In re Southern Air Transport, Inc.

• Decision Date: 14 December 2007
• Docket Number: No. 06-3796.,06-3796.
• Citation: 511 F.3d 526
• Parties: In re SOUTHERN AIR TRANSPORT, INCORPORATED, Debtor. Triad International Maintenance Corporation, Appellant, v. Southern Air Transport, Inc., Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

511 F.3d 526

In re SOUTHERN AIR TRANSPORT, INCORPORATED, Debtor Triad International Maintenance Corporation, Appellant, v. Southern Air Transport, Inc., Appellee.

No. 06-3796.

United States Court of Appeals, Sixth Circuit.

Argued: March 13, 2007.

Decided and Filed: December 14, 2007.

ARGUED:

Leon Friedberg, Carlile, Patchen & Murphy, Columbus, Ohio, for Appellant. Timothy A. Riedel, Bailey Cavalieri, Columbus, Ohio, for Appellee.

ON BRIEF:

Leon Friedberg, Carlile, Patchen & Murphy, Columbus, Ohio, for Appellant. Timothy A. Riedel, Nicholas V. Cavalieri, Bailey Cavalieri, Columbus, Ohio, for Appellee. Marshall S. Filler, Obadal, Filler, MacLeod & Klein, Alexandria, Virginia, for Amicus Curiae.

Before: NORRIS, GILMAN, and McKEAGUE, Circuit Judges.

OPINION

ALAN E. NORRIS, Circuit Judge.

The bankruptcy trustee of Southern Air Transport, Inc. ("SAT"), a debtor in a Chapter 11 proceeding, seeks to recover a $100,000 payment made to defendant Triad International Maintenance Corporation ("TIMCO") as an avoidable preference under the Bankruptcy Code. 11 U.S.C. § 547(b). TIMCO advances two theories in response: that it was a fully secured creditor at the time of the payment; alternatively, that the payment represented a contemporaneous exchange for new value, an exception to the usual rule prohibiting transfers of interest in the debtor's property made within 90 days of the filing of the bankruptcy petition. 11 U.S.C. § 547(c).

The bankruptcy court ruled in favor of the trustee in bankruptcy, and the district court affirmed. Because we hold that the trustee in bankruptcy failed to meet his burden of proving the elements necessary to establish that the payment to TIMCO was preferential, and thus avoidable under 11 U.S.C. § 547(b), we REVERSE the judgment of the district court and REMAND the case to the bankruptcy court for further proceedings consistent with this opinion.

I.

Given that we review the bankruptcy court's findings of fact for clear error, In re 5900 Assocs., Inc., 468 F.3d 326, 329 (6th Cir.2006), the following summary is drawn largely from that court's order granting summary judgment.

SAT is a Nevada corporation with its principal place of business in Columbus, Ohio. As its name suggests, SAT is engaged in the air transportation of cargo. As part of its operation, it leases planes, including the plane at issue in this appeal a McDonnell Douglas DC8-73 Aircraft ("the Aircraft") leased from Aerolease Financial Group, Inc. ("Aerolease"). SAT began leasing the Aircraft in 1994 for a five-year term.

TIMCO is a Delaware corporation with its principal offices in Greensboro, North Carolina. Its primary business is the service, repair, maintenance, and storage of aircraft. In 1992, it entered into an aircraft maintenance agreement with SAT. The bankruptcy court opinion provides the following detail concerning the financial dealings between the parties during the months leading up to the disputed transfer:

On or about November 14, 1997, TIMCO and SAT entered into an Amended Maintenance Agreement providing for maintenance, overhaul and repair services known as a "C" check on the Aircraft. The payment terms, among other items, provided for a $250,000 payment due upon induction of the Aircraft to TIMCO's facility, but in no event payment beyond November 21, 1997 and payment of not less than 100% of the total estimated invoice due upon completion of the work prior to departure of the Aircraft.

SAT paid $250,000 to TIMCO as a prepayment for the "C" check on the Aircraft.

....

SAT and TIMCO exchanged correspondence and communications regarding additional work to be performed on the Aircraft and demanding payment for past due amounts. This correspondence resulted in SAT making a $3,000,000 partial payment to TIMCO for the "C" check. SAT made the partial payment on April 13, 1998.

After April 13, 1998, SAT and TIMCO continued to negotiate relative to payments on the "C" check and performance of services for the "D" check. SAT also requested an early termination of the Lease.

TIMCO demanded payments and certain terms from SAT for continued services and past due invoices through written correspondence and communications. By letter dated May 15, 1998, TIMCO outlined requirements for SAT to show good faith and to pay the amount of $50,000 per week for five weeks beginning the week of May 18 to reduce the amount owed. The letter also required the Lessor to guarantee payment for work performed to date and the amount for the "D" check.

SAT made payments to TIMCO of $50,000 each on May 22, June 1, June 12, and June 16, 1998. Those payments were applied against the amounts due for the "C" check.

