The Critical Vendor Lure: Bite at Your Own Risk
June 29, 2005
Peter Alan Zisser - New York
As any provider of goods or services who has had the unfortunate experience of doing business with a company that subsequently files for bankruptcy knows, on the day of the filing (Petition Date), there usually will be unpaid amounts owed by the debtor. While the vendor-creditor may be able to assert a claim for those amounts, such claim will probably not be paid before the end of the case. Because of the delays inherent in the bankruptcy process, a vendor can wait for years for a payment that, even when it finally comes, is likely to be just a small fraction of the amount actually owed.
Certain vendor-creditors, however, may be able to obtain special treatment, whereby their prepetition claims are paid immediately and in full. The ticket for entry into that special class is the bankruptcy court deeming the creditor to be a “critical vendor.” While such designation may, at the time, seem like catching a tasty morsel, it can turn out to be a sharp hook to catch the unwary.
Critical Vendor Orders
On the first day of most chapter 11 cases, the debtor typically files a number of motions seeking entry of so-called “first day orders.” These motions are intended to enable the debtor to continue to operate its business as a “debtor in possession” under the restrictions of the Bankruptcy Code. Such orders often include authority to: (i) retain bankruptcy counsel (and other professionals); (ii) obtain post-petition financing or use cash collateral; (iii) maintain prepetition bank accounts and cash management systems; (iv) pay certain prepetition employee wages; and (v) maintain insurance coverage.1 In recent years, many debtors have included with the foregoing motions a motion to pay “critical vendors.”2 Generally, “critical vendors” are those vendors that the debtor believes are critical to the success of the debtor’s ongoing business and, unless their prepetition claims are paid in full, would refuse to do business with the debtor post-petition.3
The standards used by courts in determining whether to approve a critical vendor order vary. The most restrictive standards require the debtor to show that: (i) it is critical that the debtor deal with the vendor (i.e., there are no alternative sources); (ii) unless the debtor deals with the vendor, there is a risk of harm or loss of economic advantage to the bankruptcy estate or the debtor’s going concern value that is disproportionate to the vendor’s prepetition claim; and (iii) there is no practical or legal alternative by which the debtor can cause the vendor to do business with the debtor other than by payment of the prepetition claim (i.e., deposit, COD terms, etc.).4 In some cases, the court will allow the payment of prepetition claims only to certain vendors (or types of vendors).5
Generally, critical vendor orders are a study in quid pro quo: the debtors are authorized, but not directed, to pay the prepetition claims of critical vendors, in exchange for those vendors providing goods and/or services to the debtor on standard industry terms.6 How much, if anything, of each vendor’s prepetition claim will be paid is generally within the sole discretion of the debtor.7 Very often, the bankruptcy court places a cap on the amount the debtor is authorized to pay to any individual critical vendor8 and/or on the aggregate amount of prepetition payments the debtor may make to all critical vendors.9 Further, the critical vendor is often required to execute a separate agreement memorializing the terms of the relationship.10
From the critical vendor’s point of view, all of the above triggers a relatively simple decision-making process: (i) the critical vendor must determine what it is owed prepetition; (ii) the critical vendor must negotiate with the debtor what portion, if not all, of that amount the debtor is willing to pay; and (iii) the critical vendor must decide whether receipt of that amount gives the creditor sufficient comfort to continue to provide goods and services to the debtor. While the amounts to be paid are within the sole discretion of the debtor, the decision to continue to provide goods and services is in the sole discretion of the critical vendor. As a result, depending on the relative bargaining power of the parties,11 the amount paid may or may not be the actual account receivable shown on the critical vendor’s books, but some agreed-upon amount sufficient to satisfy the critical vendor.12 Going forward, the critical vendor provides the goods and services and the debtor pays for them in the ordinary course. All in all, this seems like a good deal and the vendor goes home happy thinking that all past payment issues have been satisfactorily resolved. Well, maybe not.
