Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca4-09-01209/USCOURTS-ca4-09-01209-0/pdf.json

Nature of Suit Code: 442
Nature of Suit: Civil Rights Employment
Cause of Action: 

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PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED RENTALS, INCORPORATED, 

Plaintiff-Appellant,

v.  No. 09-1209

JAMES BIGELOW ANGELL,

Trustee-Appellee. 

Appeal from the United States District Court

for the Eastern District of North Carolina, at Raleigh.

Terrence W. Boyle, District Judge.

(7:08-cv-00097-BO)

Argued: December 2, 2009

Decided: January 22, 2010

Before TRAXLER, Chief Judge, and SHEDD and DAVIS,

Circuit Judges.

Affirmed by published opinion. Chief Judge Traxler wrote the

opinion, in which Judge Shedd and Judge Davis joined.

COUNSEL

ARGUED: James Durling Fullerton, FULLERTON &

KNOWLES, PC, Clifton, Virginia, for Appellant. James

Bigelow Angell, HOWARD, STALLINGS, FROM & HUTSON, PA, Raleigh, North Carolina, for Appellee. ON

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BRIEF: Philip W. Paine, HOWARD, STALLINGS, FROM

& HUTSON, PA, Raleigh, North Carolina, for Appellee. 

OPINION

TRAXLER, Chief Judge:

United Rentals, Inc. ("United") appeals a district court

order affirming a bankruptcy court judgment allowing the

bankruptcy trustee to avoid and recover certain payments

made to United during the 90 days prior to the bankruptcy

petition. We affirm.

I.

Partitions Plus of Wilmington, Inc. ("the Debtor") filed a

Chapter 11 bankruptcy petition on September 1, 2004. The

case was subsequently converted to a Chapter 7 proceeding.

Prior to its bankruptcy filing, the Debtor had subcontracted in

several construction projects, and United had subcontracted

with the Debtor to supply rental equipment. The Debtor executed payment and performance bonds with United States Fire

Insurance Company ("the Surety"), for the construction of

several of these projects. 

In the 90-day period prior to the Debtor’s bankruptcy filing,

the Debtor made three payments to United totaling

$75,849.40 for amounts owed for United’s prior provision of

rental equipment and parts ("the transfers"), $67,470.60 of

which was for bonded projects. The bankruptcy trustee ("the

Trustee") filed this action seeking to avoid and recover the

transfers as preferential payments. See 11 U.S.C.A. § 547(b)

(West 2004 & Supp. 2009). United denied that the transfers

were avoidable and asserted defenses under 11 U.S.C.A.

§ 547(c)(1), (3), and (4) (West 2004 & Supp. 2009). 

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The Bankruptcy Code’s preference section serves two

goals. First, it prevents companies from "racing to the courthouse to dismember the debtor during his slide into bankruptcy." Harman v. First Am. Bank of Md. (In re Jeffrey

Bigelow Design Group, Inc.), 956 F.2d 479, 487 (4th Cir.

1992) (internal quotation marks omitted). And second, it protects "equality of distribution among creditors of the debtor."

Id. (internal quotation marks omitted). Except as specified in

the Bankruptcy Code, a bankruptcy trustee may avoid as a

preference a transfer made by an insolvent debtor to a creditor

on account of an antecedent debt within 90 days before the

date of the filing of the bankruptcy petition if a certain condition is satisfied.1

