Royal Golf Products Corp., In re

Citation908 F.2d 91
Decision Date18 July 1990
Docket NumberNo. 88-1615,88-1615
PartiesBankr. L. Rep. P 73,541 In re ROYAL GOLF PRODUCTS CORP., a Michigan Corporation, Debtor. Charles TAUNT, Trustee, Plaintiff-Appellee, v. FIDELITY BANK OF MICHIGAN, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Joseph A. Ahern (argued), Stark, Readan & Finnerty, Troy, Mich., for plaintiff-appellee.

John William Butler, Jr., Bloomfield Hills, Mich., Richard P. Saslow, Mark L. Kowalsky, John D. Hertzberg, Butzel, Keidan, Simon, Myers & Graham, Detroit, Mich., Lawrence A. Lichtman, (argued), Bloomfield Hills, Mich., for defendant-appellant.

Before JONES, WELLFORD and GUY, Circuit Judges.

NATHANIEL R. JONES, Circuit Judge.

Fidelity Bank of Michigan appeals from the district court's judgment, which affirmed the bankruptcy court's finding of a voidable preference under 11 U.S.C. Sec. 547(b) (1982). For the following reasons, we affirm the judgment of the district court.


On November 5, 1985, the defendant-appellant, Fidelity Bank of Michigan ("Fidelity"), loaned $194,000.00 to Royal Golf Products Corporation ("Royal Golf" or "Debtor"). Fidelity did not take a security interest in any of Royal Golf's property in connection with the loan. However, Francis McMath ("McMath"), a shareholder in Royal Golf, directed the National Bank of Detroit ("NBD") to issue an irrevocable letter of credit in the amount of $200,000.00, with Fidelity as the named beneficiary. The letter of credit thus served as Fidelity's "security" for the loan, and McMath was personally liable to NBD for any amount paid upon the letter of credit.

In April of 1986, Royal Golf defaulted on the Fidelity loan, and Fidelity sought to draw against the letter of credit issued by NBD. McMath, however, requested that Fidelity accept another form of payment. McMath then directed a trust which he controlled to disburse funds to Fidelity in repayment of Royal Golf's obligation. On May 5, 1986, the Francis McMath Revocable Trust disbursed $101,640.00 to Fidelity, and on May 21, 1986, the trust disbursed another $94,471.75 to Fidelity. These payments, totalling $196,054.75, fully satisfied Royal Golf's obligation.

McMath's payments to Fidelity were subject to a security agreement executed by Royal Golf on behalf of McMath on April 26, 1985, in connection with another loan. The security agreement provided, in pertinent part, as follows:

For the purpose of collateralizing and securing the sum of One Hundred Fifty Thousand and 00/100 ($150,000) Dollars and any other sums which may become due and owing by the Debtor to the Secured Party, the Debtor does hereby grant to Secured Party security interests in and to the following described collateral of Secured Party:

all ... general intangibles ... [and] any and all other personal property of every kind and nature, now owned and hereafter existing or acquired, subject only to validly existing and perfected prior liens.

Said security shall remain in full force as long as the Debtor is in any manner obligated or indebted to Secured Party, and shall give the secured party a continuing lien in, and on said collateral, the proceeds of sale thereof, in any replacements, additions, accessions or substitutes therefor, all after acquired property and all products of such collateral.

J. App. at 35 (emphasis added). Since McMath's payment of Royal Golf's obligation to Fidelity was essentially a loan, the amounts paid by McMath were "sums which [became] due and owing from the Debtor [Royal Golf] to the secured party [McMath]" under the security agreement.

