Arnett, In re

• Decision Date: 10 April 1984
• Docket Number: No. 82-5098,82-5098
• Citation: 731 F.2d 358
• Parties: , 10 Collier Bankr.Cas.2d 533, 11 Bankr.Ct.Dec. 1097, Bankr. L. Rep. P 69,839 In re Burton Lewis ARNETT and Charlotte Arnett, Debtors. Thomas E. RAY, Trustee, Plaintiff-Appellant, v. SECURITY MUTUAL FINANCE CORPORATION; American National Bank & Trust Company of Chattanooga; and Burton Lewis Arnett and Charlotte Joan Arnett, Defendants- Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 358

731 F.2d 358

77 A.L.R.Fed. 1, 10 Collier Bankr.Cas.2d 533,

11 Bankr.Ct.Dec. 1097, Bankr. L. Rep. P 69,839

In re Burton Lewis ARNETT and Charlotte Arnett, Debtors Thomas E. RAY, Trustee, Plaintiff-Appellant, v. SECURITY MUTUAL FINANCE CORPORATION; American National Bank & Trust Company of Chattanooga; and Burton Lewis Arnett and Charlotte Joan Arnett Defendants- Appellees.

No. 82-5098.

United States Court of Appeals Sixth Circuit.

Argued Jan. 14, 1983.

Decided April 10, 1984.

Thomas E. Ray, argued, Chattanooga, Tenn., pro se.

Andrew F. Bennett, Jr., argued, Cleveland, Tenn., for Sec. Mut.

Richard J. McAfee, Lawrence R. Ahern, III, argued, Chattanooga, Tenn., for American Nat. Bank.

Before JONES and WELLFORD, Circuit Judges, and MILES, District Judge. ^*

MILES, District Judge.

This is an appeal in bankruptcy. Plaintiff, the trustee in bankruptcy, appeals the order of the district court, 17 B.R. 912, affirming the decision of the bankruptcy court declining to set aside as a preferential transfer the security interest held by defendant-appellee Security Mutual Finance Corporation ("Security Mutual") in property of the debtors in bankruptcy and co-defendants-appellees in this proceeding, Burton and Charlotte Arnett.

On December 10, 1980, the Arnetts obtained a consolidation loan from Security Mutual, granting to Security Mutual a lien on their 1978 Volkswagen, which was at that time subject to a prior perfected lien held by defendant-appellee American National Bank ("ANB"). The loan obtained from Security Mutual thus included an amount sufficient to pay off the prior security interest. On December 10 or 11, 1980, Security Mutual mailed a check for the outstanding balance of the lien to ANB, requesting ANB to release its lien and forward the certificate of title to the vehicle to Security Mutual. ANB deposited the check on December 19, 1980. Because of the delayed holiday mails and employee absences, however, ANB did not release its lien and forward the certificate of title until January 9, 1981. Upon receiving the release, Security Mutual applied to the State of Tennessee Department of Motor Vehicles to note its lien on the certificate, as required by T.C.A. 55-3-119. The lien was perfected on January 12, 1981, 33 days after the granting of the security interest to Security Mutual.

On February 25, 1981, the Arnetts filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. Sec. 701 et seq. The trustee filed suit to set aside Security Mutual's lien on the Volkswagen as a voidable preference under 11 U.S.C. Sec. 547(b). The parties agreed to allow the vehicle to be sold to the debtors for $3,601.47 pending the outcome of this proceeding.

The bankruptcy judge ruled that Security Mutual's perfection of its security interest was "substantially contemporaneous" with the loan transaction, notwithstanding the 33-day hiatus and thus, that the transaction fell within the exception to the trustee's avoidance powers found at 11 U.S.C. Sec. 547(c)(1). See, In re Arnett, 13 B.R. 267 (Bkrtcy.E.D.Tenn.1981). The trustee unsuccessfully appealed to the district court, which upheld the bankruptcy court's decision. This appeal followed.

The sole issue before this Court is whether a delay of 33 days in perfection of a security interest is a "substantially contemporaneous exchange" under 11 U.S.C. Sec. 547(c)(1), thus excepted from the trustee's avoidance powers. Although the lower courts have been wrestling with this problem for some time, the issue has not yet been addressed by any of the circuit courts of appeals.

Section 547(b) of the Bankruptcy Code provides that, except as provided in subsection (c), the trustee may avoid any "transfer of property of the debtor"

(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 90 days and one year before the date of the petition, if such creditor, at the time of such transfer--

(i) was an insider; and

(ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer; 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.