See 11 U.S.C.A. § 547(b). That condition is

that the transfer to be avoided must have enabled the creditor

to receive more than it would have received from the debtor’s

Chapter 7 bankruptcy on the debt the transfer extinguished if

the payment sought to be avoided had never been made. See

11 U.S.C.A. § 547(b)(5).

Section 547(c) provides exceptions for certain preferential

transfers, the avoidance of which would not further the purposes of § 547(b). Section 547(c)(1) provides that a transfer

cannot be avoided "to the extent [it] was . . . intended by the

debtor and the creditor to or for whose benefit [it] was made

to be a contemporaneous exchange for new value given to the

debtor; and [it] in fact [was] a substantially contemporaneous

exchange." 11 U.S.C.A. § 547(c)(1). The purpose of the

§ 547(c)(1) exception is "to encourage creditors to continue to

deal with troubled debtors without fear that they will have to

disgorge payments received for value given." Collier on

Bankruptcy ¶ 547.04 (Alan N. Resnick & Henry J. Sommer

eds., 16th ed. 2009). As its legislative history demonstrates,

§ 547(c)(1) was designed to address the "generic problem

[that] those on the verge of bankruptcy still need to buy things

. . . and the fact that checks are used (with a brief gap between

1Unsecured creditors may then share in any avoided payments on a pro

rata basis. 

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purchase and payment) ought not render the payment avoidable as one made for an antecedent debt." Collins v. Greater

Atl. Mortgage Corp. (In re Lazarus), 478 F.3d 12, 18 (1st Cir.

2007) (citing H.R. Rep. No. 95-595, at 373 (1977)); see

Batlan v. TransAmerica Commercial Fin. Corp. (In re Smith’s

Home Furnishings, Inc.), 265 F.3d 959, 965 n.4 (9th Cir.

2001) (explaining that § 547(c)(1) "was designed to prevent

trustees from avoiding payments that were clearly intended to

support a new transaction, instead of an antecedent debt, even

though the actual payment was not recorded until after the

transaction"). Protecting contemporaneous exchanges for new

value from avoidance does not harm the preference section’s

goal of protecting the equality of distribution among the debtors because such exchanges do not diminish the size of the

debtor’s estate. See Jones Truck Lines, Inc. v. Cent. States, Se.

& Sw. Areas Pension Fund (In re Jones Truck Lines), 130

F.3d 323, 326 (8th Cir. 1997). 

The Trustee moved for partial summary judgment on the

issue of whether the transfers satisfied the § 547(b) requirements, and United moved for summary judgment. The Trustee

argued that it had established all of the § 547(b) elements as

a matter of law. As is relevant here, United responded that the

Trustee could not establish that the transfers were preferences

under § 547(b) because the transferred funds were not property of the estate. United also argued that the Trustee could

not satisfy § 547(b)(5) with regard to the transfers because

United would have received full payment from the Surety by

enforcing its bond rights had the Debtor not made the transfers.

United further contended that the § 547(c)(1) defense

applied because the transfers had the effect of discharging

United’s right to file and enforce a mechanic’s lien. United

finally maintained that certain payments from the Debtor to

United were in exchange for new value in the form of credit

extended to the Debtor after the transferred funds were

received. 

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Considering the parties’ cross-motions, the bankruptcy

court ruled as a matter of law that the Trustee met its burden

of establishing that the transfers were preferences under

§ 547(b). Regarding United’s argument that had the challenged transfers not been made, United still would have

received full payment from the bond, the court reasoned that

the critical question with regard to § 547(b)(5) was not

whether the creditor would have received payment from

another source had the challenged transfer not been made, but

rather, whether it would have received payment from the

Chapter 7 bankruptcy estate. As for United’s new-value

defense, the bankruptcy court noted that the Trustee did not

dispute United’s assertion that some payments made to the

Debtor were in exchange for credit that United extended to

the Debtor after the transferred funds were received. The

bankruptcy court thus ruled that United was "entitled to a

minimum credit of $8885.66 based on new value, and it has

the right to try to increase that amount upon an appropriate

showing at trial." J.A. 179. 

The case then proceeded to trial regarding United’s

§ 547(c)(1) defense. United sought to prove that the transfers

were substantially contemporaneous exchanges for new value

because they extinguished United’s rights to file and enforce

a lien as well as its rights to obtain payment through the bond.

