Virginia-Carolina Financial Corp., In re

Citation954 F.2d 193
Decision Date13 January 1992
Docket NumberNo. 689-00964-BKC-WA1 and A,D,No. 91-3035,VIRGINIA-CAROLINA,No. 89-00172,689-00964-BKC-WA1 and A,89-00172,91-3035
Parties26 Collier Bankr.Cas.2d 279, 22 Bankr.Ct.Dec. 783, Bankr. L. Rep. P 74,402 In reFINANCIAL CORPORATION; In re Executive Investments of Virginia, Incorporated, Joint Bkcy. Casedv. Proceedingebtors. W. Alan SMITH, Jr., Plaintiff-Appellant, v. CREATIVE FINANCIAL MANAGEMENT, INCORPORATED, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

John Ernest Falcone, Smith & Falcone, Lynchburg, Va., argued, for plaintiff-appellant.

Robert Aristidis Ziogas, Glenn, Flippin, Feldmann & Darby, Roanoke, Va., argued (Maryellen F. Goodlatte, on brief), for defendant-appellee.

Before POWELL, Associate Justice (Retired), United States Supreme Court, sitting by designation, and PHILLIPS and NIEMEYER, Circuit Judges.

OPINION

NIEMEYER, Circuit Judge:

In this appeal we must decide whether the repayment by the debtors of a $200,000 loan, made under unique circumstances, is a voidable preference under the bankruptcy code, 11 U.S.C. § 547(b) (1988). Creative Financial Management, Inc., to whom $200,000 was paid by the debtors in bankruptcy, contends that the payment to it was not a preference because (1) it was not paid on account of a debt of the debtors but on the account of a third party's debt, and (2) the loan was collateralized so that its repayment does not fall within the definition of a voidable preference. The district court agreed and reversed the bankruptcy judge who had found that the payment to Creative constituted a voidable preference. Because the bankruptcy court's determination that Creative received payment on an antecedent debt of the debtors was not clearly erroneous and because Creative received a payment which it otherwise would not have received from the bankruptcy estate if the proceedings had been a Chapter 7 liquidation, we reverse with instructions that the decision of the bankruptcy court be affirmed.

I

Executive Investments of Virginia, Inc. and Virginia-Carolina Financial Corp. are now debtors in bankruptcy. David Wilks is the sole shareholder, director, and officer of Executive Investments, and it appears that he has similar control over Virginia-Carolina Financial. Although these Virginia corporations (collectively referred to as "the Debtors") are separate legal entities, they were basically run as a single business enterprise. Records were intermingled and the two maintained a common bank account through which nearly all of the funds of both were regularly transferred.

On March 24, 1989 when the Debtors experienced serious financial difficulty and needed cash, Creative Financial Management, Inc. agreed to make them a $200,000, 30-day loan at an annual interest rate of 17%. Creative asked, however, that it receive some form of security for the loan. Following negotiations, Wilks and Creative settled on a security interest in a $360,000 promissory note payable by Southern Holdings Company to Virginia-Carolina Mortgage Fund Limited Partnership (the "Mortgage Fund"). The Mortgage Fund was organized by Wilks as a limited partnership in late 1987 or early 1988, and Wilks and one of the debtors serve as its general partners, although nearly all of the Mortgage Fund's working capital came from 33 limited partners. Because Creative insisted that the $200,000 loan be "tied to" the collateral, which was an asset of the Mortgage Fund rather than the Debtors, Wilks executed a promissory note on behalf of the Mortgage Fund simultaneous with the assignment of the $360,000 Southern Holdings note as collateral.

Although Wilks did not execute a note obligating the Debtors to repay the loan, the money from Creative was made immediately available to the Debtors. At Wilks' request, Creative sent a check for $127,000 directly to a creditor of the Debtors (whom they had already attempted to pay with a "bad check"). The rest of the money, some $73,000, went directly to the Debtors for working capital.

