Levit v. Ingersoll Rand Financial Corp.

• Decision Date: 12 May 1989
• Docket Number: 88-3092 and 88-3093,Nos. 88-3091,s. 88-3091
• Citation: 874 F.2d 1186,19 Bankr.Ct. Dec. 574
• Parties: , 22 Collier Bankr.Cas.2d 36, 19 Bankr.Ct.Dec. 574, Bankr. L. Rep. P 72,910, 11 Employee Benefits Ca 1323 Louis W. LEVIT, Trustee of V.N. Deprizio Construction Co., Plaintiff-Appellee, v. INGERSOLL RAND FINANCIAL CORPORATION, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1186

874 F.2d 1186

57 USLW 2677, 22 Collier Bankr.Cas.2d 36,

19 Bankr.Ct.Dec. 574,

Bankr. L. Rep. P 72,910,

11 Employee Benefits Ca 1323

Louis W. LEVIT, Trustee of V.N. Deprizio Construction Co., Plaintiff-Appellee, v. INGERSOLL RAND FINANCIAL CORPORATION, et al., Defendants-Appellants.

Nos. 88-3091, 88-3092 and 88-3093.

United States Court of Appeals, Seventh Circuit.

Argued April 11, 1989.

Decided May 12, 1989.

David M. Schiffman, Sidley & Austin, Chicago, Ill., Garry D. Gray, Dept. of Justice, Tax.Div., Appellate Section, Washington, D.C., for defendants-appellants.

Louis W. Levit, Levit & Mason, Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Judge, and FLAUM and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

We must decide a question no other appellate court has addressed: whether payments to creditors who dealt at arms' length with a debtor are subject to the year-long preference-recovery period that 11 U.S.C. Sec. 547(b)(4)(B) provides for "inside" creditors, when the payments are "for the benefit of" insiders, Sec. 547(b)(1). The bankruptcy court in this case answered "no", 58 B.R. 478 (Bankr.N.D.Ill.1986), and the district court "yes", 86 B.R. 545 (N.D.Ill.1988). We agree with the district court for the most part, although we conclude that payments satisfying pension obligations ordinarily are not for the benefit of inside creditors, and payments of tax obligations never are.

I

In 1980 V.N. Deprizio Construction Co. was awarded contracts to do $13.4 million of work on the extension of Chicago's subway system to O'Hare Airport. By 1982 the company was in financial trouble. Because Mayor Byrne wanted the line open before the primary election for that office in February 1983, the City made the firm extraordinary loans of $2.5 million; the firm in turn donated $3,000 to the Mayor's campaign fund. Neither outlay achieved its purpose. The line wasn't finished on time, and Byrne lost. These and other dealings by Richard N. Deprizio, the firm's president, including suspicions of affiliation with organized crime, led the United States Attorney to open an investigation. In April 1983 Deprizio Co. filed a petition under the Bankruptcy Code of 1978. Other firms finished the subway, which opened in 1984.

As the investigation continued and Deprizio's indictment was imminent, word circulated that he might "sing". So in January 1986 Deprizio was lured to a vacant parking lot, where an assassin's gun and the obligations of a lifetime were discharged together. Corporations are not so easily liquidated.

Deprizio Co. had borrowed money from many sources other than the City of Chicago, including Ingersoll Rand Financial Corp., CIT Group/Equipment Financing, Inc., and Melrose Park Bank & Trust. Richard Deprizio co-signed the note to the Bank. Richard and his brothers, Robert and Edward, all insiders of the firm, also guaranteed its debts to other lenders. ("Insider", a term to which we return, includes officers of the debtor and the officers' relatives.) As the district court observed "the record is devoid of detail" concerning these guarantees. Details are potentially important, because CIT maintains on appeal that no insider guaranteed any of the firm's debts to it. The Trustee does not contest this but maintains that inside creditors received a benefit from payments to CIT because insiders had guaranteed debt secured by collateral in which CIT held the senior interest.

