In the
United States Court of Appeals
For the Seventh Circuit

No. 00-3419

MARK A. WARSCO, Trustee,

Plaintiff-Appellant,

v.

PREFERRED TECHNICAL GROUP,

Defendant-Appellee.

Appeal from the United States District Court
for the Northern District of Indiana, Fort Wayne Division.
No. 00 C 10--William C. Lee, Chief Judge.

ARGUED JANUARY 23, 2001--DECIDED July 3, 2001



  Before POSNER, EASTERBROOK and RIPPLE,
Circuit Judges.

  RIPPLE, Circuit Judge. Mark Warsco ("the
trustee") is the trustee in bankruptcy
for Presidential, Ltd. ("Presidential").
He filed this suit against Preferred
Technical Group ("PTG") to avoid an
alleged preference made to PTG by
Presidential Holdings, L.L.C. ("LLC").
The parties filed cross motions for
summary judgment in the district court;
the district court granted PTG’s motion
and denied the trustee’s. The trustee now
appeals. For the reasons set forth in the
following opinion, we reverse the
judgment of the district court and remand
the case for further proceedings.

I

BACKGROUND

A.    Facts/1

  In 1998, Presidential purchased $2
million worth of assets from PTG.
Presidential executed an unsecured,
subordinated promissory note for $2
million in connection with this
transaction ("the note"). The principal
amount of the note subsequently was
reduced to $1.75 million.

    Thereafter, Presidential began
experiencing financial difficulties.
Monument Capital Partners 1, L.L.C.
("Monument"), a junior secured creditor
of Presidential, was dissatisfied with
Presidential’s management, and it
contacted Hans Rau, an entrepreneur, to
see if Rau was interested in purchasing
Presidential’s assets. Rau apparently
accepted Monument’s invitation and formed
LLC for the express purpose of acquiring
Presidential’s assets.

  At some point during the negotiations
between Presidential and LLC, PTG became
involved in the discussions, although the
exact nature and extent of its
involvement are not perfectly clear from
the record. The Asset Purchase Agreement
("APA") that memorialized the agreement
between Presidential and LLC had a clause
that conditioned the transaction on
receipt of consent agreements containing
releases and waivers from certain
parties. PTG apparently was among these
parties; it sent a letter dated April 15,
1999, to representatives of Presidential
and Monument in which it stated that it
would not sign the consent agreement
"unless we [PTG] are compensated on an
equitable basis for the existing notes we
hold against Presidential." R.19,
Ex.G./2

  On April 26, 1999, PTG sent Monument a
"follow up" letter "with regard to the
Presidential Sales Agreement and
subsequent conversations between
[Monument] and [PTG] and with
[Presidential]." R.19, Ex.H. In this
letter, PTG agreed to sign the required
consent agreement "if, at the time of
Closing, the parties agree to pay [PTG]
the amount of $500,000 to cover its
outstanding note and accrued interest
thereon." Id. Lastly, PTG stated that,
"[i]f the purchase agreement can be
modified to include the payment to [PTG],
then we can move forward on this
transaction." Id.

  John Weingardt, the president of
Presidential, submitted two affidavits in
which he explained the nature of
PTG’sinvolvement in the negotiations. In
his first affidavit, Weingardt stated
that "PTG negotiated with [Presidential]
and the entities that financed the sale
to [LLC] for a share of the proceeds from
the sale of [Presidential’s] assets to
[LLC]." R.19, Ex.M at 2. In his second
affidavit, Weingardt clarified that,
"despite these initial negotiations, such
a transaction never occurred. Instead,
LLC purchased the Note from PTG, and PTG
did not receive any of the proceeds from
the sale of [Presidential’s] assets."
R.22, Ex.A at 2.

  Although LLC eventually agreed to
purchase the note from PTG for $500,000,
it conditioned its purchase of the note
on its ability to purchase Presidential’s
assets. Similarly, it conditioned its
purchase of Presidential’s assets on its
ability to purchase the note from PTG for
$500,000 or less. Both Rau and Weingardt
submitted affidavits in which they
explained that (1) the $500,000 that LLC
paid to PTG for the note was not, and was
not intended to be, part of the purchase
price for Presidential’s assets,/3 (2)
the $500,000 payment to PTG did not
reduce the amount of debt Presidential
owed on the note, and (3) Presidential
did not exercise any control over how,
when, or if PTG was paid for the note.

