Clark Pipe and Supply Co., Inc., Matter of
| Decision Date | 24 January 1990 |
| Docket Number | No. 88-3376,88-3376 |
| Citation | 893 F.2d 693 |
| Parties | 22 Collier Bankr.Cas.2d 500, 20 Bankr.Ct.Dec. 68 In the Matter of CLARK PIPE AND SUPPLY CO., INC., Debtor. Claude R. SMITH, as Trustee for the Debtor, Clark Pipe and Supply Co., Inc., Appellee, v. ASSOCIATES COMMERCIAL CORPORATION, Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Rex E. Lee, Washington, D.C., Richard W. Bussoff, Linton W. Carney, Jr., Monroe & Lemann, New Orleans, La., for appellant.
Philip K. Jones, Jr., Liskow & Lewis, New Orleans, La., for appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
ON SUGGESTION FOR REHEARING EN BANC
(Opinion April 25, 1989, 5 Cir., 1989, 870 F.2d 1022)
Before POLITZ and JOLLY, Circuit Judges, and HUNTER *, District Judge.
Treating the suggestion for rehearing en banc filed in this case by Associates Commercial Corporation ("Associates"), as a petition for panel rehearing, we hereby grant the petition for rehearing. After re-examining the evidence in this case and the applicable law, we conclude that our prior opinion was in error. We therefore withdraw our prior opinion and substitute the following: 1
In this bankruptcy case we are presented with two issues arising out of the conduct of the bankrupt's lender during the ninety days prior to the bankrupt's filing for protection from creditors. The first is whether the lender improved its position vis-a-vis other creditors during the ninety-day period and thus received a voidable transfer. If so, the second question is whether the lender engaged in such inequitable conduct that would justify subordination of the lender's claims to the extent that the conduct harmed other creditors. Since we decide that equitable subordination is an inappropriate remedy in this case, we need not decide whether avoiding the transfer and equitable subordination are duplicative or complementary remedies.
Clark Pipe and Supply Company, Inc., ("Clark") was in the business of buying and selling steel pipe used in the fabrication of offshore drilling platforms. In September 1980, Associates and Clark executed various agreements under which Associates would make revolving loans secured by an assignment of accounts receivable and an inventory mortgage. Under the agreements, Clark was required to deposit all collections from the accounts receivable in a bank account belonging to Associates. The amount that Associates would lend was determined by a formula, i.e., a certain percentage of the amount of eligible accounts receivable plus a certain percentage of the cost of inventory. The agreements provided that Associates could reduce the percentage advance rates at any time at its discretion.
When bad times hit the oil fields in late 1981, Clark's business slumped. In February 1982 Associates began reducing the percentage advance rates so that Clark would have just enough cash to pay its direct operating expenses. Clark used the advances to keep its doors open and to sell inventory, the proceeds of which were used to pay off the past advances from Associates. Associates did not expressly dictate to Clark which bills to pay. Neither did it direct Clark not to pay vendors or threaten Clark with a cut-off of advances if it did pay vendors. But Clark had no funds left over from the advances to pay vendors or other creditors whose services were not essential to keeping its doors open.
One of Clark's vendors, going unpaid, initiated foreclosure proceedings in February and seized the pipe it had sold Clark. Another attempted to do so in March. The resulting priority dispute was resolved only in litigation. See Mitsubishi International Corp. v. Clark Pipe & Supply Co., 735 F.2d 160 (5th Cir.1984), and In the Matter of Clark Pipe, Inc. Debtor, 759 F.2d 19 (5th Cir.1985) (). When a third unpaid creditor initiated foreclosure proceedings in May, Clark sought protection from creditors by filing for reorganization under Chapter 11 of the Bankruptcy Code.
The case was converted to a Chapter 7 liquidation on August 31, 1982, and a trustee was appointed. In 1983, the trustee brought this adversary proceeding against Clark's lender, Associates. The trustee sought the recovery of alleged preferences and equitable subordination of Associates' claims. Following a one-day trial on August 28, 1986, the bankruptcy court entered judgment on April 10, 1987, and an amended judgment on June 9, 1987. The court required Associates to turn over $370,505 of payments found to be preferential and subordinated Associates' claims. The district court affirmed on May 24, 1988. 87 B.R. 21.
