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

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

IN RE: ROBINSON BROTHERS DRILLING, 

INC., and ROBINSON BROTHERS DRILLING 

COMPANY, 

Debtors, 

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) 

) 

) 

) 

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MANUFACTURERS HANOVER LEASING CORP.; ) 

HALLIBURTON COMPANY; GRAY TOOL COMPANY; ) 

and PONDER FISHING TOOLS, INC., ) 

Defendants-Appellants, 

.FIIJED 

United StateB Court of Appeab 

Tenth Circuit 

f'IO'I O 91989 

ROBERT L. HOECKER 

Clerk 

v. 

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No. 88-2982 

HAROLD G. LOWREY, CHAPTER 11 TRUSTEE, 

for the Estate of the Debtors, 

Plaintiff-Appellee. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE WESTERN DISTRICT OF OKLAHOMA 

(D.C. No. CIV-88-732-P) 

Theodore Gewertz (Lawrence P. King, of Wachtell, Lipton, Rosen & 

Katz, New York, New York; James Vogt, Norman E. Reynolds, and v. 

Burns Hargis, of Reynolds, Ridings & Hargis, Oklahoma City, 

Oklahoma; Richard Gerard, of Manufacturers Hanover Leasing 

Corporation, New York, New York; Robert N. Sheets, of Phillips, 

McFall, Mcvay, Sheets, Juras & Lovelace, Oklahoma City, Oklahoma; 

Deneen Douglas Jones, of Fellers, Snider, Blankenship, Bailey & 

Tippens, Oklahoma City, Oklahoma; and Bruce Kerr, of Mahaffey & 

Gore, Oklahoma City, Oklahoma, with him on the brief), of 

Wachtell, Lipton, Rosen & Katz, New York, New York, for the 

Defendants-Appellants. 

Gary L. Morrissey of Kenan & Peterson, Oklahoma City, Oklahoma, 

for the Plaintiff-Appellee. 

John J. Gill, General Counsel, and Michael F. Crotty, Associate 

General Counsel, of the American Bankers Associatioo, Washington, 

D.C., amicus curiae. 

Before TACHA, BARRETT, and BRORBY, Circuit Judges. 

PER CURIAM 

We affirm the judgment of .the district court below and adopt 

its opinion, which is ordered published with this opinion. 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 1 
Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 2 
APPENDIX A: OPINION AND ORDER TO BE REVIEWED 

·_m THE UNITED STATES DISTRICT coURT roR THEf f LED 

WESTERN DISTRICT OF OPU..AHOKA 

IN RE: 

ROBINSON BROTHERS DRILLING, INC., 

and ROBINSON Bl<CJIBERS DRILLING 

COMPANY, 

Debtors, 

) 

) 

) 

) 

~ 0 9 88 

~0.DCNNIS 

Cl£R,(, U.S. DIS TlOCT COURT 

WESn:RN DISTRJCT OF Of<LAH0"4A 

• IY0tP\ITT ~C 

) Case No. CIV-88-732-P 

) 

) 

) 

__________________ ) 

HAROLD G. LOWREY, CBAPTKR 11 

TRUSTEE, for the Estate of 

Debtors, 

Plaintiff, 

vs. 

FIRST NATIONAL B~ OF BETHANY; 

GLOBAL FLUIDS, INC.; GRAY TOOL 

COMPANY; HALLIBURTON CO.; J.D. 

HOOOES, an individual; ITI' 

COMMERCIAL FINANCE CORP.; LOR, 

INC. ; M>.NUFACTURKRS HANOVER 

LEASING CORP.; and PONDER 

FISHING TOOLS, INC., 

Defendants. 