On May 30, 1986, approximately one month after McMath satisfied the obligation to Fidelity, an involuntary bankruptcy petition was filed against Royal Golf under Chapter 7 of the United States Bankruptcy Code. On December 19, 1986, Royal Golf's trustee in bankruptcy, plaintiff-appellee Charles Taunt ("Trustee"), filed a complaint in federal bankruptcy court seeking to recover the payments from McMath to Fidelity as preferences under Section 547(b) of the Bankruptcy Code, 11 U.S.C. Sec. 547(b) (1982). After conducting a hearing, the bankruptcy judge filed a memorandum opinion on November 10, 1987, which concluded that the challenged payments constituted voidable preferences. 79 B.R. 695. Because McMath's loan to Royal Golf was subject to a security agreement, the bankruptcy court found that there was a transfer of Royal Golf's property when McMath paid the obligation to Fidelity. However, because Royal Golf's net worth at the time of the transfers was only $157,000.00, the bankruptcy court found that the transfers could not have depleted Royal Golf's estate by more than that amount. Therefore, the bankruptcy court found Fidelity liable to the Trustee for $157,000.00, plus interest and costs.

On January 12, 1988, Fidelity appealed the bankruptcy court's ruling to the United States District Court for the Eastern District of Michigan. The district court affirmed the bankruptcy court's ruling in all respects. Fidelity then filed the instant appeal.


Fidelity argues that both the bankruptcy court and the district court erred in finding that the payments from McMath to Fidelity constituted voidable preferences under Sec. 547(b) of the Bankruptcy Code. Fidelity contends that there was no transfer of Royal Golf's property, within the meaning of Sec. 547(b), because the security for the McMath loan did not deplete the value of Royal Golf's estate. Fidelity argues that since McMath's security interest is unperfected and because bankruptcy trustees may avoid payment of secured loans which are unperfected, see 11 U.S.C. Sec. 544(a) (1982 & Supp. IV 1986), there was no depletion of assets to satisfy the claims of Royal Golf's general creditors. Fidelity also contends that requiring it to disgorge the payments from McMath, when the Trustee is not required to honor McMath's unperfected security interest, would unduly enrich Royal Golf's estate.

Section 547(b) of the Bankruptcy Code empowers a trustee to void a transfer as preferential if the trustee can show that the following six elements exist:

(1) a transfer of property of the debtor;

(2) to or for the benefit of a creditor;

(3) for or on account of an antecedent debt owed by the debtor before the transfer was made;

(4) made while the debtor was insolvent;

(5) made on or within ninety days before the date of the filing of the petition, or between ninety days and one year before the date of the filing if the creditor is an insider; and

(6) the transfer enables the creditor to receive more than such creditor would receive if

(A) the case were under Chapter 7 of Title 11;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by Title 11.

In the instant case, the parties agree that their dispute is concerned solely with the question of whether the first of the foregoing six elements is satisfied; that is, whether there was a transfer of Royal Golf's property when McMath paid the Fidelity obligation.

In In re Hartley, 825 F.2d 1067, 1068 (6th Cir.1987), this court addressed the "question of whether a payment by a third party to a creditor on behalf of a debtor is a voidable preferential transfer when the debtor grants security interests to the third party in exchange for the payment." The debtor in Hartley overdrew his account with a certain bank. Following discussions among the debtor, the bank and a third party (Midwest), Midwest paid $500,000.00 directly to the bank to cover the overdraft. In return, the debtor gave Midwest security interests in certain real and personal property. Soon thereafter, the debtor filed a Chapter 7 petition for bankruptcy. The bankruptcy trustee subsequently brought an action to recover the $500,000.00 alleging that it was a voidable preference under Sec. 547(b).

This court held in Hartley that Midwest's payment of the $500,000.00 constituted a preference under Sec. 547(b), but only to the extent of the actual value of the security interest. The Hartley court reasoned that the debtor "controlled" the payment to the bank by pledging its property as security to Midwest. Since the debtor "controlled" the payment, the court reasoned that there was a transfer of the debtor's property (the security interest) within the meaning of Sec. 547(b). The Hartley court was careful to note, however, that "[e]ven where the debtor transfers a security interest in return for the loan, the payment is only a voidable preference to the extent the transaction depleted the debtor's estate." 825 F.2d at 1071. The Hartley court stated that when a loan is made for the specific purpose of paying a particular creditor, the payment is a voidable preference only to the extent the transaction prejudiced the rights of the general creditors. Id. (citing Virginia National Bank v. Woodson (In re Decker ), 329 F.2d 836 (4th Cir.1964)). In other words, the payment is...

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