In re Falcon Products, Inc., BAP No. 07-6036EM.
| Decision Date | 28 January 2008 |
| Docket Number | BAP No. 07-6036EM. |
| Citation | 381 B.R. 543 |
| Parties | In re FALCON PRODUCTS, INC., et al., Debtors. Falcon Creditor Trust, Plaintiff-Appellant, v. First Insurance Funding, Defendant-Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Eighth Circuit |
Appeal from the United States Bankruptcy Court, for the Eastern District of Missouri.
David M. Brown, Nicholas A. Franke, on brief, St. Louis, MO, for appellant.
David A. Sosne, Bonnie L. Clair, Brian J. LaFlamme, on brief, St. Louis, MO, for appellee.
Before MAHONEY, FEDERMAN and VENTERS, Bankruptcy Judges.
This is an appeal of the bankruptcy court's determination on summary judgment that certain payments made to the Defendant by Debtor Falcon Products, Inc., within the 90-day preference period were not preferential under 11 U.S.C. § 547. We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158(b). For the reasons set forth below, we reverse the decision of the bankruptcy court and remand this case for further proceedings consistent with this opinion.
We review the bankruptcy court's grant of summary judgment de novo, applying the same standard used by the bankruptcy court and viewing the evidence in the light most favorable to the Plaintiff as the nonmoving party. Summary judgment is appropriate if the record shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.1
The Panel adopts the factual findings of the bankruptcy court, which findings are undisputed.
First Insurance Funding ("First Insurance") is engaged in the business of financing commercial insurance premiums. In November 2004, Falcon Products, Inc. ("Falcon") entered into a commercial premium finance agreement with First Insurance to finance several insurance policies ("Policies"). The premiums for the Policies totaled $1,889,409.68. Under its agreement with First Insurance, Falcon made a $472,584.85 down payment on the Policies and agreed to repay the balance of $1,416,824.83, plus interest, in ten monthly installments of $144,943.05, with the first installment due December 1, 2004. Falcon granted First Insurance a security interest in the unearned premiums under the Policies to secure the premiums financed. The value of unearned premiums diminished each day by approximately $5,175.62—the value of the daily insurance coverage provided under the Policies. In the event Falcon failed to make a payment to First Insurance, First Insurance had the right to cancel the Policies and to apply any unearned premiums to the unpaid balance owed to First Insurance.
On December 6, 2004, Falcon paid the first monthly installment of $144,943.05 to First Insurance. Immediately prior to this payment, Falcon owed First Insurance $1,449,430.50, and the unearned premiums had a value of $1,690,422.54. Therefore, the value of the unearned premiums (First Insurance's collateral) exceeded the debt owed by Falcon by $240,992.04.
On January 10, 2005, Falcon paid the second monthly installment of $144,943.04, plus a late charge of $7,247.08; for a total payment of $152,193.12. Immediately prior to this payment, Falcon owed First Insurance $1,304,473.45, and the unearned premiums had a value of $1,519,868.12. Therefore, the value of First Insurance's collateral exceeded the debt by $21.5,394.67.
On January 31, 2005, Falcon Products, Inc.; Epic Furniture Group, Inc.; The Falcon Companies International, Inc.; Falcon Holdings, Inc.; Howe Furniture Corporation; Johnson Industries, Inc.; Madison Furniture Industries, Inc.; Sellers & Josephson, Inc.; and Shelby Williams Industries, Inc. (collectively, "Debtors") filed petitions for relief under Chapter 11 of the Bankruptcy Code. On the petition date, Falcon owed First Insurance $1,159,527.41, and the unearned premiums had a value of $1,418,601.44. Therefore, the value of the unearned premiums exceeded the debt owed to First Insurance by Falcon by $259,074.03.
On October 18, 2005, the bankruptcy court, confirmed the Debtors' Third Amended Joint Plan of Reorganization pursuant to which the Debtors' cases were substantively consolidated. Under the Plan, the authority to prosecute avoidance actions under Chapter 5 of the Bankruptcy Code vested in the Falcon Creditor Trust ("Trust").