) 

) 

) 

) 

) 

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) 

) 

) 

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) 

(Bankruptcy No. 83-1962-A) 

(Chapter 11) 

(Adv. No. 86-0252) 

MEMORANDUM DECISION Mm 

ORDER 

I. HISTORY OF PROCEEDINGS 

Before the Court is the appeal from the bankruptcy court's 

Order Granting Motion For swnmary Judgment, filed January 11, 

1988. Appellant Harold G. Lowrey, Chapter 11 Trustee, filed his 

brief on May 12, 1988. First National Bank.of Bethany, et al., 

Appellees, filed a response on June 8, 1988, to which Appellant 

replied on June 27, 1988. Appellees filed a special reply brief 

A-1 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 3 
on July 11, 1988, and a letter of additional authorities was 

1 

mailed to t~·Court on August 31, 1988. Appellant filed 'a 

-., l 

, special rep~~t brief on August 12, 1988. Oral arguments were 

r 

heard by the Court on September 22, 1988. A 

.~ 

#I 

A. FACTS 

The facts in this , appeal from sWtUnary judgment are 

undisputed. They are: 

I 

(1) J.D. Hodges personally guaranteed payment of certain 

debts owed by Robinson Brothers Drilling, Inc. ("RBDI") to each 

Appellee. 

(2) J.D.· Hodges was a corporate officer and shareholder of 

RBDI. 

(3) During the period between 90 days and one year before 

RBDI entered bankruptcy, RBDI made payments in partial 

satisfaction of RBDI's debts to Appellees. 

(4) On July 25, 1983, involuntary bankruptcy petitions were 

filed against R.BDI. 

(5} None of the Appellees are insiders of RBDI within the 

definition of Title 11 U.s.c. S 101(30)(B). 

(6) J.D. Hodges was an insider of RBDI within the definition 

of Title 11 U.S.C. S 101(30)1B). 

Brief of Appellant at S (filed May 12, 

Appellees at 1-2 (filed June 8, 1988). 

B. R.ELEVANT STATUTES 

1988}; Answer Brief of 

The statutes at issue in this case are Title 11 u.s.c. S 

547(b)(l) & (b)(4)(B) and Title 11 U.s.c. S SS0(a)(l). Section 

A- 2 

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Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 4 
547(b)(l) & (b)(4)(B) provides that the trustee in bankruptcy can 

avoid a tfalisfer of money "to or for the benefit of a creditor . 

made --: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." Title 11 U.S.C. S SS0(a)(l) provides 

that the trustee may recover from "the initial transferee of such 0 

transfer or the ·entity for whose benefit 

made." 

such transfer was 

C. THB BMlJlUPTCY COURT'S DHCISI-Clf 

In its swranary judgment· order of Jan~ary 11, 1988, the 

bankruptcy court ruled as follows: 

[T]he Trustee, under these circumstances, cannot utilize 

11 u.s.c. S SS0(a) to recover payments received·by 

.defendants who hold guarantees of J.D. Hodges, an 

insider of debtor, outside of the 90 day period and 

within one year of the filing of the bankruptcy. 

Furthermore, the [Bankruptcy) Court finds that a reading 

of 11 u.s.c. S SS0(a) does not indicate that Congress 

explicitly intended to circumvent 11 u.s.c. S 547 by 

permitting recovery for transfers outside of. the 90 day 

period and within one year from non-insider creditors. 

Based upon the ambiguities in 11 u.s.c. S 550, the 

[Bankruptcy) Court must consider the equities involved. 

A review of the equitable considerations and long 

settled credit practices involving guarantees, mitigates 

against permitting recovery from the non-insider 

creditors. 

Order Granting Motion For Surranary Judgment at 2. 

, 

I 

District courts and bankruptcy judqes have struggled for 

years with transactions involving debtors who pay preferential 

debts while on the brink of bankruptcy. One of the issues in 

this area which has received little treatment by the circuit 

courts ls under what circumstances a transfer can~ avoided and 

recovered when the transfer is made to a creditor which benefits 

A- 3 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 5 
a guarantor who is an insider of the debtor. The specific issue 

now before ~·the Court is whether a debtor's trans£ er, made more 

than 90 d~y~/before but within one year of the filing of the 

. bankruptcy petition, to a non-insider creditor who holds a 

guarantee from an insider of the debtor, constitutes an avoidable 

preference recoverable by the trustee from the non-insider 

creditor. Unlike the bankruptcy court below, this Court answers 

the question in the affirmative, holding that such a transaction 

constitutes an avoidable preference under the bankruptcy laws. 