The resolution of past arrearages at the beginning of the case may, or may not, be the last word. In making the calculation as to how much the critical vendor believes it is owed, the creditor will likely subtract from its outstanding accounts receivable balance all payments made to the creditor by the debtor prior to the Petition Date. If any of these payments were made within the 90 days prior to the Petition Date (the Preference Period), however, then, notwithstanding: (i) the entry of an order authorizing the debtor to pay the critical vendor its prepetition claims; (ii) the negotiations between the debtor and the critical vendor over the amount to be paid; (iii) the debtor’s payment to the critical vendor of that negotiated amount; and (iv) the provision of post-petition goods and services in reliance on the foregoing, the critical vendor may find itself, at some point in time, the target of an avoidance action to recover any amounts paid to it prior to the Petition Date.
Recovery of Preferential Transfers
The Bankruptcy Code permits a trustee (or a debtor in possession) to avoid and recover any transfer (a preferential transfer) of the debtor’s property if the transfer: (i) was to or for the benefit of a creditor; (ii) was for or on account of an antecedent debt; (iii) was made while the debtor was insolvent; (iv) was made during the Preference Period; and (v) enables the creditor to receive more than it would have received under a chapter 7 liquidation if the transfer had not been made.13 In simple terms, if the debtor paid any of the critical vendor’s open invoices in the 90 days prior to the Petition Date, the critical vendor may have to return those payments to the debtor’s estate.14 An action to avoid and recover a preferential transfer may be commenced up to two years after the Petition Date.15
In some cases, particularly when the debtor refuses to bring avoidance actions (often because the debtor must continue to trade with the potential defendants), the bankruptcy court will authorize the unsecured creditors committee to prosecute these actions.16 Similarly, many chapter 11 plans provide for the creation of a liquidating or litigation trust and the appointment of a trustee to prosecute avoidance actions on behalf of the estates’ creditors after the plan has been confirmed.17 These provisions are often made either when the debtor’s assets have been sold off or when the debtor has been liquidated. As a result, there is no ongoing business between the affected vendor and the debtor, the profits from which might offset the effect of any recovery.
This was the scenario facing the courts in a number of recent decisions,18 the first by Judge Mary F. Walrath of the Bankruptcy Court for the District of Delaware.19 In Hayes Lemmerz, the debtor, Hayes Lemmerz International, Inc. (Hayes), manufactured and sold wheel and brake components for commercial vehicles. Export Corp. (Export) was a warehouseman which stored quantities of Hayes’ products and, when instructed by Hayes, delivered such products on a “just-in-time” basis, to Hayes’ customers. Along with its chapter 11 petition, Hayes filed a critical vendor motion seeking authority to pay certain prepetition shipping and warehousing charges. The order entered by the court (the CV Order) provided that Hayes was “authorized, but not directed” to make certain payments with respect to, inter alia, warehouse charges. The CV Order did not have a list of vendors attached and did not mention Export by name. Hayes subsequently paid Export all of Export’s outstanding amounts owed as of the petition date pursuant to the CV Order.
Twenty-three months later, the creditor trust established pursuant to Hayes’ chapter 11 plan filed a complaint against Export seeking to recover as a preferential transfer certain payments made by Hayes and received by Export during the Preference Period. In response, Export filed a motion to dismiss the complaint, asserting that the payments made to Export during the Preference Period were protected under the CV Order. Essentially, Export argued that the CV Order was the law of the case,20 and that, pursuant to the CV Order and the enabling motion, the court had determined that Export was a critical warehouseman entitled to full payment of its prepetition claims in exchange for agreeing to provide post-petition services to Hayes. Thus, even if Export had not received the alleged preferential transfers under the CV Order, Hayes would have had to have paid those amounts as well.21 As such, the payments could not be avoided as preferential transfers.
