Southmark Corp., Matter of
| Decision Date | 02 July 1996 |
| Docket Number | No. 95-10872,95-10872 |
| Citation | 88 F.3d 311 |
| Parties | , 29 Bankr.Ct.Dec. 451, 10 Tex.Bankr.Ct.Rep. 254 In the Matter of SOUTHMARK CORPORATION, Debtor. SOUTHMARK CORPORATION, Appellant, v. SCHULTE ROTH & ZABEL, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Lawrence Chek, Jenkens and Gilchrist, Dallas, TX, for Appellant.
Judith R. Elkin, Robin E Phelan, Haynes & Boone, Dallas, TX, for Appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before POLITZ, Chief Judge, and WIENER and BARKSDALE, Circuit Judges.
In a settlement agreement entered into prior to filing for bankruptcy, Southmark agreed to reimburse a group of dissatisfied, minority-interest shareholders for expenses incurred in connection with their proxy contest and related lawsuits. Southmark now appeals the bankruptcy court's ruling that this transfer was not "for or on account of an antecedent debt owed by the debtor before such transfer was made" and thus not a preferential transfer under 11 U.S.C. § 547. Southmark also appeals the bankruptcy court's denial of its leave to file a second amended complaint. Finding reversible error in the bankruptcy court's determination that attorneys' fees and costs were not antecedent debts, we reverse and remand.
This bankruptcy case has its roots in a proxy contest waged by a group of dissatisfied, minority-interest shareholders of Southmark known as the Parks Group. The Parks Group comprised Defendants-Appellees R & P Ventures (R & P) and Garson L. Rice, Sr., as well as former defendants Herbert B. Parks and Byron Investments, Inc. (Byron). 1 Defendant-Appellee Schulte Roth & Zabel In March 1989, the Parks Group disclosed to the Securities and Exchange Commission (SEC) an intention to propose nominees for election to Southmark's board of directors. In April, the group publicly announced its intention to wage a proxy contest for control of Southmark. Soon thereafter the Parks Group disseminated several statements in opposition to the then-current board of directors, expressing dissatisfaction with a number of matters, such as corporate governance and executive compensation. In these solicitation materials, the Parks Group also indicated that, to the extent legally permissible, it intended to seek reimbursement of the costs and expenses incurred in connection with the proxy contest.
(SR & Z) is a law firm, which was retained to represent the Parks Group. 2
Between February and May 1989, the Parks Group initiated three actions in state and federal courts in connection with the proxy contest, and Southmark initiated two actions in state and federal courts (collectively, the Lawsuits). Through its claims and counterclaims in the Lawsuits, the Parks Group sought (1) equitable and injunctive relief which included the right to examine Southmark's record of shareholders, and (2) judgments (a) blocking the implementation of, and declaring null and void, a Southmark anti-takeover "poison pill" provision, (b) prohibiting the Southmark directors from soliciting proxies unless specified disclosures were made, (c) directing the Southmark directors to cure deficiencies in their proxy statement, and (d) forcing Southmark and its directors to refrain from postponing a scheduled shareholders' meeting. 3 In two of its actions as plaintiff and in one of its counterclaims as defendant, the Parks Group requested that it be awarded costs and disbursements, including reasonable attorneys' fees, incurred in these Lawsuits. 4
On May 24, 1989, a comprehensive settlement agreement (Agreement) was reached with respect to the proxy contest and all of its sub-plots. In addition to, among other things, ending the proxy contest and the Lawsuits and giving the Parks Group a voice on the Southmark board of directors, the Agreement also required Southmark to reimburse the Parks Group for all expenses, including the attorneys' fees, incurred in connection with the proxy contest and the Lawsuits. The parties estimated these expenses to be $3.3 million.