II • STMDARD OP' REVIEW 

In reviewing a bankruptcy court's decision, the district 

court functions as an appellate court and is authorized to 

I 

affirm, reverse or modify the bankruptcy court's ruling or to 

remand the case for further proceedings. Fed. R. Bankr. P. 8013. 

The Court may examine the bankruptcy court's ·conclusions of law de 

novo. In re Mullet, 817 F.2d 677, 678-79 (10th Cir. 1987). A 

bankruptcy appeal allows the district court to make an independent 

determination of the bankruptcy court's conclusions when legal 

conclusions are drawn from undisputed evidence. In re Golf Course 

Builders Leasing, Inc., 768 F.2d 1167, 1169 (10th Cir. 1985) 

(citing Colorado Springs Nat'l Bank v. United States, 505 F.2d 

1185, 1189 (10th Cir. 1974)). 

A-4 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 6 
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( 

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.. , ........ J ., ....... -,.i.,~ ........ , .• • ····---~· ✓-----~~ ·------_.· -'••-~··----

III. LEGAL DISCUSSIOH 

There •·are two schools of thought regarding the issue ot 

whether a trustee can avoid and recover a transfer of money paid 

to non-insider creditors during the preferential period when such 

debt was paid for the benefit of an insider guarantor. ,One 

school, representing the minority view, advocates strict 

construction of the plain meaning of the statutes in question. 

The other school relies on the creation of a "two-transfer" 

theory to overcome the express language of the statutes by an 

equity argument. 

. Appellees argued below that the "two-transfer" theory applies 

to the circumstances of the present case. Under this theory, the 

first transfer is represented by the direct payment from.the 

debtor to the Appellees. The second transfer is represented by 

the indirect transfer to the guarantor by virtue of the 

satisfaction of the guarantor's contingent liability. See 

Kellogg v. Blue Quail Energy, Inc. (In re Compton), 831 F.2d 586, 

591-95 (5th Cir.), reh'g granted, 835 F.2d 585 (1987) (per curiarn) 

(citing National Bank of Newport v. National Herkimer County Bank, 

225 U.S. 178, 184 (1912); 11 u.s.c. S 101(50) (definition of 

transfer); and discussing In re Mercon Indus., Inc., 37 Bankr . 

.. 549, 552 (Bankr. E.D. Pa. 1984)). Appellees argue that under 

Section 547(b)(4)(B), only the second transfer to the guarantor, 

an insider, is within the preferential period and therefore 

f avoidable; the first transfer to the Appellees is not avoidable, \ 

however, because they are not insiders. The Court finds this ' 

A-5 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 7 
argument unpersuasive to overcome the express language of the 

statutes fox.-.-..the reasons developed below. 

The cqntrary school of thought is represented by jurists who 

have strictly construed the statutes. The Trustee defends this 

minority view, and argues that a trustee under Section 547(b)(l) & 

(b)(4)(B) can avoid a tran~fer of money "to or for the benefit of 

a creditor . made -- 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." 11 U.S.C. S 547(b)(l) & 

(b)(4)(B) (emphasis added). 

The Trustee reasons that the guarantor (Hodges) was an 

insider, and that as a guarantor, he is a creditor. The 

Bankruptcy Code defines creditor as "an entity that has a claim 

against the debtor that arose at the time of or before the order 

for relief concerning the debtor." 11 U.S.C. S 101(9)(A). The 

Trustee buttresses this argument that a guarantor is included in 

the definition of creditor by citing the legislative history of 

Title 11 u.s.c. S 101(9)(A) found in the definitional section of 

the Code: "A guarantor of or surety for a claim against the debtor 

will also be a creditor, because he will hold a contingent claim 

against the debtor that will become fixed wheri he pays the 

creditor whose claim he has guaranteed or insured." H.R. Rep. No. 

