Erin Food Services, Inc., In re
| Decision Date | 08 April 1992 |
| Docket Number | 91-2176,Nos. 91-2175,s. 91-2175 |
| Citation | 980 F.2d 792 |
| Parties | , 27 Collier Bankr.Cas.2d 1689, 23 Bankr.Ct.Dec. 1108, Bankr. L. Rep. P 75,013 In re ERIN FOOD SERVICES, INC., Debtor, The TRAVELERS INSURANCE COMPANY, et al., Appellants, v. CAMBRIDGE MERIDIAN GROUP, INC., et al., Appellees. In re ERIN FOOD SERVICES, INC., Debtor. The TRAVELERS INSURANCE COMPANY, et al., Appellants, v. CAMBRIDGE MERIDIAN GROUP, INC., et al., Appellees. . Heard |
| Court | U.S. Court of Appeals — First Circuit |
Evan D. Flaschen with whom Derek M. Johnson, Charles F. Vandenburgh, Ronald J. Silverman and Hebb & Gitlin, Hartford, Conn., were on brief, for appellants.
James D. McGinley with whom Neil W. Bason and Edwards & Angell, Boston, Mass., were on brief, for appellees.
Before BREYER, Chief Circuit Judge, CYR, Circuit Judge, and STAHL *, District Judge.
Appellants, creditors holding partially secured claims ("appellants" or "secured lenders") against property of the estate of the chapter 11 debtor, 1 Erin Food Services, Inc. ("debtor" or "Erin"), challenge a bankruptcy court order setting aside, as voidable preferences, three installment interest payments Erin made to appellants, within one year of the chapter 11 petition, on an antecedent debt guaranteed by an Erin "insider." Appellants argue that (1) Bankruptcy Code § 550(a) does not permit direct recovery from the non-insider transferees unless the transfers were made within the conventional ninety-day preference period; (2) even assuming the transfers were directly recoverable from the non-insiders under section 550, the trustee did not establish that the insider-guarantor derived a cognizable "benefit" from the transfers, a prerequisite to their avoidance under Bankruptcy Code §§ 547(b)(1), (b)(4), and (b)(5); and (3) as transfers in the "ordinary course of business," the installment interests payments are not subject to avoidance under Bankruptcy Code § 547(c)(2).
In 1971, David W. Murray (the "insider") acquired exclusive franchises from Burger King Corporation to own and operate restaurants in parts of New Hampshire and Massachusetts. Murray established Erin to operate the restaurants. By 1987, Erin was operating more than twenty Burger King restaurants on real estate either leased or subleased from Murray, Erin's sole shareholder. Murray retained title to twenty-two parcels of real estate.
In order to fund an expansion, Erin negotiated a long-term refinancing arrangement with the secured lenders in July 1987. As primary obligor, Erin borrowed $45 million, most of which was disbursed by the secured lenders directly to Erin's existing During the eleven-month period between the loan and the July 5, 1988, installment interest payment, Erin withdrew $3,249,990 from the RCA, including $2,808,290 with which to make the three installment interest payments to the secured lenders as they became due on April 1, July 1, and July 5, 1988. Erin was rendered insolvent. In re Erin Food Servs., Inc., 117 B.R. 21, 29 (Bankr.D.Mass.1990). 3 Within a year of the first installment interest payment to the secured lenders, an involuntary chapter 11 petition was filed against Erin and an operating trustee was appointed. At the date of the petition, the real estate securing Murray's personal guaranty had an approximate value of $19.35 million and Erin's total indebtedness to the secured lenders approximated $61.7 million.
creditors and mortgage lenders. As part of the same refinancing, the secured lenders agreed to provide Erin with a $25 million dollar secured revolving credit account ("RCA"), from which Erin could withdraw funds for future franchise expansion, site acquisition, and working capital. Both loans, totalling $70 million, were secured by an Adjusted Collateral Pool ("ACP"), which included Erin's "cash-flow" assets, such as its equipment and franchise agreements. In addition, the secured lenders obtained Murray's personal non-recourse guaranty on both Erin loan obligations. The guaranty was secured by liens on the twenty-two parcels of real estate owned by Murray. 2
The trustee initiated an adversary proceeding against the secured lenders to recover the three installment interest payments as voidable preferences. See Bankruptcy Code § 547(b), 11 U.S.C. § 547(b). The bankruptcy court concluded that $2,089,059 was recoverable directly from the secured lenders as voidable preferential transfers. 4 The secured lenders appeal from the district court judgment affirming the bankruptcy court order. 140 B.R. 14.