The court rejected Export’s argument, noting that, as a preliminary matter, the payments at issue were not made under the CV Order, but were made before the motion was filed and before the CV Order was entered. Thus, the challenged payments were not protected by the CV Order. Further, the court found that the CV Order was permissive, not mandatory. Therefore, while Export may have been paid some of its prepetition claims, Export was not entitled by virtue of the CV Order to receive the full payment of all of its prepetition claims.22 The court ruled that even accepting that the CV Order was the law of the case, it would not support Export’s arguments because the CV Order did not (i) identify Export, (ii) require that Export’s prepetition claims be paid in full, or (iii) provide that any payments previously made to Export were protected from recovery as preferential transfers. In fact, in granting the relief requested in the enabling motion, no consideration was given or analysis done with respect to whether any critical vendor may have received a preference.
Finally, Judge Walrath rejected any argument that the effect of the CV Order (i.e., allowing the payment of the prepetition claims of certain but not all unsecured creditors) was analogous to cases in which the courts found that prepetition transfers made in connection with prepetition executory contracts that later are assumed under section 365 of the Bankruptcy Code may not be avoided under section 547 of the Bankruptcy Code.23 First, unlike section 365, which provides for mandatory cure upon lease assumption, the CV Order was permissive, allowing Hayes to cure all, some, or none of the prepetition claims, at Hayes’ discretion. Second, and probably more importantly, the CV Order in this case contained language viewed by the court as explicitly precluding any reliance on section 365.24
For all practicable purposes, the facts underlying the decisions in Bethlehem Steel, U.S. Office Products and Zenith, all of which relied almost exclusively on Hayes Lemmerz, are substantively identical. In each of these cases, a critical vendor order was entered in which: (i) the debtors were authorized but not directed to pay the prepetition claims of critical vendors; (ii) no critical vendors were specifically mentioned by name in the order25; and (iii) the order was not deemed an authorization to assume. Further, the defendants also argued that a critical vendor is similar to a counterparty to an assumed contract, that the payments were authorized and protected by critical vendor order, and that the debtors should be equitably estopped from arguing that the payments were not authorized.
Similar to Hayes Lemmerz, the courts in Bethlehem Steel, U.S. Office Products and Zenith rejected defendants’ arguments, finding, inter alia, that: (i) the payments sought to be avoided were made before the critical vendor order was entered and, thus, were not protected by such order; (ii) the critical vendor order did not mandate payments of prepetition claims, but simply authorized the debtors to pay at their discretion; (iii) the critical vendor order did not require that payments be made; (iv) there was no waiver of preference claims; and (v) the critical vendor order specifically stated that it was not granting any authority to assume contracts.26
The defendants in each of the cases, including U.S. Office Products, relied for support on a decision by Judge Fitzgerald, sitting by designation in Delaware.27 In Primary Health, the debtor filed for bankruptcy relief on March 17, 1999. As part of the first day orders, an order was entered (the Benefits Order) authorizing the debtors to pay prepetition wages, salaries, employee benefits, including health insurance coverage, and certain reimbursable employee expenses. In particular, the Benefits Order provided that the debtors were authorized to “honor and pay all employee benefits in accordance with their prepetition employee benefit plans and policies, including all costs and expenses incurred in connection with the maintenance of such plans and policies.”28 Medical Mutual of Ohio (MMO), on both a pre- and post-petition basis, provided administrative and other services relating to the debtors’ self-insured employee health program.
Two years later, the Official Committee of Unsecured Creditors (the Committee) commenced an action against MMO, seeking the avoidance and recovery of approximately $1 million paid to MMO in the 90 days prior to Primary’s bankruptcy. MMO filed a motion to dismiss, arguing that the challenged payments were covered by the Benefits Order and, accordingly, were not avoidable as a preference. In response to MMO’s motion to dismiss, the Committee argued that because the Benefits Order did not mandate payment of prepetition amounts to MMO and did not effectuate an assumption of the underlying benefits contracts with MMO, the Committee should not be deemed to have waived its preference action.