Deprizio Co. was party to collective bargaining agreements calling for payments to pension and welfare plans, for the benefit of the firm's employees. When it fell behind in making the required payments, the firm executed notes in favor of the plans, secured by junior interests in equipment in which Ingersoll and CIT held senior interests. Richard Deprizio co-signed the notes to several plans. The Central States Pension and Welfare Funds received only notes and security interests from Deprizio Co.; no insider guaranteed these notes.

Then there were tax obligations. Employers must remit to the government taxes withheld from wages. The Trustee believes that Deprizio Co. fell behind in making these payments but made substantial payments of delinquent withholding taxes in the year before bankruptcy. The United States, on the other hand, believes that Deprizio Co. did not remit any overdue taxes during the year before it filed its petition in bankruptcy.

Payments out of the ordinary course in the 90 days before filing a bankruptcy petition may be recovered for the estate under Secs. 547 and 550. Creditors then receive shares determined by statutory priorities and contractual entitlements rather than by their ability to sneak in under the wire. Payments to or for the benefit of an insider during a full year, not just 90 days, may be recovered by virtue of Sec. 547(b)(4)(B). The Trustee filed adversary proceedings against the lenders, the pension and welfare funds, and the United States--none of them insiders--seeking to recover payments made more than 90 days but within the year before the filing. The Trustee reasoned that the payments made to these outside creditors were "for the benefit" of inside co-signers and guarantors, because every dollar paid to the outside creditor reduced the insider's exposure by the same amount.

Without deciding whether any of the payments was preferential within the meaning of Sec. 547 or worked to the benefit of any insider, the bankruptcy judge denied the Trustee's request. Judge Eisen concluded that any transfer to an outside creditor for the benefit of an insider should be treated as two transfers: one being the money, and the other the benefit. A transfer may be recovered under Sec. 550(a) only to the extent it is avoidable under Sec. 547. The monetary transfer to the outsider is not avoidable, Judge Eisen concluded, when made more than 90 days before the filing. Thus it may not be recovered from the outsider, even though the benefit to the insider may be recovered from the insider.

On an interlocutory appeal to the district court, Judge Plunkett reversed. He concluded that payment is only one transfer, although a transfer may create benefits for many persons. If the insider receives a benefit, then the transfer is avoidable under Sec. 547(b)(4)(B) if made within a year of the bankruptcy and does not qualify for the exclusions in Sec. 547(c). (These include payments in the ordinary course of business, payments for equivalent value received, and so on.) Section 550(a), as Judge Plunkett read it, allows the Trustee to recover the transfer from either the recipient or the indirect beneficiary, at the Trustee's option. The district court remanded the case so that the bankruptcy court could determine whether the payments identified by the Trustee occurred, whether an insider received a benefit from any particular payment, and whether any of them was protected by Sec. 547(c). Judge Plunkett certified the question under 28 U.S.C. Sec. 1292(b), and we granted leave to appeal. ¹

II

Many bankruptcy and district judges have addressed the question we confront, ² as have commentators. ³ A majority of judges have concluded that insiders' guarantees do not expose outside lenders to an extended preference-recovery period, frequently because they believe that recovery would be inequitable when ordinarily outside creditors need restore only preferences received within the 90 days before bankruptcy. The commentators are evenly divided.

A

Six sections of the Bankruptcy Code supply the texts. Section 547(b) says:

Except as provided in subsection (c) 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.

This is Sec. 547(b) as amended in 1984. The version in force in 1983, when this case began (and thus the one applicable to it), applied the year-long period for insiders only if the insider "had reasonable cause to believe the debtor was insolvent at the time of such transfer", Sec. 547(b)(4)(B)(ii), a qualification unimportant to this case.

Section 547(b) uses three terms of art: "creditor", "insider", and "transfer", and the definition of "creditor" brings in a fourth: "claim". Section 101 defines each.

(4) "claim" means--

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; ...

(9) "creditor" means--

(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor;

(B) entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g), 502(h) or 502(i) of this title; ...

(30) "insider" includes--

* * *

(B) if the debtor is a corporation--

(i) director of the debtor;

(ii) officer of the debtor;

(iii) person in control of the debtor;

* * *

(vi) relative of a general partner, director, officer, or person in control of the debtor;

* * *

(50) "transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption; ...

...