Weaver v. Aquila Energy Marketing Corp., Civil Action No. H-95-4785.
| Decision Date | 20 May 1996 |
| Docket Number | Civil Action No. H-95-4785. |
| Citation | 196 BR 945 |
| Parties | John W. WEAVER, Liquidating Trustee, Appellant-Cross Appellant, v. AQUILA ENERGY MARKETING, CORPORATION, Appellee-Cross Appellant. |
| Court | U.S. District Court — Southern District of Texas |
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Daniel H. Johnston, Jr., Brown Parker & Leahy, Houston, TX, for John W. Weaver.
Joel P. Kay, Sheinfeld Maley & Kay, Houston, TX, for Trans Marketing Houston, Inc.
H. DeWayne Hale, Hale Trust Aston Seckel & Taubenfeld, PC, Dallas, TX, Douglas F. Pedigo, Omaha, NE, for Aquila Energy Marketing Corporation.
U.S. Bankruptcy Clerk, U.S. Bankruptcy Clerk's Office, Houston, TX, amicus curiae.
William R. Greendyke, Houston, TX, amicus curiae, pro se.
Pending before the Court is the appeal of John W. Weaver, Liquidating Trustee (the "Trustee"), the cross-appeal of Aquila Energy Marketing Corporation ("Aquila"), and Aquila's request for oral arguments. The appeals come to this Court after a final judgment was entered in a core proceeding, pursuant to the Bankruptcy Act of 1978 (the "Code"), 28 U.S.C. § 157, et al. This Court has jurisdiction pursuant to 28 U.S.C. § 158(a).
The Trustee brought the original cause of action against Aquila to avoid an alleged "preferential transfer." The bankruptcy court found that no preferential transfer had occurred because neither Aquila nor the estate would benefit from the actions taken by Aquila. Having considered the briefs, the record, and the applicable law, the Court Reverses in part the bankruptcy court's judgment and Renders Judgment for the Trustee.
The following facts are undisputed. In early 1992, Aquila sold natural gas to Trans Marketing Houston, Inc. ("TMHI") on an unsecured or open account basis. However, TMHI never paid for the gas.
On or about March 17, 1993, Aquila filed a sworn garnishment application in state court directed against Banque Paribus (the "Bank"), TMHI's primary lender and largest secured creditor. The writ was sought in conjunction with Aquila's lawsuit also filed in state district court and seeking $1,832,538.12. The state district court issued the writ of garnishment on March 23, 1993, and the writ was served on the Bank on March 25, 1993. At the time the writ was served, TMHI had on deposit funds in excess of the $1.8 million.
On April 1, 1993, the Bank, notwithstanding the writ, applied the entire balance in TMHI's account against debts owed to it. The Bank did not send any written notices or declarations to TMHI that it's loans were in default, or that the loans were subject to acceleration before exercising the setoff.
On April 11, 1993, TMHI filed for protection under chapter 11 of the Bankruptcy Code. While under bankruptcy protection, TMHI filed an action as debtor-in-possession seeking to avoid Aquila's writ of garnishment as a preferential transfer under 11 U.S.C. § 547(b).
Aquila has not recovered a judgment on its lawsuit or writ but did file a proof of claim with the bankruptcy court in the amount of $3,442,282.26. Of this amount, $1,832,538.12 is claimed by Aquila to be secured by reason of its prejudgment writ that was served on the Bank prior to TMHI's bankruptcy.
On January 9, 1994, the bankruptcy court confirmed the second amended liquidating plan formulated by the official creditors' committee. The plan called for the creation of a trust to take over all of TMHI's assets. In addition, it stayed the state court proceedings. Another key provision of the plan required the Trustee to prosecute TMHI's avoidance action to a final judgment.
Aquila objected to confirmation of the liquidation plan. The objection was based, in part, on the plan's provisions requiring the Trustee to pursue the avoidance action. Aquila argued that the pursuit of that action would only benefit the Bank, not TMHI's unsecured creditors. Also, Aquila argued that the plan deprived it of the right to pursue its state court action.
Notwithstanding Aquila's objection, the plan was confirmed after an evidentiary hearing. Aquila appealed the confirmation order to this Court, which dismissed the appeal as moot because the plan had been substantially consummated under 11 U.S.C. § 1127(b). The Fifth Circuit affirmed this Court's judgment of dismissal.
