In re Auto-Train Corp.
| Decision Date | 30 April 1985 |
| Docket Number | Adv. No. 82-0305,Bankruptcy No. 80-00391,Civ. A. No. 84-293,84-296,82-0367. |
| Citation | 49 BR 605 |
| Parties | In re AUTO-TRAIN CORPORATION, A Florida Corporation, also known as Railway Services Corporation, Debtor. A.I. CREDIT CORPORATION, Appellant, v. Murray DRABKIN, Trustee of Auto-Train Corporation, also known as Railway Services Corporation, Appellee. |
| Court | U.S. District Court — District of Columbia |
COPYRIGHT MATERIAL OMITTED
Barry Dichter, Cadwalader, Wickersham & Taft, Washington, D.C., for trustee.
Calvin Cobb, Bryan Veis, Steptoe & Johnson, Washington, D.C., for A.I. Credit Corp.; Michael Davis, New York City of counsel.
The creditor A.I. Credit Corporation ("A.I. Credit" or "AICCO") appeals from two identical adversary proceedings in the United States Bankruptcy Court for the District of Columbia. Bankruptcy Case No. 80-391; Adversary Proceeding Nos. 82-305 and 82-367. After a hearing on November 15, 1983, the bankruptcy judge granted summary judgment in favor of Murray Drabkin, the duly qualified trustee of the debtor, Auto-Train Corporation ("Auto-Train"), also known as Railway Services Corporation, and against A.I. Credit. He issued findings of fact and conclusions of law from the bench, which were later incorporated in a written opinion, issued December 6, 1983. A.I. Credit was directed to return $155,000 in payments it had received from the debtor during the 90-day period prior to the filing of its petition for relief under the Bankruptcy Code, in addition to prejudgment interest, for a sum total of approximately $190,000. After a thorough review of the record, the briefs of the parties and the oral argument of counsel, the Court affirms the rulings of the Bankruptcy Court in all respects. The reasons for that determination are set forth below.
Auto-Train filed a petition under Chapter 11 of the Bankruptcy Code on September 8, 1980. Approximately four months earlier, Auto-Train had negotiated an agreement with AICCO whereby AICCO financed certain insurance premiums on property and casualty insurance policies. In return for AICCO's payment of $1.3 million in prepaid insurance premiums to Auto-Train's broker, Auto-Train agreed to make a contemporaneous down payment on the loan and two monthly installment payments, in addition to future monthly installments. The collateral for this loan consisted of "any and all unearned return premiums and dividends which may become payable under the policies. . . ." Appendix at 298.1
If Auto-Train defaulted on any installment payments, AICCO could recover the value of its security by cancelling the policies, and collecting the unearned return premiums. The nature of this collateral was somewhat unusual in that its value diminished at a constant rate as Auto-Train received insurance coverage. Thus, the value of AICCO's secured claim decreased over time, while the value of its unsecured claim concommitantly increased.
This phenomenon is demonstrated by the undisputed facts in this case. On June 13, 1980, the date of the loan transaction, the value of the unearned return premiums exceeded $1 million. On September 8, 1980, the date Auto-Train declared bankruptcy, the value of AICCO's security interest had diminished to $762,000, and its remaining claim of $486,000 was unsecured.
Between these two dates, the debtor and creditor entered into an arrangement which is the predicate for this litigation. When the check Auto-Train issued for the down payment and the first two monthly installments was dishonored for insufficient funds, AICCO agreed to a new payment schedule whereby Auto-Train would tender weekly payments to AICCO in the amount of $25,000. During the 90 days prior to bankruptcy, Auto-Train made sporadic payments to AICCO under this arrangement totaling $155,000. The parties disagree as to whether these payments represented payments on the secured or unsecured portion of the debt.
