In re Erin Food Services, Inc., Civ. A. No. 90-12639-K

• Decision Date: 18 September 1991
• Docket Number: Civ. A. No. 90-12639-K,90-12640-K,Bankruptcy No. 89-12250-HAL,Adv. No. 90-1052.
• Parties: In re ERIN FOOD SERVICES, INC., Debtor. CAMBRIDGE MERIDIAN GROUP, INC./MICHAEL E. WEINGARTEN, Trustee of Erin Food Services, Inc., Plaintiff-Appellee, v. CONNECTICUT NATIONAL BANK, et al., Defendants-Appellants.
• Court: U.S. District Court — District of Massachusetts

140 B.R. 14 (1991)

In re ERIN FOOD SERVICES, INC., Debtor.

CAMBRIDGE MERIDIAN GROUP, INC./MICHAEL E. WEINGARTEN, Trustee of Erin Food Services, Inc., Plaintiff-Appellee, v. CONNECTICUT NATIONAL BANK, et al., Defendants-Appellants.

Civ. A. Nos. 90-12639-K, 90-12640-K, Bankruptcy No. 89-12250-HAL, Adv. No. 90-1052.

United States District Court, D. Massachusetts.

September 18, 1991.

OPINION

KEETON, District Judge.

This case comes before this court on appeal by defendants-appellants (the "Secured Lenders") from orders of the United States Bankruptcy Court for the District of Massachusetts, dated September 11 and 25, 1990. At issue is the avoidability of certain interest payments made by Erin Food Services ("Erin") to Secured Lenders between 90 days and one year before the filing of a bankruptcy petition by Erin on March 28, 1989 (the "Petition Date"). The interest payments were due on loans made by the Secured Lenders to Erin that were secured by property owned by Erin officer David W. Murray ("Murray"). Secured Lenders challenge, inter alia, the Bankruptcy Court's application of the Seventh Circuit's decision and reasoning in Levitt, Trustee of V.N. Deprizio Construction Co. v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir.1989) ("Deprizio"), applying the one year time limitation of 11 U.S.C. § 547(b)(4)(B) to interest payments made on loans secured by insider guarantees. For reasons explained in this Opinion, I conclude that the Bankruptcy Court was correct in its rulings of law and did not make any clearly erroneous findings of fact. The Bankruptcy Court's decision, as modified by its Order of September 25, 1990, will be affirmed.

In February 1990, the Trustee, as successor to Erin's former management, initiated an adversary proceeding against the Secured Lenders and Murray, Erin's sole shareholder. In addition to other relief not relevant here, the Trustee sought to recover interest payments made to the Secured Lenders within one year of the Petition Date, on the grounds that they were preferential transfers under 11 U.S.C. § 547. The answer filed by Secured Lenders included defenses under § 547(c)(1) ("contemporaneous exchange") and § 547(c)(2) ("ordinary course"). On July 16, 1990, after trial, the Bankruptcy Court entered its decision reported as In re Erin Food Services, Inc., 117 B.R. 21 (Bankr.D.Mass.1990), ruling that the Secured Lenders had a valid secured claim in the principal amount of $55,913,459 and an equitably subordinated claim in the amount of $5,827,541. The Bankruptcy Court also ruled that the interest payments were not avoidable by the Trustee because they were "contemporaneous exchanges."

After a hearing on August 28, 1990, on the Trustee's Motion for Reconsideration, the Bankruptcy Court vacated its earlier ruling as to "contemporaneous exchange" and, by Orders of September 11 and 25, 1990, determined that interest payments of $2,808,290 made to the Secured Lenders within the year before the Petition Date (1) were preferential under § 547(b), (2) were not protected by § 547(c)(1), but (3) were — to the extent of $719,231 — protected by the "new value" defense under § 547(c)(4). Thus, the Bankruptcy Court determined, Secured Lenders received avoidable preferences in the amount of $2,089,059 ($2,808,290 less $719,231).

Secured Lenders appeal from the Orders of September 11 and 25, 1990.

Secured Lenders have argued on appeal, both orally and in their briefs:

(1) that the Bankruptcy Court erred in adopting the Seventh Circuit's reasoning in Deprizio and applying the one year recovery of payments limitation of § 547(b)(4)(B) to interest payments on debt secured by insider guarantees;

(2) that even if the one year limitation is applicable in this case, the Bankruptcy Court erred in concluding that the Trustee had satisfied his burden of proof as to the other provisions of 11 U.S.C. § 547(b), in that Murray did not receive a "benefit" as required by § 547(b)(1);

(3) that the Bankruptcy Court erred in concluding that the Trustee had satisfied his burden of proof as to § 547(b)(5), in that the interest payments did not enable Murray to receive more than he would have received if the "case were a case under chapter 7";

(4) that the Bankruptcy Court erred in determining that the interest payments did not qualify for the "ordinary course of business" exception of § 547(c)(2);

(5) that the Bankruptcy Court erred in determining that the interest payments did not qualify for the "contemporaneous exchange" exception of § 547(c)(1); and,

(6) that the Bankruptcy Court erred in determining that the interest payments made on loans backed by insider guarantees may be recovered from the Secured Lenders under 11 U.S.C. § 550, rather than holding that the Trustee's right of recovery in these circumstances is against the insider guarantor alone.