  LLC offered three reasons for why it
wished to purchase the note from PTG.
First, LLC planned to reduce the
principal amount of the note by $750,000
and to apply this amount toward the
purchase price it paid for Presidential’s
assets. Second, LLC thought its purchase
of the note would be advantageous to
those of Presidential’s creditors with
which it expected to do business in the
future, which did not include PTG. LLC
believed that, if it could purchase the
note from PTG, Presidential’s other
unsecured creditors would recover fifty
cents on the dollar in the event
Presidential declared bankruptcy, whereas
PTG received only twenty-nine cents on
the dollar for the note. Third, LLC
wanted to secure a place as
Presidential’s largest unsecured creditor
so as to occupy "a position of influence"
during a potential bankruptcy proceeding.
R.16, Ex.D at 3.

  The APA that governed the sale of
Presidential’s assets to LLC defined the
purchase price for the assets as (1)
$3.425 million in cash,/4 plus (2) the
book value of the liabilities LLC
assumed,/5 plus (3) $750,000 of debt
forbearance on the note LLC would
purchase from PTG at the time of
closing,/6 plus (4) a post closing
payment ("PCP") of $585,000. The total
purchase price was subject to an
adjustment; the amount of the adjustment
depended on the value of Presidential’s
working capital at the time of
closing./7 If Presidential’s working
capital was less than $1,255,000, the
amount of the adjustment would be
$1,255,000 less the value of the working
capital. The adjustment would be due from
Presidential to LLC, and it would take
the form of a decrease in the aggregate
amount of the PCP. Similarly, if
Presidential’s working capital was more
than $1,370,000, the amount of the
adjustment would be the value of the
working capital less $1,370,000. The
adjustment would be due from LLC to
Presidential, and it would take the form
of an increase in the aggregate amount of
the PCP.

  The transactions between the parties
were consummated on May 5, 1999. The
closing cash statement reveals that LLC
had $4,470,000 on hand in cash at the
time of closing. Of that cash,
$2,470,325.97 was wired to National City
Bank; $908,881.88 was wired to Monument;
and $45,792.22 was wired to OHMITE
Manufacturing Company. The total value of
these three wires was $3.425 million.
Additionally, $157,000 was wired to
Extruded Metals and $37,500 was wired to
Weingardt./8 Last but not least,
$500,000 was wired to PTG. The combined
value of all these disbursements is
$4,119,500, which was $350,500 less than
the total amount of cash on hand. The
record provides no indication of what the
parties did with this additional cash.

  Presidential never received its PCP. The
value of Presidential’s working capital
apparently was less than $1,255,000,
although the record does not reveal the
degree to which it came up short. The
resulting adjustment, however, was large
enough to wipe out the entire PCP, so
that Presidential never received any
portion of the $585,000./9

  Within one month of the sale of
Presidential’s assets to LLC, an
involuntary bankruptcy petition under
Chapter 7 was filed against Presidential.
The money Presidential received as a
result of the asset sale was sufficient
to pay only Presidential’s secured
creditors. Presidential’s unsecured
creditors received nothing from the
bankruptcy estate, instead of the fifty
cents on the dollar LLC initially thought
the asset sale would provide them. The
only unsecured creditor to receive any
payment was PTG, which received the
$500,000 LLC had paid it for the note.
The trustee filed this action against PTG
to avoid that $500,000 payment as a
preference.