Lessor agreed to guarantee the payment of balances due and owing for the "C" check and "D" check, upon certain stated conditions, from the reserves held by the Lessor under the Lease.

By cover letter dated July 30, 1998, John Eichten, on behalf of TIMCO, provided to SAT a progress invoice number 9807139 for service order number 147025 in the amount of $603,329.65 for work completed and for which payment was required prior to test flight, and other enclosures.

....

By letter dated August 8, 1998, Bing Crosby, on behalf of SAT, sent a letter to TIMCO agreeing to complete [SAT]'s obligations under the Second Amendment on certain conditions including the payment of $100,000 on the past due invoice number 9807139.

SAT authorized the Transfer as payment upon invoice 9807139 and TIMCO accepted the Transfer as a payment on said invoice.

On August 11, 1998, SAT transferred $100,000.00 to TIMCO by wire as a partial payment on invoice 9807139, dated July 30, 1998, for $603,329.65 (the "Transfer"), which Transfer is the subject of this Adversary Proceeding.

Between August 12 and September 10, 1998, TIMCO completed in satisfactory fashion all of the inspections requested by SAT, Lessor and Emery Worldwide including that required by Lessor for the early termination of the Lease and the re-lease of the Aircraft from Lessor to Emery Worldwide, the cost of which was paid in full to TIMCO by Lessor.

On or before September 10, 1998, Lessor, pursuant to its agreement paid TIMCO the unpaid balances of the "C" Check, "D" Check and "E" Check and related work relative to the Aircraft.

In re Southern Air Transp., Inc., No. 00-0041, slip op. at 4-6 (Bankr.S.D.Ohio Jan. 4, 2002). On October 1, 1998, SAT filed a voluntary petition for relief under Chapter 11, which was less than 90 days from the time of the $100,000 transfer at issue. Thereafter, the bankruptcy trustee, on behalf of SAT, sought to avoid the August 11 payment to TIMCO.

II.

A. Preliminary Matters

Standard of Review

"We review the bankruptcy court's decision directly, according no deference to the district court. The bankruptcy court's findings of fact are reviewed for clear error, and questions of law are reviewed de novo." In re 5900 Assocs., Inc., 468 F.3d at 329 (citations omitted).

The Statutory Framework

Sections 547(b) and 550(a) of the Bankruptcy Code provide that the bankruptcy trustee may recover the value of property transferred by the debtor to a creditor within 90 days before the date of the filing of the bankruptcy petition if certain conditions are met. Of central importance to this appeal is the provision that the disputed transfer is avoidable if the creditor receives more than it would have received had no transfer been made, and the case had been filed under Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 547(b)(5). This avoidance provision is designed "to accomplish proportionate distribution of the debtor's assets among its creditors, and therefore to prevent a transfer to one creditor that would diminish the estate of the debtor that otherwise would be available for distribution to all." In re Shelton Harrison Chevrolet, Inc., 202 F.3d 834, 837 (6th Cir.2000) (quoting In re Nucorp Energy, Inc., 902 F.2d 729, 733 (9th Cir.1990)).

The second statutory provision at issue in this appeal is referred to as the "new value" exception. 11 U.S.C. § 547(c). It provides that the trustee may not avoid a transfer if it was "intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and [was] in fact a substantially contemporaneous exchange." 11 U.S.C. § 547(c)(1)(A) & (B).

The Bankruptcy Court's Reasoning

After finding the facts outlined earlier and reviewing the statutory framework, the bankruptcy court framed the case in these terms:

[T]he relevant determinations that remain for this Court are (1) whether the last element of the avoidable preference set forth under Section 547(b)(5) has been met, i.e., whether the transfer enabled TIMCO to receive more than TIMCO would received if (a) Debtor's bankruptcy case were a proceeding under Chapter 7 of the Bankruptcy Code, (b) the transfer had not been made, and (c) TIMCO received payment of such debt to the extent provided by the Bankruptcy Code; and (2) whether TIMCO's release of its purported and asserted statutory lien rights against the Aircraft constitute new value for purposes of Section 547(c)(1).

In re Southern Air Transp., Inc., No. 00-0041, slip op. at 10 (Bankr.S.D.Ohio Jan. 4, 2002).

As it does before this court, TIMCO took the position below that it was a fully secured creditor at the time of the $100,000 payment by virtue of an artisan's lien against the Aircraft. Because North Carolina, the state in which the work was performed, does not require a formal written filing to perfect such a lien, TIMCO asserts that it need not have filed notice of its interest in the Aircraft with the Federal Aviation Administration ("FAA"), which maintains a national registry in Oklahoma City of encumbrances against aircraft. As summarized by the bankruptcy court, SAT countered by (1) noting that it did not own the Aircraft, but was a mere lessee; (2) arguing that an artisan's lien cannot attach to a leasehold interest;...