The soundness of the avoidance theory adopted by the bankruptcy court ultimately turns on the proper interpretation of Bankruptcy Code §§ 547(b) and 550(a), governing the avoidability and recovery of preferential transfers. Section 547(b) permits the trustee in bankruptcy to avoid certain prepetition transfers of property of the debtor on account of an antecedent debt as a consequence of which a creditor receives more than it would have received in a chapter 7 liquidation proceeding. 5 Section 547(b)(4), however, distinguishes between (1) preferential transfers to or for the benefit of an "insider," typically a "director," "officer," or other "person in control of the debtor," Bankruptcy Code § 101(30), 11 U.S.C. § 101(30), which are avoidable if made within one year of the date of the petition; and (2) transfers to or for the benefit of non-insiders, which are not avoidable unless made within ninety days. Bankruptcy Code § 547(b)(4), 11 U.S.C. § 547(b)(4). The one-year preference period is designed to inhibit insiders--entities normally privy to inside financial information long before it becomes available to arm's-length creditors--from influencing the insolvent debtor to deplete its remaining assets for the insider's benefit, to the detriment of non-insider creditors. The secured lenders concede that Murray is an Erin "insider."
The bankruptcy court correctly found that the secured lenders held a secured claim of $53,842,400, a $2,089,059 million unsecured claim, and an equitably subordinated claim in the amount of $5,827,541. 6 On the other hand, Murray, personal guarantor of the Erin debt to the secured lenders, held a contingent unsecured claim against Erin equal to the value of the collateral Murray pledged to secure his non-recourse personal guaranty. The greatly broadened definition of "claim" under Bankruptcy Code § 101(4), as any "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, ... legal, equitable, secured, or unsecured," 11 U.S.C. § 101(4), unquestionably encompasses contingent claims for contribution, reimbursement or indemnification. See In re C-L Cartage Co., 899 F.2d 1490, 1493 (6th Cir.1990); see also In re Hemingway Transport, Inc., 954 F.2d 1, 8 (1st Cir.1992). A "creditor" is an "entity that has a claim against the debtor that arose at the time of or before the order for relief...." Bankruptcy Code § 101(9), 11 U.S.C. § 101(9). Thus, both Murray, the insider, and the non-insider secured lenders, independently qualify as Erin "creditors" on the same obligation.
Nevertheless, since Murray alone qualifies as an "insider," only a transfer which conferred cognizable "benefit" on Murray, see Bankruptcy Code § 547(b)(1) () (emphasis added), would trigger the one-year preference period under Bankruptcy Code § 547(b)(4) (). 7 The insider guaranty by Murray ostensibly provided the last link needed to convert these installment interest payments into trilateral preferences. There can be no question that an insider-guarantor derives measurable economic benefit from a payment on the guaranteed debt, to the extent the insider's contingent liability on the personal guaranty is reduced. The trustee accordingly contends that the installment interest payments Erin made to the secured lenders conferred a simultaneous "benefit" upon Murray as well as the secured lenders. Finally, the trustee contends that, as "creditor" Murray received benefit from the installment interest payments made by Erin, the one-year preference period applies.
Once the transfer is determined avoidable under section 547(b), the trustee looks to the greatly broadened recovery powers conferred by section 550(a). 8 Thus, a trustee may elect to recover the property (or value) involved in an avoided transfer either from the "entity for whose benefit such transfer was made" (i.e., Murray) or from the "initial transferee of such transfer" (i.e., the secured lenders). Since section 550(a) makes no distinction similar to that found in section 547(b) between the treatment of insiders and non-insiders, the bankruptcy court ordered the secured lenders to remit the installment interest payments to the trustee even though the secured lenders were not "insiders" to whom a prepetition transfer would trigger the one-year preference period under section 547(b)(4).
The bankruptcy court relied on the landmark decision in Levit v. Ingersoll Rand Fin. Corp. (In re V.N. Deprizio Constr. Co.), 874 F.2d 1186 (7th Cir.1989) [hereinafter "Deprizio "], which is premised on the presumed "unfair" advantage that non-insider creditors, holding personal guaranties from insider creditors, may have over arm's-length creditors. See id. at 1195 (); see also In re Kroh Bros. Dev. Co., 115 B.R. 1011, 1015 (Bankr.W.D.Mo.1990).
The proper interpretation and accommodation of sections 547(b) and 550(a) presents an issue of first...
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