Memorandum of Decision Re: Preference

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re VALLEY FURNITURE CENTER,                                       No. 1-89-00122      Debtor. ___________________________/ RAYMOND A. CAREY, Trustee,      Plaintiff,    v.                                                                                        A.P. No. 1-89-0072 JACK A. SPIEGELMAN,      Defendant. ______________________________/
Memorandum of Decision
     Debtor Valley Furniture Center was a family-owned furniture business incorporated by defendant Jack A. Spiegelman, who retired in 1981 and turned the business over to his children. Spiegelman owned the business premises, and leased them to the debtor corporation.      During the fall of 1988, the debtor fell behind several months in its rent payments to Spiegelman. As of September 1, the past due rent was $34,800.00. By this adversary proceeding, the Trustee seeks to avoid as a preference the eventual payment of most of this back rent.      On September 13, 1988, Spiegelman entered into a written agreement with the debtor terminating the lease. The agreement provided that in return for forbearance in exercising his unlawful detainer rights, Spiegelman would be paid his back rent from proceeds of a liquidation sale which Spiegelman would allow on the premises. At the same time, Spiegelman signed a new short-term lease with a professional liquidator. The liquidator paid Spiegelman $6,000.00 for the balance of September, leaving a balance due for back rent of $28,800.00.      At the same time as the debtor entered into the lease termination agreement with Spiegelman it signed a contract with the liquidator whereby the liquidator agreed to sell the debtor's inventory on its behalf. The debtor agreed that the liquidator could keep as its commission all amounts received over and above the debtor's invoice cost of the inventory. The debtor was also entitled to a small percentage of the liquidator's gross.      On November 3, 1988, the liquidator paid $30,000.00 to Spiegelman's attorney, who placed the funds in his trust account. The attorney sent Spiegelman a check drawn on the trust account for $26,500.00 on the same day, and a further check for the balance owing on the back rent for $2,300.00 four days later. The debtor filed its Chapter 7 petition on January 25, 1989.      The trial brief submitted by Spiegelman's counsel contains not a single reference to the Bankruptcy Code. From his opening statement, the Court gleans that he alleges first that his forbearance was new consideration and second that the source of funds paid toward the back rent was not the debtor. Stated in terms of the Code, the defenses appear to be that the transfer was a substantially contemporaneous exchange for new value, and therefore unavoidable pursuant to section 547(c)(1), and that the transfer was not of property in which the debtor had an interest as required by section 547(b). Neither argument has any merit.      The term "new value" used in section 547(c)(1)(A) is defined in section 547(a)(2) as money or money's worth; it does not mean one obligation substituted for another. It is black-letter law that forbearance cannot be deemed new value. In re Air Conditioning, Inc. of Stuart (11th Cir.1988) 845 F.2d 293, 298; In re E.R. Fegert, Inc. (9th Cir.BAP 1988) 88 B.R. 258, 259; In re Drabkin (D.C.Cir.1986) 800 F.2d 1153, 1159.      Spiegelman's argument regarding the source of the funds is rather inchoate, and difficult to maintain in light of the statement in his own trial brief (page 4, lines 5-6) that the $28,800.00 was paid to him by the debtor in November, 1988. Nonetheless, the Court sees no basis for the argument that the debtor had no interest in the transferred funds. The debtor obtained certain rights by virtue of its agreement with the liquidator. To the extent it used any of those contract rights to pay the back due rent, directly or indirectly, it made an avoidable transfer. See 4 Collier on Bankruptcy, section 547.03[1], page 547-17; 11 U.S.C. section 101(50). Even if the transaction is deemed to be a transfer of the debtor's rights in the inventory to the liquidator in return for the liquidator's promise to pay the back rent, Spiegelman is still liable for an avoidable transfer pursuant to section 550(a)(1) of the Code because such a transfer was for his benefit. Only someone very unfamiliar with the Bankruptcy Code would expect form to dominate over substance in this matter.      All of the other elements of a preference having been conceded, the Trustee shall have judgment against Spiegelman in the sum of $28,800.00, together with interest at the legal rate from and after November 3, 1988, and costs of suit. Counsel for the Trustee shall submit an appropriate form of judgment.      This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: June 26,1989                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy