United States Trustee v. First Jersey Securities, Inc. (In re First Jersey Securities, Inc.)

The Securities and Exchange Commission (SEC) sued First Jersey Securities, Inc. (First Jersey) (debtor) for securities fraud. First Jersey subsequently filed for bankruptcy and sought to retain the RSW law firm as counsel under 11 U.S.C. § 327(a). RSW had also represented First Jersey in the securities-fraud action, and First Jersey owed RSW $389,000 for prior legal services. On the same day as First Jersey’s bankruptcy filing, First Jersey transferred shares of unregistered restricted stock to RSW for RSW to liquidate in satisfaction of a bill for legal services rendered between January and July 1995. The United States trustee and the SEC objected to RSW serving as First Jersey’s counsel, arguing that the stock transfer was a voidable preference that disqualified RSW from acting as First Jersey’s counsel because RSW held an interest adverse to the bankruptcy estate. The bankruptcy court approved First Jersey’s application to retain RSW, reasoning that for the stock transfer to be a voidable preference under 11 U.S.C. § 547(b), the transfer had to be made as payment for an antecedent past-due debt. The bankruptcy court concluded that the debt to RSW was not past due and that the payment had been made in the ordinary course of business between RSW and First Jersey. The record did reflect other periodic payments from First Jersey to RSW. However, each payment between December 1994 and May 1995 was for $150,000, and First Jersey did not make any of the payments using restricted stock. The district court affirmed the bankruptcy court’s decision, and the trustee and the SEC appealed.