In re Kroh Bros. Development Co., Bankruptcy No. 87-00640-1-11
| Decision Date | 06 July 1990 |
| Docket Number | Bankruptcy No. 87-00640-1-11,Adv. No. 90-4021-1-11. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Missouri |
| Parties | In re KROH BROTHERS DEVELOPMENT CO., Debtor. KROH BROTHERS DEVELOPMENT CO. and The Kroh Operating Limited Partnership, Plaintiffs, v. NATIONAL FIDELITY LIFE INSURANCE CO., Defendant. |
Steven H. Mustoe, McDowell, Rice & Smith, Kansas City, Mo., for plaintiffs.
Richard A. Drews, Brashear & Ginn, Omaha, Neb., for defendant.
Debtor Kroh Brothers Development Company, renamed the Kroh Operating Limited Partnership ("Kroh") after confirmation of its Chapter 11 plan, sued defendant National Fidelity Life Insurance Company ("NFL") to recover, pursuant to 11 U.S.C. §§ 547 and 550, four alleged preferential transfers made by Kroh to NFL within 90 days and one year before the date of Kroh's bankruptcy petition. Three issues are pending: (1) whether Kroh established all the elements of § 547(b); (2) whether the insider preference provision of § 547(b)(4)(B) should be extended to include non-insider transferees under § 550; and (3) if plaintiffs have met their burden under § 547(b), whether defendant established its affirmative defense that the transfers were made in the ordinary course of business.
Kroh has not met its burden of proof under § 547(g) to establish the preference elements of § 547(b)(1) and (5). Accordingly, it is not necessary to reach the issue of whether a non-insider "expanded preference" is recoverable under § 550. Pursuant to FRCP 52 and Bankruptcy Rule 7052, the court makes the following findings of fact and conclusions of law.
In 1983 Kroh borrowed from NFL1 the principal sum of $2.7 million secured by a shopping center in Colorado. Loan documents included a note, deed of trust and security agreement, plus an assignment by which NFL became the lender by assignment from Charter American Mortgage Company. The loan was nonrecourse. The note, deed of trust and security agreement each contained a clause by which lender NFL waived any and all right to obtain a personal or deficiency judgment against Kroh "or anyone else" and agreed to look exclusively to the shopping center property in the event of default in payments. Kroh was obligated to make payments of interest only for the first five years.
From the inception of the loan, the parties contemplated that Kroh would subsequently establish a limited partnership to which the shopping center would be transferred. In September, 1985, the Ken Caryl Associates Limited Partnership (the "partnership") was formed. Pursuant to a Real Estate Purchase and Sale Agreement dated September 19, 1985, Kroh conveyed the shopping center to the partnership. Kroh was the general partner and the Manfuso family was the limited partner.
The purchase price for sale of the property by Kroh to the Ken Caryl Associates Limited Partnership was $2.7 million, which was the same amount as the balance Kroh owed NFL on the note. Kroh and the partnership agreed that Kroh would retain sole and exclusive liability on Kroh's note to NFL. Upon conveyance of the shopping center to the partnership, the partnership specifically and expressly did not assume general partner Kroh's debt to NFL. Paragraph 4(b) of the Real Estate Purchase and Sale Agreement stated: "Notwithstanding anything else herein to the contrary, the purchaser is not assuming said first mortgage indebtedness and shall not have any personal obligation for the payments thereof."
In connection with conveyance of the shopping center from Kroh to the partnership, general partner Kroh gave the partnership a guaranty against cash flow deficits. The guaranty provided that in certain circumstances, Kroh would cover the partnership's cash flow deficits with additional capital contributions. The guaranty stated that any payments by general partner Kroh were not to be considered loans or advances but were to be capital contributions.
General partner Kroh continued to manage the property; it was entitled to various commissions and fees for management and leasing. Kroh also managed other properties owned wholly by Kroh and as general partner in other limited partnerships. Kroh commingled its own funds and funds from all the partnerships in one account. Payments of all types, including debt service and operating expenses, pertaining to the various partnership properties and Kroh obligations were not paid out of separate accounts for each partnership or property, but rather were paid at Kroh's convenience out of the giant commingled account.
