United States District Court, N.D. Illinois, Eastern Division
August 8, 2005.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS of ABC-NACO, INC., Appellant,
SOFTMART, INC., Appellee.
The opinion of the court was delivered by: GEORGE LINDBERG, Senior District Judge
MEMORANDUM AND ORDER
The Official Committee of Unsecured Creditors of ABC-Naco, Inc.
("the Committee"), on behalf of ABC-Naco, Inc. ("Debtor"), is
appealing a U.S. Bankruptcy Court judgment in favor of Softmart
Inc. ("Softmart"). The bankruptcy court held that Debtor's
transfer within the preference period was not avoidable because
Debtor received "new value" under 11 U.S.C. § 547(a)(2) and
(c)(4) when it assigned contracts to a third party, Meridian Rail
Debtor entered into an agreement with Softmart, a "large
account reseller" for Microsoft Corporation ("Microsoft"), to
purchase Microsoft software licenses. Microsoft policy requires
any purchasers from "large account resellers" to enter into two
agreements with Microsoft regarding volume pricing and
Microsoft's right to revoke in case of breach. Softmart was not
privy to the two Debtor/Microsoft agreements.
Within 90 days prior to Debtor filing the bankruptcy petition
and pursuant to the purchase agreement with Softmart, Debtor made
four payments to Softmart totaling more than $98,000. After
Debtor filed its bankruptcy petition, the bankruptcy court
authorized a partial sale of assets to alleviate its debt. Under this authority,
Debtor assumed and assigned several contracts to Meridian,
including the software purchase agreement between Debtor and
Softmart and the two agreements between Debtor and Microsoft.
After Softmart filed suit to protect these payments from being
returned to Debtor, the bankruptcy court held the payment could
not be returned to Debtor because Debtor received "new value"
from Softmart. First, the court held that Softmart's forbearance
from advising Microsoft about Debtor's breach was "new value."
Second, the court held that Debtor's continued use of the
software license during the preference period and its retention
of the ability to transfer the software licenses constituted "new
value." The court reasoned that Microsoft would have exercised
its right to terminate Debtor's continued use and ability to
transfer if advised of the breach. The court also held it was not
necessary for Softmart to quantify the "new value" at issue.
The Committee raises three issues on appeal: (1) whether the
bankruptcy court erred in holding that forbearance from a
potential remedy constituted "new value" under § 547(a)(2) and
(c)(4); (2) whether the bankruptcy court erred in finding that
Softmart provided "new value" to and for the benefit of Debtor;
and (3) whether the bankruptcy court erred by failing to require
Softmart to quantify the "new value" at issue.
Whether forbearance constitutes "new value" is a question of
law. "District and appellate courts review factual findings of
the bankruptcy courts under a clearly erroneous standard, but
review conclusions of law de novo." Matter of Newman,
903 F.2d 1150, 1152 (7th Cir. 1990).
"New value" is "money or money's worth in goods or services
. . . but does not include an obligation substituted for an
existing obligation." 11 U.S.C. § 547(a)(2). The Committee
argues that the bankruptcy court erred in holding that Softmart's
forbearance constituted "new value." The Court agrees. See In re
Jones Truck Lines, Inc., 130 F.3d 323, 327 (8th Cir. 1997)
("forbearance from terminating benefits is not `new value'"); In
re Jet Florida System, Inc., 841 F.2d 1082, 1084 (11th Cir.
1988) ("forbearance from terminating lease is not `new value'");
In re Air Conditioning, Inc., 845 F.2d 293 (11th Cir. 1988)
(same); Drabkin v. A.I. Credit Corporation, 800 F.2d 1153, 1159
(D.C. Cir. 1986) (same); In re Ottawa Cartage, Inc., 1985 U.S.
Dist. LEXIS 14029 (Same).
Softmart's forbearance from advising Microsoft of Debtor's
breach provided nothing of value to Debtor. The only testimony
presented to the bankruptcy court conclusively established that
after Debtor made the payments to Softmart, Softmart "did not
deliver any goods, . . . provide any services . . . [, or]
provide any new credit to the Debtor." Furthermore, the purchase
agreement the only contract to which Softmart was privy
provided no revocation rights to Softmart, but rather only the
ability to advise Microsoft of Debtor's breach. And even if
Softmart reported the breach to Microsoft, Microsoft had the
option to act. Because Microsoft was free to exercise its own
discretion on whether to revoke the licenses, Softmart's
abstention from advising Microsoft of Debtor's breach conferred
nothing of value to Debtor.
The second issue before the Court is whether the bankruptcy
court erred when it held that Softmart provided Debtor "new
value" when Debtor transferred the contracts to Meridian. The
bankruptcy court found Debtor's payments allowed continued use of
the software licenses and the ability to transfer the contract
constituted "new value". The bankruptcy court also found that
Debtor's ability to "transfer its rights under [the] agreements
to Meridian" was "new value" pursuant to In re Discovery Zone
2004 WL 2346002. Additionally, the bankruptcy court held that Meridian benefitted from the use of Debtor's contracts. The
Debtor's continued use of the software licenses is not "new
value." 11 U.S.C. § 547(a)(2). Debtor contracted with Softmart
under a purchase agreement to use the software licenses in
exchange for quarterly payments. After filing its bankruptcy
petition, Debtor continued to use the software licenses pursuant
to the original purchase agreement but breached its payment
obligations. The court reasoned that the payments made by Debtor
and Meridian for continued use are not avoidable because
"[Debtor] avoid[ed] termination of the [two Microsoft
agreements]." However, Softmart provided nothing new to Debtor.
Also, Debtor's transfer of the contracts to Meridian is not
"new value;" rather, it was an assignment and assumption
authorized by the bankruptcy court. Debtor was relieved of its
duty to pay Softmart under the purchase agreement, a duty that
Meridian assumed. Softmart did not transfer "new value."
Additionally, the court held that Meridian benefitted from
Debtor's contracts with Microsoft because Debtor received
discounted volume pricing. Notwithstanding, the assignment and
assumption, the Microsoft agreements were standard operating
procedure for end-users of software licenses, like Debtor,
contracting with "large account resellers," like Softmart. Debtor
did not receive special consideration when contracting with
Microsoft nor would Meridian if it had itself contracted with
Microsoft. Thus, Debtor received no "new value" from any transfer
of the contracts to Meridian.
The final issue on appeal concerns the bankruptcy court's
failure to require Softmart to quantify (in dollars) the "new
value" conferred to Debtor. Because the Court has concluded that
Debtor was not provided with any "new value" under § 547(a)(2),
this issue is moot and need not be addressed.
ORDERED: The final Judgment Order of the U.S. Bankruptcy Court
in favor of Softmart Inc. is reversed and judgment is granted in
favor of the Official Committee of Unsecured Creditors of
ABC-Naco, Inc. Softmart will submit a draft judgment consistent
with this opinion on or before August 22, 2005. See
Fed.R.Civ.P. 58, 79(a).
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