95-595, 95th Cong., 1st Sess. 309-10 (1977); S. Rep. No. 95-989,~ 

95th Cong., 2d Sess. 22 (1978) guoted in Norton Bankr. Code 

Pamphlet 1987-1988 Ed., (21); 4 Collier on Bankruptcy, S 547.18 

(15th ed. 1981). Thus, part one of the Trustee's argument ls that 

A-6 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 8 
under Section 547(b)(l) & (b)(4)(B) the transfer is avoidable. 

( See H.R. Rep'-~ No. 95-595, 95th Cong., 1st Sess. 375 ( 1977) 

reprinted ·in:· 1978 U.S. Code Cong. & Admin. News 5787,· 6)31 

(avoidance/recovery bifurcation discussion). 

( 

In the second part of the Trustee's analysis, it is urged 

that under Section SSO(a)(l) a trustee may recover from "the 

- initial transferee of such transfer [i.e. Appellees] or the entity 

for whose benefit such transfer was made [i.e. guarantor Hodges]." 

11 U.S.C. S SSO(a)(l) (emphasis added).i In short, the Trustee 

seeks a literal interpretation of Sections 547(b)(l) & (b)(4)(B) 

and SSO(a)(l) which, when read in conjunction with Section 

101(9)(A), would clearly allow an avoidance of the transfer from 

1 As one critic has observed: 

As hard as one searches, one is unable to uncover any 

material evidence in the Code or its legislative history 

that Congress intended paragraph SSO(a)(l) to operate 

less than literally merely because of one of the 

potential defendants designated in that paragraph 

supplies the factual predicate for avoiding a transfer . ., 

In fact, in the original bills approved by the Senate 

and the House of Representatives, each version of 

Section 550 mandated recovery from the "initial 

transferee". 

Pitts, Insider Guaranties and the Law of Preferences, 55 Am. 

Bankr. L.J., 343, 347 (1981) (citing S. 2266, 95th Cong. 2d Sess. 

§ 101 (1978) (proposed 11 u.s.c. S 550(a)(l); H.R. 8200, 95th 

Cong. 1st Sess. S 101 (1977) (proposed 11 u.s.c. S 550(a)(l1)). 

"In the precursor to Section 550 proposed by the Commission 

on the Bankruptcy Laws of the United States, the primary target of 

the trustee's recovery was likewise the initial transferee!" 

REPORT OF THE COMMISSION OF THE BANKRUPTCY LAWS OF THE UNITED 

STATES, H.R. Doc. No. 93-137, 93rd Cong. 1st Sess., Pt. II, at 127 

(1973) (S 4-409(a)). "In explaining this section, the Commission 

stated that it 'covers all initial transferees of recoverable 

property, not just those pref erred.'" Id. at 180 n. 2 ( emphasis 

supplied by reporting court) reported in In re Big Three Transp., 

Inc., 41 Bankr. 16, 21 n.l (Ban.kr. W.D. Ark. 1983). 

A-7 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 9 
the debtor to Appellees made within the preferential period. Th 

transfer, ttlE!'Trustee contends, can be recovered because it serve. 

to benefit ··an insider (i.e. guarantor Hodges) of the debtor. In 

this Court's view the intent of Congress seems clear, and cannot 

be circumvented by the creation of a "two-transfer" theory. 

.. The Court notes that the Tenth Circuit has not squarely 

ruled on this issue. 2 However, after the bankruptcy court's 

decision in the present case, the Seventh Circuit developed a 

hypothe.tical example that is foursquare with the circumstances of 

this case. The Seventh Circuit set forth a persuasive policy that ·[ 

is in alignment with the Trustee's argument in this case: 

There is a related, and more nettlesome, question 

about the use of equitable powers under S SSO(a). 

Genuine transferees can be caught in a time warp as.a 

result of the special treatment of inside guarantors. 

