796 F.2d 752 (5th Cir. 1986), 85-1457, Matter of Missionary Baptist Foundation of America, Inc.

Docket Nº:85-1457.
Citation:796 F.2d 752
Party Name:In the Matter of MISSIONARY BAPTIST FOUNDATION OF AMERICA, INC., et al., Debtors. Robert B. WILSON, Trustee in the Bankruptcy Case of Missionary Baptist Foundation of America Inc., Plaintiff-Appellant, v. FIRST NATIONAL BANK, LUBBOCK, TEXAS, Defendant-Appellee.
Case Date:August 11, 1986
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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796 F.2d 752 (5th Cir. 1986)

In the Matter of MISSIONARY BAPTIST FOUNDATION OF AMERICA,

INC., et al., Debtors.

Robert B. WILSON, Trustee in the Bankruptcy Case of

Missionary Baptist Foundation of America Inc.,

Plaintiff-Appellant,

v.

FIRST NATIONAL BANK, LUBBOCK, TEXAS, Defendant-Appellee.

No. 85-1457.

United States Court of Appeals, Fifth Circuit

August 11, 1986

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[Copyrighted Material Omitted]

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Robert B. Wilson, Sims, Kidd, Hubbert & Wilson, Richard Hubbert, Lubbock, Tex., for plaintiff-appellant.

Jack McCutchin, Jr., Crenshaw, Dupree & Milam, Joe Nagy, Cecil C. Kuhne, Lubbock, Tex., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, WILLIAMS and DAVIS, Circuit Judges.

GOLDBERG, Circuit Judge:

I. Introduction

This bankruptcy case involves a revolving line-of-credit and accounts receivable financing arrangement entered into by the Missionary Baptist Foundation of America, Inc. ("the Debtor") and the First National Bank at Lubbock, Texas ("the Bank"). The Debtor operated a group of affiliated nursing homes as separate corporations in Texas and other states. The Debtor had a chronic cash-flow problem, because its primary source of income was medicare and medicaid cost reimbursement payments that were typically not received until a month or more after services had been rendered. 1

In an attempt to remedy this problem the Debtor negotiated a $500,000 line of credit at the Bank on June 12, 1979. 2 The Loan Agreement was signed by the cognizant officers of each of the Debtor's affiliated corporations, which were listed at the beginning of the document. 3 The term of this financing was limited to six months, with automatic extensions for additional

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six-month periods unless either party terminated the Agreement in the manner provided for. A separate Security Agreement was also executed by the parties the same day. 4

Pursuant to these agreements an arrangement was set up whereby the Debtor's medicare and medicaid reimbursement payments would be received directly at the Bank. As the payments arrived they were immediately applied to the Debtor's loan balance, which could then be re-extended up to the maximum of $500,000.

Even this amount of credit proved insufficient, however, so on May 29, 1980, the Debtor took out a separate $350,000 loan at the Bank. This loan was also secured by the Debtor's accounts receivable. 5

During the summer of 1980 the Debtor's financial situation began to deteriorate rapidly. Overdrafts of more than a million dollars began appearing on the Debtor's account. The Bank notified the Debtor in June that it was reviewing the situation and would renew the $500,000 master note for only three months. The Bank also requested extensive financial information and documentation from the Debtor.

On October 14, 1980, the Bank notified the Debtor that it was terminating their financing arrangements. The Bank immediately began collecting all available assets of the Debtor and applying them to the outstanding loan balance. The Debtor's payroll checks were no longer honored by the Bank. On October 15, 1980, the Debtor filed a petition for relief under Chapter 11 of Title 11, United States Code. That same day an officer of the Bank flew to Austin, Texas, and picked up several unprocessed warrants for payment to the Debtor's account and brought them to the Bank later in the day.

Shortly thereafter a trustee in bankruptcy, Robert B. Wilson ("the Trustee"), was appointed. The Trustee brought suit against the Bank, alleging invalid financing arrangements, preferential payments, post-petition transfers, fraudulent conveyances, and the like. In October, 1984, the case came on for a bench trial before the Honorable Bill H. Brister in the United States Bankruptcy Court for the Northern District of Texas. The bankruptcy court ruled against the Trustee on all counts, but did require the Bank to file an amended claim. See Memorandum and Order of Feb. 25, 1985, 48 BR 885, at 28-29. The district court, Woodward, C.J., affirmed the bankruptcy court's judgment in all respects. See Order of June 18, 1985.

