other than those specifically enumerated in Section 547(c) and other than "threshold defenses." It is unlikely that a court would reverse the Bankruptcy Court's ruling on appeal.

  Uniden further argues that the Bankruptcy Court disregarded Kmart's alleged fraud in striking the Non-Statutory Defenses. The Bankruptcy Court noted that "[f]raud is neither an element of proof on a prima facie preference avoidance action under section 547(b)," nor one of the enumerated defenses of Section 547(c). (Bankruptcy Order at 10.) The Bankruptcy Court further noted that "proof of [the debtor's] actual or constructive fraud of the [defendant's] good faith in accepting the payments . . . is simply irrelevant and immaterial in preference actions. . . ." (Bankruptcy Order at 10 (quoting Stoecker, 131 B.R. at 983.) Uniden has not provided any authority supporting its argument that Kmart's alleged bad acts were relevant to the Bankruptcy Court's ruling.

  III. An Immediate Appeal Will Not Advance The Ultimate Termination Of This Case

  Given the Court's ruling that there is no substantial difference of opinion with respect to the legal question in this case, "an immediate appeal is more likely to delay litigation than materially advance the ultimate termination of this case." Jartran, Inc. v. Winston & Strawn, 208 B.R. 898, 901 (N.D. Ill. 1997); Custom Cos. v. Official Comm. of Unsecured Creditors, No. 00 C 1161, 2000 WL 765090, at *2 (N.D. Ill. June 12, 2000).

  CONCLUSION

  There is no substantial difference of opinion as to whether a preference defendant can assert affirmative defenses other than those specifically enumerated in Section 547(c) and other than "threshold defenses." Accordingly, an immediate appeal of the Bankruptcy Court's Order is unwarranted, and the Court declines to grant Uniden leave to immediately appeal the Bankruptcy Court's Order.*fn5 Uniden's motion for leave to appeal is denied.


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