Kroh Bros. Development Co., Matter of

• Citation: 930 F.2d 648
• Decision Date: 18 April 1991
• Docket Number: 90-1822,Nos. 90-1799,s. 90-1799
• Parties: 24 Collier Bankr.Cas.2d 1757, 21 Bankr.Ct.Dec. 982, Bankr. L. Rep. P 73,937, 16 UCC Rep.Serv.2d 408 In the Matter of KROH BROTHERS DEVELOPMENT COMPANY; Kroh Brothers Equity Company; Kroh Brothers Realty Company; Kroh Investments I, Inc.; Kroh Telecommunities, Inc.; Ward Parkway Corp., a Missouri Corporation, Debtors. KROH BROTHERS DEVELOPMENT COMPANY; Kroh Brothers Equity Company; Kroh Brothers Realty Company; Kroh Investments I, Inc.; Kroh Telecommunities, Inc.; Ward Parkway Corp.; and the Kroh Operating Limited Partnership, Appellants/Cross-Appellees, v. CONTINENTAL CONSTRUCTION ENGINEERS, INC., Appellee/Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 648

930 F.2d 648

24 Collier Bankr.Cas.2d 1757, 21 Bankr.Ct.Dec. 982,

Bankr. L. Rep. P 73,937, 16 UCC Rep.Serv.2d 408

In the Matter of KROH BROTHERS DEVELOPMENT COMPANY; Kroh

Brothers Equity Company; Kroh Brothers Realty Company;

Kroh Investments I, Inc.; Kroh Telecommunities, Inc.; Ward

Parkway Corp., a Missouri Corporation, Debtors.

KROH BROTHERS DEVELOPMENT COMPANY; Kroh Brothers Equity

Company; Kroh Brothers Realty Company; Kroh Investments I, Inc.; Kroh Telecommunities, Inc.; Ward Parkway Corp.; and the Kroh Operating Limited Partnership, Appellants/Cross-Appellees, v. CONTINENTAL CONSTRUCTION ENGINEERS, INC., Appellee/Cross-Appellant.

Nos. 90-1799, 90-1822.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 15, 1990.

Decided April 18, 1991.

Johnathan A. Margolies, Kansas City, Mo., for appellants/cross-appellees.

Kenneth C. Jones, Kansas City, Mo., for appellee/cross-appellant.

Before BOWMAN and BEAM, Circuit Judges and HARRIS, ^* District Judge.

BEAM, Circuit Judge.

The debtor, Kroh Brothers Development Corporation, brought this adversary proceeding in bankruptcy court against Continental Construction Engineers, Inc. to recover preferential transfers of $57,400.13. In response, Continental asserted that it gave new value of $29,490.14 to or for the benefit of Kroh Brothers. See 11 U.S.C. Sec. 547(c)(4) (1988). ¹ The bankruptcy court allowed Continental to assert the new value defense and awarded Kroh Brothers $27,909.94 plus interest. See Kroh Bros. Dev. Co. v. Aoki Landscape Maintenance (In re Kroh Bros. Dev. Co.), 104 B.R. 182 (Bankr.W.D.Mo.1989), aff'd, 114 B.R. 658 (W.D.Mo.1990).

On appeal, Kroh Brothers contends: (1) that the lower courts erred in holding that the date a check is delivered is the date of transfer for purposes of section 547(c)(4); (2) that Continental is not entitled to assert a new value defense because it was paid for the new value by sources other than Kroh Brothers; and (3) that the lower courts erred in the finding of the date on which Kroh Brothers' interest in a particular development project was terminated. On cross-appeal, Continental argues that the lower courts erroneously computed the amount of new value it gave to Kroh Brothers. We affirm in part, reverse in part, and remand.

I. BACKGROUND

Kroh Brothers, formerly one of Kansas City's largest real estate development companies, filed a chapter 11 petition on February 13, 1987. Continental is a civil engineering firm which had done contracting work for Kroh Brothers since 1981. Prior to the bankruptcy filing, Continental was working on several projects for Kroh Brothers, including one in which Kroh Brothers had an ownership interest. This appeal concerns Kroh Brothers' concededly preferential payments to Continental for these projects.

The first payment was for twelve invoices in the amount of $46,887.34 and was made by check dated December 12, 1986. The check was paid by the drawee bank on December 22, 1986. The second check was for three invoices in the amount of $10,512.79 and was dated December 15, 1986. This check was paid on January 6, 1987. The bankruptcy court concluded that, although the payments were preferences, Continental could offset them with construction services provided to Kroh Brothers until the date of filing. Because the bankruptcy court concluded that the date of transfer for purposes of section 547(c)(4) is the date a check is delivered, it calculated the new value from December 13, 1986, just after the first preferential payment, to February 13, 1987, the date of filing. Thus, the bankruptcy court awarded judgment to Kroh Brothers for $27,909.94, the amount of the two preferential transfers less the new value advanced.

The district court affirmed these findings as well as the bankruptcy court's conclusion that Continental was entitled to assert a new value defense even though it had been paid for at least some of the new value. The bankruptcy court found that while none of Continental's invoices for the services constituting new value were paid by Kroh Brothers, "Continental received payment on the ... projects from sources other than Kroh." In re Kroh Bros., 104 B.R. at 194. The district court noted that Kroh Brothers contends that these sources "were the owners of the development projects." In re Kroh Bros., 114 B.R. at 662. In spite of these statements that Continental had been paid for its services, both courts nevertheless indicated that they did not decide "whether new value is considered unpaid if paid for by a party other than the debtor." Id. See also In re Kroh Bros., 104 B.R. at 195 n. 8. As indicated, both parties appeal.

