In re Almarc Mfg., Inc.

• Decision Date: 24 July 1986
• Docket Number: Bankruptcy No. 83 B 2639,85 A 232.
• Citation: 62 BR 684
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re ALMARC MANUFACTURING, INC., Debtor. Bernard C. CHAITMAN, Trustee of Almarc Manufacturing, Inc., Plaintiff, v. PAISANO AUTOMOTIVE LIQUIDS, INC., Defendant.

62 B.R. 684 (1986)

In re ALMARC MANUFACTURING, INC., Debtor.

Bernard C. CHAITMAN, Trustee of Almarc Manufacturing, Inc., Plaintiff, v. PAISANO AUTOMOTIVE LIQUIDS, INC., Defendant.

Bankruptcy Nos. 83 B 2639, 85 A 232.

United States Bankruptcy Court, N.D. Illinois, E.D.

July 24, 1986.

Arthur Raphael, Teller, Levit & Silvertrust, P.C. Chicago, Ill., for trustee.

Raymond E. Stachnik, Abramson & Fox, Chicago, Ill., for Paisano.

MEMORANDUM AND ORDER

ROBERT E. GINSBERG, Bankruptcy Judge.

The trustee has filed a complaint seeking to recover a preferential payment to Paisano Automotive Liquids, Inc. under 11 U.S.C. § 547(b). The parties have presented the case to the Court on stipulated facts. The sole issue in dispute is whether Paisano may set off the amount of an alleged subsequent advance to the debtor against the amounts it has received in an otherwise preferential transfer under 11 U.S.C. § 547(c)(4).¹

On September 21, 1982, Paisano shipped certain automotive goods to the debtor for use in the debtor's business. On November 23, 1982, the debtor mailed a $63,342.30 check to Paisano to pay for those goods. Paisano received the check on November 24, 1982 and deposited it in its bank account on November 30, 1982. The check cleared the debtor's bank account on December 1, 1982. On November 29, 1982, Paisano shipped additional goods to the debtor for use in its business. The amount of this second shipment was $61,427.00. The parties agree that under established company policy Paisano would not have sent this second shipment had it not received the check in payment for the first shipment. The debtor never paid for the second shipment. On February 28, 1983, the debtor filed a Chapter 11 petition.

Paisano concedes that the check it received for the first shipment satisfies all of the elements of a preferential payment under § 547(b). However, it contends that the trustee may not avoid that transfer by virtue of § 547(c)(4). Section 547(c)(4) provides:

(c) The trustee may not avoid under this section a transfer

* * * * * *

(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor —

(A) not secured by an otherwise unavoidable security interest; and

(B) 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). Thus, Paisano claims that the trustee can recover the preferential payment only to the extent that it exceeds the subsequent new value received by the debtor in the form of the second shipment of goods.²

For a preferential transfer to be saved from avoidance under § 547(c)(4) a very clearcut order of events must have taken place. First, the creditor must have received a transfer which is otherwise voidable as a preference under § 547(b). Second, after receiving the preferential transfer, the preferred creditor must advance additional credit to the debtor on an unsecured basis. Third, that additional post-preference unsecured credit must be unpaid in whole or in part as of the date of the petition. See In re American International Airways, Inc., 56 B.R. 551, 554 (Bankr.E.D.Pa.1986) and cases cited therein; but see In re Paula Saker & Co., Inc., 53 B.R. 630, 634 (Bankr.S.D.N.Y.1985). If these three elements are satisfied, the preferred creditor may set off the amount of the post-preference unsecured credit which remains unpaid as of the date of the petition against the amount which the creditor is required to return to the trustee on account of the preferential transfer it received. Thus, if Paisano can get within the elements of § 547(c)(4), it can set off the $61,427.00 it advanced the debtor on November 29, 1982 against the $63,342.30 it received from the debtor in an admittedly preferential transfer, and it will only be required to return $1,915.30 to the trustee.³ If Paisano cannot get within § 547(c)(4), it will have to return the full $63,342.30 to the trustee and be stuck with a $61,427.00 unsecured claim against the estate.⁴

There is no doubt that Paisano received a $63,342.30 preferential transfer. Nor is there any doubt that Paisano was owed $61,427.00 from the debtor as of the date of the petition. The only question under § 547(c)(4) is whether Paisano gave such new value to the debtor after it received the preferential payment. The trustee claims that Paisano received the preference on December 1, 1982 when the drawee bank honored the debtor's check for the first shipment. Thus, as the trustee sees it, because Paisano shipped the additional goods on November 29, 1982, this new value was given two days before the preference occurred, and § 547(c)(4) does not apply. Paisano, on the other hand, claims that the preference occurred on November 24, 1982 when it received the debtor's check for the first shipment. Therefore, according to Paisano, the new value was given five days after the preferential transfer and § 547(c)(4) does apply.

