Warsco v. Preferred Technical Group

• Decision Date: 03 July 2001
• Docket Number: No. 00-3419,00-3419
• Parties: (7th Cir. 2001) MARK A. WARSCO, Trustee, Plaintiff-Appellant, v. PREFERRED TECHNICAL GROUP, Defendant-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 557

258 F.3d 557 (7th Cir. 2001)

MARK A. WARSCO, Trustee, Plaintiff-Appellant, v. PREFERRED TECHNICAL GROUP, Defendant-Appellee.

No. 00-3419

In the United States Court of Appeals For the Seventh Circuit

ARGUED JANUARY 23, 2001

DECIDED July 3, 2001

Appeal from the United States District Court for the Northern District of Indiana, Fort Wayne Division. No. 00 C 10--William C. Lee, Chief Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before POSNER, EASTERBROOK and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

Mark Warsco ("the trustee") is the trustee in bankruptcy for Presidential, Ltd. ("Presidential"). He filed this suit against Preferred Technical Group ("PTG") to avoid an alleged preference made to PTG by Presidential Holdings, L.L.C. ("LLC"). The parties filed cross motions for summary judgment in the district court; the district court granted PTG's motion and denied the trustee's. The trustee now appeals. For the reasons set forth in the following opinion, we reverse the judgment of the district court and remand the case for further proceedings.

I BACKGROUND

A. Facts¹

In 1998, Presidential purchased $2 million worth of assets from PTG. Presidential executed an unsecured, subordinated promissory note for $2 million in connection with this transaction ("the note"). The principal amount of the note subsequently was reduced to $1.75 million.

Thereafter, Presidential began experiencing financial difficulties. Monument Capital Partners 1, L.L.C. ("Monument"), a junior secured creditor of Presidential, was dissatisfied with Presidential's management, and it contacted Hans Rau, an entrepreneur, to see if Rau was interested in purchasing Presidential's assets. Rau apparently accepted Monument's invitation and formed LLC for the express purpose of acquiring Presidential's assets.

At some point during the negotiations between Presidential and LLC, PTG became involved in the discussions, although the exact nature and extent of its involvement are not perfectly clear from the record. The Asset Purchase Agreement ("APA") that memorialized the agreement between Presidential and LLC had a clause that conditioned the transaction on receipt of consent agreements containing releases and waivers from certain parties. PTG apparently was among these parties; it sent a letter dated April 15, 1999, to representatives of Presidential and Monument in which it stated that it would not sign the consent agreement "unless we [PTG] are compensated on an equitable basis for the existing notes we hold against Presidential." R.19, Ex.G.²

On April 26, 1999, PTG sent Monument a "follow up" letter "with regard to the Presidential Sales Agreement and subsequent conversations between [Monument] and [PTG] and with [Presidential]." R.19, Ex.H. In this letter, PTG agreed to sign the required consent agreement "if, at the time of Closing, the parties agree to pay [PTG] the amount of $500,000 to cover its outstanding note and accrued interest thereon." Id. Lastly, PTG stated that, "[i]f the purchase agreement can be modified to include the payment to [PTG], then we can move forward on this transaction." Id.

John Weingardt, the president of Presidential, submitted two affidavits in which he explained the nature of PTG'sinvolvement in the negotiations. In his first affidavit, Weingardt stated that "PTG negotiated with [Presidential] and the entities that financed the sale to [LLC] for a share of the proceeds from the sale of [Presidential's] assets to [LLC]." R.19, Ex.M at 2. In his second affidavit, Weingardt clarified that, "despite these initial negotiations, such a transaction never occurred. Instead, LLC purchased the Note from PTG, and PTG did not receive any of the proceeds from the sale of [Presidential's] assets." R.22, Ex.A at 2.

Although LLC eventually agreed to purchase the note from PTG for $500,000, it conditioned its purchase of the note on its ability to purchase Presidential's assets. Similarly, it conditioned its purchase of Presidential's assets on its ability to purchase the note from PTG for $500,000 or less. Both Rau and Weingardt submitted affidavits in which they explained that (1) the $500,000 that LLC paid to PTG for the note was not, and was not intended to be, part of the purchase price for Presidential's assets,³ (2) the $500,000 payment to PTG did not reduce the amount of debt Presidential owed on the note, and (3) Presidential did not exercise any control over how, when, or if PTG was paid for the note.

