In re USA Inns of Eureka Springs, Arkansas, Inc., Civ. No. 92-3106.
| Decision Date | 12 February 1993 |
| Docket Number | Civ. No. 92-3106. |
| Citation | 151 BR 492 |
| Parties | In re U.S.A. INNS OF EUREKA SPRINGS, ARKANSAS, INC., Debtor. Claude R. JONES, Plaintiff, v. UNITED SAVINGS AND LOAN ASSOCIATION, Defendant. |
| Court | U.S. District Court — Western District of Arkansas |
Steven B. Davis, Davis & Goldie, Harrison, AR, for Claude Jones.
Gail Inmann Campbell, Walker, Campbell, Campbell & Crawford, Harrison, AR, for United Sav. and Loan Ass'n.
Currently before the court for disposition is an appeal of the bankruptcy court's decision in the above styled matter. The bankruptcy court, after conducting a trial on November 11, 1991, and taking the issues under advisement, by memorandum opinion entered on September 30, 1992, 151 B.R. 486, found that the appellant, United Savings and Loan Association, failed to prove one of the three essential elements needed to establish the applicability of 11 U.S.C. § 547(c)(2) (1988), and therefore, pursuant to 11 U.S.C. § 547(b) (1988), the appellee, Claude R. Jones, Trustee, is entitled to a preferential transfer judgment against the appellant for $63,000.00. After careful consideration of the decision issued by the bankruptcy court, this court believes that the judgment should be reversed and the matter remanded for further action consistent with this opinion.
A United States' district court has jurisdiction to entertain appeals from final orders entered by a bankruptcy judge pursuant to 28 U.S.C. § 158(a) (1992), and thus jurisdiction properly has been asserted. This court is also the proper venue for appellant's appeal pursuant to the dictates of § 158(a).
Appellant has raised two issues for consideration in the appeal of this matter. First, appellant submits that the bankruptcy court erred in its application of 11 U.S.C. § 547(c)(2)(C) to the facts of this case. Second, appellant submits that the bankruptcy court erred in finding that appellant failed to prove the payments in issue were made according to ordinary business terms.
A bankruptcy court's conclusions of law are subject to de novo review by the district court, which must make an independent determination of the applicable law and accuracy of the legal conclusions adopted by the bankruptcy judge. See Matter of Bonnett, 895 F.2d 1155 (7th Cir. 1990). Appellants' first issue, the bankruptcy court's interpretation and application of 11 U.S.C. § 547(c)(2)(C), is properly characterized as a matter of law and thus reviewed de novo.
The factual findings of a bankruptcy court, whether based on oral or documentary evidence, are reviewed under the "clearly erroneous" standard. Bankruptcy Rule 8013 (1992); See Logan v. Basic Distribution Corp. (In re Fred Hawes Organization, Inc.), 957 F.2d 239, 242 (6th Cir. 1992), citing Yurika Foods Corp. v. United Parcel Service, 888 F.2d 42, 45 (6th Cir. 1989). A finding is "clearly erroneous" when although there is evidence to support it, the court reviewing the entire evidence is left with the definite and firm conviction that a mistake has been committed. Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 500 (8th Cir.1991), quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948); In re LeMaire, 898 F.2d 1346, 1349 (8th Cir.1990) (en banc). Thus, the appellant's second issue for review, the court's factual finding that appellant failed to prove that the payments in issue were made according to ordinary business terms, is subject to review under the clearly erroneous standard.
The stipulated record reveals the following: On July 31, 1985, Eureka Motel, a joint venture, made and delivered to United Savings and Loan Association (hereinafter United) a promissory note in the principal sum of $2,700,000.00. The promissory note was secured by a mortgage interest in Eureka Motel and a security interest in all of the furniture, fixtures, equipment and inventory of Eureka Motel, both of which were properly perfected. Eureka Motel thereafter failed to make timely payments under the terms of the agreement and a foreclosure action was initiated by United in the Chancery Court of Carroll County, Arkansas.