Suppose Firm borrows money from Lender, with Guarantor 

as surety. When Firm pays off the debt, Lender is the_ 

"initial transferee" and Guarantor is an "entity for~ 

l, 

2 The Fourth Circuit has accepted the "two-transfer" theory in 

principle, and acknowledged.equity can be considered. But the 

compelling circumstances before that Circuit, and the principal 

case it cited, dealt with mere conduits of funds who initially 

accepted money, without consideration, and simply transferred the 

money to the second transferee. Thereafter, the trustees tried to 

recover money from these initial transferees. In re Harbour, 845 

F.2d 1254, 1255-58 (4th Cir. 1988) (holding mother of ultimate 

recipient accepted initial transfer and her bad faith precluded 

equity); see also Katz v. First Nat'l Bank of Glen Head, 568 F.2d 

964, 969 n.4 (2nd Cir. 1977) (acknowledginq broad definition of 

transfer), cert. denied, 434 U.S. 1069 (1978) cited in Kellogg v. 

Blue Quail Energy, Inc. (In re Compton}, 831 F.2d at 591~94 

(application of doctrine of indirect transfer used as a sword to 

avoid a letter of credit transfer). This Court believes that~the 

two actual transfers, and the "mere conduit" problem in those 

cases make them clearly distinguishable from the circwnstance 

under review where there is only the fiction of the second 

transfer. 

A-8 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 10 
whose benefit [the] transfer was made". The payment of 

a debt benefits the guarantor. Each may have received a 

preference voidable under S 547 (and therefore 

recoverable under§ 550). If Guarantor is a stranger to 

Firm, th~ trustee may recover only preferences within_~:90

days of the petition. 11 U.S.C. S 547(b)(4)(A). · If 7 

Guarantor is an "insider" at the. time of the transfer/ 

the preference period lasts a. year. /·-- 11 u.s.c;··'s 

5 4 7 ( b ) ( 4 ) ( B ) • Sec ti on . 5 4 7 ( b )( ,f)-·' di s tin gu i shes 

according to the· status of Guarantor, but S 550 does 

not. It says that if a transfer is recoverable by the 

trustee, it may be recovered from either the "initial 

transferee" (Lender) or the "entity for whose benefit , such transfer was made" (Guarantor). This creates a· 

situation that several courts have perceived to be 

"inequitable": Lender must satisfy the trustee (if Firm 

goes bankrupt between 91 days and a ye~r after the 

preference) when Guarantor is an- insider but not when 

Guarantor is a stranger, yet, it see~s, this has nothing 

to do with any proper theory of Lender's liability. 

Most bankruptcy courts that have addressed this question 

C?on9-lude that "equity" will relieve Lender from a 

li t·eral construction of S 550. Commentators, whose 

articles collect and discuss the cases, are divided. 

We have serious doubts both about the amount of equity. 

in Lender's position (for Firm may have paid Lender 

preferentially only to assist Guarantor, the insider, 

and Lender is in a good position to monitor the 

performance of its debtor; if Firm collects from Lender, 

Lender may collect in turn from Guarantor, bearing the 

risk of Firm's insolvency it planned to bear all along) 

and about the propriety of judges' declining to enforce 

statutes that produce inequitable results. Bankruptcy 

statutes are not special cases. We mention the problem 

not to resolve it (for it is not before us) but to show 

that this appeal to "equity" -- to deny recovery against 

an "initial transferee" within the statute -- _ is 

different in source and scope from the way in which we 

have employed considerations of policy to define 

"transferee" under S 550(a)(l). Doubts about this use 

of equity do not imply that courts should take 

"transferee" for all it could be worth rather than for 

what a sensible policy implies it is worth. 

·i 

,. 

:•, 

Bonded Fin. Serv., Inc. v. European Am. Bank, 838 F.2d 890, 894-95 

(7th Cir. 1988) (dictwn) (citations omitted) (emphasis in 

original). Admittedly, the Seventh Circuit spoke to this issue 

only in dictwn, but this Court is persuaded to follow the Seventh 

A-9 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 11 
Circuit's sound guidance for heeding the clear intent of Congress. 

as have other=-courts. In re V.N. De•Prizo Constr. Co., 86 Bankr. 