B.   Earlier Proceedings

  The parties filed cross motions for
summary judgment in the district court.
The court held that the trustee had
failed to prove that the payment to PTG
was a preference; therefore, it granted
PTG’s motion and denied the trustee’s.
According to the district court, the
trustee’s case was lacking in two
critical respects. The first shortcoming
was that the trustee was unable to
demonstrate that the payment to PTG was a
transfer of an interest of the debtor in
property. See 11 U.S.C. sec. 547(b). The
district court did not believe that the
payment to PTG was part of the purchase
price LLC paid to Presidential for its
assets. As a result, LLC’s independent
decision to purchase the note from PTG
did not deprive the bankruptcy estate of
property it would have had if not for the
transfer. Because the trustee was unable
to demonstrate that LLC’s payment to PTG
somehow depleted the bankruptcy estate,
he had not established that the payment
was an interest of the debtor in
property. Thus, the district court held
that summary judgment was proper on this
basis alone.

  Nevertheless, the district court went on
to address a second aspect of the
trustee’s case that, in its view, also
served as an alternative basis for
summary judgment in favor of PTG. The
district court did not believe that the
trustee demonstrated that the payment to
PTG was for or on account of an
antecedent debt owed by Presidential. See
11 U.S.C. sec. 547(b)(2). The key inquiry
for the district court on this issue was
how PTG applied the payment it received
from LLC. The district court did not
believe that the $500,000 that PTG
received from LLC reduced the amount of
debt Presidential owed to the holder of
the note; instead, LLC’s payment to PTG
merely worked a substitution of
creditors. Thus, the payment was not for
an antecedent debt, making summary
judgment in favor of PTG appropriate on
this ground as well.

II

DISCUSSION

A.   Standard of Review

  The trustee appeals the district court’s
entry of summary judgment in favor of
PTG. We review a district court’s grant
of summary judgment de novo, and we view
the record and draw all reasonable
inferences therefrom in favor of the
trustee, the nonmovant in this case. See
In re Smith, 966 F.2d 1527, 1529 (7th
Cir. 1992). Summary judgment is proper
when the "pleadings, depositions, answers
to interrogatories, and admissions on
file, together with the affidavits, if
any, show that there is no genuine issue
as to any material fact and that the
moving party is entitled to a judgment as
a matter of law." Fed. R. Civ. P. 56(c).
The nonmovant must show through specific
evidence that a triable issue of fact
remains on issues on which he bears the
burden of proof at trial. See Celotex
Corp. v. Catrett, 477 U.S. 317, 324
(1986). "The nonmovant may not rest upon
mere allegations in the pleadings or upon
conclusory statements in affidavits; it
must go beyond the pleadings and support
its contentions with proper documentary
evidence." Chemsource, Inc. v. Hub Group,
Inc., 106 F.3d 1358, 1361 (7th Cir.
1997). With these standards in mind, we
turn to the merits of this case.

B.   Section 547

  A trustee may avoid certain preferential
transfers made from the debtor’s estate
before the debtor declared bankruptcy.
See 11 U.S.C. sec. 547(b). The trustee’s
power to avoid preferential transfers is
designed to further the Bankruptcy Code’s
central policy of equality of
distribution: "[C]reditors of equal
priority should receive pro rata shares
of the debtor’s property." Begier v. IRS,
496 U.S. 53, 58 (1990). Additionally, by
preventing the debtor from favoring
certain creditors over others and by
ensuring an equal distribution, the
preference provision helps reduce "the
incentive to rush to dismember a
financially unstable debtor." In re
Smith, 966 F.2d at 1535.

  A transfer of an interest of the debtor
in property is preferential, and
therefore avoidable, if it (1) was made
to or for the benefit of a creditor, (2)
was for or on account of an antecedent
debt, (3) was made while the debtor was
insolvent, (4) was made on or within 90
days before the date of the filing of the
petition, and (5) allowed the creditor to
receive more than it otherwise would
have. See 11 U.S.C. sec. 547(b). PTG
concedes that most of these elements are
met in this case; the only elements at
issue are (1) whether the $500,000
payment to PTG constituted a transfer of
an interest of Presidential in property
and (2) whether the transfer was for or
on account of an antecedent debt. The
trustee bears the burden of proving each
of these elements. See Boberschmidt v.
Soc’y Nat’l Bank (In re Jones), 226 F.3d
917, 921 (7th Cir. 2000).