On August 10, 1988, while the note was in default, Eureka Motel entered into an agreement to sell and convey the collateral to the debtor, U.S.A. Inns of Eureka Springs, Arkansas, Inc. (hereinafter USA Inns). United was not notified of the transaction until after it was consummated. Under the terms of the agreement, USA Inns agreed to pay Eureka Motel the sum of $3,625,000.00 for the collateral, of which $30,000 was paid in cash and the remainder paid by assumption of Eureka Motel's indebtedness. On November 10, 1988, USA Inns entered into an agreement with United, whereby USA Inns agreed to assume and pay the aforementioned indebtedness of Eureka Motel to United, totaling $2,795,437.33.
USA Inns failed to make timely payments under the terms of the assumption agreement, and on June 12, 1989, United exercised its option to accelerate the entire indebtedness and declare the entire balance under the terms of the promissory note and assumption agreement immediately due and payable. On June 10, 1989, a qualified appraiser retained by United had appraised the fair market value of the collateral at $2,620,000.00. Thereafter, on October 4, 1989, United filed foreclosure proceedings against USA Inns and on October 10, 1989, USA Inns filed its bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. As of the date of the bankruptcy petition, USA Inns was indebted to United in the amount of $2,815,037.65.
Thereafter, on November 8, 1989, USA Inns filed an action seeking to recover, inter alia, payments made to United during the ninety-day period prior to the filing of the aforesaid Chapter 11 petition. During the ninety-day period, USA Inns made payments to United as follows:
DATE AMOUNT
07-14-89 $ 6,538.45
07-21-89 6,461.55
07-26-89 7,000.00
08-01-89 1,845.37
08-01-89 11,154.63
08-08-89 2,642.19
08-17-89 7,357.81
08-18-89 966.30
08-18-89 5,233.70
08-25-89 3,800.00
09-01-89 10,000.00
__________
TOTAL $63,000.00
As of September 30, 1991, the total assets of the bankrupt estate consisted of a bank account with a balance of $5,183.61 and a claim for the recovery of preferential transfers against United for $63,000.00.
On November 8, 1991, a trial was conducted on the matter of the alleged preferential transfers by USA Inns to United. The question for adjudication was whether the payments made by USA Inns, totaling $63,000.00, were received by United under the exception to preferential transfers as provided by 11 U.S.C. § 547(c).
Section 547(b) states that certain transfers made within a period preceding the petition for bankruptcy may be avoided as "preferences." 11 U.S.C. § 547(b) (1988). Under section 547(b), a bankruptcy trustee may avoid the transfer to a creditor of an interest in property by the debtor that is made (1) on or within 90 days before the date of the filing of the bankruptcy petition, (2) while the debtor was insolvent, (3) on account of an antecedent debt, and (4) which enables the creditor to receive more than it would have received in a bankruptcy liquidation. The parties stipulated that under the facts and circumstances of this matter the requisite elements are present to constitute a preference under section 547(b).
However, the Bankruptcy Code permits the transferee of a preferential payment to prevent avoidance of the transfer by satisfying three requirements set forth in 11 U.S.C. § 547(c)(2).1 Section 547(c) states in pertinent part that:
11 U.S.C. § 547(c)(2) (1988).
During trial the bankruptcy court received the stipulated record on behalf of the trustee, Claude R. Jones, and testimony from J.C. Benage, chairman of the board, president, and chief executive officer of United. Mr. Benage testified that Eureka Motel entered into an agreement with USA Inns whereby Eureka Motel transferred its interest in loan collateral to USA Inns in August of 1989. He testified that United did not learn of the transfer in interest to USA Inns for almost two months, but thereafter, reluctantly entered into an assumption agreement with USA Inns, whereby United opted to forego its right to exercise a due-on-sale clause contained in its agreement with Eureka Motel.
Mr. Benage testified that USA Inns then failed to make timely monthly payments of $27,000.00 pursuant to the assumption agreement with United. He stated, however, that United, recognizing that the motel business in Eureka Springs, Arkansas is a seasonal cash flow business, decided not to call the loan for failure to make timely payments because the contract was made, the business was in place, and United's board decided that it was in the "best interest of United" not to call the loan. Mr. Benage also testified that United was encouraged and directed by regulatory authorities to work with customers in the "so-called real estate crisis that's going on across this country" and that this was another reason why the loan was not called:
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