Judge Fitzgerald noted that while the Committee had not yet been formed at the time of entry of the Benefits Order, every member of the Committee had been served with the related motion, no objections had been filed and no appeal from the Benefits Order was taken. Thus, the Benefits Order became the law of the case. As a result, as long as the payments made to MMO fell under the “umbrella” of the Benefits Order, such payments would be protected from avoidance under Bankruptcy Code section 547.29
Judge Fitzgerald also pointed out that the debtors had explicitly stated in the underlying motion seeking entry of the Benefits Order that (i) they maintained various employee benefit plans and policies, (ii) they pay benefits that are not paid by insurers, and (iii) the filing of the bankruptcy prevented them from paying and performing their obligations to employees for such benefits to the extent the obligations arose prepetition. More importantly, the debtors had alleged that their employees would be subject to “extreme personal hardship and may be unable to pay their daily expenses if their out-of-pocket expenses and benefits weren’t paid … and that the maintenance of … Employee Benefits programs and polices are essential to maintain employee morale and loyalty.”30
Given that the payments to MMO that the Committee sought to avoid and recover were used to “maintain” the same employee benefits the debtors had argued were essential to their operation, Judge Fitzgerald found that the payments to MMO were clearly covered by the Benefits Order and, thus, were not preferential.31
Judge Fitzgerald’s decision was affirmed by the District Court, which held that:
The court concludes that the bankruptcy court did not err as a matter of law when it found that the payments to MMO were authorized pursuant to the Benefits Order. This finding is consistent with the language of the Benefits Order and clearly consistent with the intent and purpose of the Benefits Order, i.e., to protect the orderly payment of employee benefits prepetition. To put the point differently, to characterize these payments as preferential transfers, as appellant would suggest, flies in the face of the spirit and letter of the Benefits Order and its underlying motion.32
In Hayes and Bethlehem Steel, the courts refused to adopt the Primary Health decision, but gave no real explanation as to why, other than the case was factually distinguishable from the cases before them. The court in Zenith also refused to adopt the Primary Health decision, but only after Judge Fitzgerald herself, in U.S. Office Products, explicitly rejected the argument that her ruling in Primary Health stood for the general proposition that the entry of a critical vendor order foreclosed subsequent preference liability. As Judge Fitzgerald noted on the record at the hearing on the defendants’ motion for reconsideration of her denial of summary judgment:
[M]y Primary Health decision was based on the fact that those were employees with priority claims. It’s an entirely different thing ... [T]he payments that were made pursuant to the order in that case were within the priorities. Not one person got a dime more than the priority amounts. They would’ve been entitled to those priority amounts in any event in the Chapter 7 ahead of unsecured creditors ... You’re looking here [in U.S. Products] at simply having one unsecured creditor as opposed to another unsecured creditor. That wasn’t the situation in Primary Health. It was a creditor group that had priority claims as opposed to unsecured priority claims, and in the pecking order of the Bankruptcy Code the priorities get paid first.33
While the deciding judge obviously is in the best position to explain the intent in reaching a particular decision, it is also obvious that those defendants that relied on Primary Health were certainly justified in doing so. While the Primary Health opinion refers to priority claims,34 there is nothing in the record or the opinion to suggest that the aggregate prepetition payments to MMO determined by Judge Fitzgerald to be exempt under the Benefits Order were in any way related to or limited by a per-employee priority cap under the Bankruptcy Code. In fact, MMO never advanced the argument that the payments it received were protected from avoidance under section 547 because such payments would have been entitled to priority treatment under the Bankruptcy Code.35 Further, as noted above, while the courts in Hayes Lemmerz and Bethlehem Steel declined to follow Primary Health, neither court distinguished Primary Health on the basis that it applied only to payments that would otherwise have been priority payments under Bankruptcy Code section 507.
Conclusion
Based on the decisions in Hayes, Bethlehem Steel, U.S. Office Products and Zenith, as well as Judge Fitzgerald’s subsequent repudiation of Primary Health, it should be commonly accepted as a fact of life that critical vendor orders, in and of themselves, will not protect recipients of otherwise avoidable preferential transfers. Unfortunately, this makes it very complicated for creditors to decide whether critical vendor status is in their best interest.