  1.   Interest of the Debtor in Property

  A transfer is only preferential if what
was transferred constituted an interest
of the debtor in property. The Bankruptcy
Code’s definition of a transfer is
"expansive," Barnhill v. Johnson, 503
U.S. 393, 400 (1992), and encompasses
"every mode, direct or indirect, absolute
or conditional, voluntary or involuntary,
of disposing of or parting with property
or with an interest in property." 11
U.S.C. sec. 101(54)./10 In the typical
preference action, the debtor itself
transfers something of value to a
particular creditor. As the explicit
language of the Bankruptcy Code makes
clear, however, the transfer need not be
made directly by the debtor; indirect
transfers made by third parties to a
creditor on behalf of the debtor may also
be avoidable under the Code. See Dean v.
Davis, 242 U.S. 438, 443 (1917) ("Mere
circuity of arrangement will not save a
transfer which effects a preference from
being invalid as such."). This case
requires us to determine whether LLC’s
$500,000 payment to PTG is avoidable as
an indirect transfer of an interest of
the debtor in property.

  "[P]roperty of the debtor subject to the
preferential transfer provision is best
understood as that property that would
have been part of the estate had it not
been transferred before the commencement
of bankruptcy proceedings." Begier, 496
U.S. at 58 (internal quotation marks
omitted). Courts considering this element
of the preference provision have focused
on whether the transfer diminished the
debtor’s estate./11 See, e.g., Buckley
v. Jeld-Wen, Inc. (In re Interior Wood
Prods. Co.), 986 F.2d 228, 230-31 (8th
Cir. 1993); In re Smith, 966 F.2d at
1535-36; Mandross v. Peoples Banking Co.
(In re Hartley), 825 F.2d 1067, 1070 (6th
Cir. 1987). When a third party pays a
creditor of the debtor after having
purchased the debtor’s assets, the
fundamental question in determining
whether that payment was property of the
debtor is whether the funds used to make
the payment were part of the purchase
price for the assets. See, e.g., In re
Interior Wood, 986 F.2d at 231; Mordy v.
Chemcarb, Inc. (In re Food Catering &
Housing, Inc.), 971 F.2d 396, 398 (9th
Cir. 1992). If the funds the third party
used to pay the creditor were
consideration for the debtor’s sale of
its assets, then those funds would have
been part of the debtor’s estate and
would have been available for
distribution had they not been
transferred to the creditor. On the other
hand, if the funds used to pay the
creditor were not part of the sale price
for the debtor’s assets, then it is
unlikely that the payment diminished the
debtor’s estate. Instead, the transaction
between the third party and the creditor
likely was an independent transaction
that did not affect the property in the
debtor’s estate available for
distribution.

  In those cases in which courts have held
that a preference was given in the
context of an asset sale, there is a
fairly direct, traceable link between the
consideration given for the debtor’s
assets and the funds used to pay the
creditor. For instance, a debtor may sell
its assets to a third party, and, as part
of the purchase agreement, the third
party may agree to assume the debtor’s
liabilities. When the third party
subsequently pays a creditor of the
debtor, courts have allowed the
bankruptcy trustee to recover the payment
as a preference. See In re Food Catering,
971 F.2d at 397-98; Sommers v. Burton (In
re Conard Corp.), 806 F.2d 610, 611-12
(5th Cir. 1986). In such cases, the third
party’s assumption of the debtor’s debt
is consideration for the sale of the
debtor’s assets. See In re Food Catering,
971 F.2d at 398. The debtor effectively
transferred to the creditor its right to
receive a portion of the sale price equal
to the amount of the debt. See In re
Conard Corp., 806 F.2d at 612. The result
is the same when, instead of transferring
the money directly to the creditor, the
third party deposits the money into an
escrow account over which the debtor has
no control. See In re Interior Wood, 986
F.2d at 231. Nor does the result change
when the third party, rather than the
debtor, specifies which creditor will
receive the funds paid into the escrow
account. See Feltman v. Bd. of County
Comm’rs of Metro. Dade County (In re
S.E.L. Maduro (Florida), Inc.), 205 B.R.
987, 992-93 (Bankr. S.D. Fl. 1997).