On January 12, 2007, the Trust filed a complaint to avoid and recover under §§ 547 and 550 of the Bankruptcy Code Falcon's December and January Payments to First Insurance, totaling $297,136.17.
To avoid a transfer as a preference, a trustee (or entity imbued with the powers thereof) must establish every element of 11 U.S.C. § 547(b),2 which provides:
Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property
(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 ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; 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:
In this case, only the last element is in dispute—whether the $297,136.17 in payments the Debtor made to First Insurance in December 2006 and January 2007 enabled First Insurance to receive more than it would have received under a hypothetical Chapter 7 liquidation had those transfers not been made. The resolution of this dispute turns on an issue over which the courts are divided, namely: For purposes of applying the hypothetical liquidation test to an allegedly preferential payment made to a secured creditor, should the collateral be valued as of the date of the transfer(s) or as of the petition date?3 Or, expressed in the terms of the statute, should the hypothetical liquidation test of § 547(b)(5) be conducted as of the transfer date or as of the petition date?
The bankruptcy court sided with the courts holding that the hypothetical liquidation test should be conducted as of the date of the allegedly preferential transfer. And in this case, because the undisputed evidence established that the value of First Insurance's collateral—the unearned insurance premiums—exceeded the amount of debt owed to First Insurance on the dates of both of the allegedly preferential transfers, the bankruptcy court concluded that neither of the transfers sought to be avoided by the Trust enabled First Insurance to receive anything more than it would have if the Debtor had been liquidated under Chapter 7 of the Bankruptcy Code and the transfers had not been made. The bankruptcy court granted summary judgment in favor of First Insurance accordingly.
The Trust, on the other hand, argues that Supreme Court and Eighth Circuit Court of Appeals precedent require, and the better reasoned case law supports, conducting the § 547(b)(5) hypothetical liquidation test as of the petition date. As of the petition date, the unearned premiums had a value of $1,418,601.44, and the debt owed to First Insurance totaled $1,456,663.58, representing the then current debt ($1,159,527.41) plus the amount of the transfers assumed not to have been made ($297,136.17). Because the amount of the debt exceeded the amount of the collateral (by 838,062.14), the Trust concludes, the transfers at issue enabled First Insurance to receive more than it would have in a Chapter 7 case, and the bankruptcy court's order granting summary judgment in favor of First Insurance should be reversed.
Upon review of the statutory language of § 547(b) and the case law applying it and its predecessor provision in the Bankruptcy Act, the Panel concludes that the hypothetical liquidation test must be conducted as of the petition date. Consequently, the record in this case supports a finding that the $297,136.17 in transfers received by First Insurance within the 90 days prior to the petition date enabled it to receive more as a result of those transfers than First Insurance would have received if this was a case under Chapter 7 and the transfers had not been made.
When a statute's language is plain, "the sole function of the courts is to enforce it according to its terms."4 Here, § 547(b)(5) does not specifically indicate whether the hypothetical liquidation test should be conducted as of the transfer date or as of the petition date, but it does state unequivocally that the test assumes that the transfers had not been made.5 Recognition of this assumption, which has been referred to as the "add-back" method, is important because it forecloses one of the arguments used against conducting the test as of the petition date. For reasons that are unclear, several cases have conclusorily determined that the add-back method does not apply to transfers to fully secured creditors because payments to a fully secured creditor cannot be preferential.6 But this statement still begs the question: Should transfer-date or petition-date values be used to determine a secured creditor's status? Moreover, the plain language of § 547(b)(5) simply does not support a departure from the add-back method.
Upon inspection, the rejection of the add-back method in these cases is more of a veiled rejection of a petition-date hypothetical liquidation test than a true objection to the add-back method since the status of the secured creditors in these cases was determined using the add-back method, i.e., by considering the creditor's secured status immediately prior to the transfer.7 Therefore, the only real issue is...
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