Southmark Corp., Matter of
| Citation | 49 F.3d 1111 |
| Decision Date | 14 April 1995 |
| Docket Number | No. 94-10534,94-10534 |
| Parties | , 33 Collier Bankr.Cas.2d 558, 27 Bankr.Ct.Dec. 48, Bankr. L. Rep. P 76,457 In the Matter of SOUTHMARK CORPORATION, Debtor. SOUTHMARK CORPORATION, Appellant, v. Joseph GROSZ, Appellee. Fifth Circuit |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Michelle E. Roberts, Roberts & Smaby, James Roberts Prince, Thompson & Knight, Dallas, TX, for appellant.
D. Ronald Reneker, Thomas E. Shaw, Bird & Reneker, Dallas, TX, for appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before DUHE, WIENER and STEWART, Circuit Judges.
Southmark Corporation ("Southmark"), a debtor in possession, appeals from a judgment dismissing its claim that a payment to Joseph Grosz, a former officer of one of Southmark's subsidiaries, was preferential and thus avoidable under 11 U.S.C. Sec. 547. As we conclude that the bankruptcy court erred in determining that Grosz was not compensated with funds from Southmark's estate, we reverse the summary dismissal of Southmark's preference claim and remand for further proceedings consistent with this opinion.
Southmark, debtor in possession of a real estate and financial services company, 1 has literally hundreds of affiliated businesses and subsidiaries, one of which is a wholly owned subsidiary named American Realty Advisors ("ARA"). In 1984, Grosz entered in an employment agreement with Southmark and Southmark Funding (later renamed ARA), to serve as the president and a director of ARA, and American Realty Trust, another of Southmark's wholly owned subsidiaries. In consideration of that service, Grosz was entitled to compensation in the form of, inter alia, loan procurement fees, bonuses, and profit sharing.
Sometime during the late 1980s, the relationship between Southmark and Grosz soured, and Southmark refused to pay Grosz portions of the accrued fees and bonuses to which he believed he was entitled. Southmark and Grosz decided to resolve the dispute out of court and entered in a settlement agreement.
Pursuant to that agreement, Southmark delivered Grosz a check totaling $289,258.96, $214,228 of which was for commissions and other compensation that he had previously earned. 2 Although the check named ARA as the remitter and the W-2 Form reporting Grosz' income to the IRS identified ARA as the payor, the check was actually drawn on an account owned by Southmark.
The somewhat confused circumstances surrounding the identity of the entity that paid Grosz' check was drawn on a general miscellaneous bank account, referred to as the "Payroll Account." 3 Like other accounts in the CMS, the Payroll Account is maintained in Southmark's name and is owned, operated, and controlled by Southmark. Southmark used funds from the account to pay for its own obligations in addition to those incurred by affiliates and subsidiaries participating in the CMS. There is no evidence of any agreement between ARA and Southmark restricting Southmark's access to or use of the funds in the Payroll Account. In fact, had Southmark desired, it could have totally depleted that account to pay its own creditors--or those of any affiliate or subsidiary--without regard to any other subsidiary's contribution to or balance remaining in the account.
Grosz were caused by the fact that Southmark uses a cash management system (the "CMS") to administer more efficiently and effectively its financial operations and assets. The CMS employs several different bank accounts to process all deposits, transfers, and payments of Southmark and of those affiliates and subsidiaries--such as ARA--that also use the CMS. Although each company's receipts and disbursements are commingled in the CMS for cash management purposes, they are segregated for record keeping purposes and can be readily identified. At the time Grosz was paid, ARA had a positive balance in the CMS.
In 1989, Southmark filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. 4 Almost two years later, Southmark, as a debtor in possession, filed an adversary action in Bankruptcy Court in the Northern District of Texas in which it sought to recover, inter alia, the payment to Grosz, arguing that the transfer was a preferential payment and thus avoidable under Sec. 547(b). Grosz filed a motion for summary judgment, arguing, among other things, that the funds with which he had been paid were not the property of Southmark's estate, so that the payment was not an avoidable preference. The bankruptcy court agreed and dismissed Southmark's preference claim (the "February Order"), then tried the remaining issues in the case, ultimately ruling in favor of Grosz on all counts.
Southmark appealed the February Order to the district court, which affirmed the bankruptcy court's summary judgment. In the instant appeal, Southmark urges only that the court erred in dismissing its claim that the $214,228 portion of the disbursement to Grosz was a preferential payment, and is thus avoidable under Sec. 547(b).
Both the bankruptcy court and the district court granted summary judgment for Grosz. "Summary judgment is appropriate if the moving party establishes that there is no genuine issue of material fact and that it is entitled to a judgment as a matter of law." 5 "The courts' reasoning on issues of law must be appraised de novo." 6
The bankruptcy court dismissed Southmark's preference claim against Grosz based primarily on the court's reasoning in a prior ruling, Southmark Corporation v. Kranz, 9 which involved Southmark and another of its subsidiaries, Southmark/Envicon. In Kranz, the bankruptcy court held that a payment to Kranz, a former officer of Southmark/Envicon, was not an avoidable transfer under Sec. 547(b), even though that payment, like the one to Grosz here, was made from Southmark's Payroll Account. 10 The bankruptcy court took judicial notice of the fact that, in numerous other cases in which claims had been filed against Southmark's affiliates or subsidiaries, "Southmark had encouraged this court in thousands of objections to be very mindful of the separate legal entity [with which] people were dealing." The court then concluded that Southmark could not avoid the transfer, because Southmark/Envicon--not Southmark--was the corporate entity that actually paid Kranz, therefore the transfer was made with property belonging to Southmark/Envicon.
In the instant case, the court invoked Kranz and again held that the transfer did not involve property from Southmark's estate:
The court has consistently in the Southmark case attempted to recognize appropriate boundaries of legal entities not imposing liability on a parent company if it's not there, but by the same token not permitting the parent company when it's appropriate to step into the shoes of the subsidiary and so forth. The result is there have been lots of claims against Southmark disallowed, but it also cuts in this case in favor of the defendant [Grosz].
The court continued,
The fact that funds are transferred through a cash management system to get The bankruptcy court's ruling dismissing Southmark's preference claim makes clear that the court was attempting, in an equitable fashion, to disentangle the various assets and liabilities of the Southmark family of companies. 11 Although Sec. 105(a) of the Bankruptcy Code ("Code") authorizes bankruptcy courts to fashion such orders as are necessary to further the substantive provisions of the Code, that provision does not, as we recently observed, empower bankruptcy courts to act as " 'roving commission[s] to do equity.' " 12 "Even the broad powers of the bankruptcy courts to fashion equitable remedies ... must be exercised only within the confines of the Bankruptcy Code." 13 "The 'statute does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law....' " 14
into a Southmark payroll account in San Jacinto does not create a genuine issue of material fact, [that] in this case this is an ARA, Inc. payment. It's an ARA check. W-2 Reports to the IRS it's an ARA payment. The ARA accounts are charged and credited. Southmark's providing a servicing function here only. The property interests are those of ARA.
In attempting to do equity here, the bankruptcy court exceeded the limits of its equitable powers under Sec. 105(a) by creating substantive rights that otherwise would not have existed. The court ruled that ARA possessed a property interest in funds that, under the law governing avoidable preferences, indisputably belonged to Southmark's estate: The check paid to Grosz was...
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