  In contrast to this line of cases are
those situations in which two separate
transactions occur. See, e.g., Crews v.
Shopping Ctr. Equities, Inc. (In re
Sneakers Sports Grill, Inc.), 228 B.R.
795 (Bankr. M.D. Fl. 1999). In In re
Sneakers, the parties entered into a
purchase agreement in which a third party
agreed to purchase the debtor’s assets.
However, the third party conditioned the
purchase on its ability to obtain for
$50,000 a new lease from the debtor’s
landlord, who was also a creditor of the
debtor. See id. at 797. The third party
negotiated an agreement with the landlord
in which it paid $100,000 in exchange for
a lease and various equipment. See id. at
798. The trustee in bankruptcy filed suit
to recover $50,000 of that payment as a
preference because the debtor owed the
landlord that amount in back rent. The
court refused to allow the trustee to
avoid the payment because there was no
evidence that the $50,000 otherwise would
have gone to the debtor. See id. at 800.
Instead, the parties testified that the
$50,000 payment to the landlord was not
connected to the asset sale, that the
$50,000 was never to go to the debtor,
and that the third party financed each
transaction from its own funds. See id.
at 798. Based on these facts, the court
held that the debtor did not have an
interest in the $50,000 because the asset
sale and the agreement with the landlord
were independent transactions. The
payment to the landlord therefore did not
affect the debtor’s estate. See id. at
800.

  In this case, there is no smoking-gun
connection similar to an assumption-of-
debt clause between LLC’s $500,000
payment to PTG and the purchase price for
Presidential’s assets./12 Thus, we are
left to determine if there is a genuine
issue of triable fact as to whether the
practical effect of the transactions was
to funnel $500,000 of the purchase price
for Presidential’s assets to PTG, or
whether LLC’s payment to PTG was truly
independent of its purchase of
Presidential’s assets. We believe that
the record evidence permits two rational
interpretations of the transactions that
occurred in this case. It is clear from
the correspondence among the parties to
the transaction that PTG was not going to
consent to this asset sale unless it
received what it considered fair
compensation for the note it held against
Presidential. In response to this
obstacle, the parties may have put their
collective heads together to restructure
the deal so as to divert $500,000 of the
purchase price to PTG without involving
Presidential directly in the transfer.
Alternatively, LLC may have believed that
refusing to appease PTG would threaten
the viability of the deal. In order to
save the deal and to promote its own
business purposes, then, LLC may have
decided to pay PTG itself.

  PTG maintains that the $500,000 payment
it received was not part of the purchase
price for Presidential’s assets. It
argues that its sale of the note to LLC
merely substituted one creditor for
another so that Presidential’s estate was
not diminished. PTG also relies on Rau’s
and Weingardt’s affidavits, both of which
indicate that the $500,000 was not
intended to be part of the purchase price
and did not reduce the amount LLC paid
for Presidential’s assets. To the
contrary, asserts PTG, the payment it
received allowed Presidential to get more
for its assets than it otherwise would
have: If LLC had not purchased the note,
it would not have given Presidential
anything for its assets, let alone the
extra $500,000.

  The trustee responds by asking us to
look at the transaction as a whole.
According to the trustee, the interdepen
dence of the transactions proves that the
money PTG received was really part of the
purchase price: Because the asset sale
was not going to take place without the
simultaneous purchase of the note, the
payment to PTG was, in effect,
consideration for the asset sale. The
trustee believes that this
characterization of the transactions is
supported by the fact that the principal
amount due on the note was reduced by
$750,000 in connection with the sale and
by the fact that PTG received its
$500,000 at the time of closing. Lastly,
the trustee argues that allowing PTG to
receive $500,000 in connection with the
sale of Presidential’s assets, when no
other unsecured creditor received
anything from the bankruptcy estate,
defeats the policy of equal distribution
among creditors.