Nevertheless, given the choice of whether or not to be a critical vendor, the answer should always be a resounding “Yes!” When you are dealing with a company that is either in financial distress or has already filed for relief under chapter 11, it is always better to get paid than not get paid, even if you may have to give back some of the money later. Nevertheless, vendors contemplating taking critical vendor status should take certain steps to avoid later litigation. First, vendors should be aware of payments they may have already received from the debtor within the Preference Period when negotiating the amounts due for unpaid prepetition obligations.36 Second, vendors should request that as part of the agreement to provide goods and services post-petition pursuant to a critical vendor order, the debtor waive any preference or similar claims, although this may require some downward adjustment in the amount of the vendor’s prepetition claims that are satisfied post-petition.37 If vendors know they have received payments during the Preference Period and the debtor refuses to waive its preference or similar claims, those vendors should consider themselves potential future targets for preference claims and should proceed with this in mind. Alternatively, if a particular vendor and the debtor are parties to an executory contract, that vendor should request that the debtor assume the contract.38
The critical vendor lure is bright and shiny. As long as vendors are
aware that critical vendor status, by itself, will not prevent their later
being hooked in a preference action, they may be able to protect themselves.
Forewarned is forearmed.
For more information, e-mail Peter A. Zisser at
peter.zisser@hklaw.com or call toll free, 1-888-688-8500.
1 See, e.g., Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 574 n.8 (3d Cir. 2003) (“Cybergenics II”).
2 See In re K Mart Corp., 359 F.3d 866 (7th Cir. 2004), cert. denied, 2004 U.S. LEXIS 7528 (November 15, 2004). For an in-depth analysis of the Seventh Circuit’s decision, see Stephen A. Bogorad, Seventh Circuit Deals Blow to Critical Vendor Doctrine, Holland & Knight News and Analysis/Bankruptcy and Creditors’ Rights (March 2004, Vol. 5, Issue 1) (hereinafter, “Bogorad”). As noted by Mr. Bogorad, the Seventh Circuit questioned whether paying the prepetition claims of critical vendors could ever be appropriate under the Bankruptcy Code.
3 See, e.g., In re Payless Cashways, Inc., 268 B.R. 543, 547 (Bankr. W.D. Mo. 2001) (to grant relief, court must be “satisfied that the debtor will not be able to obtain inventory or labor of the same quality on a timely basis, and that [such inventory or labor] is critical to survival of the business.”).
4 See In re Coserv, L.L.C., 273 B.R. 487, 498 (Bankr. N.D. Tex. 2002); accord In re Mirant Corp., 296 B.R. 427 (Bankr. N.D. Tex. 2003). The Seventh Circuit’s decision in K Mart was, to a great degree, based on the fact that the bankruptcy court granted the critical vendor motion without being presented with any competent evidence that these conditions existed. See Bogorad at p.7
5 See, e.g., In re Just for Feet, Inc., 242 B.R. 821, 826 (D. Del. 1999) (court denied debtors’ request to designate all trade vendors as critical, limiting critical vendor status only to suppliers of athletic footwear and apparel). Based on the same authority cited herein, many debtors seek critical vendor status only for foreign vendors. In these cases, absent such relief, the debtor may be faced not only with an inability to obtain the goods and services (i.e., no alternative sources or payment terms), but also with the possibility that foreign vendors will ignore the automatic stay and take actions to seize the debtor’s property or otherwise enforce their claims. See, e.g., In re U.S. Airways, Case No. 04-13819 (Bankr. E.D. Va. September 12, 2004) (Docket No. 8).