The bankruptcy court found that the § 547(c)(1) defense was

not established because the discharge of United’s inchoate

lien rights and bond rights did not constitute new value. The

court noted that United had not perfected any lien or security

interest in property to secure the Debtor’s debt and thus had

no interest to release in exchange for the transfers. The court

ruled that to establish the § 547(c)(1) defense with regard to

its inchoate lien and bond rights, United would have to prove

that it would have timely enforced these rights and been paid

in full had the challenged transfers not been made, and that at

that time the Debtor was still owed funds by the general contractor on which the Surety could have asserted a lien. Concluding that United failed to establish the former point, the

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court ruled that the Trustee was entitled to recover the remainder of the challenged transfers—$66,963.74—for the benefit

of the bankruptcy estate. United then appealed to the district

court, which affirmed the bankruptcy court judgment. 

II.

United argues that the bankruptcy court erred in granting

partial summary judgment against it regarding whether the

transfers were preferences under § 547(b). We find no reversible error.

We review a grant of partial summary judgment by the

bankruptcy court and the affirmance thereof by the district

court de novo. See Bank of N.Y. v. Treco (In re Treco), 240

F.3d 148, 155 (2d Cir. 2001). Summary judgment in bankruptcy is governed by Federal Rule of Bankruptcy Procedure

7056, which incorporates the standards of Federal Rule of

Civil Procedure 56 into bankruptcy proceedings. See Fed. R.

Bankr. P. 7056; Fed. R. Civ. P. 56. Thus, in reviewing a grant

of partial summary judgment, we view the facts and the reasonable inferences drawn therefrom in the light most favorable to the nonmoving party. See EEOC v. Navy Fed. Credit

Union, 424 F.3d 397, 405 (4th Cir. 2005). Partial summary

judgment is appropriate "if there is no genuine issue of material fact and the moving party is entitled to a judgment as a

matter of law." Cline v. Wal-Mart Stores, Inc., 144 F.3d 294,

300 (4th Cir. 1998).

Section 547(b) states:

Except as provided in [11 U.S.C.A. § 547(c) and (i)],

the trustee may avoid any interest of the debtor in

property-

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

(2) for or on account of an antecedent debt owed by

the debtor before such transfer was made; 

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(3) made while the debtor was insolvent; 

(4) made- 

(A) on or within 90 days before the date of the filing of the petition; or 

(B) between ninety days and one year before the

date of the filing of the petition, if such creditor at

the time of such transfer was an insider; and 

(5) that enables such creditor to receive more than

such creditor would receive if-

(A) the case were a case under chapter 7 of this

title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to

the extent provided by the provisions of this title.

11 U.S.C.A. § 547(b) (emphasis added); see Morrison v.

Champion Credit Corp. (In re Barefoot), 952 F.2d 795, 798

(4th Cir. 1991). The bankruptcy trustee bears the burden of

proving that a transfer is avoidable under § 547(b). See 11

U.S.C.A. § 547(g) (West 2004).

United contends that the bankruptcy court erred in concluding at the summary judgment stage that the Trustee had established the fifth § 547(b) requirement as a matter of law. This

is so, United argues, because had the transfers not been made,

United could have received full payment from the Surety by

enforcing its bond rights.2 The bankruptcy court properly

2United similarly argues that the court’s resolution of the § 547(b) issue

at the summary judgment stage was improper because the Trustee failed

to show as a matter of law that, had the transfers not been made, United

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rejected this argument, however. The § 547(b)(5) inquiry

focuses "not on whether a creditor may have recovered all of

the monies owed by the debtor from any source whatsoever,

but instead upon whether the creditor would have received

less than a 100% payout" from the bankruptcy estate. Smith

v. Creative-Financial Mgmt., Inc., (In re Virginia-Carolina

Fin. Corp.), 954 F.2d 193, 199 (4th Cir. 1992).

III.

United next argues that the district court erred in finding

that it did not establish a § 547(c)(1) defense at trial.3 We disagree.

A.