  Despite Rau’s and Weingardt’s
affidavits, which support the view that
the payment to PTG was not part of the
purchase price for Presidential’s assets,
we believe that the nature of these
transactions precludes summary judgment,
at least on the record as presently
constituted. The fact that the asset sale
and the note purchase were conditioned
upon each other indicates that LLC was
willing to pay $3.925 million in cash to
acquire Presidential’s assets, in
addition to the value of the other
elements of the purchase price. Notably,
only $3.425 million of that cash went to
Presidential-- or, more accurately, to
Presidential’s secured creditors-- while
the remaining $500,000 went to one
unsecured creditor. Furthermore, PTG’s
letter of April 16 provides a firm
indication that the deal between
Presidential and LLC was not going to
occur unless PTG was paid. Thus, the
$500,000 paid to PTG plausibly can be
described as consideration for the asset
sale.

  An additional factor is the $750,000 of
debt forbearance that, according to PTG,
constituted a portion of the purchase
price for Presidential’s assets. PTG’s
claim in this regard appears to be based
on an artificial estimate of the real
worth of the underlying note. The
$750,000 of debt that LLC "forgave" was
not worth $750,000 given Presidential’s
impending bankruptcy. Indeed, we doubt
that it had any worth at all.
Consequently, the forbearance may have
added nothing of real value to the
consideration Presidential received.

  Other important questions are posed by
the documentation but remain unanswered.
For instance, Presidential was slated to
receive a $585,000 PCP that never
materialized. According to the APA, LLC
was not required to make this payment if
the value of Presidential’s working
capital fell below a certain amount.
Presidential’s working capital was
defined as its inventory plus its
accounts receivable. The record raises,
but leaves unanswered, the question of
how LLC would have underestimated the
value of this capital as significantly as
it must have in order to wipe out the PCP
altogether, if it had conducted any
reasonable due diligence. However,
neither party has given us any indication
of how Presidential and LLC reached their
initial valuation of the working capital.
The APA appears to establish a target
range for the value of the capital; if
the value of the capital fell below this
range, Presidential would owe LLC the
difference, and if the value fell above
this range, LLC would owe Presidential
the difference. The existence of this
range suggests the possibility that the
parties evaluated the worth of the
capital to the best extent they could,
but imprecision remained inherent in the
valuation process. However, the lack of
any explanation in the record as to how
the parties agreed on this range also
permits the contrary inference that the
numbers were chosen to ensure that the
PCP would never be made.
  The record poses other unanswered
questions. PTG claims that one of LLC’s
goals in purchasing the note was to
provide Presidential’s remaining
unsecured creditors fifty cents on the
dollar in the upcoming bankruptcy.
Although the APA indicates what assets
Presidential retained following the sale
to LLC,/13 the record provides no
indication of what those remaining assets
were worth or how they would be applied
to satisfy Presidential’s outstanding
obligations. The trustee informed us at
oral argument that Presidential’s
unsecured debt was approximately $2
million, not including the amount owed to
LLC on the note. In order to provide the
remaining unsecured creditors fifty cents
on the dollar, Presidential would have
needed $1 million worth of assets
remaining in its estate following the
sale to LLC. If we disregard the $750,000
of debt forgiveness, which appears to
have had little or no value, and the PCP,
which never materialized, the value of
"substantially all" of Presidential’s
assets was approximately $3.425 million.
R.19 at 2. After payment was made to
Presidential’s secured creditors, no part
of these funds remained to satisfy
Presidential’s unsecured debt. It is
therefore difficult to accept on faith
that Presidential was likely to retain $1
million worth of assets following the
sale.

  There are important questions about
these transactions that simply remain
unanswered. In particular, we do not know
how the parties reached their initial
valuation of Presidential’s assets. If
Presidential received what the parties
agreed its assets were worth prior to the
time PTG insisted on being paid, it is
less likely that the payment to PTG was a
preference and more likely that it was a
business investment on LLC’s part.
Similarly, if the actual value of
Presidential’s working capital was not
ascertainable prior to closing, it is
more likely that the prospect of a PCP
provided valuable consideration to
Presidential. We also do not know the
value of the assets Presidential retained
following the sale./14 If the assets
Presidential retained should have been
sufficient to provide the remaining
unsecured creditors fifty cents on the
dollar, that fact would support PTG’s
claim that its purchase of the note was a
business investment designed to placate
those particular creditors.

