In Re: Delco Oil Inc.

• Decision Date: 16 March 2010
• Docket Number: No. 09-11759.,09-11759.
• Parties: In re: DELCO OIL, INC., Debtor. Marathon Petroleum Co., LLC, Defendant-Appellant, v. Aaron R. Cohen, Plaintiff-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

599 F.3d 1255

In re: DELCO OIL, INC., Debtor. Marathon Petroleum Co., LLC, Defendant-Appellant, v. Aaron R. Cohen, Plaintiff-Appellee.

No. 09-11759.

United States Court of Appeals Eleventh Circuit.

Decided: March 16, 2010.

Constantine Trela, Jr., Andrianna D Kastanek, Sidley Austin, LLP, Chicago IL, for Defendant-Appellant.

Charles W. Throckmorton, Kozyak, Tropin & Throckmorton, P.A., Coral Gables FL, for Plaintiff-Appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before EDMONDSON, BIRCH and BALDOCK, ^* Circuit Judges.

BALDOCK, Circuit Judge:

Defendant-Appellant Marathon Petroleum Company, LLC (Marathon) appeals the district court's order affirming the bankruptcy court's grant of summary judgment in favor of Plaintiff-Appellee Aaron R. Cohen (Cohen). The issue presented to this Court is whether a bankruptcy trustee may avoid post-petition payments by a debtor under 11 U.S.C § 549(a) and § 363(c)(2) as unauthorized transfers of cash collateral. Exercising jurisdiction under 28 U.S.C. § 1291, we conclude in this case the trustee may avoid the debtor's unauthorized post-petition transfers of cash collateral. We, therefore, affirm the district court's decision affirming the bankruptcy court's entry of summary judgment in favor of Cohen.

I.

Delco Oil, Inc. (Debtor) is a distributor of motor fuel and associated products. Debtor began purchasing petroleum products from Marathon in 2003 pursuant to a sales agreement. Debtor also entered into a financing agreement with CapitalSource Finance in April 2006, in which CapitalSource agreed to provide financing to Debtor in exchange for Debtor's pledge of all rights to Debtor's personal property including collections, cash payments, and inventory.

On October 17, 2006, Debtor filed for Chapter 11 bankruptcy protection and filed an emergency motion with the bankruptcy court requesting authorization to use cash collateral to continue its operations. CapitalSource objected. The following day, the bankruptcy court authorized Debtor to continue its business as a debtor-in-possession. On November 6, 2006 the bankruptcy court denied Debtor's request to use its cash collateral (later reduced to a written order). Between October 18 and November 6, however, Debtor distributed over $1.9 million in cash to Marathon in exchange for petroleum products pursuant to its sales agreement.

In December 2006, Debtor voluntarily converted its bankruptcy to a Chapter 7 proceeding and the bankruptcy court appointed Cohen as trustee. Cohen filed an adversary proceeding against Marathon to avoid the post-petition cash transfers and ultimately filed the motion for summary judgment that is the subject of this appeal. The bankruptcy court granted summary judgment in favor of Cohen and entered a judgment for $1,960, 088.91 against Marathon, concluding Debtor used CapitalSource's cash collateral to pay Marathon without authorization. On appeal, the district court affirmed the bankruptcy court's entry of summary judgment in favor of Cohen.

II.

We review a bankruptcy court's grant of summary judgment de novo, applying the same legal standard used by the bankruptcy court. See In re Kingsley, 518 F.3d 874, 876 (11th Cir.2008) (applying the same standard for summary judgment as the bankruptcy court); In re Optical Tech. Inc., 246 F.3d 1332, 1334 (11th Cir.2001) (explaining "that an appellate court reviews a bankruptcy court's grant of summary judgment de novo"); Fed. R. Bankr.P. 7056 (making Fed.R.Civ.P. 56's summary judgment standard applicable in bankruptcy adversary proceedings). Summary judgment is proper "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c)(2). We must view all evidence and make all reasonable inferences in favor of the nonmoving party in making this determination. Optical Tech., 246 F.3d at 1334. But "[a] moving party is entitled to sum-mary judgment if the nonmoving party has 'failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.'" In re Walker, 48 F.3d 1161, 1163 (11th Cir.1995) (quoting Celotex Corp. v. Catrett, All U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). Moreover, the nonmoving party "may not rely merely on allegations or denials in its own pleading; rather, its response must... set out specific facts showing a genuine issue for trial." Fed.R.Civ.P. 56(e)(2). As the Supreme Court has explained: "When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

III.

