Sufolla, Inc., In re

• Decision Date: 23 August 1993
• Docket Number: No. 92-35202,92-35202
• Citation: 2 F.3d 977
• Parties: , 24 Bankr.Ct.Dec. 1011, Bankr. L. Rep. P 75,396 In re SUFOLLA, INC., dba Lewis Packing Co., Debtor. OFFICIAL UNSECURED CREDITORS COMMITTEE OF SUFOLLA, INC., on behalf of the ESTATE OF SUFOLLA, INC., dba Lewis Packing Co., Plaintiff-Appellee, v. U.S. NATIONAL BANK OF OREGON, a National Banking Association, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 977

2 F.3d 977

62 USLW 2136, 24 Bankr.Ct.Dec. 1011,

Bankr. L. Rep. P 75,396

In re SUFOLLA, INC., dba Lewis Packing Co., Debtor OFFICIAL UNSECURED CREDITORS COMMITTEE OF SUFOLLA, INC., on behalf of the ESTATE OF SUFOLLA, INC., dba Lewis Packing Co., Plaintiff-Appellee, v. U.S. NATIONAL BANK OF OREGON, a National Banking Association, Defendant-Appellant.

No. 92-35202.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 14, 1993.

Decided Aug. 23, 1993.

John Casey Mills, Miller, Nash, Wiener, Hager & Carlsen, Portland, OR, for defendant-appellant.

Michael F. Crotty, Deputy Gen. Counsel for Litigation, American Bankers Ass'n, Washington, DC, for amicus.

No appearance for plaintiff-appellee.

Appeal from the United States District Court for the District of Oregon.

Before: GOODWIN, FARRIS, and THOMPSON, Circuit Judges.

FARRIS, Circuit Judge:

U.S. National Bank of Oregon appeals the district court's judgment in favor of the Official Unsecured Creditors Committee of Sufolla, Inc., in the Committee's action to recover a transfer made by the Chapter 11 debtor to the Bank. The district court found the transfer to be preferential and allowed the Creditors Committee to recover against the Bank pursuant to 11 U.S.C. Sec. 550(a)(1). After examining for the first time the problem of the "trilateral preference," we affirm.

I.

On December 11, 1985, Sufolla entered into a loan and security agreement with the Bank whereby the Bank agreed to supply Sufolla with a line of credit and Sufolla granted the Bank a security interest in certain collateral to secure any resulting indebtedness. The Bank subsequently perfected its interest. Sufolla's obligation was guaranteed by certain of its shareholders.

Sufolla filed a voluntary petition for reorganization on June 9, 1988. Prior to March 9, 1988, but subsequent to June 9, 1987, Sufolla paid the Bank $4,322.05 from the sale of equipment, a source other than collateral.

The Official Unsecured Creditors Committee initiated an adversary proceeding against the Bank in the United States Bankruptcy Court for the District of Oregon, seeking, inter alia, to avoid and recover the payment to the Bank. ¹ The bankruptcy court concluded that the transfer was a preference recoverable directly from the Bank and entered judgment against the Bank for $4,322.05. The Bank appealed to the United States District Court for the District of Oregon, which affirmed the judgment of the bankruptcy court. This appeal followed. ²

The issue presented is one of statutory construction. We review the district court's judgment de novo. Briggs v. Kent (In re Professional Inv. Properties of America), 955 F.2d 623, 626 (9th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 63, 121 L.Ed.2d 31 (1992).

II.

A.

Section 547(b) of the Bankruptcy Code permits the trustee in bankruptcy to avoid certain prepetition transfers of property interests of the debtor. ³ Section 547(b)(4)(B) establishes an extended preference recovery period for transfers made to or for the benefit of an insider. The one-year preference period is designed to deter insiders from influencing an insolvent debtor to distribute its remaining assets in a manner that benefits the insider to the detriment of non-insider creditors. Section 550(a) empowers a trustee in bankruptcy to recover transfers avoided under Sec. 547(b). ⁴

The individuals who guaranteed Sufolla's obligation are "insiders" within the meaning of Sec. 547(b)(4)(B), see 11 U.S.C. Sec. 101(31) (Supp. III 1991). None of the defenses in Sec. 547(c) are implicated. The guarantors are also "creditors" within the meaning of Sec. 547(b)(1) because they have a contingent right to payment from the debtor. See 11 U.S.C. Sec. 101(10), (5) (Supp. III 1991).

In the customary trilateral preference case, the debtor transfers an interest in property to a non-insider creditor within one year--but not within ninety days--of bankruptcy. The trustee, representing the unsecured creditors of the debtor, seeks to avoid the transfer under Sec. 547(b) and to recover from the non-insider under Sec. 550(a), on the theory that the transfer benefited the insider guarantor by reducing the guarantor's exposure on the debtor's obligation.

B.