The first issue before us is whether the bankruptcy court was correct in finding that Clark, by selling its inventory and thereby converting the inventory to accounts receivable that had been assigned to Associates, made a preferential transfer to Associates that should be avoided in accordance with sections 547(b) and (c)(5) of the Bankruptcy Code. Under section 547(c)(5), 2 a voidable preferential transfer occurred if Associates improved its position over the ninety-day period between February 5 and May 7 to the prejudice of unsecured creditors. 3
In order to determine whether Associates improved its position during the ninety-day preference period, we must apply the test we adopted in Matter of Missionary Baptist Foundation of America, Inc., 796 F.2d 752, 760 (5th Cir.1986) (Missionary Baptist II ):
The "two-point net improvement" test of Section 547(c)(5) requires ... a computation of (1) the loan balance outstanding ninety days prior to the bankruptcy; (2) the value of the [collateral] on that day; (3) the loan balance outstanding on the day the bankruptcy petition was filed; and (4) the value of the [collateral] on that day.
By comparing the loan balance minus the value of Associates' collateral on February 5 with the loan balance minus the value of Associates' collateral on May 7, it can be determined whether Associates improved its position during the ninety-day period. The loan balances on February 5 and May 7 are not at issue here. The dispute concerns the value to be assigned the collateral.
Associates argues that in valuing the inventory, the bankruptcy court should have employed the going-concern method of valuation rather than the liquidation method. Associates contends that because the bankruptcy court employed the wrong valuation method, it found a preference where there was none. Moreover, Associates contends that even if the liquidation method is appropriate here, the bankruptcy court improperly viewed the value of inventory from the debtor's perspective rather than the creditor's perspective, and subtracted out operating costs of Clark bearing no relation to the liquidation of inventory. Finally, Associates argues that because the bankruptcy court failed to give reasons for its choice of valuation method, and the district court merely affirmed the bankruptcy court without discussing the valuation question, we must reverse and remand.
We consider first whether the record is sufficiently complete to permit review in the absence of precisely articulated reasons for the actions of the bankruptcy court. In Missionary Baptist II we remanded, finding the record unreviewable because, in applying section 547(c)(5), the bankruptcy judge had not given specific reasons for his choice of valuation method. 796 F.2d at 761-62. Viewing this record as a whole, however, we conclude that it is adequate for purposes of review. In its Conclusions of Law, the bankruptcy court rejected Associates' argument that going-concern value should be used in determining the value of the collateral and explicitly accepted the expert testimony offered by the trustee that liquidation value should be used. That expert testimony contained reasons in support of its conclusion. Thus, we conclude that the bankruptcy court adopted the reasoning of the trustee's expert, and therefore we cannot say that the case must be remanded before we can properly review it on appeal.
Having concluded that the record is reviewable, we must examine the record to determine whether the bankruptcy court adopted the appropriate method of valuing the collateral. The Code does not prescribe any particular method of valuing collateral, but instead leaves valuation questions to judges on a case-by-case basis. See H.R.Rep. No. 595, 95th Cong. 1st Sess. 216, 356 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6176, 6312. Valuation is a mixed question of law and fact, the factual premises being subject to review on a "clearly erroneous" standard, and the legal conclusions being subject to de novo review. In re Ebbler Furniture and Appliances, Inc., 804 F.2d 87, 89 (7th Cir.1986); Matter of Missionary Baptist Foundation of America, 712 F.2d 206, 209 (5th Cir.1983) (Missionary Baptist I ). Associates' collateral consisted of inventory and receivables. Since the parties stipulated the value of the accounts receivable, the sole issue was the value of the inventory.
The bankruptcy court adopted the view of the trustee's expert that Clark was in the process of liquidation throughout the ninety-day period from February 5 to May 7. This finding of fact was not clearly erroneous. Thus, for purposes of determining whether Associates improved its position at the expense of other creditors during that period, we conclude that the liquidation method of valuing the collateral was proper at both ends of the preference period.
Associates maintains that even if the liquidation method is appropriate in this case, the bankruptcy court improperly valued...
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