Matter of Midwestern Companies, Inc.
| Decision Date | 18 April 1989 |
| Docket Number | Bankruptcy A. No. 84-01679-SW-7-DJS,Civ. A. No. 89-5009-CV-SW-1.,Adv. A. No. 88-0624-SW-7-DJS |
| Citation | 102 BR 169 |
| Parties | In the Matter of The MIDWESTERN COMPANIES, INC., Debtor. Steven C. BLOCK, Trustee Appellant, v. TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Appellee. |
| Court | U.S. District Court — Western District of Missouri |
Steven C. Block, Kansas City, Mo., for trustee appellant.
Paul M. Hoffman of Smith, Gill, Fisher and Butts, Kansas City, Mo., Edward L. Rothenberg of Liddell, Sapp, Zivly, Hill, Houston, Tex., for defendant.
Before the court is an appeal from the bankruptcy court, where an order granting summary judgment was entered on December 15, 1988. 96 B.R. 224 (Bankr.W.D.Mo. 1988). The appellant/plaintiff trustee filed his brief February 17, 1989. The appellee/defendant bank association filed its brief on March 20, 1989. The trustee filed a brief on March 29, 1989, in reply to the bank's brief. For the reasons set forth below, that judgment of the Honorable Dennis J. Stewart will be affirmed.
The significant facts here apparently are undisputed. The trustee in bankruptcy filed a complaint on September 2, 1988, seeking to recover $2,032,800 from the defendant which was transferred by the debtor to the bank. The transfer occurred more than 90 days, but less than one year, prior to when the bankruptcy petition was filed. The bank had loaned money to the debtor. The bank was not considered an "insider," within the meaning of 11 U.S.C. § 101(30)(B), of the debtor corporation. However, the guarantor for the loan was an "insider." As a guarantor, the insider benefitted from the payment of the loan because his contingent liability was eliminated when the debt was paid.
In lieu of an answer to the complaint, the bank filed on November 4, 1988, a motion to dismiss for failure to state a claim. On December 15, 1988, the bankruptcy court entered its order to dismiss the complaint on the grounds that the bank was not an "insider" of the debtor within the meaning of 11 U.S.C. § 547(b)(4)(B). The bankruptcy court found that, inasmuch as the bank/transferee was not an insider, the transfer would not be avoided as a preference payment and the estate would not recover from the bank.
The trustee urges the transfer to be avoided so the bankruptcy estate can recover the loan payment. He argues that the payment operated as a preference for an insider (i.e., the guarantor, by relieving the insider/guarantor of liability on the debt) within a year prior to bankruptcy, and thus can be avoided. The bank argues that the Bankruptcy Code does not provide for avoiding a transfer to a non-insider more than 90 days prior to bankruptcy — regardless of whether the guarantor who benefits indirectly is an insider.
The issue on appeal is whether appellant's complaint states a claim for an avoidable preference which is recoverable from a non-insider creditor. The complaint alleges debtor transferred $2,032,800, more than 90 days but within a year of when the bankruptcy petition was filed, to a non-insider creditor who holds a guarantee from an insider of the debtor. Nevertheless, the bankruptcy court held that the complaint did not state a claim for a preference which is recoverable from the bank. In reviewing a bankruptcy court's decision, the district court functions as an appellate court and is authorized to affirm, reverse or modify the ruling, or to remand for further proceedings. Rule 8013, Fed.R.Bankr.P. The bankruptcy judge's findings of fact must be accepted unless they are clearly erroneous, but conclusions of law are subject to de novo review. In re Martin, 761 F.2d 472, 474 (8th Cir.1985).
The Bankruptcy Code statutes at issue are 11 U.S.C. §§ 101(4)(A), 101(9)(A), 101(30)(B), 547(b)(1), 547(b)(4)(A), 547(b)(4)(B), and 550(a)(1). Section 101(4)(A) defines a "claim" as a "right to payment, whether or not such a right is . . . contingent." Section 101(9)(A) defines a "creditor" as an "entity that has a claim against the debtor that arose at the time of or before the order of relief concerning the debtor." Section 101(30)(B) provides that an "insider" is one who has a relationship with the debtor corporation as a director, officer, person in control, partner, or relative of any of such persons.
Sections 547(b)(1) and 547(b)(4)(B) provide that the trustee in bankruptcy can avoid a transfer of money "to or for the benefit of a creditor . . . made — 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." Section 547(b)(4)(A) is the same, except that it sets a 90-day period for non-insiders. Section 550(a)(1) provides that the trustee may recover a transfer from the "initial transferee of such transfer or the entity for whose benefit the transfer was made."
The statutes are aimed at situations where debtors give preference to some creditors while on the verge of bankruptcy, leaving fewer assets to satisfy the remaining debts. Of course, insiders ordinarily can foresee financial trouble before non-insider/creditors. Hence, payments to insiders for a full year prior to bankruptcy may be avoided and recovered. Disbursements to non-insiders are recoverable only if they were paid during the 90 days preceding bankruptcy.
