In re Farrell & Howard Auctioneers, Inc., Bankruptcy No. 92-40142JFQ. Adv. No. 94-4054.
| Decision Date | 13 October 1994 |
| Docket Number | Bankruptcy No. 92-40142JFQ. Adv. No. 94-4054. |
| Parties | In re FARRELL & HOWARD AUCTIONEERS, INC., Debtor. Richard P. SALEM, Trustee, Plaintiff, v. LAWRENCE LYNCH CORP., Defendant. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
Richard P. Salem, Trustee, Leicester, MA.
Dennis F. Gorman, Fletcher, Tilton & Whipple, Worcester, MA, for Lawrence Lynch Corp.
This is a preference case brought by the chapter 7 trustee of Farrell & Howard Auctioneers, Inc. (the "Debtor"), a licensed auctioneer. Among the defenses of Lawrence Lynch Corp. (the "Defendant") is the contention that the payment in question came not from funds of the Debtor but rather from either the Defendant's funds or funds of others whose property the Debtor had sold. I reject that contention. This decision will therefore do much to resolve the ownership issues which dominate other pending preference actions and control distribution of the entire bankruptcy estate.
Richard P. Salem (the "Trustee") seeks to avoid as preferential a payment of $10,971.00 made by the Debtor to the Defendant on October 28, 1991. The Defendant moves for summary judgment. For the reasons set forth below, the motion is denied.
In reciting the facts, I draw in part from the Trustee's report which sets forth the Debtor's business and banking operations. The facts disclosed in the report are not disputed. The report was filed at the request of the court in an attempt to make headway in tracing net sales proceeds. As shall be seen, such tracing will not be necessary.
The Debtor was in the business of auctioning industrial equipment and other personal property. On August 20, 1991, the Debtor and the Defendant signed an agreement for the auction of certain items of the Defendant's equipment. The agreement was made on the Debtor's printed form. It states the Defendant "employs" the Debtor at an 8% commission to sell the equipment at an auction scheduled for September 12, 1991. The Defendant agreed to "sell the . . . equipment to the highest bidder . . . and to deliver said equipment to the purchaser by Bill of Sale free of all encumbrances" and "to provide insurance for fire, theft, collision, personal liability, etc.".
Significantly, the agreement contains no provision requiring the Debtor to segregate the equipment's sales proceeds from funds of the Debtor or others. Nor does it contain any statement that the Debtor was to hold the proceeds in trust. The only provision concerning the sales proceeds reads as follows: "Net proceeds less commission to be paid to seller by Debtor 14 banking days from date of sale."
On September 12th, the Debtor sold the equipment at public auction for $11,925. The price was paid in checks payable to the Debtor. The Debtor maintained two checking accounts. It used one for payroll only. The other was used for general operations, into which the Debtor deposited all receipts, including auction proceeds. The Debtor paid from this account all its expenses and sums due property owners for net auction proceeds, after deduction of its commission. The Debtor deposited into its general checking account the $11,925 received from the sale of the Defendant's equipment. On October 28, 1991, it drew a $10,971 check on the account payable to the Defendant, the payment now in question. Under the terms of the parties' agreement, the payment had become due the end of September.
On January 17, 1992, the Debtor filed a chapter 11 petition with this court. The case was converted to chapter 7 on February 4, 1992. Thereafter, the Trustee was appointed interim trustee. On March 16, 1992 he became permanent trustee as the result of creditors declining to hold an election of a trustee.
The Trustee commenced this adversary proceeding on January 18, 1994, two years and a day following the initial filing of the chapter 11 case.
The Defendant contends that this adversary proceeding was commenced after the statute of limitations had expired. Section 546(a) of the Code, as it is about to be amended, would support the Defendant. The amendment would bar an avoidance action commenced after the later of "(A) 2 years after the entry of the order for relief; or (B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title. . . ." As of this writing, the amendment has been passed by both houses, but has not yet been signed by the president. See H.R. 5116, 103d Cong., 2d Sess. (1994). The amendment does not apply, however, to an adversary proceeding such as this commenced before the date of its enactment. Id., § 702.
