In re: William Dunlap Cannon III, Debtor, 99-6446

Decision Date24 October 2000
Docket NumberNo. 99-6446,99-6446
Citation237 F.3d 716
Parties(6th Cir. 2001) In re: William Dunlap Cannon III, Debtor. First Tennessee Bank, N.A., Appellant, v. George W. Stevenson, Trustee for William Dunlap Cannon III, Appellee. Argued:
CourtU.S. Court of Appeals — Sixth Circuit

Appeal from the United States District Court for the Western District of Tennessee at Memphis. No. 98-02507, Julia S. Gibbons, Chief District Judge.

Toni C. Parker, HARRIS, SHELTON, DUNLAP, COBB & RYDER, Memphis, Tennessee, for Appellant.

Thomas H. Fulton, James E. Bailey III, Fred M. Acuff, Jr., HUMPHREYS, DUNLAP WELLFORD, ACUFF & STANTON, Memphis, Tennessee, for Appellee.

William L. Norton III, BOULT, CUMMINGS, CONNERS & BERRY, Nashville, Tennessee, for Amicus Curiae.

Before: DAUGHTREY and CLAY, Circuit Judges; RUSSELL, District Judge*

OPINION

RUSSELL, District Judge.

In this check-kiting case that originated in the Bankruptcy Court for the Western District of Tennessee, we are faced with a collision between Article 4 of the UCC (and federal banking regulations) and the Bankruptcy Code. Appellant, First Tennessee Bank, N.A., appeals from the District Court's order affirming the Bankruptcy Court's grant of summary judgment in favor of the Plaintiff/Appellee, George W. Stevenson, on Plaintiff's complaint filed to recover an alleged voidable preference pursuant to 11. U.S.C. § 547 of the Bankruptcy Code. The District Court concluded that the Appellant's collection efforts under Article 4 on deposit accounts held by the Debtor, William Dunlap Cannon, III, constituted a voidable preference. Because we conclude Article 4 granted the Appellant a fully-secured interest under the Bankruptcy Code so that it would receive the same amount in a Chapter 7 bankruptcy as when it exercised its Article 4 collection rights, we REVERSE.

BACKGROUND

In January and February of 1994, the Debtor, William Dunlap Cannon, III, a real estate lawyer in Memphis, Tennessee, engaged in a check kiting scheme1 involving the Appellant, First Tennessee, and two non-party banks, United American Bank of Memphis and Hibernia Bank in New Orleans. Cannon opened an account at Hibernia, and cut two courtesy checks (on which he had forged the name of a fictitious mortgage company as the account holder) to his accounts2 at First Tennessee totaling $163,350.00 (of which the Hibernia account actually contained $7,500.00). First Tennessee extended Cannon a provisional credit for the checks on the day of the deposit, January 10, 1994, and as with any kiting scheme, Cannon immediately drew down against the provisional credit.

First Tennessee presented the two Hibernia checks to the New Orleans Federal Reserve for clearing on the next day. On January 13, 1994, the checks were returned to First Tennessee by Hibernia for insufficient funds. First Tennessee then automatically resubmitted the checks to the Federal Reserve clearing house on January 18, 1994, to see if they would clear on the second attempt (the record indicates that 90% of checks clear on the second attempt). Hibernia returned the checks again on January 20, 1994, for insufficient funds. First Tennessee attempted to charge back the checks against Cannon's accounts, which, naturally, had insufficient funds to cover the checks. First Tennessee's automated systems then turned over the checks to a human for the first time in this saga, and on January 24, 1994, the collection officer at First Tennessee received the checks. However, on the same day, Cannon successfully covered the charge back by transferring monies to the Real Estate Escrow Account and the Escrow Recording Account from a different First Tennessee account, and from a check from Fleet Mortgage Corp., an entity unrelated to First Tennessee3.

About two weeks later, however, First Tennessee became more concerned with Cannon's banking activities. The record reveals that Mr. Cannon had bounced some number of checks prior to the two Hibernia checks, but that First Tennessee had taken no adverse action. During the week of February 8th, Cannon bounced over $200,000.00 in checks at First Tennessee drawn on his United American Bank accounts. An account officer at First Tennessee returned all checks presented for payment on the accounts, and terminated all of Cannon's accounts on February 17, 1994. The action of First Tennessee led to the "collapse" of the check kiting scheme, and Mr. Cannon was forced into bankruptcy.