545 (N.D. Ill. 1988) rev'g 58 Bankr. 478 (Bankr. N.D. Ill. 1986); 

In re Coastal Petroleum Corp., 1988 WESTLAW 98766 (Bankr. N.D. 

Ohio); In re Big Three Transp., Inc., 41 Bankr. 16 (Bankr. N.D. 

Ill. 1986). 

The majority view among lower courts who have decided the 

issue is supported by either the "two-transfer" theory discussed 

above, or by relying on the equitable powers of the bankruptcy 

court under Title 11 u.s.c. S 105 to prevent injustice, or both. 3 

See, e.g., note 2 above and the author-ities cited therein; In re 

· Mercon Indus., Inc., 37 Bankr. 549, 552 (Bankr. E.D. Penn. 1984); 

Seeley v. Church Bldgs. & Interiors, Inc. (In re Church Bldgs. & 

Interiors, Inc.), 14 Bankr. 128, 131 (Bankr. W.D. Okla. 1981); In 

re V.N. Deprizio Constr. co., 58 Bankr. 478, 480 (Bankr. N.D. Ill~ 

1986), rev'd, 86 Ban.kr. 545 (N.D. Ill. 1988); .4 Collier on 

Bankruptcy, 1 550.02 (15th ed. 1983). 

The stated policy reason behind developing the "two-transfer" 

theory is that, in effect, strict construction of the statutes 

prejudices informal debt reorganization practices by punishing 

creditors who insist on guarantors. See,~, 4 Collier on 

., 

Bankruptcy, 1 550.02. But see In re V.N. Deprizio Constr. Co., 86 

Bankr. at 553. This reasoning overstates the issue o Only insider·. 

guarantors trigger the one-year preference avoidance mechanism of 

3 1\lthough l\ppellees argued the "two-transfer" theory below, 

there is no mention of this theory in the ruling. of the bankruptcy 

court. 

A-10 

i' 

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Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 12 
' \ 

Section 547(b). Non-insider creditors with non-insider guarantors 

are not included in the expanded \ 

one-year preference period. \ 

Moreover, creditors still have Section 547(c) defenses available~ 

if applicable. J 

; 

In the present case 

I 

the bankruptcy court followed the lower. 

I 

court majority view by using its equitable powers to overcome what 

it perceived as ambiguities in the statutes. Order Granting 

Motion For Summary Judgment at 2. But see In re V.N. Deprizio 

Constr. co., 86 Bankr. at 552-53 (persuasive criticism of the 

equity argument). I 

~ t f 

I 

IV. RESOLUTICtf OF ISSUE~ APPEAL / 

i 

j 

j 

It is rare that this Court substitutes its judgment for that 

of any 

' ' 

~ 

of the outstanding bankruptcy judges who serve the Western 

District of Oklahoma. Their expertise and judgment 

I 

in the field 

; 

of bankruptcy is rarely subject to credible challenge. This 

case, however, presents a matter of pure statutory interpretation ' 

applied to undisputed facts. 

I 

} 

Moreover, other court's have 

I 

\ 

addressed the issue since the bankruptcy court's decision below. 

\ 

\ 

This Court believes that the minority view, advocating a literal I 

I 

interpretation of the Bankruptcy Code as enacted by Congress, is. 

the most persuasive and compelling, and avoids the result-;riented 

approach of the "two-transfer" theory. 

The equitable powers of the bankruptcy court under Section 

105 to avoid strict construction of the Code is limited. 

Official Carran. of Equity Sec. Holders v. Ma.bey, 832 F.2d 299, 302 

A-11 

I 

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i 

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Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 13 
~. 

(4th Cir. 1987), cert. denied, U.S. _, 100 s.ct~ 1220 (1988) 

' 

(quoting In ·1:~ Chicago, Milwaukee, St. Patil & Pacific R.R., 791 !. 