  The district court essentially treated
this case as a failure on the trustee’s
part to prove the necessary elements of a
preference. We do not believe, however,
that the court’s determination gives the
trustee the benefit of all the inferences
available from the record before the
court. Indeed, the district court did not
discuss the fact that the $750,000 of
debt forbearance added no value to the
consideration Presidential received for
its assets. It also failed to mention the
nonpayment of the PCP.

  In sum, we believe that the contingent
nature of the asset sale and the note
purchase; the $750,000 of false consider
ation; the ambiguous valuation of
Presidential’s working capital that
resulted in the nonpayment of the
$585,000 PCP; and the $500,000 payment to
PTG, when considered together as part of
one complex transaction, preclude summary
judgment on this record. The ambiguous
nature of these transactions is
heightened by the inadequacy of PTG’s
explanations for why LLC wanted to
purchase the note independently of its
purchase of Presidential’s assets. These
transactions, as documented in this
record, are sufficient to satisfy the
trustee’s burden of producing evidence
sufficient to create a genuine issue of
material fact as to whether the $500,000
payment to PTG was a transfer of an
interest of the debtor in property.
Consequently, the district court’s grant
of summary judgment in favor of PTG on
the basis of this factor cannot be
sustained at this juncture.


  2.   For or on Account of an Antecedent
Debt

  Even though PTG was not entitled to
summary judgment on the ground that the
$500,000 payment it received was not an
interest of Presidential in property,
summary judgment still would have been
proper if the payment was not for or on
account of an antecedent debt. An
antecedent debt exists when a creditor
has a claim against the debtor, even if
the claim is unliquidated, unfixed, or
contingent. See Energy Coop., Inc. v.
Socap Int’l, Ltd. (In re Energy Coop.,
Inc.), 832 F.2d 997, 1001 (7th Cir.
1987). There is no question in this case
that the note PTG held against
Presidential was an antecedent debt;
instead, the only question is whether the
payment PTG received was "for or on
account of" that antecedent debt. 11
U.S.C. sec. 547(b)(2).

  PTG argues that it could not have been
paid for or on account of the antecedent
debt because the payment it received
merely worked a substitution of creditors
and did not reduce the outstanding amount
of Presidential’s debt. See, e.g., 1
Robert E. Ginsberg & Robert D. Martin,
Ginsberg & Martin on Bankruptcy sec.
8.02[D] (4th ed. 2000) ("The key is how
the creditor applies the payment. If it
is applied to reduce an existing claim in
whole or in part, then the part so
applied is avoidable as a preference . .
. ."). PTG’s argument might have merit if
LLC’s purchase of the note truly was
independent of its purchase of
Presidential’s assets and if possession
of the note provided real value to the
owner. As we have already indicated,
however, the record does not permit us to
draw either of these conclusions.

  The documentation in the record
indicates that PTG threatened to hold up
the sale of Presidential’s assets to LLC
unless it was "compensated on an
equitable basis for the existing notes
[it held] against Presidential." R.19,
Ex.G. LLC subsequently paid PTG $500,000
in connection with the asset sale for a
note that essentially was uncollectible
in light of Presidential’s impending
bankruptcy. Moreover, for the same reason
that applying $750,000 of debt
forbearance towards the purchase price
for the assets added no real value to the
consideration Presidential received, own
ership of the note provided no real value
to LLC. Contrary to PTG’s argument, then,
it is possible that the note purchase was
not just a substitution of creditors;
instead, the note purchase may have
allowed LLC to eliminate Presidential’s
debt to PTG by paying PTG $500,000 it
otherwise would not have received. In
this procedural context and on this
record, this possibility is sufficient to
satisfy the trustee’s burden of
demonstrating that the transfer was made
for or on account of an antecedent debt.
Therefore, PTG is not entitled to summary
judgment on this ground.