I.

In order to avoid a transfer, the Trustee must prove the existence of each of the five elements of 11 U.S.C. § 547(b). If the Trustee does so, the transferee(s) may assert each of the defenses permitted by § 547(c).

Section 547(b) provides as follows:

(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor —

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the filing of the petition; or

(B) between 90 days and one year before the date of filing of the petition if such creditor at the time of such transfer —

(i) was an insider; and (ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer; and

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b).

In this case, the Bankruptcy Court determined that the extended time period of 11 U.S.C. § 547(b)(4)(B) applies to the contested interest payments made by Erin to the Secured Lenders between 90 days and one year before the Petition Date because the underlying loan was secured by property owned by insider Murray. Insofar as the issue is one of statutory interpretation, the Bankruptcy Court's decision is reviewable nondeferentially (or "de novo," as commonly stated). In re Gonic Realty Trust, 909 F.2d 624, 626 (1st Cir.1990).

Although the precise issue presented here has not been decided previously in the First Circuit, and perhaps not even in other courts in view of the quite distinctive facts of this case, many courts in other circuits have ruled upon a somewhat similar issue. Of the numerous decisions only three come from Courts of Appeals. All three Courts of Appeals have favored the position asserted by the Trustee here. A substantially larger number of Bankruptcy and District Courts have held otherwise. Even if it should be held that precisely the same issue as to which the courts are divided is present in this case, I conclude that the Bankruptcy Court did not err in reaching the same result as the three Courts of Appeals. See In re C-L Cartage Co., Inc., 899 F.2d 1490 (6th Cir.1990); Deprizio, 874 F.2d at 1194-1200 (7th Cir.1989); In re Robinson Bros. Drilling, Inc., 97 B.R. 77 (W.D.Okla.1988), aff'd, 892 F.2d 850 (10th Cir.1989). This result is supported by a thorough parsing of the text of the relevant sections of the statute.

The extended time period of § 547(b)(4)(B) applies only if "such creditor at the time of such transfer was an insider." The defendants-appellants argue that "such creditor" as used in § 547(b)(4)(B) refers to the Secured Lenders, not to the insider Murray, because the Secured Lenders are the creditors to whom Erin made the transfer. Since Secured Lenders are outsiders, the time period of § 547(b)(4)(B) would not apply. They argue further that to hold that "such creditor" refers to the insider Murray, and thus avoid the transfer to outsiders Secured Lenders, would render meaningless the statute's different time periods for inside and outside creditors. See Secured Lenders' Brief at 9-10. This contention must be rejected.

The phrase "such creditor" refers to the "creditor" identified in subsection (b)(1). See In re C-L Cartage Co., Inc., 899 F.2d at 1493. The term "creditor" is defined for the purposes of the Bankruptcy Code at 11 U.S.C. § 101(10)(A) (Supp.1991) as an "entity that has a claim against the debtor." The term "claim" is defined at 11 U.S.C. § 101(5) to include the contingent right to payment. As the owner of property pledged to secure Erin's debt, Murray held a contingent claim against Erin should the collateral be required to satisfy the debt, and was therefore a "creditor" within the meaning of the statute. Neither party disputes that Murray, as an officer of Erin, was an insider as defined in the Bankruptcy Code at 11 U.S.C. § 101(31)(B)(ii). Since Murray was both creditor and insider to Erin, the one year limitation of § 547(b)(4)(B) was properly invoked by the Bankruptcy Court. This meaning of the statute is, for reasons explained in Parts II-VI of this Opinion, consistent with the manifested objectives of all the relevant provisions of the statute, construed together as a whole.

II.

Secured Lenders contend that the Trustee did not meet his burden of proving that the interest payments were transfers "to or for the benefit of" creditor Murray as required by § 547(b)(1). They argue that because the guarantee was on a non-recourse basis, secured only by property owned by Murray and not by his personal guarantee, and, because the value of the collateral owned by Murray was less than the amount outstanding on the loan, the interest payments made by Erin to Secured Lenders never yielded a benefit to insider-creditor Murray. Put...