I 

F.2d 524, 528.:·(7th cir. 1986), cert. denied/_ u.s .. _ .. _, 107 s.ct/ 

t 

2 460 ( 1987) ( "the fact that a proceeding .is equit~le does not 

give the judge a free-floating discretion to redistribute rights 

in accordance with his personal views of justice : and fairness, 

however enlightened those views may be")); Guerin v ... Weil, Gotshal 

& Manges, 205 F.2d 302, 304 (2nd Cir. 1953). 4 

The Court is persuaded that a transfer to a creditor for the 

benefit of an insider guarantor can be avoided and r·ecovered. The 

... mischief that the Code is attempting to correct; by its plain 

language is the situation where a debtor.is in financial trouble· 

and contemplates paying preferential debts on the brink of· 

' bankruptcy. In that instance, one creditor is preferred over 

others because an insider who guaranteed the note on·. the debt will •.• 

be contingently liable upon debtor's default.~ Thus, under the 

'· 

4 See also Cooper Petroleum co. v. Hart, 379 ·. F.2d 777 (5th 

Cir. 1967); In re Aerco Metals, Inc., 60 BanJcr. 77, (Bankr. N.D. 

Tex. 1985); Nutovic, The Bankruptcy Preference Laws: Interpreting 

Code Sections 547(c)(2), 550{a)(l), and 546(a){l), 41 BUS. LAW. 

175, 186-91 (Nov. 1985); and Pitts, Insider Guaranties and the Law 

of Preferences, 55 'J\M. BANKR. L.J. 343 (1981) (non-insider 

creditor is liable if there is an insider guarantor); cf. P. 

Blumberg, The Law of Cor orate Grou s: Problems in Bankru tc, S 

9.03 (1985) d scussed in Bonded Fin. Serv., Inc. v. European- Am. 

Bank, 838 F.2d at 894 ("liability should turn_on Guarantor's 

solvency"); and Norton Bankruptcy Law Adviser, "Insider 

Guarantees and Preference Liability. - Round Three, Article 4," 

Professor Boshkoff (1986-10) cited in In re Vermont Toy Works, 

Inc., 82 Bankr. 258, 326 n.42 (Bank.r. D.Vt. 1987). 

5 

These insiders commonly benefit. ·-in the; form of 

increased salaries, bonuses or stock dividends; from the 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 14 
( 

( 

Code a trustee can avoid these transfers made on behalf of an\ 

insider gu.a.r_antor during the more broad preferential period 

days to one:year. 

of 9 0 .,.·.i .. 

With plain language, Congress developed this\ 

hard and fast rule to help prevent litigation over the issue of \ 

bad faith preferential payments by debtors. Unfortunately, this ;I 

rule does not necessarily have a just result in all cases. Under / 

the present case, for exarnple, there is no evidence of bad faith 

associated with the payments by the debtor. However, because the ') 

,I 

< 

). transfer 

Hodges, 

of 

who 

money 

is an 

to Appellees serves to benefit the guarantor I 

insider, the transfer is covered by the / 

statutes, and is thus avoidable and recoverable. 

V. ca{CLUSIO{ 

Accordingly, the bankruptcy court's Order Granting Motion 

For Swnrnary Judgment is REVERSED and the case is REMAfIDED for 

debtor's receipt of the funds, when the monies serve to 

increase the debtor's revenue. When the debtor's demise 

is irrminent, the insiders who guaranteed the debtor's 

loan frequently hold enough sway with the debtor to 

cause it to pay off these guaranteed loans prior to the 

payment of other obligations. Consequently, the 

insiders have diverted resources to protect themselves. 

I 

I 

r 

In re Mercon Indus. Inc., 37 Bankr. at 553. For a definition of . 

insider of a corporate debtor see Title 11 u.s.c. S 101(30)(B). 

A-13 

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Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 15 
further proceedings consistent with this Order. 

IT IS so- ORDERED THIS _9.....__ DAY OF NOVEMBER, 1988. 

~ , ~ ~ 

( 7:.i.R.PBILLIPS 

United States District Judge 

ENTERED IN JUDGEM;NT DOCKET ON 

NOVO 9 1988 

A-14 

Appellate Case: 88-2982 Document: 010110065034 Date Filed: 11/09/1989 Page: 16