In re Merry-Go-Round Enterprises, Inc.

• Decision Date: 23 February 2005
• Docket Number: No. 04-1646.,04-1646.
• Citation: 400 F.3d 219
• Parties: In re: MERRY-GO-ROUND ENTERPRISES, INC., Debtor. Deborah H. Devan, Plaintiff-Appellee, v. PHOENIX AMERICAN LIFE INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

400 F.3d 219

In re: MERRY-GO-ROUND ENTERPRISES, INC., Debtor Deborah H. Devan, Plaintiff-Appellee, v. PHOENIX AMERICAN LIFE INSURANCE COMPANY, Defendant-Appellant.

No. 04-1646.

United States Court of Appeals, Fourth Circuit.

Argued: December 2, 2004.

Decided: February 23, 2005.

COPYRIGHT MATERIAL OMITTED

ARGUED: Morton Alfred Faller, Shulman, Rogers, Gandal, Pordy & Ecker, P.A., Rockville, Maryland, for Appellant. Cynthia Louise Leppert, Neuberger, Quinn, Gielen, Rubin & Gibber, P.A., Baltimore, Maryland, for Appellee. ON BRIEF: Stephen A. Metz, Shulman, Rogers, Gandal, Pordy & Ecker, P.A., Rockville, Maryland, for Appellant. Deborah H. Devan, Jason M. St. John, Neuberger, Quinn, Gielen, Rubin & Gibber, P.A., Baltimore, Maryland, for Appellee.

Before KING and SHEDD, Circuit Judges, and Henry F. FLOYD, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed by published opinion. Judge King wrote the opinion, in which Judge Shedd and Judge Floyd joined.

KING, Circuit Judge:

In this appeal by Phoenix American Life Insurance Company ("Phoenix American"), we are called upon to decide whether interest payments made by a debtor on post-petition life insurance policy loans constitute avoidable transfers under § 549(a) of the Bankruptcy Code. Phoenix American maintains that the claim of the Trustee for the estate of debtor Merry-Go-Round Enterprises, Inc. ("MGRE") should have been denied because such interest payments are not, under the statute, avoidable "transfer[s] of property of the estate." 11 U.S.C. § 549(a). In the alternative, Phoenix American asserts that the interest payments made by MGRE were authorized by statute and the bankruptcy court. Both the bankruptcy and district courts disagreed with Phoenix American, ruling that interest payments made to Phoenix American by MGRE on post-petition life insurance policy loans were avoidable transfers. As explained below, we affirm.

I.

A.

In January 1985, MGRE, a retail clothing business operating approximately 1,442 stores nationwide, entered into separate but identical retirement agreements with ten of its executives, providing each of them an annual retirement income of approximately $100,000, commencing at age 65 (the "Retirement Agreements").¹ On September 1, 1985, MGRE purchased ten identical group life insurance policies from Phoenix American to fund the Retirement Agreements (the "Insurance Policies" or "Policies").² The Insurance Policies designated the executives as the insureds and MGRE as sole owner and beneficiary of the policies. Pursuant to the terms of the Insurance Policies, total annual premiums of approximately $191,500 were payable to Phoenix American by MGRE on September 1 of each policy year.

The Insurance Policies also provided that interest on outstanding loans was due and payable on September 1 of each year. If such interest was not timely paid, it was charged as an additional loan against a policy's cash value and added to the policy's loan balance. Finally, the Insurance Policies provided that they would be cancelled if a policy's loan balance exceeded its cash value. In order to pay the annual premiums due in 1986, 1987, and 1988, MGRE obtained loans from Phoenix American on the Insurance Policies — on September 1 of each year — against the accumulated cash values of the Policies, for an outstanding loan principal of approximately $575,000. For each of the years 1989 through 1993, MGRE paid the annual premiums on the Insurance Policies when they were due, plus interest on the outstanding loans. These payments were made by MGRE from its cash flow, without resort to any policy loans.

On January 11, 1994 (the "Commencement Date"), MGRE filed a Chapter 11 bankruptcy petition in the District of Maryland, seeking court protection in the reorganization of its business operations. On the Commencement Date, MGRE filed an "Emergency Motion for Authority to Make Payment in Full of (1) Payroll, (2) Reimbursable Employee Expenses, and (3) Employee Benefits." By this motion, MGRE disclosed the existence of the Insurance Policies, including the annual premiums of approximately $191,500, plus accrued annual interest of approximately $50,000 on the outstanding loans, due on September 1, 1994. Although the bankruptcy court granted the motion in part, MGRE did not seek, and the court did not award, any relief relating to the Retirement Agreements or the Insurance Policies.