Conclusion

  Based on this record, the trustee has
demonstrated that LLC’s $500,000 payment
to PTG in connection with the asset sale
may have been a transfer of an interest
of Presidential in property that was made
for or on account of an antecedent debt.
The district court’s entry of summary
judgment in favor of PTG is reversed, and
this case is remanded for further
proceedings consistent with this
opinion.

REVERSED and REMANDED
FOOTNOTES

/1 The facts on which we rely are taken
from the affidavits the parties submitted
in support of their motions for summary
judgment, along with various documents
that the parties stipulated would be
admissible into evidence.

/2 The record also contains a copy
of handwritten notes relating to the APA
taken by a representative of PTG,
although the record does not reveal when
or in what context the notes were taken.
The PTG representative wrote the
following in his notes:

Owners of buying entity
Getting $3.5 mm for the assets
to bank & to JV
o to us!

R.19, Ex.I.

  The notes appear to have been taken
April 15, 1999, the same day PTG sent its
initial letter to LLC and Monument. The
note-taker initialed the notes and wrote
"4/15/99" under his initials. Id.
However, "5/99" also is written on the
notes. Id. The asset sale between
Presidential and LLC took place on May 5,
1999, and we presume the "5/99" notation
relates to that transaction. However, the
parties have provided no indication of
when, where, or why the notes were taken,
so our conclusion as to the date the
notes were taken must be somewhat
speculative.

/3 Weingardt’s affidavit also states
that LLC’s $500,000 payment to PTG did
not reduce the amount LLC paid to
Presidential for its assets.

/4 At oral argument, the trustee
informed us that the amount of
Presidential’s secured debt was
approximately $3.4 million.

/5 LLC assumed only two of
Presidential’s liabilities. The first
liability LLC assumed was the book value
of a $443,000 trade account payable to
Extruded Metals, Inc. The closing cash
statement reflects that Extruded Metals
received only $157,000 on closing day.
The second liability LLC assumed was
current and ordinary business expenses
not yet paid and properly accrued as of
the closing date.

/6 According to PTG’s appellate
brief, the trustee has filed suit
elsewhere to recover this $750,000 as a
preference.

/7 Presidential’s working capital
was defined as the sum of its inventory
plus its accounts receivable, less the
value of the Extruded Metals trade
account, less business expenses.

/8 This $37,000 payment to Weingardt
appears to represent consideration for a
non-compete agreement, as the closing
cash statement includes the notation
"Non-Compete" under the amount of cash
that was wired. R.19, Ex.F.

/9 According to PTG’s attorney at
oral argument, Presidential actually
ended up owing LLC money after all the
adjustments were made. Following the
closing, Presidential was supposed to try
to collect its accounts receivable. If
any accounts remained outstanding at the
end of the collection period, LLC had the
right to make Presidential buy those
accounts back. Put simply, Presidential
had to pay LLC for the accounts it could
not collect. If the shortage in the
working capital and the amount of the
outstanding accounts exceeded the PCP
($585,000), no PCP would be made and
Presidential would have to pay LLC for
the remaining shortage.

/10 This provision of the Bankruptcy
Code probably should be numbered sec.
101(58). See 11 U.S.C. sec. 101 n.8. Due
to a numbering error, it is the second of
two provisions labeled sec. 101(54).

/11 We have recognized in the past
that diminution of the debtor’s estate is
not an element of the preference statute.
See In re Smith, 966 F.2d 1527, 1536 n.13
(7th Cir. 1992). However, we also have
recognized that "the ’diminished estate’
element of a preferential transfer is
consistently applied," and we previously
have refused to disturb its application.
Id. In keeping with our prior precedent
and that of other circuits, we continue
to consider whether the transfer in
question diminished the debtor’s estate.

/12 We note in passing that, under
the APA, LLC effectively assumed the debt
Presidential owed to Extruded Metals.
However, neither party has argued that
this payment is a preference, and we
therefore express no opinion on the
matter.

/13 The assets Presidential retained
were its cash, corporate books and
records, benefit plans, certain
contracts, and tax refunds.

/14 See supra note 13 and
accompanying text.