Section 546(a) of the Code now provides in pertinent part:
The "appointment of a trustee under section 702" took place in this case on March 16, 1992, when the Trustee's status changed from "interim trustee" to "trustee." The present action having been commenced on January 18, 1994, it would seem to be clear from section 546(a) that suit was brought well within its two year limitation period. Many courts have so held.1
Other courts disagree. The question typically arises in a chapter 11 case where no trustee is appointed. Many cases commenced under chapter 11 never have a trustee appointed, whether under chapter 11 (§ 1104), under chapter 7 (§ 702) or under any of the other statutes referred to in section 546(a). If a chapter 11 case continues with the debtor in possession, this would mean, under a literal reading of section 546(a), there is no limitation period for avoidance actions in these cases until the case is closed. Not willing to tolerate that void, and finding no rationale for a distinction between debtors in possession and trustees, some courts find a bar date. They read "appointment of a trustee" to refer to the debtor's filing of its chapter 11 petition, so that the bar date falls two years thereafter.2 They do so because they regard a debtor in possession as equivalent to a trustee in chapter 11 on the ground a debtor in possession has essentially the same rights, powers, functions and duties of a trustee appointed under section 1104.3 Observing that all courts read "appointment of a trustee" to include an elected trustee under section 702 in a chapter 7 case, they reject as too literal the decisions that stop the ticking of the clock only at case closing.
Courts making this interpretation of section 546(a) do violence to the statute's language. The "appointment of a trustee" surely means something other than the voluntary filing of a chapter 11 petition. If this is not plain, the additional words "under section . . . 1104" remove any possible doubt. Section 1104 is the section which authorizes a court to appoint a chapter 11 trustee. Moreover, the other interpretation leaves unanswered what happens in a case such as the present one where a trustee has been appointed following an initial chapter 11 filing. Having two limitation periods in these cases is not very tidy.
Reading the statute literally, as I do, means there is no bar date for commencement avoidance actions, other than the date the case is closed, when the debtor serves as debtor in possession. That may not be desirable. Although the court should not delay closing a confirmed case solely because payments remain to be completed under the plan,4 cases can stay open as long as something remains on the court's docket. On the other hand, deferring the bar date to the date of case closing may make sense in many instances. A debtor in possession will often want to delay bringing avoidance actions until after confirmation. In that way the debtor devotes its energies to negotiating and confirming the plan, and avoids alienating creditors during the process. The counter-arguments to this are: (i) under the other interpretation the debtor has two full years to confirm a plan without involvement in preference actions, and (ii) the debtor must disclose its intention to bring preference actions after confirmation. But the wisdom of the statute is beside the point. Congress made its decision in words too plain for misunderstanding. Its mandate must be followed.
The Defendant's other argument raises an issue which transcends this case and applies to other pending preference actions. The Defendant contends the funds used for its payment were not property of the Debtor, but were rather sales proceeds belonging either solely to the Defendant or jointly to the Defendant and others whose property the Debtor had sold. In order for a transfer to be preferential, the transfer must of course be "of an interest of the debtor in property."5 And, with respect to the rights of other sellers remaining unpaid, it is true that the bankruptcy estate does not include any property in which the Debtor did not hold an equitable interest.6 The Debtor nevertheless had an equitable interest in the funds constituting the payment here. Let me explain.
The parties' agreement was a consignment to the Debtor rather than a sale, and the Trustee does not contend otherwise. Under the agreement, the Defendant "employs" the Debtor. The Defendant, not the Debtor, was charged with delivery of a bill of sale to the auction buyer and with the responsibility of insuring the property in the interim. The agreement contained no fixed price. These terms are indicia of a consignment, not a sale.7 The prime feature distinguishing consignment from sale is the absence in a consignment of an obligation to pay for the goods on the part of the party to whom they are delivered.8 The Debtor had no obligation to pay if it did not sell the equipment. Upon sale, its sole obligation was to pay the...
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