On March 17, 1994, MGRE filed an "Amended Motion to Approve Payment of Certain Prepetition Employee Benefits" (the "Amended Motion"). The Amended Motion stated, in pertinent part, that: "[MGRE] has supplemental retirement agreements with certain executive officers. . . . [A]pproval is sought to maintain and honor these agreements. A list of affected employees, titles, policy numbers and cash values is included. . . ." Amended Motion at ¶ 9. On April 11, 1994, the bankruptcy court ruled on the Amended Motion, entering an order providing that "the debtors shall be permitted to honor and maintain the supplemental retirement agreements described in the [Amended Motion]" (the "April 11, 1994 Order"). No mention was made in the Amended Motion or the April 11, 1994 Order of the outstanding loans against the Insurance Policies.

On November 9, 1994, MGRE directed a request to Phoenix American seeking to "borrow the maximum cash value available" on the Insurance Policies and for Phoenix American to deduct the annual premiums due on September 1, 1994.³ On December 9, 1994, pursuant to MGRE's request, Phoenix American issued a check to MGRE in the sum of $1,210,752.70 ("Loan I"), representing the maximum loans available to MGRE at that time less the 1994 annual premiums of approximately $191,500 (for the policy year September 1, 1994, through August 31, 1995).

By September 1, 1995, additional cash values had accumulated in the Insurance Policies, but loans totalling $1,976,695.86 remained outstanding.⁴ On September 26 1995, MGRE paid Phoenix American accrued interest on the outstanding loans in the sum of $134,689.10 ("Interest Payment I") for the preceding policy year (September 1, 1994, through August 31, 1995). That same day, MGRE again directed a request to Phoenix American to "borrow the maximum cash value available" on the Insurance Policies and directed Phoenix American to deduct the annual premiums from the sum to be loaned. Pursuant to MGRE's request, Phoenix American, on October 27, 1995, paid MGRE the sum of $99,875.69 ("Loan II"), representing the maximum loans available at that time less the loans used to pay the 1995 annual premiums of approximately $191,500 (for the policy year September 1, 1995, through August 31, 1996). The approval of the bankruptcy court was neither sought nor obtained for any of the loans made by Phoenix American on the Insurance Policies after the Commencement Date.

On March 1, 1996, the bankruptcy court converted the MGRE bankruptcy case to a Chapter 7 liquidation proceeding and the Trustee was appointed. On October 1, 1996, upon demand of the Trustee that the estate be paid the cash surrender values of the Insurance Policies, Phoenix American issued the Trustee a check for $810.63. This sum represented (1) the total cash values of the Insurance Policies ($2,438,695.29), (2) minus the outstanding loans ($2,268,057.34),⁵ and (3) minus accrued interest on the outstanding loans for the preceding policy year (September 1, 1995, through August 31, 1996) of $169,827.32 ("Interest Payment II").

B.

On September 2, 1997, the Trustee initiated an adversary proceeding against Phoenix American in the bankruptcy court seeking to recover the sum of $1,616,144.81 for the loans Phoenix American had made on the Insurance Policies after the Commencement Date, i.e., Loans I and II (collectively, the "Loans"), and the two interest payments made by MGRE on those loans, i.e., Interest Payments I and II. The Trustee contended that the Loans and Interest Payments I and II were unauthorized post-petition transfers under 11 U.S.C. § 549, which provides, in relevant part, that "the trustee may avoid a transfer of property of the estate . . . that occurs after commencement of the case . . . [and] that is not authorized under this title or by the court." 11 U.S.C. § 549(a)(2)(B) (the "Statute"). On March 31, 1999, after the parties filed cross-motions for summary judgment, the bankruptcy court granted summary judgment to Phoenix American with respect to the Trustee's claims on the Loans. However, the court denied any relief to Phoenix American with respect to Interest Payments I and II, concluding that they may have constituted unauthorized post-petition transfers under the Statute, and preserving that issue for trial. Devan v. Phoenix Am. Life Ins. Co. (In re Merry-Go-Round Enter., Inc.), No. 94-5-0161-SD, slip op. at 6-9 (Bankr.D.Md. Mar. 31, 1999) (granting in part and denying in part motion for summary judgment) ("Bankr.Op.I").

On September 12, 2003, the parties filed renewed motions for summary judgment on the Trustee's claims relating to Interest Payments I and II, and the parties agreed that these motions should be heard together at the bench trial scheduled for November 3, 2003. In connection with the summary judgment motions and the upcoming trial, the parties, on October 20, 2003, filed the Joint Stipulation with multiple exhibits. The court thereafter conducted the bench trial and rendered an oral opinion in favor of the Trustee on Interest Payments I and II. Devan v. Phoenix Am. Life Ins. Co. (In re Merry-Go-Round Enter., Inc.), Tr. of Judge's Decision Only, No. 94-5-0161-SD (Bankr.D.Md. Nov. 3, 2003) ("Bankr.Op.II"). Pursuant thereto, on November 24, 2003, the court entered judgment against Phoenix American in the sum of $214,211.72, plus pre-judgment interest from August 29, 1997. The court determined the amount of the judgment by aggregating Interest Payment I ($135,689.10) with Interest Payment II ($169,826.32)...