The Bankruptcy Code defines cash collateral as:

[C]ash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property... whether existing before or after the commencement of a case under this title.

11 U.S.C. § 363(a). The Bankruptcy Code prohibits the post-petition use of cash collateral by a trustee or a debtor-in-possession, unless the secured party or the bankruptcy court after notice and a hearing authorizes the use of cash collateral upon a finding that the secured party's interest in the cash is adequately protected. See 11 U.S.C. § 1107 (providing a debtor-in-possession the rights, powers, functions and duties of a bankruptcy trustee); 11 U.S.C. § 363(c)(2) ("The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection unless—(A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section."); 11 U.S.C. § 363(e) ("[O]n request of an entity that has an interest in property... proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest."). Section 363(c)(2) balances competing interests in a Chapter 11 reorganization. As we have explained, a debtor reorganizing his business has a compelling need to use cash collateral in order to meet its daily operating expenses and rehabilitate its business. In re George Ruggiere Chrysler-Plymouth, Inc., 727 F.2d 1017, 1019 (11th Cir.1984). At the same time, however, unhindered use of cash collateral, i.e., "secured 'property' may result in the dissipation of the estate." Id. Section 363(c)(2) resolves this tension between a debtor and a secured creditor by only allowing the debtor to use cash collateral after it has procured either the secured creditor's or the bankruptcy court's permission upon a showing that the secured creditor's interest is adequately protected. Id.

Section 549(a) of the Bankruptcy Code authorizes a trustee to recover unauthorized post-petition transfers of estate property. See 11 U.S.C. § 549(a) ("[T]he trustee may avoid a transfer of property of the estate—(1) that occurs after the commencement of this case; and... (2)(b) that is not authorized under this title or by the court."). To avoid a transfer under Section 549(a) a trustee need only demonstrate: (1) a post-petition transfer (2) of estate property (3) which was not authorized by the Bankruptcy Code or the court. See 11 U.S.C. § 549(a) ("[T]he trustee may avoid a transfer of property of the estate- (1) that occurs after the commencement of the case; and (2)(B) that is not authorized under this title or by the court"); Manuel v. Allen. 217 B.R. 952, 955 (Bankr. M.D.Fla.1998) (explaining that pursuant to Section 549, "the criteria for avoidance are (1) a transfer; (2) of property of the estate; (3) which occurred postpetition; and (4) was not authorized by the Bankruptcy Code or the court"). After the trustee makes that showing, the party asserting an established transfer's validity bears the burden of proving it valid. Fed. R. Bankr.P. 6001. Once a court finds a transfer avoidable, Section 550(a) allows the trustee to recover the property transferred from the initial transferee. See 11 U.S.C. § 550(a) ("[T]o the extent that a transfer is avoided under section... 549... the trustee may recover, for the benefit of the estate, the property transferred, or if the court so orders, the value of such property, from—(1) the initial transferee of such transfer....").

IV.

Marathon asserts the bankruptcy and district courts erred because a material issue of fact remains regarding whether the funds it received from Debtor actually constituted CapitalSource's cash collateral. Principally, Marathon argues that the funds did not constitute CapitalSource's cash collateral under Fla. Stat § 679.332(2) (a replica of U.C.C. § 9 332(b)), which provides that "[a] transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party." Fla. Stat. § 679.332(2). Relying on this Florida law, Marathon contends upon receipt of the funds they became free of CapitalSource's security interest and, therefore, the funds were not cash collateral.¹

Despite Marathon's contentions otherwise, Florida's Section 679.332(2) does not alter the fact that CapitalSource had a security interest in Debtor's deposit account funds as proceeds of CapitalSource's properly secured collateral while they were in Debtor's hands. See Fla Stat. § 679.3151(l)(b) and (3) ("A security interest attaches to any identifiable proceeds of collateral" and that security interest in the proceeds is...