Memorandum of Decision Re: Preference Defense

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Judge's Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re MOONSTONE MOUNTAIN ENGINEERING,                                                                              No. 97-13484 INC.,      Debtor(s). ______________________________________/ LINDA S. SCHUETTE, Trustee,      Plaintiff(s),    v.                                                                                                                                                   A.P. No. 98-1073 DONITA RAPP,      Defendant(s). _______________________________________/
Memorandum of Decision
I. Introduction      Prior to its Chapter 7 bankruptcy, debtor Moonstone Mountain Engineering was a maker of outdoor apparel. Defendant Donita Rapp was a clothing designer. In this adversary proceeding the bankruptcy trustee, Linda S. Schuette, seeks to recover as a preference a payment made to Rapp by the debtor in the amount of $11,352.00 made about two months before Moonstone filed its bankruptcy petition, less $3,745.80 in credits for services rendered after the payment.      Rapp concedes that all of the elements of a preference under § 547(b) of the Bankruptcy Code are present. She alleges that she has a defense under § 547(c)(1), in that the payment to her was a substantially contemporaneous exchange for new value.
II.. Facts
     The great difficulty in this case is the nature of the written contract between Rapp and Moonstone. It is poorly drafted and unclear, and requires significant testimony to explain it.      From the testimony provided, it appears that Rapp was to be paid a flat fee of $39,750.00 for 37 designs. However, Rapp was to be paid on an interim basis at the rate of $50.00 per hour as she developed the designs. Although the contract does not specifically say so, it appears that Rapp was to bill on an hourly basis up to a maximum of $39,750.00. Rapp was also entitled to some additional compensation of travel, which appears to be in addition to the maximum. The contract did recite that "[s]ketches developed for Client shall become the property of Client only upon payment in full of the fee charged."      Commencing in May of 1997, Rapp began to experience problems getting paid by Moonstone. Throughout May and June, her invoices were consistently paid late. On June 15, 1997, she invoiced Moonstone for $5,220.00, of which $225.00 was for travel time. On July 1, 1997, she invoiced Moonstone for $6,132.00, of which $400.00 was travel time.(1) On July 15, 1997, she invoiced Moonstone $6,268.00, of which $349.00 was for travel. On the same date, she sent Moonstone a short note saying that the outstanding balance owed to her, $16,306.00, must be paid immediately "in order to receive the majority" of her designs. On July 21, 1997, Rapp received a check from Moonstone for $11,352.00, in payment of the June 15 and July 1 invoices. On July 24, 1997, she sent 19 designs to Moonstone.      If the July 21 payment was intended to be a payment of the outstanding invoices, then it was clearly preferential. However, Rapp argues that the payment was for the 19 designs, which she was not legally required to send until she was paid. Thus, she argues that the delivery of the designs was new value which she contemporaneously exchanged for payment.
III. Intent of the Parties
     In order to establish the contemporaneous exchange defense, the creditor must show that both it and the debtor intended the exchange to be for new value. In re Gateway Pacific Corp., 214 B.R. 870, 876 (9th Cir. BAP 1997). For this reason, courts which have considered the issue have pretty much universally held that where a creditor delivered new goods only on condition that old bills be paid the defense is not available. See, e.g., In re Fasano/Harriss Pie Co., 71 B.R. 287, 289-90 (W.D.Mich. 1987); In re Ajayem Lumber Corp., 143 B.R. 347, 352 (Bkrtcy.S.D.N.Y. 1992); In re Miniscribe Corp., 123 B.R. 86, 92 (Bkrtcy.D.Colo. 1991); In re Family Home Sales Center, Inc., 65 B.R. 176, 177 (Bkrtcy.N.D.Ga.1986).      Seen in this light, it appears that Rapp's letter to Moonstone's Ceo of July 15, 1997, is fatal to her defense. In it, she says that the enclosed invoice must be paid in full before she will ship the designs. The invoice of that date includes "PAST DUE BALANCE 6/1 - 6/15 $5,220" and "PAST DUE BALANCE 6/15 - 6/30 $6,132." Her notation on the invoice "pd 7/22" shows that the check she received was on account of these past due invoices. Thus, Rapp clearly intended the payment to be for past due accounts, not the designs themselves.
IV. New Value
     The crux of the new value defense is that the debtor's estate must not be diminished by the transfer. For this reason, the burden is on the creditor to show a dollar-for-dollar exchange, not hypothetical or ephemeral value. In re Jet Florida Systems, Inc., 861 F.2d 1555, 1559 (11th Cir. 1988). In this case, the "value" of the designs is entirely hypothetical. Rapp presented no testimony that the designs had any value to anyone other than Moonstone or could have been sold to anyone else for anything at all. Accordingly, Rapp would have no defense even if she had intended the exchange to be for new value.
V. Subsequent New Value
     At all stages of this litigation, the trustee has been willing to give Rapp a credit for her services provided to Moonstone after the preferetial payment which were never paid, pursuant to § 547(c)(4) of the Code. Rapp largely spurred this credit, taking the position that she had a 547(c)(1) defense. At the last minute, she argued that she did indeed have a (c)(4) defense, based on postpayment services. However, she then argued that in addition to the invoiced services there were others provided gratis which exceeded the preferential payment. As to this argument, Rapp's evidence was too vague to meet her burden of proof. Accordingly, her (c)(4) credit will be limited to the amount conceded by the trustee. $3,745.80.
VI. Conclusion
     The payment in question was intended by Rapp to be on account of past due invoices, not the designs. Accordinlgy, she has no defense under § 547(c)(1) of the Code. She has a defense under § 547(c)(4), but only to the extent of $3,745.80. Accordingly, the trustee shall have judgment against her in the amount of $7,606.20, together with interest at the federal rate from and after the date the complaint was filed. The trusee shall also recover her costs of suit.      This memoradum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for the trustee shall submit an appropriate form of judgment.
Dated: December 7, 1998                                                                          __________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy Judge

1. The invoices were addressed to Moonstone and to Quest, an affiliate of Moonstone. All invoices were paid by Moon