Chrysler Credit Corp. v. Hall
| Decision Date | 20 July 2004 |
| Docket Number | No. CIV. 1:03cv1502.,No. CIV. 1:04cv93.,No. CIV. 1:03cv1501.,CIV. 1:03cv1501.,CIV. 1:03cv1502.,CIV. 1:04cv93. |
| Citation | 312 B.R. 797 |
| Parties | CHRYSLER CREDIT CORP., Appellant, v. Richard G. HALL, Trustee, Appellee. Richard G. Hall, Trustee, Appellant, v. Chrysler Credit Corp., Appellee. |
| Court | U.S. District Court — Eastern District of Virginia |
Joel Sanford Aronson, Ridberg, Press & Sherbill, LLP, Bethesda, MD, for Chrysler Credit Corp.
George Richard Pitts, Dickstein, Shapiro, Morin & Oshinsky, LLP, Washington, DC, for Ford Motor Company on behalf of the Trustee.
This case consists of three consolidated appeals of the decisions by the bankruptcy court involving the insolvency of a number of motor vehicle dealerships. It arises out of an adversarial proceeding brought by the bankruptcy Trustee to avoid a series of transfers to Chrysler Credit Corporation as preferences under 11 U.S.C. § 547(b). These appeals present two questions: whether the bankruptcy court erred in holding that (1) the "subsequent new value defense," 11 U.S.C. § 547(c)(4), to a preference action requires the "new value" to remain unpaid; and (2) the Trustee in a preference action bears the burden of tracing the funds used to make preferential payments in a case involving a commingled account that included the creditor's collateral from a floating lien. The Court will reverse the bankruptcy court on the first issue and affirm its decision on the second issue.
On October 22, 1991, a number of motor vehicle dealerships owned and controlled by John W. Koons, Jr. filed petitions under chapter 11 of the Bankruptcy Code. Those dealerships included the following: JKJ Chevrolet, Inc., in Tyson's Corner, Va. ("JKJ Chevrolet"); JKJ Glebe, Inc., in Arlington, Va. ("JKJ Glebe"); Koons Chrysler Plymouth, Inc., in Tyson's Corner, Va. ("Koons"); JKJ Chrysler Plymouth in Alexandria, Va. ("JKJ CP"), and Brandnewco, Inc., in Woodbridge, Va. ("Brandnewco"). These cases were consolidated and subsequently converted to chapter 7. Richard Hall served as the Trustee in the bankruptcy.
On July 18, 1994, Richard Hall commenced the underlying adversary proceeding against Chrysler Credit Corporation ("Chrysler Credit") to recover payments made to Chrysler Credit by three of the consolidated debtors made within ninety days prior to the filing of the debtor's respective petitions: JKJ CP, Koons, and Brandnewco.
The Complaint contained two counts. Count I sought to recover preference payments; Count II seeks to recover fraudulent payments. These claims were assigned to Ford Motor Credit Corporation ("FMCC"), which is prosecuting the claim in the name of the Trustee. Chrysler Credit's appeal, Civil No. 1:03 cv1501, concerns only Count I as it pertains to JKJ CP. The Trustee's appeals, Civil No. 1:03cv1502 and 1:04cv93, concern Count I as it pertains to Koons and Brandnewco.
Chrysler Credit provided "floor plan" inventory financing to JKJ CP, Koons, and Brandnewco. It also provided several smaller loans for working capital and equipment.1 The loan documents for each floor plan were identical. In each case, the debtors executed promissory notes, security agreements (and amendments), and UCC filing statements. The total amount paid to Chrysler Credit during the period in question and sought to be recovered is alleged to be in excess of ten million dollars.
The floor plan loans functioned in the following five steps:
1. As vehicles were shipped to the dealerships, Chrysler Credit paid the manufacturer for them and added the cost of those vehicles to the dealership's line of credit. Those vehicles became additional collateral. 2. Interest would accrue on each vehicle until Chrysler Credit was repaid the principal. 3. Repayment was due five days after the vehicle was sold and the dealership received the funds. Interest on the amount outstanding was due and payable monthly in arrears. 4. So long as the dealership did not reach the maximum amount of its loan and was not in default, it could add vehicles to its inventory as it saw fit. 5. As Chrysler Credit received payment for each vehicle, the loan amount was reduced, making room for additional inventory. Thus, the [value of] the collateral and the loan balance were constantly moving up and down as vehicles were added to inventory and sold.
(Bankr.Op. of August 13, 2002 at 3.) Chrysler Credit conceded that the payments it received from JKJ CP were preferences subject to certain defenses.
