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In re The Truland Group, Inc.

United States District Court, E.D. Virginia, Alexandria Division

May 24, 2019

In re THE TRULAND GROUP, INC., et al, Debtors.
H. JASON GOLD, in his capacity as trustee for The Truland Group, Inc., et al,, Appellee. MYERS CONTROLLED POWER, LLC,, Appellant,


          Leonie M. Brinkema, United States District Judge

         Before the Court is Myers Controlled Power, LLC's ("Myers" or "appellant") appeal from an order of the bankruptcy court in this adversary proceeding granting judgment in favor of H. Jason Gold, the trustee ("trustee" or "appellee") for the avoidance and recovery of a preference in the amount of $2, 107, 039.86, along with prejudgment interest at the federal rate. The appeal has been fully briefed, [1] and the Court finds that oral argument would not aid the decisional process. For the reasons stated below, the judgment of the bankruptcy court will be affirmed.

         I. BACKGROUND

         This dispute arises out of a large-scale construction project related to the Washington Metropolitan Area Transit Authority's ("WMATA") Orange and Blue Lines. Mem. Op. 1-2. WMATA engaged Clark Construction Group, LLC ("Clark") to serve as the prime contractor for the $273 million renovation. Id. at 2. Clark then subcontracted with Truland Walker Seal Transportation, Inc. ("TWST"), one of several affiliated companies performing electrical contracting work under the name "Truland." Id. at 1-2. Among other terms, the subcontract between Clark and TWST included a "flow-down" provision requiring TWST to pay all subcontractors and suppliers to prevent those parties from making any claims against the surety that guaranteed TWST's performance. Id. at 2. TWST ultimately decided to use Myers, the appellant, as a second-tier subcontractor to provide necessary electrical equipment and switches. Id. at 2-3. Myers did not contract with TWST directly; rather, it signed a supplier subcontract with Nationwide Electrical Services, Inc. ("NES"), a disadvantaged business enterprise.[2] Myers sent all but one of its invoices to NES.[3] Id. at 3. Even so, "Myers took its directions exclusively from TWST, not from NES." Id.

         The Truland companies ran into serious financial difficulties in the spring of 2014 and became unable to make the required flow-down payments to their suppliers and subcontractors. Mem. Op. 4. As unpaid invoices began to accumulate, Myers notified TWST and Clark that it would cease delivering equipment until payments resumed. Id. Because TWST's financial difficulties were threatening the schedule of the overall project, the parties began searching for alternative arrangements. Myers initially sought direct payment and a guarantee from Clark. Clark refused, insisting instead on an arrangement in which checks made jointly payable to Myers and TWST would be sent to TWST for endorsement and then delivered to Myers. Id. at 5. Based on Clark's representations about this arrangement, Myers released equipment worth approximately $1.8 million on May 27, 2014. Id. at 6. The parties executed the Joint Check Agreement ("JCA") on June 16, 2014, and two days later, Myers released additional equipment worth over $250, 000. Id. On July 11, 2014, Clark delivered a check made jointly payable to TWST and Myers in a total amount of $2, 107, 039.86; TWST endorsed the check, returned it to Clark, and Clark forwarded it to Myers. Id.

         TWST filed a Chapter 7 bankruptcy petition on July 23, 2014. TWST's petition was jointly administered with those of The Truland Group, Inc. and the rest of its subsidiaries (collectively, "debtors"). The trustee instituted this adversary proceeding in July 2016, seeking to recover the $2, 107, 039.86 paid to Myers under the JCA as an avoidable transfer under 11 U.S.C. § 547(b). Myers opposed the trustee's efforts on several grounds, including that Myers was not a creditor of TWST or any of the other debtors at the time of the alleged transfer; that the joint check was not TWST's "property," at least for purposes of bankruptcy law, at the time of the transfer; and that the transfer was not avoidable because it was a substantially contemporaneous exchange for new value under 11 U.S.C. § 547(c).

         The bankruptcy court held a trial on the merits in February and March of 2018. Based on the parties' written submissions and the evidence adduced at trial, the bankruptcy court found that Myers was TWST's creditor at the time of the transfer in July 2014; that the joint check was properly part of the bankruptcy's estate as of that date; that the JCA and resulting payment constituted an avoidable transfer from TWST to Myers; and that although the parties had intended to effect an exchange for new value through the JCA, that exchange was not "substantially contemporaneous" and thus was not covered by § 547(c)'s defense to avoidance. The bankruptcy court concluded that the trustee was entitled to recovery of the $2, 107, 039.86 transfer along with prejudgment interest at the federal rate, as calculated from the date of filing of the adversary proceeding. Myers timely filed this appeal.


         The bankruptcy court had jurisdiction over this dispute under 28 U.S.C. § 1334 and the Order of Reference entered on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(F), and the Court has jurisdiction over Myers's appeal under 28 U.S.C. § 158(a). On appeal, the bankruptcy court's legal determinations are reviewed de novo, and its factual findings are reviewed for clear error. Fairchild Dornier GMBH v. Official Comm. of Unsecured Creditors (In re Dornier Aviation (N. Am.). Inc.). 453 F.3d 225, 231 (4th Cir. 2006); see First Owners' Ass'n of Forty Six Hundred Condo.. Inc. v. Gordon Props.. LLC (In re Gordon Props.. LLC). 516 B.R. 323, 327 (E.D. Va. 2014) ("A district court sitting as an appellate court in a bankruptcy proceeding reviews the [bankruptcy] court's legal conclusions de novo.... [F]indings of fact will be overturned only if consideration 'of the entire record leaves [the reviewing court] with the definite and firm conviction that a mistake has been committed.'" (third alteration in original) (quoting Harman v. Levin. 772 F.2d 1150, 1153 (4th Cir. 1985))).

         A. Avoidable Transfer

         Under the Bankruptcy Code, the trustee may avoid any transfer of an interest of the debtor in property-

         (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 ...

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