6 See, e.g., In re Worldcom, Inc. et al., 2002 WL 1732647 (S.D.N.Y. July 22, 2002) (critical vendors must agree to provide goods and services to the debtors during the pendancy of these cases on customary trade terms); In re Just for Feet, Inc., 242 B.R. at 826 (requiring extension of credit on standard industry terms on an unsecured basis in an amount at least equal to 100 percent of the vendors’ prepetition claims); In re Payless Cashways, Inc., 268 B.R. at 547 (same).
7 See, e.g., In re Fleming Cos., Inc. et al., Case No. 03-10945 (Bankr. D. Del. April 3, 2003) (Docket No. 11) (“The Debtors request authorization to pay all, a portion or none of the Critical Vendor Claims as determined by the Debtors in their sole discretion in order to continue the vital goods and services provided by the Critical Vendors.”).
8 See, e.g., In re Tropical Sportswear Int’l, 320 B.R. 15, 21 (Bankr. M.D. Fla. 2005) (critical vendors to receive 77.5 percent of invoiced value and waiver of all preference liability in exchange for waiver of 22.5 percent deficiency).
9 See, e.g., In re Worldcom, Inc., et al., supra, (aggregate payments not to exceed $70 million); In re New World Pasta Co., Case No. 04-02817 (Bankr. M.D. Pa. May 10, 2004) (Docket No. 50) ($7 million); In re Loral Space & Comm., Inc., Case No. 03-41710 (Bankr. S.D.N.Y. July 15, 2003) (Docket No. 31) ($15 million); In re Fleming Cos., Inc., supra, ( Docket No. 733) ($100 million).
10 See, e.g., In re Fleming Cos., Inc., supra; In re Just for Feet, 242 B.R. at 824.
11 Determining that the vendor is “critical” to the debtor does not necessarily mean that the vendor always holds the upper hand because it has the ability to cease doing business with the debtor if the vendor does not get all of its prepetition claims paid. In some cases, the debtor may be the vendor’s main, if not its only, customer. In Kmart, the Seventh Circuit singled out one such vendor, Fleming Companies, where Kmart accounted for 50 percent of Fleming’s business, noting that:
Fleming [was not] likely to walk away even if it had a legal right to do so. Each new delivery produced a profit; as long as Kmart continued to pay for new product, why would any vendor drop the account? That would be a self-inflicted wound. To abjure new profits because of old debts would be to commit the sunk-cost fallacy; well-managed businesses are unlikely to do this. Firms that disdain current profits because of old losses are unlikely to stay in business. They might as well burn money or drop it into the ocean.
Kmart, 359 F.3d at 873. As it turned out, when Kmart stopped buying from Fleming, Fleming was forced to file its own chapter 11 case.
12 The parties’ agreement may also provide for the balance to be asserted as a general, unsecured claim against the estate.
13 See 11 U.S.C. §§ 547(b), 550(a). Although Bankruptcy Code section 547(b) requires both that the transfer must have been made within 90 days of bankruptcy and the debtor must have been insolvent, the debtor is presumed to be insolvent during those 90 days. See 11 U.S.C. § 547(f).
14 Even when all the elements of a preferential transfer can be shown, there are a number of statutory defenses that may be raised by the creditor/transferee, such as ordinary course of business, contemporaneous exchange and/or subsequent new value. See 11 U.S.C. § 547(c). A detailed description of these defenses is beyond the scope of this article. Nevertheless, for purposes of this discussion only, we have assumed that these defenses are not available to the critical vendor. Further, in the event the vendor is compelled to return to the estate payments received during the Preference Period, the creditor will be able to assert a general, unsecured claim against the estate for those amounts.
15 See 11 U.S.C. § 546(a).
16 See, e.g., Cybergenics II, 330 F.3d at 574 n.8. As noted by the Cybergenics II court, allowing a committee to revisit first day orders acts to eliminate the “Hobson’s Choice” of first day orders faced by the bankruptcy court:
A court facing motions for first-day orders has a difficult choice. If it disapproves of the order, it could simply refuse to issue it on the theory that the parties would renegotiate and eliminate any offending provisions. Alternatively, it could table the motion and explore the claim’s underlying merits,. But either choice is problematic, for first-day orders are by their nature extremely urgent – without an order approving financing for critical vendors, for example, the debtor might collapse before reorganization can occur. The possibility of a derivative suit by a creditors’ committee serves Congress’s [sic] goals when, by granting fist-day [sic] orders, bankruptcy courts nevertheless reserve to the creditors’ committees the right to investigate and pursue claims that would otherwise be released in those orders.