In the bankruptcy court, Chrysler Credit sought summary judgment on all of FMCC's claims. FMCC sought summary judgment on its claims only as they related to JKJ CP. At oral argument on the cross-motions, the bankruptcy court denied Chrysler Credit's motion, and granted FMCC's motion finding that payments from JKJ CP to Chrysler Credit in the amount of $2,109,274.26 were preferences and that Chrysler Credit had no valid defenses. (Tr. of March 7, 2003 at 42.) It also denied that the payments by Koons and Brandnewco were preferential.
On August 15, 2002, the bankruptcy court issued an order granting summary judgment to FMCC on the avoidance of the $2,109,274.26 in preferences to Chrysler Credit. The Court made the following ruling:
4. Section 547(c)(4) provides the recipient of a preferential transfer with a defense to the extent that, subsequent to the challenged transfer, the recipient "gave new value to or for the benefit of the debtor ... not secured by an otherwise unavoidable security interest; and ... on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor." 11 U.S.C. § 547(c)(4). However, the § 547(c)(4) defense is not available to a creditor that has received payment for the advances that it contends represent subsequent new value. In re Kroh Brothers Development Co., 930 F.2d 648, 653 (8th Cir.1991).
5. In this case, the evidence establishes that Chrysler Credit in fact received payment from JKJ C-P for every transfer that it contends represented subsequent new value ... and the fact that some of these repayments may have occurred postpetition does not affect the analysis. In re D.J. Management Group, 161 B.R. 5 (Bankr.W.D.N.Y.1993). Under the undisputed facts of this case, a § 547(c)(4) defense is not available to Chrysler Credit.
(Bankr.Op. of August 15, 2002 at 4-5.) Chrysler Credit asserts that the bankruptcy court erred when it concluded that the payments received by Chrysler Credit from JKJ CP were recoverable and not subject to the "new value" defense of 11 U.S.C. § 547(c)(4).
On January 9, 2003, the remainder of the case — the claims against Koons CP and Brandnewco — proceeded to trial. Oral argument as to the issues was deferred until May 8, 2003 to permit the filing of trial memoranda and proposed findings of fact and conclusions of law by the parties. At trial, the Trustee offered the testimony of Joseph Crisafulli, the former Vice President of Finance for the JKJ Debtors. He testified that: (1) both Koons CP and Brandnewco maintained single operating bank accounts into which receipts were deposited; and (2) those accounts contained funds that were not proceeds of any collateral of Chrysler Credit and were therefore commingled accounts. (Tr. of January 9, 2003 at 42-45.) Neither party presented evidence tracing the alleged preferences either to or not to Chrysler Credit's collateral in the commingled accounts. Rather, both parties pointed the proverbial finger at the other, claiming that it was their opponent's burden to trace the funds. On October 15, 2003, the bankruptcy court entered an order and Memorandum Opinion.
The bankruptcy court described the facts and legal issues before it as follows:
The chapter 7 trustee seeks to recover as preferences under § 547 a series of pre-petition payments to defendant Chrysler by debtors Brandnewco and Koons in the total respective amounts of $3,346,580.43 and $3,116,005.27. The parties agree that as to these payments all elements of preferential transfers are present except for that of § 547(b)(5), which requires that the creditor must have received more than it would otherwise receive in a chapter 7 liquidation.
Throughout the preference period, Chrysler held a "floating lien" on each dealership's vehicle inventory, including the proceeds of collateral. According to the debtors' financial statements Chrysler was undersecured as to each company both at the beginning of the 90 day preference period and on the date the chapter 11 petitions were filed.
The payments in question were made from the respective operating accounts of the debtors. Each of these accounts contained funds representing proceeds of Chrysler's collateral and also funds from various intercompany transfers. Chrysler argues that the related debtor corporations engaged in a check-kiting scheme by which cash was merely shifted among the corporations and accordingly that such deposits to Brandnewco and Koons accounts should be disregarded. If intercompany deposits are to be disregarded, it is argued, then all payments to Chrysler during the preference period would have been made from Chrysler's collateral proceeds and therefore could not have been preferences.
The trustee, on the other hand, argues that the case operating accounts were fungible and held not only Chrysler collateral proceeds but other receipts along with the intercompany transfers. Although the trustee is unable to trace the funds in the operating accounts he argues that Chrysler has the burden of proof to establish that the payments were derived from its collateral, and failing that the trustee must prevail.
It can bee seen from the statement of the parties' positions that the ultimate issue for the court is to determine which party has the burden to prove the nature and source of the debtors' payments to Chrysler.
(Bankr.Op. of Oct. 15, 2003 at 7-8.)
The bankruptcy court concluded, relying upon Batlan v....
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