The Chapter 7 Trustee, Appellee George Stevenson, initiated this adversary proceeding on February 21, 1996 to avoid the January 24, 1994 transfers by Cannon to cover the charge backs. The Trustee claimed these were preferential transfers which unduly benefitted First Tennessee, and sought the entire $163,350.00 plus pre-judgment interest. The Bankruptcy Court agreed with the Trustee, holding that check kiting creates an antecedent debt for the purposes of the preference statute, 11 U.S.C. § 547(b). The Bankruptcy Court also found that the provisional credit extended by First Tennessee when the Hibernia checks were initially deposited was unsecured. The Bankruptcy Court also found that due to the large amount of unsecured claims against Cannon's estate, First Tennessee certainly recovered more in the January 24 transfer than it would have as an unsecured Chapter 7 creditor.

The Bankruptcy Court conducted a trial on First Tennessee's subsequent new value defense4 as well as the amount of damages the Trustee could receive. First Tennessee argued that the subsequent new value defense applied to its dealings with Cannon since it continued to honor checks written by Cannon between January 10, 1994 (when he initially deposited the Hibernia checks) and January 24, 1994 (when he covered the charge back for the Hibernia checks with other good funds). The Bankruptcy Court agreed the new value defense applied, but only to the extent of value extended after the date of the preferential transfer. Since it fixed the date of the preferential transfer at January 24, 1994, the Bankruptcy Court found that the defense did not apply to First Tennessee's claims. The Bankruptcy Court did not reach the issue of First Tennessee's security interest, nor did it adjust the award of damages to the Trustee.

First Tennessee appealed to the District Court, challenging the entirety of the Bankruptcy Court's conclusions. The District Court agreed that the check kiting scheme had created an antecedent debt for bankruptcy purposes under In re Montgomery, 983 F.2d 1398 (6th Cir. 1993). The District Court conceded that under Tennessee Code § 47-4-210, First Tennessee had a security interest in deposits made to all four accounts held by Cannon. However, since the Hibernia bank account did not contain sufficient funds to support the two checks in question, the District Court found the security interest was in nothing more than "valueless paper checks." As to the new value defense, the District Court concluded that First Tennessee continued to extend value to Cannon until it closed his accounts on February 17, 1994. Nonetheless, due to the security interest created by Tennessee state law, First Tennessee could not demonstrate the new value was unsecured for purposes of § 547(c)(4). Unlike the Hibernia checks, which had no value, the deposits taken after January 24, 1994 were secured by sufficient collateral in the form of the two deposits made on that date. First Tennessee sought an order to alter or amend, which the District Court denied for failing to meet the standards found in either Fed. R. Civ. P. 59(e) or Bankruptcy Procedure Rule 8015.

DISCUSSION

The "collision" noted above in this case involves whether or not provisional credits allowed by Article 4 and the Expedited Funds Availability Act (12 U.S.C. §§ 4001-4010) are "debts" within the meaning of the bankruptcy code, and if they are, whether or not the satisfaction of those debts are voidable transfers. The issue of whether or not they are "debts" goes to the question of "antecedent debts," which is not necessary for the resolution of this case. The only real issue is whether or not they can be avoided. 11 U.S.C. §547(b) allows the Trustee to avoid:

any transfer of an interest of the debtor in property-- (1)to or for the benefit of a creditor; (2)for or on account of an antecedent debt owed by the debtor before such transfer was made; (3)made while the debtor was insolvent; (4)made-- (A)on or within 90 days before the date of the filing of the petition; or (B)between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5)that enables such creditor to receive more than such creditor would receive if-- (A)the case were a case under chapter 7 of this title; (B)the transfer had not been made; and (C)such creditor received payment of such debt to the extent provided by the provisions of this title.

First Tennessee assumes for the purpose of arguing that the first four factors of § 547(b) have been met, and asks the Court to decide the case on the issue of being fully secured. This is the typical pattern in this area of the law. See Laws v. United Missouri Bank of Kansas City, 98 F.3d 1047, 1051-52 (8th Cir. 1996), cert. denied, 520 U.S. 1168, 117 S. Ct. 1432, 137 L. Ed. 2d 540 (1997)(finding a material issue of fact on the issue of antecedent debt, but dismissing the case on the issue of being fully secured); In the Matter of Summit Financial Services, Inc., 240 B.R. 105 (Bankr. N.D. Ga. 1999)(finding the existence of antecedent debt, but denying avoidance due to being fully secured); In re Brown, 209 B.R. 874, 883 (Bankr. W.D. Tenn. 1997)(holding that "rather than unnecessarily decide" the issue of antecedent debt, the court would deny avoidance due to being fully secured).

I. IN RE MONTGOMERY

In the present case, the courts below relied on our opinion in In re Montgomery, 983 F.2d 1389 (6th Cir....

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