Despite the $200,000 infusion of cash to the Debtors, their financial status continued to deteriorate. They had hoped to repay the loan by selling lots in one of their real estate developments known as Windchase, located in Wilmington, North Carolina, but the projected sales in that project never occurred and the loan was not repaid on time. In an effort to resolve the crisis, the Debtors proposed that Creative invest in the Windchase project. Creative declined the offer, but did agree to buy two lots in the Windchase development for $316,000 from which the $200,000 loan to it would be repaid. Accordingly, on May 19, 1989, to purchase the two lots, Creative wrote a check to the Debtors for $316,000, the purchase price of the lots, and on the same day received from the Debtors a payment of $204,368.74, representing the amount of the March 24 loan plus interest.

Less than 90 days later, on August 10, 1989, the Debtors were involuntarily petitioned into bankruptcy.

The trustee in bankruptcy commenced an action in bankruptcy court against Creative to reclaim the May 19 payment made by the Debtors on the ground that the transfer of money was a voidable preference under § 547(b) of the bankruptcy code. After a trial, the bankruptcy court entered an opinion finding that the loan repayment was a voidable preference and ordered repayment by Creative to the bankruptcy estate. On appeal the district court reversed, holding that the bankruptcy court was clearly erroneous in its determination that the trustee had met his burden of proof under §§ 547(b)(2) and (5). This appeal followed.

II

Federal law gives to the bankruptcy trustee extensive power to avoid certain pre-petition transactions which adversely affect the bankruptcy estate. See 11 U.S.C. §§ 544-551, 553 (1988). Among the more important of these voidable transfers is the "preference," which is, generally, a transfer made within a limited time prior to the filing of a bankruptcy petition that enables a creditor to receive more than the creditor would otherwise receive if, instead, the creditor were limited to his or her share of a distribution resulting from a Chapter 7 liquidation. See 11 U.S.C. § 547(b) (1988). Section 547(b) establishes:

(b) 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 ... 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.

A trustee who seeks to reclaim for the estate a pre-petition transfer which is characterized as a voidable preference bears the burden of demonstrating the presence of all elements of a preference, as established in § 547(b). See 11 U.S.C. § 547(g) (1988).

III

In the bankruptcy court, Creative argued that the trustee failed to establish that the payment to it by the Debtors was on account of the Debtors' antecedent debt as required by § 547(b)(2). It argued that the court, in making a § 547(b)(2) determination, must look exclusively at the promissory note and assignment of collateral executed by the Mortgage Fund. Creative thus contended that any payment on that note could not be on account of a debt of the Debtors because they never signed it. Nevertheless, considering all the evidence presented at trial, the bankruptcy court made a finding of fact that the May 19 payment was in return for a loan made to the Debtors, satisfying § 547(b)(2), and not to the Mortgage Fund as alleged by Creative. Notwithstanding the acknowledged facts that the Mortgage Fund executed a note and assigned collateral to Creative, the bankruptcy court found that none of the parties involved intended that a loan be made to the Mortgage Fund, that the Fund received none of the proceeds, that the Fund was not looked to for repayment, and that the Fund did not in fact repay the loan. Moreover, the bankruptcy court noted that Creative offered no explanation for why the Debtors would repay a loan owed by the Mortgage Fund.

Creative appealed and the district court reversed. Although the district court rested its decision on another point, it expressed disagreement with the bankruptcy court's finding that the Mortgage Fund was not the debtor on the $200,000 note, and concluded that such a finding contradicts the terms of the note in violation of the parol evidence rule.

The trustee now urges us to reaffirm the findings of the bankruptcy court, because the issues resolve mainly from findings of fact and the district court erred in failing to give due regard to the bankruptcy court's findings. See Bankruptcy Rule 8013. We agree with the trustee and reject the district court's narrow limitation of the evidence.

In support of its finding that the loan of $200,000 by Creative did create a debt of the Debtors, the bankruptcy court considered numerous facts established at trial. The proceeds of the loan, for instance, went directly from Creative to the Debtors (or their creditors). The evidence established that the Debtors were in dire need of financial assistance, and David Wilks, who negotiated the loan agreement, said that the money was intended for them. No evidence was produced to indicate that the Mortgage Fund was in need of any funds. J.W. Burton, the president of Creative who agreed to the loan on its behalf, made conflicting statements with regard to his understanding of the loan, but concluded "I was intending to make the loan to Mr. Wilks, who was the owner of these corporations, or the general...

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