This action arises from the trustee's recovery of these pre-petition payments as preferential transfers under 11 U.S.C. § 547(b). In an earlier action instituted by the trustee, he challenged the validity of AICCO's security interest in the unearned premiums and sought to enjoin the cancellation of the policies. That action was instituted on November 26, 1980, approximately two and one-half months after he was appointed trustee. The Bankruptcy Court granted summary judgment in AICCO's favor. In Re Auto-Train Corp., 9 B.R. 159 (Bankr.D.D.C.1981) ("AICCO I"). AICCO recovered the full value of its secured claim, measured as of the date of the filing of the petition. AICCO will receive no reimbursement for the unsecured portion of its claim because no dividends will be paid to unsecured creditors. Thus, the proper characterization of the $155,000 in payments is crucial to the outcome of this case.
In a 23-page memorandum decision, the Bankruptcy Court determined that the trustee had established all of the requisite elements of a voidable preferential transfer under 11 U.S.C. § 547(b).2 The Court also determined that the transfers were not protected from preference attack by any of the statutory exceptions to recovery. § 547(c). These rulings form the basis for the present appeal.
The first issue is whether the Bankruptcy Court correctly determined that the payments were preferential transfers. The appellants argue that the payments are not preferences because they were applied to the secured portion of the debt and AICCO returned something of value to the estate by refraining from canceling the insurance policies.
The second issue is whether the Bankruptcy Court correctly determined that these payments did not fall into one of several exceptions to the preference provisions of § 547(b): payments in exchange for contemporaneous or subsequent new value, or transfers in the nature of fluctuating collateral which did not enable the creditor to improve its position during the 90-day period before bankruptcy. The third issue is whether principles of res judicata bar this action.
Preferential transfer: § 547(b)
The preferential transfer provision of the Code, 11 U.S.C. § 547(b), includes five elements. The complete text of 11 U.S.C. § 547(b) reads as follows:
The trustee must establish all five elements in order to avoid a transfer. Barash v. Public Finance Corp., 658 F.2d 504, 507 (7th Cir.1981).
The appellants assert that the trustee has not established the fifth element, which requires the trustee to show that the creditor received more money than he would have received if the payments had not been made and he received reimbursement after liquidation. See id. at 508. The purpose of this provision is to discourage creditors within a short period before bankruptcy "from racing to the courthouse to dismember the debtor during his slide into bankruptcy" and to ensure that creditors are treated equally. H.R.Rep. No. 595 ("House Report"), 95th Cong., 1st Sess. 177, reprinted in 1978 U.S.Code Cong. & Ad.News, 5787, at 5963, 6138. To the extent a creditor obtains more than a pro rata share of his outstanding claim, he has been preferred over other creditors in his class.
The first step in determining whether a creditor has received a preferential transfer requires a determination of the secured status of the creditor at the time bankruptcy is declared, see, e.g., Palmer Clay Products Co. v. Brown, 297 U.S. 227, 229, 56 S.Ct. 450, 80 L.Ed. 655 (1936); Barash, 658 F.2d at 506-09, and the amount of any payments he has received during the 90-day period. This analysis requires the Bankruptcy Court to determine whether the value of a creditor's secured interest at the date of bankruptcy, coupled with the transfers, enabled the creditor to obtain more funds than if no transfer had occurred. Barash, 658 F.2d at 507. A creditor may retain any payments received during the 90-day period if those payments do not give him a bigger payoff than he would have received if he had waited until bankruptcy to obtain payment. In short, the Court conducts two separate liquidation analyses: a real liquidation in which the Court looks at the value of the secured claim on the date of bankruptcy, plus the transfer, and a hypothetical liquidation, in which the Court determines the value of the secured claim if the transfers had not occurred. In Re Zachman Homes, Inc., 40 B.R. 171, 172 (Bankr. D.Minn.1984). In both cases, the secured claim is valued as of the date of bankruptcy. See id. at 173; In Re Conn, 9 B.R. 431, 434 (Bankr.N.D.Ohio 1981).
Opinion at 6. If so, the elements of a preference have been satisfied.
It is undisputed that as of the date of bankruptcy, AICCO had a secured claim of $762,000 and an unsecured claim of $486,000. In the absence of any payments during the 90-day period, AICCO would have received $762,000, the amount...
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