The Trustee takes issue with the bankruptcy court's finding that no preferential transfer occurred. He contends that a transfer occurred at the moment of service of the writ of garnishment, converting Aquila's unsecured claim into a secured claim. Further, the Trustee contends that as a secured creditor, Aquila will receive more than it would have as an unsecured creditor. In addition, the Trustee argues that it is not necessary that the estate benefit from an avoidance of the transfer and, even if such a showing were necessary, he has shown such a benefit. Therefore, according to the Trustee, Aquila's garnishment lien is avoidable because it amounts to a preference.
A "preference" is a transfer of a debtor's assets, during a specified pre-bankruptcy period, that unjustifiably favors the transferee over other creditors. See 4 Collier on Bankruptcy § 547.01 at 547-14 (15th ed.1996) ("Collier 15th ed."). The preference section of the Bankruptcy Code permits the bankruptcy trustee to "avoid any transfer of property" made (1) to a creditor, (2) on account of an antecedent debt, (3) while the debtor was insolvent, (4) 90 days before the bankruptcy filing, and (5) that enables the creditor to receive a larger share of the estate than if the transfer had not been made. 11 U.S.C. § 547(b).
In the case at bar, conditions one through four were either uncontested or decided in favor of the Trustee. At issue is condition five—whether a transfer occurred enabling Aquila to receive a larger share of the estate than it would have had if no transfer occurred.
The Court must first determine whether a transfer of property took place by service of the writ of garnishment prior to TMHI seeking bankruptcy protection. This inquiry raises a question of law; therefore, it will be reviewed de novo. See Chase Commercial Corp. v. Donald Benson Accessories, Inc., 69 B.R. 32 (N.D.Tex.1986) ().
Case law interpreting § 547(b) defines a transfer and determines when a transfer is complete. In re Kaufman, 187 B.R. 167, 170 (Bankr.E.D.La.1995); see also Barnhill v. Johnson, 503 U.S. 393, 397, 112 S.Ct. 1386, 1389, 118 L.Ed.2d 39 (1992). The term "transfer" is defined broadly to include "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest." 11 U.S.C. § 101(41). This definition has been interpreted to include garnishment liens. In re Conner, 733 F.2d 1560, 1562 (11th Cir.1984).
The Code provides that a transfer is complete when it is "perfected". In re Conner, 733 F.2d at 1562; 11 U.S.C. § 547(e)(2)(A)-(B). "For property other than realty, the transfer is perfected `when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.'" In re Conner, 733 F.2d at 1562 (quoting 11 U.S.C. § 547(e)(1)(B)). Thus, a transfer is effective when a creditor acquires rights in the debtor's property superior to similarly situated creditor. See 11 U.S.C. § 547(e)(3).
The term "property" or "interest in property" is not defined in the Code. In re Kaufman, 187 B.R. at 170. Therefore, courts must look to state law to determine what constitutes property and when property interests are acquired. Id.; see also Barnhill, 503 U.S. at 398, 112 S.Ct. at 1389.
Texas courts define the term "property" broadly. A Texas appeals court stated:
Courts have variously defined the word "property" as signifying the physical corporeal thing, or denoting rights and interest. It may reasonably be construed to include obligations, rights and other intangibles, as well as physical things; and thus the word "property" means not only the thing possessed, that is, the physical corporeal thing, but also rights in the physical corporeal thing which are created and sanctioned by law. The word "property" embraces everything which is or may be the subject of ownership, whether a legal ownership, or whether beneficial, or a private ownership. 73 C.J.S. Property § 1, pp. 140-141.
Davis v. Davis, 495 S.W.2d 607, 611 (Tex. App.1973).
Following these principals, courts have held that a transfer of property by garnishment occurs at the moment of service. E.g., In re Latham, 823 F.2d 108, 110 (5th Cir.1987) (per curiam); United States v. Standard Brass & Manufacturing Co., 266 S.W.2d 407, 408 (Tex.App.1954). At that moment, the garnishor acquires "rights in the physical corporeal thing" that he did not have before service. He becomes a secured creditor. See Chase Commercial Corp., 69 B.R. at 34 ().
It, therefore, follows that a transfer of property interest took place before TMHI filed for bankruptcy. The writ of garnishment was issued on March 23, 1993, and served on March 25, 1993. TMHI filed for bankruptcy on April 11, 1993. Also, it is undisputed that TMHI was indebted to Aquila in an amount certain at the time the writ was served. Thus, Aquila held a valid, perfected lien as of the date of service of the writ. No party could receive a judicial lien superior to Aquila's interest after service. The transfer of property interest, i.e., the conversion of Aquila's interest from unsecured to secured status, occurred on the date of service, the Bank's setoff...
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