Paisano's problems are compounded by the fact that it is clear that § 547(c)(4) does not codify the "net result" rule. In re Fulghum Construction Co., 706 F.2d 171, 173-74 (6th Cir.1983); Leathers v. Prime Leather Finishes Co., 40 B.R. 248, 250 (D.Ct.D.Me.1984); In re Garland, 19 B.R. 920, 926 (Bankr.E.D.Mo.1982). In other words, in applying § 547(c)(4), the court does not take all preferential transfers received by a creditor during the 90 day (or one year) period and reduce it by all unpaid unsecured advances which the creditor gave the debtor during that same period to see what if anything the creditor must return to the trustee. Leathers v. Prime Leather Finishes Co., 40 B.R. 248, 250 (D.Ct.D.Me.1984); In re American International Airways, Inc., 56 B.R. 551, 553 (Bankr.E.D.Pa.1986). Were the net result rule to apply, Paisano would succeed on any theory. However, § 547(c)(4) requires a strict order of first a preference, then subsequent thereto an advance of unsecured credit. There is no doubt when Paisano extended unsecured credit to the debtor (on November 29), the date the additional goods were shipped. Thus, the key question here is when did the preferential transfer take place for § 547(c)(4) purposes. Was it November 24 when Paisano received the debtor's check or December 1 when the debtor's bank honored the check?

This Court previously has been presented with the question of when a transfer occurs for § 547(b) purposes in another preference proceeding in this very same Chapter 11 case. In Matter of Almarc Mfg., Inc. (Chaitman v. Chicago Boiler Co.), 52 B.R. 582 (Bankr.N.D.Ill.1985), this Court held that for § 547(b) purposes a transfer occurs when the drawee bank honors the check. The trustee now asks the Court to extend this holding to § 547(c)(4). However, §§ 547(b) and 547(c)(4) have entirely different purposes. Section 547(b) is designed to allow the debtor or trustee to avoid transactions that favor creditors. Matter of Fasano/Harriss Pie Co., 43 B.R. 871, 876 n. 2 (Bankr.W.D.Mich.1984). The key focus is the recovery of funds to the estate for equitable distribution among creditors of equal priority. The fact that the payee is not vested with any title to the funds until the check is honored by the drawee bank has prompted most courts to find that no transfer occurs under § 547(b) until the check is honored. See Almarc, 52 B.R. at 583 and cases cited therein.

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.⁵Leathers v. Prime Leather Finishes Co., 40 B.R. 248, 251 (D.Me.1984); Matter of Georgia Steel, Inc., 38 B.R. 829, 837 (Bankr.M.D.Ga.1984); In re Gold Coast Seed Co., 30 B.R. 551, 553 (BAP-9 1983). The key focus under § 547(c)(4) is to treat fairly a creditor who has replenished the estate after having received a preference. In re American International Airways, Inc., 56 B.R. 551, 553, (Bankr.E.D.Pa.1986); In re Paula Saker & Co., Inc., 53 B.R. 630, 633 (Bankr.S.D.N.Y.1985). Thus, by way of example, suppose the debtor owes Creditor A $1,000 on an old unsecured debt. On day 1, the debtor pays Creditor A $1,000. On day 45, the debtor goes to Creditor A and says something like, "You were willing to lend me $1,000. I paid you back. How about lending me another $1,000?" Creditor A, figuring the debtor is good for at least $1,000, figures why not and lends the debtor a fresh $1,000 on an unsecured basis. The debtor puts the $1,000 in a desk drawer. On day 60 the debtor files Chapter 7. The trustee finds the $1,000 still in the desk drawer. The trustee brings a $1,000 preference action against Creditor A on account of the $1,000 payment made on day 1. Assume that all of the elements of § 547(b) can be proved with respect to that payment. If the trustee is allowed to recover that payment, it will be better off than it would have been had this series of transactions not taken place. It will now have $2,000 where on day 1 it only had $1,000.⁶ Creditor A, on the other hand, will be out $2,000 where on day 1 it was only out $1,000. More importantly, at no time had Creditor A shown any willingness to advance the debtor more than $1,000. To prevent such a result, § 547(c)(4) allows the bankruptcy court to give credit for the amount of the subsequent advance.⁷

Holding that the transfer occurs upon receipt of the check for these purposes furthers the goal of § 547(c)(4) and leads to a more appropriate result in policy terms. In most cases, absent a post-dated check or a request to hold the check, parties in a normal business transaction would, as the parties did here, treat a check as a cash transaction and extend new credit immediately upon receiving a check in payment of a prior debt rather than waiting until the check has cleared to send new goods. See In re Gold Coast Seed Co., 30 B.R. 551, 553 (BAP-9 1983). There is no policy reason why a creditor who waits for a check...