Lewis W. Shurtleff, Inc., In re

• Decision Date: 03 September 1985
• Docket Number: No. 84-6213,84-6213
• Parties: 13 Collier Bankr.Cas.2d 1400, Bankr. L. Rep. P 70,902 In re LEWIS W. SHURTLEFF, INC. and Frontier Properties, Inc., Debtors. Thomas D. ELLIOTT, Trustee, Plaintiff-Appellee, v. FRONTIER PROPERTIES/LP 102/Meadow Glen Arms/79, et al., Defendants-Appellants. Ninth Circuit. Submitted *
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1416

778 F.2d 1416

13 Collier Bankr.Cas.2d 1400, Bankr. L. Rep. P 70,902

In re LEWIS W. SHURTLEFF, INC. and Frontier Properties,

Inc., Debtors.

Thomas D. ELLIOTT, Trustee, Plaintiff-Appellee, v. FRONTIER PROPERTIES/LP 102/Meadow Glen Arms/79, et al.,

Defendants-Appellants.

No. 84-6213.

United States Court of Appeals,Ninth Circuit.

Submitted ^* Sept. 3, 1985.

Decided Dec. 20, 1985.

As Amended on Denial of Rehearings Jan. 23, 1986.

Kevin J. Hoyt, Joel Estes, San Diego, Cal., for plaintiff-appellee.

John M. Ross, San Diego, Cal., for defendants-appellants.

Appeal from the United States District Court for the Southern District of California.

Before SNEED, NELSON, and NORRIS, Circuit Judges.

SNEED, Circuit Judge:

This is an appeal from an order of the district court setting aside as a voidable preference under 11 U.S.C. Sec. 547 (1982) the transfer of an apartment complex from the debtor-in-bankruptcy, Frontier Properties, to three limited partnerships. We affirm in part and vacate and remand in part.

I. FACTS

Frontier Properties (Frontier) acquired the Cobble Square Apartments (the apartments) on April 20, 1979. In the transaction, the seller, Kenman, Ltd., assigned its interest in the underlying land sale contract to Frontier and, in exchange, Frontier paid cash, issued a short term note, and assumed various liabilities.

On the same day the apartments were acquired, Frontier agreed to transfer its interest in them to three different limited partnerships. Frontier executed three separate agreements. The first partnership, Meadow Glen, Ltd. (Meadow Glen), received an undivided 56.23% interest in the apartments in exchange for the payment of $250,156.50 in cash. The second partnership, Broadway, Ltd. (Broadway), traded property valued at $220,000 in exchange for an undivided 35.1438% interest in the apartments and a promissory note issued by Frontier for $169,365.75. The third partnership, Lexington, Ltd. (Lexington), traded property valued at $54,000 in exchange for an undivided 8.62% interest in the apartments and a note issued by Frontier in the sum of $29,657.76. To fulfill its part of the bargain, Frontier assigned to the three partnerships its interest in the land sale contract acquired from Kenman.

The parties evidenced their transactions by executing a warranty deed. For reasons that do not appear in the record, Frontier failed to record the deed until July 30, 1981. Eighteen days later, Frontier filed a petition under Chapter 11 of the Bankruptcy Code.

The trustee initiated proceedings in bankruptcy court to set aside the transfer of the apartments. The trustee asserted that the parties' delay in recording the warranty deed--and thus in perfecting the transaction--rendered the transfer a voidable preference under 11 U.S.C. Sec. 547 (1982).

The bankruptcy court ruled that the trustee had established all of the elements of a preferential transfer, save the requirement of section 547(b)(5) that the transfer enabled the preferred creditor to receive more than he would have received in a Chapter 7 liquidation if the transfer had not been made. In analyzing this requirement, the court began by determining that the partnerships' claims against the estate were equal in value to the amounts that each had paid in property or cash to acquire the subject property--according to its calculations, a combined total of $524,156.50. (In characterizing this figure as the combined amount paid by the partnerships to acquire the apartments, the court neglected to subtract the "boot" that Broadway and Lexington received to equalize their exchanges with Frontier--a total of $199,023.51. Nonetheless, because the "boot" took the form of debt from Frontier, the court's calculation of the total claim was correct.) The court then found that, whereas the partnerships would receive 10 to 13 percent of their claims in a Chapter 7 liquidation (that is, $52,415.65 to $68,140.35), the net value of the apartments on the date of the transfer, July 30, 1981, after taking into account the encumbrances on the property and the transaction cost of selling the building, was $27,500. Because this amount would satisfy only about 5 percent of the partnerships' claims--a far smaller share than the partnerships would receive in liquidation--the court concluded that the transfer was not preferential.