On appeal to this court the Trustee raises the following issues:

1. The Bankruptcy Court erred in determining the Bank's purported security interest in Debtor's accounts receivable to be valid.

2. Assuming validity of the purported security interest, the Bank improved its position during the 90 days preceding bankruptcy.

3. The Bank's purported security interest in accounts receivable from AMH OF THE GREENBELT was not properly perfected.

4. The Trustee established all of the elements of voidable preferences against the Bank on transfers occurring within 90 days of bankruptcy.

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5. The "ordinary course of business" exception to a preferential payment is not available to the Bank as a matter of law, or in the alternative, the evidence does not establish such affirmative defense.

6. The Bank's transfers from Debtor initiated on October 15, 1980 were violative of the automatic stay or in the alternative, were preferential payment recoverable by the Trustee.

7. The Bank's transfers from Debtor's account subsequent to October 15, 1980 were post-petition transfers recoverable by the Trustee.

8. The Bank's application of $10,373.16 to the indebtedness of WEST TEXAS HOME HEALTH AGENCY on October 15, 1980 was a fraudulent conveyance recoverable by the Trustee.

9. Payment of $108,324.24 on the $350,000 note was a preferential transfer.

10. The Bank's conduct on the date of bankruptcy and thereafter would justify subordination of its claim.

11. An award of special damages and/or attorney's fees would be appropriate in this case.

Appellant's Brief at vii.

II. Standard of Review

The bankruptcy court's findings of fact will be accepted by this court unless they are clearly erroneous and its judgment will be sustained unless based on an incorrect view of applicable law. Matter of Missionary Baptist Foundation, 792 F.2d 502, 506 n. 2 (5th Cir.1986); Bankr.Rule 8013; Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1307-08 (5th Cir.1985); Mitsubishi International Corporation v. Clark Pipe and Supply Co., Inc., 735 F.2d 160 (5th Cir.1984); Highland Village Bank v. Bardwell, 610 F.2d 228 (5th Cir.1980). A finding of fact is clearly erroneous when "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Company, 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). Strict application of the clearly-erroneous rule is "particularly important where, as here, the district court has affirmed the bankruptcy judge's findings." Matter of Missionary Baptist Foundation of America, Inc. v. Huffman, 712 F.2d 206, 209 (5th Cir.1983) (citing cases). But the clearly-erroneous standard "does not inhibit an appellate court's power to correct errors of law." Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 104 S.Ct. 1949, 1960, 80 L.Ed.2d 502 (1984).

III. Can the Debtor's Accounts Receivable Collateralize the

Bank's Loans?

The most far-reaching argument made by the Trustee is that the Debtor's accounts receivable could not serve as collateral for the Bank's loans. The Trustee relies for this proposition on provisions of state and federal law purportedly prohibiting the assignment or attachment of medical care payments. Resolution of this issue will determine the disposition of many of the other matters raised on appeal.

Title XIX of the Social Security Act (42 U.S.C. Secs. 1396 et seq.) specifies the conditions under which the federal government makes grants to the states through medical assistance programs. Participating states must have "state plans" that meet the requirements of the federal statute, see 42 U.S.C. Sec. 1396a. One of these requirements is that

A State plan for medical assistance must--

...

.. provide that no payment under the plan for any care or service provided to an individual shall be made to anyone other than such individual or the person or institution providing such care or service, under an assignment or power of attorney or otherwise, except that--

(A) in the case of any care or service provided by a physician, dentist, or other

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individual practitioner, such payment may be made (i) to the employer of such physician, dentist, or other practitioner if such physician, dentist, or practitioner is required as a condition of his employment to turn over his fee for such care or service to his employer, or (ii) (where the care or service was provided in a hospital, clinic, or other facility) to the facility in which the care or service was provided if there is a contractual arrangement between such physician, dentist, or practitioner and such facility under which such facility submits the bill for such care or service; and

(B) nothing in this paragraph shall be construed (i) to prevent the making of such a payment in accordance with an assignment from the person or institution providing the care or service involved if such assignment is made to a government agency or entity or is established by or pursuant to the order of a court of competent jurisdiction, or (ii) to preclude an agent of such person or institution from receiving any such payment if (but only if) such agent does so pursuant to an agency agreement under which the compensation to be paid to the agent for his services for or in connection with the billing or collection of payments due such person or institution under the plan is unrelated (directly or...

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