All five elements are prerequisites to the finding of a voidable preference. Barash v. Public Finance Corp., 658 F.2d 504 (7th Cir.1981). The parties concede that these elements are present. However, Security Mutual and ANB point to the exceptions to the trustee's avoidance powers contained in subsection (c)(1). That subsection provides:

(c) The Trustee may not avoid under this section a transfer--

(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange;

Relying on 11 U.S.C. Secs. 547(c)(3) and 547(e)(2)(A) and (B), the trustee contends that the contemporaneous exchange exception is inapplicable beyond 10 days of creation of Security Mutual's security interest, and thus, that the lien may be avoided. Section 547(c)(3), the so-called "enabling loan" provision, excepts from the trustee's avoidance powers security interests in property acquired by the debtor which are perfected within 10 days of creation. Section 547(e)(2) establishes when the "transfer" of a security interest is deemed to occur:

(2) For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made--

(A) intended by the debtor and the creditor to or the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time;

(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days;

Not persuaded that the 10-day limit established by the above two sections was incorporated sub silentio into the contemporaneous exchange exception, both the bankruptcy judge and the district judge ruled that "contemporaneity" is a question of fact to be evaluated in light of the parties' intent, the reasons for delay, and the risks of fraud and misrepresentation. The construction given to section 547(c)(1) by the lower courts in this case requires examination of all circumstances surrounding the transaction giving rise to the transfer. Thus, where delayed perfection of a security interest may be satisfactorily explained, and in the absence of dilatoriness or negligence on the part of a transferee, the transfer may still be found "substantially contemporaneous" with the exchange of new value to the debtor, regardless of the lapse of time.

Our review is guided by principles of statutory construction. The primary function of the courts in construing legislation is to effectuate the legislative intent. Philbrook v. Glodgett, 421 U.S. 707, 713, 95 S.Ct. 1893, 1898, 44 L.Ed.2d 525 (1975). Legislative intent may be ascertained from the clear language of the statute itself or from available legislative materials which clearly reveal this intent. Where the literal language of the statute does not conclusively reveal legislative intent, the courts must look beyond literal meaning, analyzing the provision in context with the whole. Kokoszka v. Belford, 417 U.S. 642, 650, 94 S.Ct. 2431, 2436, 41 L.Ed.2d 374 (1974). Finally, a construction of one part or provision of a statute which renders another part redundant or superfluous should be rejected; all parts of a statute should, if possible, be given effect. Jarecki v. Searle & Co., 367 U.S. 303, 307-308, 81 S.Ct. 1579, 1582-1583, 6 L.Ed.2d 859 (1961).

The legislative history of section 547(c)(1) is sparse. The Comment to the section provides in its entirety as follows:

The first exception [Sec. 547(c)(1) ] is for a transfer that was intended by all parties to be a contemporaneous exchange for new value, and was in fact substantially contemporaneous. Normally, a check is a credit transaction. However, for the purposes of this paragraph, a transfer involving a check is considered to be "intended to be contemporaneous," and if the check is presented for payment in the normal course of affairs, which the Uniform Commercial Code specifies as 30 days, U.C.C. Sec. 3-503(2)(a), that will amount to a transfer that is "in fact substantially contemporaneous."

H.R.Rep. No. 595, 95th Cong., 1st Sess. 373 (1977) [hereinafter cited as H.R. 595], U.S.Code Cong. & Admin.News 1978, pp. 5787, 6329.

In enacting the "contemporaneous exchange" exception, Congress intended to codify decisions under the old bankruptcy act which had held that, when a cash sale was intended, acceptance of a check instead of cash did not change the character of the transaction, so long as the check was cashed within a reasonable period of time. See, e.g., Engstrom v. Wiley, 191 F.2d 684 (9th Cir.1951); Engelkes v. Farmers Co-operative Co., 194 F.Supp. 319 (N.D.Iowa 1961). Some have stated that the provision also codified Dean v. Davis, 242 U.S. 438, 37 S.Ct. 130, 61 L.Ed. 419 (1917), which held that there was no preference where a loan was intended by both parties to be a secured loan even though the mortgage was not actually executed until seven days after the loan was made. See, e.g., In re Advance Glove Mfg. Co., 25 B.R. 521 (Bkrtcy.E.D.Mich.1982); In re Martella, 22 B.R. 649 (Bkrtcy.D.Colo.1982). Whether Dean v. Davis survived passage of the Bankruptcy Reform Act of 1978, and was codified into section 547(c)(1) has been questioned, however. In re Murray, 27 B.R. 445 (Bkrtcy.M.D.Tenn.1983).

Nonetheless, it is clear that the classic exception to avoidance intended by Congress to be reflected in section 547(c)(1) is the exchange of...