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In a matter of first impression within the U.S. Court of Appeals for the Second Circuit, the U.S. Bankruptcy Court for the Eastern District of New York recently rejected a preference defendant's request to apply a “hindsight analysis” in order to determine that a hypothetical preference waiver would have been granted in its favor, as it claimed to be a “critical vendor” of the debtors in Devices Liquidation Trust v. KMT Wireless, (In re Personal Communications Devices), 588 B.R. 661 (Bankr. E.D.N.Y. 2018).

Background and Bankruptcy Filing

The debtors, Personal Communications Devices (PCD) and Personal Communications Devices Holdings, were wireless telecommunications companies that served as intermediaries between domestic wireless providers and international wireless accessories manufacturers, as distributors of wireless devices and accessories. The debtors' devices were sold with a comprehensive warranty that required PCD to provide certain repair services. PCD also offered repair and refurbishing services for wireless devices with expired warranties. Nearly all of these repair services were performed by two third-party vendors; KMT Wireless was one of these third-party vendors.

The debtors filed voluntary Chapter 11 petitions in August 2013, and their cases were jointly administered. In an effort to continue to honor customers' warranty repair services pending a sale of substantially all of their assets, the debtors filed a “customer programs motion” seeking to continue to maintain and administer their customer repair programs. In this motion, the debtors represented to the court that “certain third-party repair service vendors” were critical to the debtors' operations and to their ability to honor warranty claims and perform out-of-warranty repair and refurbishing services. Although the customer programs motion did not specifically identify KMT Wireless, there was no real disagreement about the fact that KMT Wireless: had been paid in full for its prepetition services to the debtors; had provided all the post-petition services it had been requested of the debtors to perform; and was paid for its post-petition services to the debtors.

The court's order granting the customer programs motion authorized (but did not direct) the debtors to pay and honor prepetition obligations under the customer programs. The sale of the debtors' assets was approved in October 2013, and a liquidating plan was confirmed in April 2014.

Preference Action

In 2015, the trustee of the liquidating trust that had been created under the debtors' liquidating plan initiated an adversary proceeding against KMT Wireless seeking to avoid and recover alleged preferential transfers in the aggregate amount of $3,824,194.36.