We review the district court decision de novo, "effectively

standing in its shoes to consider directly the findings of fact

and conclusions of law by the bankruptcy court." Cypher Chiropractic Ctr. v. Runski (In re Runski), 102 F.3d 744, 745 (4th

Cir. 1996). "[W]e review legal conclusions by the bankruptcy

court de novo and may overturn its factual determinations

only upon a showing of clear error." Id.

The party against whom recovery or avoidance is sought

bears the burden of proving a § 547(c) defense. See 11

U.S.C.A. § 547(g). As we have explained, § 547(c)(1) prevents a bankruptcy trustee from avoiding a transfer "to the

would not have obtained full payment from the hypothetical Chapter 7

estate by enforcing its lien rights and thereby attaining secured-creditor

status. Because this argument is raised for the first time on appeal, we do

not address it. See Williams v. Prof’l Transp. Inc., 294 F.3d 607, 614 (4th

Cir. 2002) ("Issues raised for the first time on appeal are generally not

considered absent exceptional circumstances."). 

3United also argues that it established a defense under 11 U.S.C.A.

§ 547(c)(6). Because this argument is raised for the first time on appeal,

we do not consider it. See Williams, 294 F.3d at 614. 

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extent [it] was . . . intended by the debtor and the creditor to

or for whose benefit [it] was made to be a contemporaneous

exchange for new value given to the debtor; and [it] in fact

[was] a substantially contemporaneous exchange." 11

U.S.C.A. § 547(c)(1). The Bankruptcy Code defines "new

value" to mean 

money or money’s worth in goods, services, or new

credit, or release by a transferee of property previously transferred to such transferee in a transaction

that is neither void nor voidable by the debtor or the

trustee under any applicable law, including proceeds

of such property. 

11 U.S.C.A. § 547(a)(2) (West 2004). "New value," however,

"does not include an obligation substituted for an existing

obligation." Id.

B.

United argues that it established a § 547(c)(1) defense

under the "indirect transfer theory." In this regard, United first

contends that had the Debtor not made the transfers, United

nonetheless could have obtained full payment by enforcing its

bond rights. United maintains that had the Surety paid such a

claim under the bond, the Surety would have automatically

received an equitable lien by subrogation against the funds the

general contractor owed the Debtor. Relying on O’Rourke v.

Seaboard Surety Co. (In re E.R. Fegert, Inc.), 887 F.2d 955

(9th Cir. 1989) ("Fegert"), United argues that the money that

the Debtor was eventually paid (that the Surety could have

obtained directly from the general contractor had United

enforced its bond rights) constituted new value to the Debtor

for purposes of § 547(c)(1).

In Fegert, a general contractor ("the debtor") defaulted on

its payments to two subcontractors. See Fegert, 887 F.2d at

956. The subcontractors, in turn, sued the debtor and the

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surety that had issued a payment and performance bond on the

debtor’s behalf. See Fegert, 887 F.2d at 956. Prior to trial, the

debtor and the surety made payments to the subcontractors

that, when combined, satisfied the debt and resulted in dismissal of the suit. See id. Within 90 days of these payments,

the debtor filed a Chapter 11 bankruptcy petition that was

later converted to a Chapter 7 proceeding. See id. In a subsequent adversary proceeding, the bankruptcy trustee sought to

avoid the payments from the debtor as preferential. See id.

The bankruptcy court granted summary judgment against the

trustee, and the Bankruptcy Appellate Panel and the Ninth

Circuit affirmed. See id. at 956-57. The Ninth Circuit reasoned that if the debtor had not paid the debt in full, the subcontractors would have been paid by the surety, which then

would have had an equitable lien against the funds owed the

debtor by the owner. See id. at 958-59. The court noted that

"[t]wo circuits have held that payments by a debtor in

exchange for a secured creditor’s release of its security interest falls within the exception of section 547(c)(1)." Id. at 959

(citing Gulf Oil Corp. v. Fuel Oil Supply & Terminaling, Inc.