At 1:00 p.m. on that same day--approximately four hours before the Agreement was formally executed--Southmark transferred the $3.3 million to SR & Z by wire. In this instance, SR & Z was acting essentially as an escrow agent. It was under instructions to return these funds to Southmark in the event that the Agreement did not get executed. But the Agreement was formally executed by about 5:00 p.m. that day, so the following morning SR & Z transferred all of these funds to R & P by wire. R & P in turn transferred almost all of the money to Byron, who, later that same day, issued a check payable to SR & Z for $1 million. 5
On July 14, 1989--less than 90 days after the $3.3 million transfer, and thus within the preferential transfer window--Southmark filed for bankruptcy under Chapter 11. Southmark's plan of reorganization became effective on August 10, 1990. It specifies, inter alia, that reorganized Southmark is the representative of the Chapter 11 bankruptcy On June 19, 1991, Southmark filed the original complaint in the action underlying this appeal. The members of the Parks Group were made defendants, and Southmark sought, among other things, recovery of the $3.3 million transfer as a preference under 11 U.S.C. § 547. A first amended complaint was filed on July 12, 1991.
estate for purposes of pursuing causes of action, such as the instant one, under the bankruptcy code.
Approximately one month later, on August 19, 1991, Rice and R & P filed their answers, denying that the transfers were preferences and asserting affirmative defenses under § 547(c). To pursue settlement, however, SR & Z obtained from Southmark several extensions of time within which to file its answer. As a result, eight additional months passed before SR & Z filed its answer on April 21, 1992.
On June 16, 1992, Southmark filed a motion for leave to file a second amended complaint for the purpose of making five amendments, three of which are now moot. The two amendments that are not moot sought (1) to identify the Southmark directors, sued for money damages by the Parks Group as creditors of Southmark, for whose benefit the preferential transfers were made; and (2) to add an alternative basis for recovery of the $3.3 million, i.e., that it was a fraudulent transfer under 11 U.S.C. § 548. Following oral argument on this motion, the bankruptcy court denied Southmark leave to amend its complaint.
Later, in April 1993, the bankruptcy court ruled on both Southmark's and the Parks Group's motions for summary judgment with respect to the preferential transfer issue. In its order, the bankruptcy court granted in part Southmark's motion for summary judgment with respect to many of the required elements under § 547. Ultimately, however, the bankruptcy court ruled in favor of the Parks Group, concluding that the $3.3 million transfer of the settlement funds was not "made for or on account of an antecedent debt owed by the debtor before such transfer was made" as required under § 547(b)(2), and thus was not a preferential transfer.
The district court affirmed both the bankruptcy court's denial of Southmark's motion for leave to amend its complaint and that court's ruling that the $3.3 million was not recoverable as a preference. Southmark now appeals both of these issues to us.
We review a bankruptcy court's denial of a motion for leave to amend a complaint under an abuse of discretion standard. 6 We review a bankruptcy court's grant of summary judgment de novo. 7 All fact questions are viewed in the light most favorable to the non-movant. Summary judgment is proper when no issue of material fact exists and the moving party is entitled to judgment as a matter of law. 8
Federal Rule of Civil Procedure 15(a) provides that leave to amend pleadings "shall be freely given when justice so requires." Although Rule 15 "evinces a bias in favor of granting leave to amend," 9 it is not automatic. 10 A decision to grant leave is within the discretion of the trial court. 11 Its discretion, however, is not broad enough to permit denial if the court lacks a substantial reason to do so. 12 In deciding whether to grant such leave, the court may consider The reasons stated by the bankruptcy court for denying Southmark's leave to amend its complaint were unreasonable delay and prejudice. Specifically, the bankruptcy court concluded that the transactions on which the proposed amendments were based were known to Southmark both at the time its plan was confirmed and at the time its original and first amended complaints were filed. The bankruptcy court also noted that before filing its original complaint, Southmark had the benefit of an Examiner's Report which analyzed causes of actions that Southmark may possibly have, including this one. Further, the bankruptcy court concluded that the fact that Southmark's bankruptcy is large and complicated does not justify delay.
such factors as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of amendment. 13
Finally, the bankruptcy court determined that prejudice would result to R & P and Rice 14 from the addition of a fraudulent transfer claim under 11 U.S.C. § 548, as these two defendants had stipulated to Southmark's insolvency with respect to the § 547 preference claim. Although the debtor's insolvency at the time of transfer is an element of both § 547 and § 548, § 547(g) contains a presumption of insolvency whereas § 548 does not. The bankruptcy court did not find that prejudice would result with respect to any of the other amendments sought to be made by Southmark.
The district court...
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