The district court reversed. The court found that the bankruptcy court had erred by overlooking the fact that, upon the distribution in Chapter 11, the partnerships also would receive a certain amount with respect to the surviving balance of their claims. Thus, in addition to the 5 percent of their claims realized through the transfer of the apartment complex, the partnerships would also receive from 10 to 13 percent of the unsatisfied 95 percent balance in a distribution at the close of the Chapter 11 proceeding. The combined total of the transfer and the distribution, the district court concluded, would exceed the amount the partnerships would have received under Chapter 7 had the transfer not occurred. Finding section 547(b)(5) satisfied, the district court set aside the transfer as preferential.

II. DISCUSSION

Appellants raise three main arguments in this court. First, they claim that both courts below erred in finding that the challenged transfer involved "property of the debtor" within the meaning of 11 U.S.C. Sec. 547(b) (1982). Second, they argue that both lower courts also erred in finding that the transfer occurred within 90 days before the date Frontier filed its bankruptcy petition. Third, they contend that the district court was mistaken in holding that the transfer enabled the limited partnerships to receive more than they would have received in a Chapter 7 liquidation.

Understanding of these contentions will be enhanced by setting forth the relevant portion of section 547 of the Bankruptcy Code, which enables the trustee to set aside certain transfers made by the debtor during the 90 days immediately preceding bankruptcy. That section provides that 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--... on or within 90 days before the date of the filing of the petition; ...

(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.

11 U.S.C. Sec. 547(b) (1982).

A. The "Property of the Debtor" Requirement

The appellants contend that, because the trustee failed to prove that Frontier held legal title to the apartments prior to the transfer, there was no transfer of "property of the debtor" as required by section 547(b). Frontier's interest in the land sale contract, the appellants maintain, is not "property" within the meaning of the statute.

The appellants' proposed construction is untenable. To begin with, it would negate language found elsewhere in section 547. In explaining when a transaction involving real property should be deemed perfected, section 547(e)(1)(A) expressly includes transfers of "the interest of a seller or purchaser under a contract for the sale of real property." Had Congress intended to exclude interests in land contracts from "property" subject to the preference provision, it would not have bothered to include such interests in its definition of perfection.

More significantly, the appellants ignore the broad definition given to the phrase "property of the estate" by section 541 of the Code. Such property includes "all legal or equitable interests of the debtor in property." 11 U.S.C. Sec. 541(a)(1) (1982); see also In re Beavers, 26 B.R. 502, 504 (Bankr.N.D.Ala.1983) ("property of the estate" includes the debtor's possessory and purchase rights under a valid oral agreement for the sale of land); In re Rose, 7 B.R. 911, 912-13 (Bankr.S.D.Tex.1981) (the purchaser's rights under a "contract for deed," which creates no legal or equitable title in the purchaser until he has fully performed his part of the contract, are "property of the estate"). The term "property" used in section 547 enjoys a similarly broad scope. Frontier's interest in the contracts it acquired from Kenman, therefore, is "property of the debtor" subject to the preference provisions.

Appellants propose a second theory of why the transaction did not involve "property of the debtor." They assert that Frontier's failure to record the warranty deed constituted a wrongful detention of their property and therefore subjected the apartment building to a constructive trust in their favor pursuant to California Civil Code Sec. 2223. Appellants conclude that, because section 541 of the Code excludes from the debtor's estate property held solely in trust for others, see 11 U.S.C. Sec. 541(d) (1982); In re Bruce Farley Corp., 612 F.2d 1197 (9th Cir.1980), the apartments could not have been the subject of a preferential transfer.

Although some courts have treated constructive trusts under state law as trusts for bankruptcy purposes, see, e.g., In re Quality Holstein Leasing, 752 F.2d 1009, 1012-13 (5th Cir.1985), "we cannot accept the proposition that the bankruptcy estate is automatically deprived of any funds that state law might find subject to a constructive trust," In re North American Coin & Currency, Ltd., 774 F.2d 1390, 1391 (9th Cir.1985). No state court decree imposing a trust exists in the present case; thus appellants' entitlement to such a remedy is inchoate, at best. See id. Moreover, the appellants introduced no evidence at trial to establish that Frontier's failure to record was wrongful; in fact, as the appellees argue, there may have been rational--if not necessarily proper--business reasons why both parti...