Rine & Rine Auctioneers, Inc., In re

• Decision Date: 22 January 1996
• Docket Number: No. 95-1158,95-1158
• Citation: 74 F.3d 854
• Parties: Bankr. L. Rep. P 76,766 In re RINE & RINE AUCTIONEERS, INC., Debtor. RINE & RINE AUCTIONEERS, INC., Plaintiff, v. DOUGLAS COUNTY BANK & TRUST COMPANY; David Huddle, Defendants-Appellees. Richard D. Myers, Trustee-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 854

74 F.3d 854

Bankr. L. Rep. P 76,766

In re RINE & RINE AUCTIONEERS, INC., Debtor RINE & RINE AUCTIONEERS, INC., Plaintiff, v. DOUGLAS COUNTY BANK & TRUST COMPANY; David Huddle Defendants-Appellees Richard D. Myers, Trustee-Appellant.

No. 95-1158.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 13, 1995.

Decided Jan. 22, 1996.

Christopher D. Curzon, Omaha, NE, argued. David L. Crawford appeared on the brief, for appellant.

Thomas O. Ashby of Thomas Ashby, Omaha, NE, argued. Steven C. Turner appeared on the brief, for appellee.

Before McMILLIAN, HEANEY and MURPHY, Circuit Judges.

McMILLIAN, Circuit Judge.

Richard D. Myers (Trustee), trustee of the bankruptcy estate of Rine & Rine Auctioneers, Inc. (Debtor), appeals from an order entered in the United States District Court for the District of Nebraska, affirming the bankruptcy court's judgment in favor of Douglas County Bank & Trust Company (Bank) in an adversary proceeding brought by the Trustee pursuant to 11 U.S.C. Sec. 547, alleging that a payment in the amount of $6,761.48 made by Debtor to David Huddle and the Bank was an avoidable preferential transfer. Myers v. Douglas County Bank & Trust Co. (In re Rine & Rine Auctioneers, Inc.), No. 8:CV94-269 (D.Neb. Dec. 7, 1994), aff'g No. BK92-80770/A93-8098 (Bankr.D.Neb. Apr. 18, 1994). For reversal, the Trustee argues that the bankruptcy court erred in holding that the money paid by Debtor to Huddle and the Bank was held by the Debtor as an agent for its principal, Huddle, and it was therefore not property of the estate which the Trustee could recover under Sec. 547. For the reasons discussed below, we reverse the order of the district court and remand the case to the district court with instructions.

Background

The underlying facts are summarized as follows. Debtor was a corporation in the business of auctioning personal property for its customers. Debtor orally agreed with Huddle, an auto repair business owner, that Debtor would conduct an auction sale to dispose of Huddle's business assets. Huddle's business assets were the security for a loan which had been made by the Bank to Huddle. Debtor agreed to conduct the sale, collect the proceeds, deduct advertising expenses and its commission, and distribute the remainder to the financial institutions holding security interests in the assets sold; the remainder, if any, would be paid to Huddle. The Huddle sale occurred on December 18, 1991, and earned $23,737.50, which was deposited in Debtor's general bank account. Thereafter, Debtor issued a check in the amount of $6,761.48 payable to the Bank and Huddle. Huddle endorsed the check to the Bank, which received the full amount of the check as payment for Huddle's outstanding loan. ¹

On April 27, 1992, Debtor filed for relief under Chapter 7 of the United States Bankruptcy Code. The Trustee filed an adversary proceeding against the Bank and Huddle, seeking to set aside the payment made by Debtor to the Bank and Huddle on grounds that the payment was an avoidable preferential transfer under 11 U.S.C. Sec. 547(b). ² The Trustee maintained that Huddle was a creditor and the money in dispute was property of the bankruptcy estate which should be distributed in the normal course of the bankruptcy proceedings. Following a hearing, the bankruptcy court entered a written order in which it concluded that, under Nebraska law, Debtor and Huddle were in an agent-principal relationship, not a debtor-creditor relationship, and therefore the money was, at all relevant times, the property of Huddle. Because Huddle owned the money, the bankruptcy court reasoned, the money was never the property of Debtor and therefore the Trustee had failed to satisfy the threshold requirement that there be a transfer of "an interest of the debtor in property." 11 U.S.C. Sec. 547(b). Thus, the bankruptcy court held that Debtor's payment to the Bank and Huddle was not an avoidable preferential transfer. Slip op. at 2-3. The Trustee appealed the bankruptcy court's ruling to the district court. Upon review, the district court agreed with the bankruptcy court's analysis and affirmed. This appeal followed.