Although we confront this issue for the first time, four circuits have held that a trustee may recover from an outside creditor a transfer made within one year of bankruptcy, where the transfer benefits an inside guarantor. See Levit v. Ingersoll Rand Fin. Corp. (In re V.N. Deprizio Constr.), 874 F.2d 1186 (7th Cir.1989); Southmark Corp. v. Southmark Personal Storage, Inc. (In re Southmark Corp.), 993 F.2d 117, 120 (5th Cir.1993); Ray v. City Bank & Trust Co. (In re C-L Cartage Co.), 899 F.2d 1490 (6th Cir.1990); Manufacturers Hanover Leasing Corp. v. Lowrey (In re Robinson Bros. Drilling, Inc.), 892 F.2d 850 (10th Cir.1989), aff'g, Lowrey v. First Nat'l Bank of Bethany (In re Robinson Bros. Drilling, Inc.), 97 B.R. 77 (W.D.Okla.1988); see also T.B. Westex Foods, Inc. v. Federal Deposit Ins. Corp. (In re T.B. Westex Foods, Inc.), 950 F.2d 1187 (5th Cir.1992) (allowing recovery from garnishor of payment made by debtor garnishee, where payment benefited garnishee's insider).

The leading case is In re Deprizio, upon which the bankruptcy court and the district court relied. Deprizio employed a "literal-reading" approach to the interpretation of Secs. 547(b) and 550(a). See generally Hank J. Brands, The Interplay Between Sections 547(b) and 550 of the Bankruptcy Code, 89 Colum.L.Rev. 530, 539 (1989). The Deprizio analysis begins with Sec. 547(b), which defines those transfers that are avoidable. Deprizio, 874 F.2d at 1194. Transfers benefiting inside creditors are subject to the extended preference period of Sec. 547(b)(4)(B).

Under Deprizio, once it is determined that the elements of Sec. 547(b) are satisfied, the unambiguous language of Sec. 550(a) then identifies the party responsible for repayment of the preference. Id. Section 550(a), unlike Sec. 547(b), makes no distinction between insiders and outsiders; recovery may be obtained from either the initial transferee (the outside creditor) or the entity for whose benefit the transfer was made (the inside creditor), id.; In re C-L Cartage, 899 F.2d at 1494, but not both, see 11 U.S.C. Sec. 550(c) ("The trustee is entitled to only a single satisfaction....").

C.

Several bankruptcy courts have concluded that an insider's guaranty does not expose an outside lender to the extended preference recovery period of Sec. 547(b)(4)(B), relying on their "equitable" powers to circumvent the "plain meaning" of Secs. 547(b) and 550(a). See, e.g., Official Creditors' Comm. of Arundel Hous. Components, Inc. (In re Arundel Hous. Components, Inc.), 126 B.R. 216, 219 (Bankr.D.Md.1991); Block v. Texas Commerce Bank Nat'l Ass'n (In re Midwestern Cos.), 96 B.R. 224, 225-28 (Bankr.W.D.Mo.1988), aff'd 102 B.R. 169 (W.D.Mo.1989); In re Aerco Metals, Inc., 60 B.R. 77, 82 (Bankr.N.D.Tex.1985); Schmitt v. Equibank (In re R.A. Beck Builder, Inc.), 34 B.R. 888, 894 (Bankr.W.D.Pa.1983).

Courts applying the "equitable approach" invariably cite Collier on Bankruptcy:

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 use its equitable powers to prevent an inequitable result.

....

The result produced by Deprizio and those courts that follow it is inequitable and produces the anomalous result that a creditor who does not demand a guarantee can be in a better position than one who does.

4 Collier on Bankruptcy p 550.02 at 550-12 to 550-14 (Lawrence P. King, ed., 15th ed. 1993).

The courts of appeals that have discussed the equitable approach unanimously have rejected it. In In re C-L Cartage, the Sixth Circuit held that bankruptcy courts "cannot use equitable principles to disregard unambiguous statutory language." 899 F.2d at 1494 (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 969, 99 L.Ed.2d 169 (1988) ("whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.")); accord Deprizio, 874 F.2d at 1197; In re Robinson Bros., 97 B.R. at 82 ("The equitable powers of the bankruptcy court under Section 105 to avoid strict construction of the Code is limited."); Zolg v. Kelly (In re Kelly), 841 F.2d 908, 913 n. 4 (9th Cir.1988) ("Bankruptcy judges have no more power than any others to ignore the plain language of a statute in order to reach a result more in keeping with their notions of equity.") (citation omitted); see also Brands, supra, at 539 ("Equitable interpretation without more ... is an inappropriate tool to insulate from liability an initial transferee who did not supply the factual predicate for avoidance.").

In Deprizio, the Seventh Circuit went even further, questioning the premise that recovery against the outside lender is inequitable:

Rules of law affecting parties to voluntary arrangements do not operate "inequitably" in the business world--at least not once the rule is understood. Prices adjust.... A rule may injure debtors and creditors by foreclosing efficient business arrangements and increasing the rate of interest low-risk borrowers must pay, ... but inefficiency is not inequity. At all events, in what sense is it "inequitable" to recapture payments to creditors that may have been favored only because payment reduced insiders' exposure (recall that the insiders select which debts to pay first), then distribute these monies according to statutory priorities and contractual entitlements? In what sense is it "inequitable" to require the outside lenders to pursue the inside guarantors for any shortfall, when they bargained for exactly that recourse?

874 F.2d at 1198 (citations omitted).

The above-quoted comments may be particularly apt where, as...