LLC offered three reasons for why it wished to purchase the note from PTG. First, LLC planned to reduce the principal amount of the note by $750,000 and to apply this amount toward the purchase price it paid for Presidential's assets. Second, LLC thought its purchase of the note would be advantageous to those of Presidential's creditors with which it expected to do business in the future, which did not include PTG. LLC believed that, if it could purchase the note from PTG, Presidential's other unsecured creditors would recover fifty cents on the dollar in the event Presidential declared bankruptcy, whereas PTG received only twenty-nine cents on the dollar for the note. Third, LLC wanted to secure a place as Presidential's largest unsecured creditor so as to occupy "a position of influence" during a potential bankruptcy proceeding. R.16, Ex.D at 3.

The APA that governed the sale of Presidential's assets to LLC defined the purchase price for the assets as (1) $3.425 million in cash,⁴ plus (2) the book value of the liabilities LLC assumed,⁵ plus (3) $750,000 of debt forbearance on the note LLC would purchase from PTG at the time of closing,⁶ plus (4) a post closing payment ("PCP") of $585,000. The total purchase price was subject to an adjustment; the amount of the adjustment depended on the value of Presidential's working capital at the time of closing.⁷ If Presidential's working capital was less than $1,255,000, the amount of the adjustment would be $1,255,000 less the value of the working capital. The adjustment would be due from Presidential to LLC, and it would take the form of a decrease in the aggregate amount of the PCP. Similarly, if Presidential's working capital was more than $1,370,000, the amount of the adjustment would be the value of the working capital less $1,370,000. The adjustment would be due from LLC to Presidential, and it would take the form of an increase in the aggregate amount of the PCP.

The transactions between the parties were consummated on May 5, 1999. The closing cash statement reveals that LLC had $4,470,000 on hand in cash at the time of closing. Of that cash, $2,470,325.97 was wired to National City Bank; $908,881.88 was wired to Monument; and $45,792.22 was wired to OHMITE Manufacturing Company. The total value of these three wires was $3.425 million. Additionally, $157,000 was wired to Extruded Metals and $37,500 was wired to Weingardt.⁸ Last but not least, $500,000 was wired to PTG. The combined value of all these disbursements is $4,119,500, which was $350,500 less than the total amount of cash on hand. The record provides no indication of what the parties did with this additional cash.

Presidential never received its PCP. The value of Presidential's working capital apparently was less than $1,255,000, although the record does not reveal the degree to which it came up short. The resulting adjustment, however, was large enough to wipe out the entire PCP, so that Presidential never received any portion of the $585,000.⁹

Within one month of the sale of Presidential's assets to LLC, an involuntary bankruptcy petition under Chapter 7 was filed against Presidential. The money Presidential received as a result of the asset sale was sufficient to pay only Presidential's secured creditors. Presidential's unsecured creditors received nothing from the bankruptcy estate, instead of the fifty cents on the dollar LLC initially thought the asset sale would provide them. The only unsecured creditor to receive any payment was PTG, which received the $500,000 LLC had paid it for the note. The trustee filed this action against PTG to avoid that $500,000 payment as a preference.

B. Earlier Proceedings

The parties filed cross motions for summary judgment in the district court. The court held that the trustee had failed to prove that the payment to PTG was a preference; therefore, it granted PTG's motion and denied the trustee's. According to the district court, the trustee's case was lacking in two critical respects. The first shortcoming was that the trustee was unable to demonstrate that the payment to PTG was a transfer of an interest of the debtor in property. See 11 U.S.C. sec. 547(b). The district court did not believe that the payment to PTG was part of the purchase price LLC paid to Presidential for its assets. As a result, LLC's independent decision to purchase the note from PTG did not deprive the bankruptcy estate of property it would have had if not for the transfer. Because the trustee was unable to demonstrate that LLC's payment to PTG somehow depleted the bankruptcy estate, he had not established that the payment was an interest of the debtor in property. Thus, the district court held that summary judgment was proper on this basis alone.

Nevertheless, the district court went on to address a second aspect of the trustee's case that, in its view, also served as an alternative basis for summary judgment in favor of PTG. The district court did not believe that the trustee demonstrated that the payment to PTG was for or on account of an antecedent debt owed by Presidential. See 11 U.S.C. sec. 547(b)(2). The key inquiry for the district court on this issue was how PTG applied the payment it received from LLC. The district court did not believe that the $500,000 that PTG received from LLC reduced the amount of debt Presidential owed to the holder of the note; instead, LLC's payment to PTG merely worked a substitution of creditors. Thus, the...