The problem in this instance is that the creditor — who received payment more than 90 days prior to bankruptcy — was not an insider, but the guarantor — who benefitted substantially from elimination of his contingent liability — was an insider. The bankruptcy court found that the creditor was the "initial transferee," as described in 11 U.S.C. § 550(a), who was not an insider and, therefore, the payment was not an avoidable preference.
The Bankruptcy Code bifurcates the treatment of avoidance and recovery issues concerning preferential transfers. Section 547 governs avoidability. Section 550 governs recoverability.
To ascertain avoidability, it is necessary to determine who "creditors" are because only transfers "to or for the benefit of a creditor" are avoidable. 11 U.S.C. § 547(b)(1). In this instance, clearly the bank is a creditor. However, under the broad definition of "creditor," the guarantor also is a creditor. Read together, sections 101(4)(A) and 101(9)(A) reveal that a guarantor is a creditor because he has a contingent right to payment. The right is contingent upon guarantor's payment to the lending creditor (bank) in lieu of payment by the debtor, thereby entitling the guaranteeing creditor (guarantor) to a claim against the debtor for reimbursement. See, In the Matter of R.A. Beck Builder, Inc., 34 B.R. 888, 892 (Bankr.W.D. Pa.1983); In re Big Three Transportation, Inc., 41 B.R. 16, 19 (Bankr.W.D.Ark.1983); In re Foland & Co., Inc., 55 B.R. 593, 594 n. 3 (Bankr.E.D.Pa.1985); In re Aerco Metals, Inc., 60 B.R. 77, 79 (Bankr.N.D.Tex. 1985). Cf. Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 894 (7th Cir.1988) ().
Here, a payment to the bank was both to a creditor (the bank) and for the benefit of a creditor (the insider/guarantor), even though it was a single transfer. Curiously, one court concluded that a single payment was two transfers; one to the primary creditor, and one to the guarantor. In re Mercon Industries, Inc., 37 B.R. 549, 552 (Bankr.E.D.Pa.1984) However, Section 550(a) refers to a transfer being recoverable from "the initial transferee . . . or the entity for whose benefit such transfer was made. . . ." This dichotomy demonstrates that a single transfer can be viewed differently for an initial transferee as compared to a beneficiary, such as a guarantor. Inasmuch as the benefit of the transfer inured to both the bank and creditor, it should be recoverable from either beneficiary if other conditions are met.
To further ascertain avoidability, it is necessary to determine whether the transfer was a preference. As mentioned in the preceding paragraph, the initial transferee is distinguished from "the entity for whose benefit such transfer was made." 11 U.S.C. § 550(a). A creditor which is not an insider is liable for recovery of transfers made within 90 days prior to bankruptcy. 11 U.S.C. § 547(b)(4)(A). A creditor (including a guarantor) who is an insider is liable for recovery of transfers made within one year of bankruptcy. 11 U.S.C. § 547(b)(4)(B). The conclusion here, then, is that the non-insider/bank is not liable for recovery (because the transfer occurred more than 90 days prior to bankruptcy) and the guarantor is liable for recovery (because the transfer occurred less than a year before bankruptcy.)
Several courts already have reached this conclusion. See, In re C-L Cartage Co., 70 B.R. 928, 933-934 (Bankr.E.D.Tenn. 1987); In re V.N. Deprizio Const. Co., 58 B.R. 478, 480-481 (Bankr.N.D.Ill.1986), rev'd, 86 B.R. 545 (N.D.Ill.1988); In re Aerco Metals, Inc., 60 B.R. 77, 82 (Bankr. N.D.Tex.1985); In re Mercon, 37 B.R. 549, 553 (Bankr.E.D.Pa.1984); In re R.A. Beck Builder, Inc., 34 B.R. 888, 894 (Bankr.W.D. Pa.1983); In re Duccilli Formal Wear, Inc., 8 B.C.D. 1180 (Bankr.S.D.Ohio 1982); In re Cove Patio Corp., 19 B.R. 843, 844 (Bankr.S.D.Fla.1982); In re Church Buildings and Interiors, Inc., 14 B.R. 128, 131 (Bankr.W.D.Okla.1981), rev'd in Lowrey v. First National Bank of Bethany, (In re Robinson Brothers Drilling, Inc.), 97 B.R. 77 (W.D.Okla.1988). These courts usually refer to the analysis of Section 550 provided in 4 Collier on Bankruptcy, § 550.02 at 550-7 (15th ed. 1983):
In some circumstances, a literal application of section 550(a) would permit the trustee to recover from a party who is innocent of wrongdoing and deserves protection. In such circumstances the bankruptcy court should exercise its discretion to use its equitable powers under 11 U.S.C. section 105(a) and 28 U.S.C. § 1481 to...
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