Prior to 1986, the limited partnership had no bank accounts. All income generated by the shopping center before, during and after the disputed transfers was immediately appropriated by Kroh and deposited in the Kroh account. Funds were commingled with income from other properties owned by Kroh wholly or as a partner in other partnerships, together with other funds such as loan proceeds, interest earned on investments, note payments, and management fees. Income generated by the shopping center was never in possession or control of the partnership and was not traceable to or earmarked as property of the partnership.
Payments were due the first of each month. From late 1985 through the date of Kroh's bankruptcy filing in February, 1987, NFL received payments from Kroh which were posted as follows: November 15, 1985, December 9, 1985, January 6, 1986, February 6, 1986, March 13, 1986, April 10, 1986, May 15, 1986, July 14, 1986, August 26, 1986, September 2, 1986 and October 13, 1986.
When Kroh was unable to make the June, 1986 payment, NFL agreed that Kroh could skip it, but that future monthly payments were to be made as usual and the June payment was to be made up by the end of the year. After June, four monthly payments were made, but in the records of both Kroh and NFL, the June payment was not shown as skipped. Rather, each payment was applied to the previous month's payment. From July through October, Kroh issued and dated the check in one month, but held it for delivery until the following month. For example, a check for the June payment was issued and dated in June, but was not delivered until July 14; a check for the July payment was issued and dated in July, but was not delivered until August 26. After October's payment, which was applied as the September payment, no further payments were made to NFL and in February, 1987, Kroh filed its bankruptcy petition.
Approximately three and one half months after the last transfer, and two weeks before Kroh filed bankruptcy in February, 1987, the partnership conveyed the shopping center back to Kroh. NFL foreclosed on the property on September 25, 1987 and one year later, in August, 1988, transferred it, by an inter-company transfer, to an affiliate company. The transfer was recorded in company records for $2,300,000.
Debtor seeks to recover the last four payments, totalling $115,875.04, made from July through October, as transfers which occurred in the insider preference period between 90 days and one year before the date of Kroh's bankruptcy petition.
The parties stipulated that Kroh was insolvent at the time of the transfers and that the limited partnership was an insider of Kroh, its general partner. See 11 U.S.C. § 101(30)(B)(iv). Kroh's Complaint includes the following allegations:
In short, debtor alleges that pursuant to §§ 547 and 550, four transfers by Kroh during the one year insider preference period of § 547(b)(4)(B) should be recovered from NFL, a non-insider of debtor, because the partnership, an insider-creditor, benefited from the transfers.
In the typical insider preference action, an insider is a maker, co-maker, guarantor or surety of a debt owed by the debtor to a third party or "outside creditor." Debtor's transfer to the outside creditor in repayment of the debt benefits the insider by reducing or discharging the insider's personal liability as maker, co-maker, guarantor or insurer. See, e.g., Ray v. City Bank & Trust Co. (In re C-L Cartage Co., Inc.), 899 F.2d 1490, 1492, 1494-95 (6th Cir.1990); Lowrey v. First National Bank of Bethany (In re Robinson Brothers Drilling, Inc.), 97 B.R. 77, 79-80, 82-83 (W.D.Okla. 1988), aff'd, 892 F.2d 850 (10th Cir.1989); Levit v. Ingersoll Rand Financial Corp. (In re V.N. Deprizio Const. Co.), 874 F.2d 1186, 1190, 1190 n. 4, 1194 (7th Cir.1989).
Deprizio, C-L Cartage and Robinson hold that because of such benefit to an inside creditor, the debtor's transfer to an outside creditor more than 90 days before bankruptcy can be recovered from the outside creditor, as the immediate transferee of the transfer. Underlying the typical insider preference is the likelihood that in the period preceding bankruptcy, an insider-guarantor is both motivated and able to cause the debtor to pay down those debts on which the insider-guarantor is also liable. This rationale for recovery of insider preferences from the non-insider transferee recognizes that insiders are likely to direct the debtor's allocation of resources in favor of the insider's interests as the debtor's resources shrink. C-L Cartage, 899 F.2d at 1495; Deprizio, 874 F.2d at 1195; Robinson, 97 B.R. at 82-83 n. 5.
Prior to trial, NFL moved to dismiss the complaint based on a District Court decision in the Western District of Missouri, Block v. Texas Commerce Bank...
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