Discussion

Under the Bankruptcy Code, a trustee may avoid a pre-petition transfer of property by the debtor to a third party upon proof of several criteria. 11 U.S.C. Sec. 547(b). A threshold requirement of Sec. 547(b), however, is that the property transferred be "an interest of the debtor in property." Id. This requirement is satisfied in the present case if the money transferred to Huddle and the Bank was property of Debtor's estate at the time of the transfer. See Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1279 & n. 8 (8th Cir.1988) (Bellanca I ) (the phrase "property of the debtor" in the pre-1984 version of Sec. 547(b), which was replaced by "an interest of the debtor in property," is equivalent to "property of the estate" for purposes of determining whether the transfer of proceeds derived from the debtor's sale of transferee's assets constituted a voidable preference); see also 4 Lawrence P. King et al., Collier on Bankruptcy p 547.03, at 547-25 ("[t]he fundamental inquiry is whether the transfer diminished or depleted the debtor's estate"), 547-24 n. 18 (citing cases), 547-25 n. 20 (citing cases) (15th ed. 1995) (hereinafter Collier). Under 11 U.S.C. Sec. 541(a)(1), property of the estate is generally defined to include all legal or equitable interests of the debtor in property.

When a bankruptcy court's judgment is appealed to the district court, the district court acts as an appellate court and reviews the bankruptcy court's legal determinations de novo and findings of fact for clear error. Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987). As the second court of appellate review, we conduct an independent review of the bankruptcy court's judgment, applying the same standards of review as the district court. Id. In the present case, the controlling legal issue that was before the district court, and is now before this court on appeal, is whether the bankruptcy court erred in holding that the transfer did not involve an interest of the debtor in property, as required by Sec. 547(b). Central to this statutory issue is the question of whether the relationship between Debtor and Huddle, vis-a-vis the money transferred, was that of agent and principal or debtor and creditor at the time of the transfer. As a general rule, if property is in the debtor's hands as agent, the property or proceeds therefrom are not treated as property of the debtor's estate. 4 Collier p 541.08, at 541-42 to 541-42.1. State law controls questions concerning the nature and extent of the debtor's interest in property. N.S. Garrott & Sons v. Union Planters Nat'l Bank (In re N.S. Garrott & Sons), 772 F.2d 462, 466 (8th Cir.1985) (Garrott ). Therefore, Nebraska law governs the question of whether or not an agency relationship existed at the time of the transfer. Accord 4 Collier p 547.03, at 547-24 to 547-25 ("The term 'interest of the debtor in property' is not defined in the Bankruptcy Code ... and thus, '[w]e look to state law to determine whether property is an asset of debtor.' ") (quoting Kallen v. Ash, Anos, Freedman & Logan (In re Brass Kettle Restaurant, Inc.), 790 F.2d 574, 575 (7th Cir.1986)). Once that state law determination is made, however, we must still look to federal bankruptcy law to resolve the statutory issue. See Garrott, 772 F.2d at 466 (once a determination is made regarding the nature and extent of the debtor's interest in property, federal bankruptcy law dictates the extent to which that interest is property of the estate). ³

The bankruptcy court in the present case held that, because Debtor was the agent of Huddle, the Trustee had failed to meet his burden of proving that the money transferred to the Bank and Huddle was property of Debtor's estate. The bankruptcy court reasoned:

In Nebraska, the relationship between an auctioneer and the party who has employed the services of the auctioneer to sell personal property is that of principal and agent. Edwin Bender & Sons v. Ericson Livestock [Comm'n Co.], 228 Neb. 157, 421 N.W.2d 766 (1988). Under the law of agency when an agent is entrusted with care of a principal's property, ownership remains in the principal. Edmondson v. Aladdin Synergetics, Inc. (In re Tinnell Traffic Services, Inc.), 43 B.R. 277, 279 (Bankr.M.D.Tenn.1984). Additionally, when there exists a true agency relationship, a transfer by the agent of agency property to the principal is not a voidable preference. The reason is that the transfer is not property of the debtor but is property of the principal. Jensen-McLean Co. v. Crouthamel Potato Chip Co. (In re Crouthamel Potato Chip Co.), 6 B.R. 501 (Bankr.E.D.Pa.1980).

In this case, the debtor entered into an oral contract with Mr. Huddle. The contract provided that Mr. Huddle would make his personal property available for sale and that the debtor would conduct an auction. Following the auction, the debtor would collect the proceeds of the sale and, after deducting sale expenses, including commission, would deliver the balance to [Huddle] or to [Huddle's] secured creditors.

The debtor did conduct the auction and collect the proceeds. The fact that the debtor deposited the proceeds into the debtor's own account does not change the ownership of the proceeds. The relationship of the parties was that of agent and principal. The agent, the debtor, held the property, the proceeds of the sale, for the principal, Mr. Huddle. Mr. Huddle did not at any time agree that the proceeds of the sale would become the property of the debtor.

Slip op. at 2.

Citing Wright & Souza, Inc. v. DM Properties, 1 Neb.App. 822, 510 N.W.2d 413 (1993) (Wright & Souza ), the Trustee argues that the bankruptcy court erred in holding that Debtor and Huddle were in an agency relationship at the time the money was...