II. DISCUSSION

A. Transfer on delivery

For purposes of calculating new value under section 547(c)(4), the bankruptcy court concluded that the preferential transfers occurred when the checks were delivered, not when they were paid. In re Kroh Bros., 104 B.R. at 189. The court relied on the policy served by section 547(c)(4)--encouraging creditors to deal with troubled businesses--and distinguished it from the policy served by section 547(b)--promoting distributive equality. Id. at 188-89. The district court affirmed on the sound reasoning of the bankruptcy court. In re Kroh Bros., 114 B.R. at 660-61. We agree with this reading of the statute.

While the courts are not unanimous on this issue, by far the majority hold that, for purposes of section 547(c)(4), the transfer occurs when the check is delivered. ² Ferguson, Does Payment by Check Constitute a Transfer upon Delivery or Payment?, 64 Am.Bankr.L.J. 93, 95 & n. 5 (1990) (citing cases). But cf. Foreman Indus. v. Broadway Sand & Gravel (In re Foreman Indus.), 59 B.R. 145, 151 (Bankr.S.D.Ohio 1986) (declining to find transfer on delivery under section 547(c)(2) because to do so would be "at odds with an overriding principle of placing creditors at parity"); Hartwig Poultry v. C.W. Serv. (In re Hartwig Poultry), 57 B.R. 236, 239 (Bankr.N.D.Ohio 1986) (for purposes of section 547(c)(4), transfer on payment because check not an assignment but only an order for drawee bank to pay on proper presentment), rev'd, 87 B.R. 30, 32 (N.D.Ohio 1988); Grogan v. Chesebrough-Ponds (In re Advance Glove Mfg. Co.), 25 B.R. 521, 528-29 (Bankr.E.D.Mich.1982) (applying section 547(c)(2), transfer on delivery would encourage collusive and fraudulent agreements between debtors and creditors and would frustrate equality of distribution). Most of those courts holding that transfer occurs on delivery rely on the policy served by section 547(c)(4). As this court has characterized that policy, section 547(c)(4) " 'was not enacted to ensure equitable treatment of creditors, but rather is intended to encourage creditors to deal with troubled businesses.' " In re Bellanca Aircraft, 850 F.2d at 1280 (quoting Chaitman v. Paisano Automotive Liquids (In re Almarc Mfg.), 62 B.R. 684, 687-88 (Bankr.N.D.Ill.1986)). By contrast, 11 U.S.C. Sec. 547(b) (1988), which provides that the trustee may avoid a preferential transfer, seeks to ensure equality of distribution among creditors. Thus, while the majority of courts hold that transfer occurs on payment for purposes of determining when a preference occurs under section 547(b), see Ferguson, supra, at 94, the different policy served by section 547(c)(4) justifies a different conclusion about when a transfer occurs for purposes of section 547(c)(4). See In re New York City Shoes, 880 F.2d at 681 n. 2 (date of transfer under section 547(b) not necessarily the same as under section 547(c)(4) because of different purposes furthered by the sections); In re Almarc Mfg., 62 B.R. at 687, 689 n. 8 (sections 547(b) and 547(c)(4) "have entirely different purposes" and different rules justified); Gold Coast Seed Co. v. Spokane Seed Co. (In re Gold Coast Seed Co.), 30 B.R. 551, 553 (9th Cir. BAP 1983) ("Congress did not contemplate a unitary concept for the time of 'transfer' under section 547.").

The courts are in general agreement that section 547(c)(4) seeks to encourage creditors to deal with troubled businesses in the hope of rehabilitation. See In re New York City Shoes, 880 F.2d at 680-81; In re Almarc Mfg., 62 B.R. at 688-89; Valley Candle Mfg. Co. v. Stonitsch (In re Isis Foods), 39 B.R. 645, 651 (W.D.Mo.1984). This rationale presumes that creditors who ordinarily provide goods to purchasers on credit treat a payment by check as a cash transaction, and therefore ship a new order of goods upon receipt of a check. See In re Almarc Mfg., 62 B.R. at 688. Shipping on receipt rather than waiting for the check to clear, as creditors might be forced to do were a shipment not considered a subsequent advance under section 547(c)(4), does not disrupt the potential debtor's normal business flow. The effect of such a shipping delay, especially "on businesses requiring perishables, such as restaurants or grocery stores, could be to push the debtors into bankruptcy rather than to keep them out." Id. at 689. Moreover, were the transfer to occur only on payment by the drawee bank, the creditor who shipped goods in the ordinary course of business in reliance on payment by check for a prior shipment would not benefit from section 547(c)(4) even though the effect on the bankruptcy estate--enhancement--would be the same as if the creditor waited for the check to clear. In effect, a rule of transfer on payment would enhance the bankruptcy estate at the creditor's expense, discouraging commerce with a shaky business. See id. at 688. A rule that a transfer occurs on delivery, then, both avoids unnecessary bankruptcies and treats creditors fairly. See In re New York City Shoes, 880 F.2d at 681; In re Almarc Mfg., 62 B.R. at 688-89. Thus, we join those courts holding that, for purposes of section 547(c)(4), payment by check constitutes a transfer upon delivery, not upon payment. ³ The district court correctly calculated the new value beginning after December 13, 1986.

B. Payment for new value

Kroh Brot...