## Facts

- First Jersey Securities, Inc., a broker-dealer, faced a large SEC judgment for securities fraud, including an order to disgorge $75 million, making the SEC the largest unsecured creditor.
- On August 7, 1995, First Jersey filed a voluntary Chapter 11 petition and sought to retain Robinson, St. John & Wayne (RSW) as counsel for the debtor in possession under 11 U.S.C. § 327(a).
- Before filing, First Jersey owed RSW about $389,000 for legal services previously rendered.
- On the petition date, First Jersey transferred 200,001 shares of unregistered restricted stock (ITB stock) to RSW.
- The transfer was structured for RSW to liquidate the stock and apply proceeds to a $200,000 bankruptcy retainer and $250,000 toward prepetition invoices, with any excess returned to the debtor.
- The United States Trustee and the SEC objected, arguing the transfer was an avoidable preference under 11 U.S.C. § 547(b) and therefore created an adverse interest disqualifying RSW under § 327(a).
- The bankruptcy court approved retention, concluding the transfer was not preferential and was protected by the ordinary-course exception; the district court affirmed.

## Issues

1. Whether the petition-date transfer of restricted stock to proposed debtor’s counsel, intended in part to satisfy prepetition legal fees, was an avoidable preferential transfer under 11 U.S.C. § 547(b).
2. If the transfer was avoidable, whether counsel’s receipt of it created an adverse interest or actual conflict that disqualified counsel from representing the debtor in possession under 11 U.S.C. § 327(a).

## Decision

- The Third Circuit reversed and remanded.
- The court held the stock transfer was a voidable preference under § 547(b).
- The court rejected the view that a debt must be “past due” to be antecedent; the relevant debt arose when legal services were performed.
- The court held the ordinary-course defense did not apply because the transfer’s form, timing, and bankruptcy-related purpose departed from prior payment practices.
- Because the transfer was avoidable, counsel had an actual conflict and an interest adverse to the estate, disqualifying it from retention under § 327(a).

## Legal Principles

- For § 547(b) purposes, an “antecedent debt” arises when services are rendered, not when an invoice becomes due or goes unpaid.
- Transfers made on the eve of bankruptcy (including on the petition date) to pay prepetition obligations can be preferential when they diminish the estate and improve the transferee’s position relative to other unsecured creditors.
- The § 547(c) ordinary-course defense is not satisfied where the challenged payment’s method and circumstances materially differ from the parties’ prior course of dealing, particularly when structured around a bankruptcy filing.
- Under § 327(a), counsel for a debtor in possession must be disinterested and must not hold or represent an interest adverse to the estate; receipt of an avoidable preference creates an actual conflict because counsel has a personal stake in resisting recovery.

## Conclusion

The Third Circuit required disqualification of proposed debtor’s counsel where the debtor transferred restricted stock on the petition date to fund a bankruptcy retainer and satisfy prepetition legal fees, holding the transfer avoidable as a preference and the resulting conflict incompatible with § 327(a)’s disinterestedness and adverse-interest limits.


United States Trustee v. First Jersey Sec., Inc. (In re First Jersey Sec., Inc.), 180 F.3d 504 (3d Cir. 1999)