Braniff Airways, Inc. v. Exxon Co., U.S.A.

Citation814 F.2d 1030
Decision Date20 April 1987
Docket NumberNo. 86-1531,86-1531
Parties16 Collier Bankr.Cas.2d 1447, Bankr. L. Rep. P 71,794 BRANIFF AIRWAYS, INC. Debtor and Debtor-in-Possession, and the Official Unsecured Creditors' Committee of Braniff Airways, Inc., Plaintiffs-Appellees, v. EXXON COMPANY, U.S.A. Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

David M. Bates, Houston, Tex., for defendant-appellant.

Michael S. Kranitz, A.L. Vickers, Ungerman & Vickers, Dallas, Tex., for plaintiffs-appellees.

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

Before GARWOOD, JOLLY, and HILL, Circuit Judges.

ROBERT MADDEN HILL, Circuit Judge:

In this bankruptcy appeal, Exxon Company, U.S.A., argues that the district court erred in concluding that Exxon could not setoff pre-petition claims owed to it by debtor Braniff Airways, Inc., against pre-petition debts that it owed to Braniff. We find that Exxon does have a right of setoff pursuant to 11 U.S.C. Sec. 553(a), but that any setoff is potentially subject to being recovered by Braniff pursuant to 11 U.S.C. Sec. 553(b). Since the record is not sufficient to allow us to decide whether a section 553(b) recovery by Braniff is appropriate, we reverse and remand this case for further proceedings as outlined herein.

I.

The facts in this case are undisputed and have been stipulated to by both parties. Prior to Braniff's filing its petition on May 13, 1983, for relief under Chapter 11 of the Brankruptcy Code, Exxon and Braniff were parties to a contract for the sale of jet turbo fuel. Pursuant to the contract, Braniff made a prepayment by wire transfer each week based on its estimated fuel needs for the following week. On May 11 Braniff made one of these weekly prepayments in the amount of $530,000 for estimated fuel purchases for the week beginning May 12. By May 13 when Braniff filed its bankruptcy petition, it had used $96,252.11 in fuel. The unused prepayment of $434,972.20 was owed to Braniff.

As of the date of the bankruptcy petition, Exxon also had pre-petition claims against Braniff in the amount of $1,824.21. An agreed turnover order pursuant to 11 U.S.C. Sec. 542(b) was subsequently entered in the bankruptcy court authorizing Exxon to setoff mutual pre-petition claims and debts in the amount of $1,824.31 under 11 U.S.C. Sec. 553. The remaining $433,147.89 of the prepayment was ordered remitted to Braniff.

Prior to the filing of Braniff's bankruptcy petition, Braniff and Exxon also had a contract for the sale of turbo oil, lubricating oil, gasoline, and other miscellaneous products that were sold on open account. During the ninety-day period prior to bankruptcy, Braniff had made payments totalling $145,745.30 to cover purchases it made pursuant to this account. 1

Braniff commenced this action by filing suit in the district court seeking to recover as voidable preferences the payments it made to Exxon on the open account during the ninety days prior to its filing for bankruptcy protection. Braniff stipulated that $80,752.80 of the $145,745.30 in open account payments fall within the exception in 11 U.S.C. Sec. 547(c)(2) 2 and are not recoverable as voidable preferences. The dispute regarding these payments revolves around the remaining $64,992.50.

As a result of a stipulation by the parties as to the facts, the only issue to be decided by the district court was whether Braniff's open account payments to Exxon allowed Exxon to receive more than it would have if the payments had not been made and Braniff were liquidated under Chapter 7 of the Bankruptcy Code. The resolution of that question depended on whether Exxon was secured by a right of setoff of its claim against Braniff in the amount of $64,992.50 against the debt that it owed to Braniff in the amount of $433,147.89.

The district court ruled in Braniff's favor. The court found that Exxon did not have a right of setoff under 11 U.S.C. Sec. 553 because the debt owed by Exxon to Braniff was created by a judgment of the bankruptcy court, which occurred after the bankruptcy petition was filed. Thus, because the debt arose post-petition, the court held that the debts were not mutual, pre-petition debts, and the requirements of section 553 prior to a setoff being allowed were not met.

