UNITED STATES BANKRUPTCY COURT
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NORTHERN DISTRICT OF CALIFORNIA
MOONSTONE MOUNTAIN ENGINEERING, No. 97-13484
LINDA S. SCHUETTE, Trustee,
v. A.P. No. 98-1073
Memorandum of Decision
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.
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
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
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,
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
, 123 B.R. 86, 92 (Bkrtcy.D.Colo. 1991); In re Family Home Sales Center, Inc.
, 65 B.R. 176,
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
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
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 __________________________
U.S. Bankruptcy Judge
1. The invoices were addressed to Moonstone and to Quest, an affiliate of Moonstone. All
invoices were paid by Moon