Id. (citations omitted).
17 See 11 U.S.C. § 1123(b)(3); see also, e.g., In the Matter of Texas General Petroleum Corp., 52 F.3d 1330 (5th Cir. 1995) (liquidating trustee); In re APF Co. et al., 264 B.R. 344 (Bankr. D. Del. 2001)(creditor trust); In re Kroh Bros. Dev. Co., 100 B.R. 487 (Bankr. W.D. Mo. 1989) (same).
18 Zenith Ind. Corp. v. Longwood Elastomers, Inc. (In re Zenith Ind. Corp.), Case No. 02-10754 (PJW), Adv. No. 04-53015 (Bankr. D. Del. Jan. 24, 2005) (Docket No. 33) (unreported decision); Vistar Corp. v. USOP Liquidating LLC and USOP Liquidating LLC v. United Stationers, Inc. (In re U.S. Office Products Co.), Case No. 01-646 (JKF), Adv. Nos. 02-7192 and 03-50990 (Bankr. D. Del. Oct. 22, 2004) (Docket No. 58) (unreported decision); Bethlehem Steel Corp. v. AMG Resources Corp. (In re Bethlehem Steel Corp.), Case No. 01-15288, Adv. Pro. No. 03-90785 (Bankr. S.D.N.Y. Sept. 17, 2004) (Docket No. 13) (unreported decision); In re Hayes Lemmerz Int’l, Inc. et al., 313 B.R. 189 (Bankr. D. Del. 2004).
19 Judge Walrath’s decision in Hayes Lemmerz is not just the first described herein, but the first reported decision from any court directly addressing this issue.
20 The law of the case doctrine states that “once an issue has been decided, parties may not relitigate that issue in the same case.” Ogbudimkpa v. Ashcroft, 342 F.3d 207, 210 n.7 (3d Cir. 2003) (quoting Waldorf v. Shuta, 142 F.3d 601, 616 n.4 (3d Cir. 1998)).
21 Although not specifically mentioned by the court, this argument finds support in the language of section 547(b), which requires as an element of the cause of action that the transferee receive more than it would have received if the case was a chapter 7 case. See 11 U.S.C. § 547(b)(5). In practice, the court looks at whether, under the circumstances of the case, the transferee will be paid in full. See, e.g., Alvarado v. Walsh (In re LCO Enterprises), 12 F.3d 938, 942 (9th Cir. 1993) (the preferential effect of the payment must be determined “not by what the situation would have been if the debtor’s assets had been liquidated and distributed among his creditors at the time the alleged preferential payment was made, but by the actual effect of the payment as determined when bankruptcy results.”) (quoting Palmer Clay Products Co. v. Brown, 297 U.S. 227, 229, 56 S.Ct. 450, 451 (1936)). Thus, if Export would have been paid 100 percent of its prepetition claim under the CV Order, the Debtors arguably would have failed to satisfy section 547(b)(5).
22 Judge Walrath also held that because there were certain factual disputes as to whether the debtors actually made any payments to Export under the CV Order and/or whether Export was even meant to be covered by the CV Order, these issues could not be resolved on a motion to dismiss.
23 Section 365(b) of the Bankruptcy Code provides, in pertinent part, that:
(1) If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee –
(A) cures, or provides adequate assurance that the trustee will promptly cure, such default.
11 U.S.C. § 365(b)(1)(A). Because section 365(b)(1)(A) conditions the right of assumption on the debtor’s cure of all defaults, including any outstanding prepetition claims, prepetition payments made to the non-debtor contract party are no