(In re Fuel Oil Supply & Terminaling, Inc.), 837 F.2d 224,

229-30 (5th Cir. 1988), and Kenan v. Fort Worth Pipe Co. (In

re George Rodman, Inc.), 792 F.2d 125, 127 (10th Cir.

1986)). The court therefore held that "[t]he security interest

constitutes the ‘new value’ that is ‘contemporaneously

exchanged’" and noted that "the value of the debtor’s estate

is not diminished." Id.

Without deciding the correctness of the Fegert court’s conclusion that the release of the surety’s security interest in that

case constituted "new value" contemporaneously received by

the debtor, we conclude that that was not the case on the facts

before us. Since United never even attempted to make any

claim on the bond here, the Surety never obtained any lien

that it could release. It is therefore not surprising that United

does not even argue to us that the Debtor received new value

by virtue of the removal of the possibility that any such lien

would ever be created.

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What United does argue is that new value was given to the

Debtor in the form of the money that it eventually received

from the general contractors that might have instead been paid

to the Surety had the Surety paid a bond claim. This argument

does not work. Even if the money the Debtor paid to United

in the transfers was eventually offset by the Debtor’s later

receipt of funds that the Surety might otherwise have claimed,

United has not shown when the Debtor received this "new

value." Accordingly, regardless of whether the transfers set in

motion a chain of events that resulted in the Debtor’s recoupment of the amounts paid, United did not show that such new

value was "‘given to the debtor’ . . . as part of a ‘contemporaneous exchange.’" Baker Hughes Oilfield Operations, Inc. v.

Cage (In re Ramba, Inc.), 416 F.3d 394, 399-400 (5th Cir.

2005) ("[I]t is the precise benefit received . . ., and not the

secondary or tertiary effects thereof, that must fit within one

of the five categories of ‘new value’ . . . enumerated in

§ 547(a)(2)."). In this case, the only benefit that United

showed the Debtor was given as part of the contemporaneous

exchange for the transfers was the extinguishment of its debt,

which does not fit within any of the five new-value categories. 

Furthermore, even assuming arguendo that the transfers

were part of a contemporaneous exchange for new value,

United produced no evidence that the Debtor and United

intended that would be the case. United failed to produce evidence that the parties viewed this transaction as anything

more than the payment of the debt of an as-yet unsecured

creditor; no evidence demonstrated when the parties believed

the Debtor might recoup some of the transferred funds or even

that they believed any funds would be recouped.

C.

Similar to its argument that it could have pursued payment

from the Surety, United contends that had the transfers not

been made, it also could have pursued its right to file a North

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Carolina mechanic’s lien on the real property improved by

one of the construction projects. To the extent that United

maintains that the new value given to the Debtor was

money—the money it retained by not having to face offset

claims that the property owner would have gained from United’s enforcement of its lien rights—the argument fails for the

same reasons we have discussed regarding its bond argument.

United argues, however, that the discharge of United’s inchoate lien rights themselves constitutes new value, independent

of any financial benefit the Debtor received from the discharge. In particular, United claims that it held a security

interest in the owners’ properties at the time of the transfers

(and thus "had property previously transferred," 11 U.S.C.A.

§ 547(a)(2)) because the mechanic’s lien statutes immediately

grant a security interest to a supplier who furnishes labor or

material to improve the property. The Code’s definition of

"transfer" indeed includes "the creation of a lien." 11 U.S.C.

§ 101(54)(A) (West Supp. 2009). However, just as the Surety

did not have an equitable lien to release since it had not paid

a claim on the bond, United did not have a security interest

to release because it never filed the mechanic’s lien claim

necessary to obtain such an interest. 

Under North Carolina law, a person who improves real

property, including by providing rental equipment pursuant to

a contract with the owner, "shall, upon complying with the

provisions of this Article, have a right to file a claim of lien

on real property [also known as a mechanic’s lien] on the real

property to secure payment of all debts owing for" rented

equipment. N.C. Gen. Stat. § 44A-8 (2009); see also N.C.

