899 F.2d 1490 (6th Cir. 1990), 88-5556, In re C-L Cartage Co.

Docket Nº:88-5556, 88-5557.
Citation:899 F.2d 1490
Party Name:In re C-L CARTAGE CO., INC., Debtor. Thomas E. RAY, Trustee, Plaintiff-Appellee/Cross-Appellant, v. CITY BANK AND TRUST COMPANY, Defendant-Appellant/Cross-Appellee, Automotive Parts Exchange, et al., Defendants.
Case Date:April 03, 1990
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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Page 1490

899 F.2d 1490 (6th Cir. 1990)

In re C-L CARTAGE CO., INC., Debtor.

Thomas E. RAY, Trustee, Plaintiff-Appellee/Cross-Appellant,

v.

CITY BANK AND TRUST COMPANY, Defendant-Appellant/Cross-Appellee,

Automotive Parts Exchange, et al., Defendants.

Nos. 88-5556, 88-5557.

United States Court of Appeals, Sixth Circuit

April 3, 1990

Argued Aug. 8, 1989.

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Harold L. North, Jr. (argued), Ray & North, Chattanooga, Tenn., for plaintiff-appellee cross-appellant.

B. Timothy Pirtle (argued), McMinnville, Tenn., for defendant-appellant cross-appellee.

Before JONES and NORRIS, Circuit Judges, and McQUADE, District Judge. [*]

ALAN E. NORRIS, Circuit Judge.

This appeal presents a question of statutory interpretation of first impression for our circuit: whether 11 U.S.C. Sec. 550(a)(1), read together with sections 547(b)(1) and (b)(4)(B), allows a trustee in bankruptcy to recover avoidable payments from non-insiders made during the extended preference period when those payments benefited insider creditors or guarantors. The bankruptcy court held that, while the debtor's payments to City National Bank and Trust were voidable preferences under 11 U.S.C. Sec. 547(b), payments to the bank outside of the ninety-day preference period were not recoverable by the trustee in bankruptcy, 70 B.R. 928. The district court affirmed on all grounds 113 B.R. 416. For the reasons stated in part III, we conclude that section 550(a)(1) permits such a recovery.

I.

In March 1983, Carlos Foster, president of C-L Cartage Company ("Cartage"), the debtor, approached City Bank and Trust Company ("the bank") for financing. The bank refused to lend money to the company but agreed to make a personal loan to Carlos of $30,000, on the condition that his mother, Della Foster, cosign the note and secure it with certificates of deposit. In December 1983, the bank made a second personal loan to Carlos for $20,000, which Della Foster also cosigned. Carlos transferred the funds to Cartage to finance its business operations. No promissory notes were signed or delivered by Cartage to the Fosters.

On March 2, 1984, Cartage filed for reorganization under Chapter 11 of the Bankruptcy Code. That action was later converted to a Chapter 7 liquidation in December 1984, and a trustee was appointed.

Within the year preceding the filing of the bankruptcy petition, Cartage made nine payments of $1,399.31 each on the first loan. Six were made by checks payable directly to the bank, while three were made by checks payable to Della Foster who, in

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turn, endorsed them over to the bank. Two of the nine payments were within the ninety days preceding bankruptcy. On the second loan, Cartage paid $957.45 directly to the bank, within ninety days of the filing of the petition.

The parties have stipulated that Cartage was insolvent when these loan payments were made, and the bank concedes that the Fosters were insiders within the meaning of 11 U.S.C. Sec. 547(b)(4)(B). In characterizing the loan transactions for the purpose of applying section 547(b), both the bankruptcy and district courts concluded that either the bank loaned the money to the Fosters who, in turn, loaned the money to Cartage, or the bank loaned the money directly to Cartage with the Fosters as an artificial conduit used to guarantee the loan. Under either view, the district court concluded that the Fosters were "creditors" of Cartage within the meaning of 11 U.S.C. Sec. 101(9)(A) because they had an existing or contingent claim against the company. The district court rejected the Fosters' argument that the transfer of the loan proceeds to Cartage was a capital contribution.

Because the Fosters were "creditors," both courts concluded that the payments to the bank were "to or for the benefit of creditors" within section 547(b)(1) and were therefore voidable preferences. In interpreting section 550(a)(1), however, the district court concluded that "equitable considerations" prevented the recovery of payments made to the non-insider bank during the extended preference period though such payments benefited the Fosters as insider creditors.

The bank appeals the district court's determination that the Fosters were creditors within the meaning of the code, and argues that Cartage's payments do not otherwise meet section 547 requirements for voidable preferences. The trustee cross-appeals arguing that section 550(a)(1) permits recovery of payments from the bank during the...

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