Exxon now appeals, contending that the debts were mutual and pre-petition and therefore it was entitled to setoff the amount owed by Braniff against the amount owed to Braniff. This right of setoff, Exxon claims, has the status of a secured claim and thus the payments made by Braniff to it on the open account were not preferential because, being secured, it did not receive more than it would have in a Chapter 7 liquidation.

II.

Section 547(b) of the bankruptcy code allows a trustee to recover as a preferential payment certain transfers made by a debtor to a creditor within the ninety-day period prior to bankruptcy. This section provides the elements of a preference:

Except as provided in subsection (c) of this section, the trustee may 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.

11 U.S.C. Sec. 547(b). The first four elements are not in dispute; Exxon has stipulated to the applicability of each one. The controversy revolves around the fifth element. This is the requirement that before a trustee in bankruptcy can avoid a preferential payment, the trustee must establish 3 that the payment enabled the creditor to receive more than the creditor would have received upon liquidation under Chapter 7 of the bankruptcy code. It must be determined, then, whether Exxon, in receiving the pre-petition open account payments from Braniff, received more than it would have if the payments had not been made and Braniff were liquidated.

To compare what the creditor would have received in a Chapter 7 liquidation with what it received pre-petition, it is necessary to consider how the debt would have been treated in a Chapter 7 liquidation. In re Mason and Dixon Lines, Inc., 65 B.R. 973, 976 (Bankr.M.D.N.C.1986). That is, if the debtor had not made the payment to the creditor, and the debtor were liquidated, it must be determined what amount the creditor would receive.

Exxon argues that it was secured by a right of setoff, so that if there were a Chapter 7 liquidation it would have been able to setoff its claim to the open account payments made by Braniff against its debt to Braniff growing out of Braniff's jet fuel prepayments. Exxon contends that this amount that it would be entitled to in a liquidation would be the same amount that it received as pre-petition payments from Braniff because of this setoff right, and therefore the payments did not enable it to receive more than it would have in a liquidation.

The issue therefore becomes whether Exxon had a right of setoff, because if such a right exists Exxon would be secured and would therefore have a permissible preference to the degree of the allowable setoff. See In re Brooks Farms, 70 B.R. 368 (Bankr.E.D.Wis.1987); In re Santoro Excavating, Inc., 32 B.R. 947, 950 (Bankr.S.D.N.Y.1983). This conclusion is based on section 506(a), which provides that a claim subject to setoff under section 553 is secured to the extent of the amount subject to setoff. 4 See Mason and Dixon Lines, 65 B.R. at 977; Santoro, 32 B.R. at 950. Any "[p]ayments to a fully secured creditor are not preferential because the creditor does not receive more than he would in a Chapter 7 liquidation." Mason and Dixon Lines, 65 B.R. at 977 (citing cases). Thus, since section 553 bestows secured status upon a creditor for the amount of the setoff, and payments to a secured creditor are not preferential, section 547 cannot be used to avoid the amount of the setoff. See Brooks, 70 B.R. at 372-73 ("When Sec. 553 is determined to be applicable, Sec. 547 cannot thereafter be utilized to undo its effect. The enactment of Sec. 553 was an expression of the Congressional intent sanctioning the exercise of setoff as a permissible preference under certain circumstances.") (citing In re Fox, 62 B.R. 432 (Bankr.D.R.I.1986)); In re Nepsco, 55 B.R. 574, 578 (Bankr.D.Me.1985) (when a creditor has an offsetting pre-petition debt that exceeds the amount of the payments it has received from the debtor, the creditor has not been preferred); In re Balducci Oil Co., 33 B.R. 847, 852 (Bankr.D.Colo.1983) ("Section 553(b) ... is, in essence, a miniature preference provision....").

Exxon argues that it is entitled to setoff because it had a pre-petition debt to Braniff in the amount of $434,972.20 and a pre-petition claim of $1,824.21, which were setoff, and that if Braniff had not paid the $64,992.50, Exxon would merely have had a larger claim to setoff. Thus, if the open account payments had not been made, Exxon asserts that it would have merely remitted a lesser amount back to the bankrupt estate. For the reasons set forth below, we agree with Exxon that it had a right of setoff.

Setoffs in bankruptcy are governed by section 553, which provides in pertinent part:

(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case...

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