Gen. Stat. § 44A-12 (2009) (providing the place, time, and

contents of the filing required for a mechanic’s lien). Such a

lien "shall relate to and take effect from the time of the first

furnishing of labor or materials at the site of the improvement

by the person claiming the claim of lien on real property."

N.C. Gen. Stat. § 44A-10 (2009). 

A first-, second-, or third-tier subcontractor who has furnished rental equipment in the improvement of real property,

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upon compliance with certain requirements, may also enforce

the contractor’s lien on real property. See N.C. Gen. Stat.

§ 44A-23 (2009). Once a subcontractor has filed a lien, it may

enforce the lien within 180 days after the last furnishing of

labor or materials to the real property by filing a lawsuit. See

N.C. Gen. Stat. § 44A-13 (2009). A mechanic’s lien is discharged by failure to enforce the claim of lien within the prescribed time. See N.C. Gen. Stat. § 44A-16(3) (2009).

As we have explained, United claims that it held a security

interest in the owners’ properties at the time of the transfers

because the mechanic’s lien statutes immediately grant a

security interest to a supplier who furnishes labor or material

to improve the property. United bases this argument on the

notion that a mechanic’s lien, once filed, is retroactively

effective to the time the material or labor were furnished.

United’s conclusion does not follow from its premise, however. North Carolina’s mechanic’s lien statutes grant a supplier of labor or material only the right to file a mechanic’s

lien, which United did not do here. See N.C. Gen. Stat. § 44A8 ("Any person who . . . furnishes rental equipment . . . shall,

upon complying with the provisions of this Article, have a

right to file a claim of lien on real property." (emphasis

added)). Only upon the filing of a claim for a mechanic’s lien

is the owner’s property encumbered. See N.C. Gen. Stat.

§ 44A-10 ("A claim of lien on real property granted by this

Article shall relate to and take effect from the time of the first

furnishing of labor or materials at the site of the improvement

by the person claiming the claim of lien on real property"

(emphasis added)). Because United had not filed such a claim

when the transfers were made, no interest had been transferred to United and United had no such interest to release.4

4United argues that McCoy v. Wood, 70 N.C. 125 (1874), is to the contrary. However, as United concedes, McCoy did not interpret the mechanic’s lien statutes at issue here. Indeed, the mechanic’s lien statutes

considered in McCoy did not have comparable wording to those before us

now. 

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United argues that it would not make sense from a policy

standpoint to force a subcontractor in United’s position to

refuse tendered payments and file a mechanic’s lien. But it

does not necessarily follow from our holding that subcontractors would need to take that course. Indeed, United argues in

this very appeal that the Trustee, in order to prove that the

transfers were even preferences under § 547(b), should have

been required to show that had the transfers not been made,

United would not have promptly filed lien claims and thereby

attained secured-creditor status such that it could have

obtained full payment in a hypothetical Chapter 7 bankruptcy.

Whether United’s argument is correct is an issue that will

have to wait for another case in which the issue is properly

preserved. See supra, at 7 n.2 (explaining that we do not

address this argument because United raised it for the first

time on appeal). 

Our holding today is limited to the conclusion that United

did not establish the § 547(c)(1) defense beyond the amounts

determined by the bankruptcy court at the summary judgment

stage. This holding makes perfect sense when viewed in the

context of § 547(c)(1)’s purpose, to accommodate the need of

financially unsteady companies to use checks to pay for new

transactions. See In re Lazarus, 478 F.3d at 18; In re Smith’s

Home Furnishings, Inc., 265 F.3d at 965 n.4. The facts of this

case, wherein the transfers were not made substantially contemporaneously with United’s supplying of the equipment

and parts that generated the debt, present a completely different scenario. 

IV.

For the foregoing reasons, we affirm the district court order

affirming the bankruptcy court judgment in favor of the

Trustee.

AFFIRMED

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