Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-07-06036/USCOURTS-ca8-07-06036-0/pdf.json

Parties Involved:
Falcon Creditor Trust
Appellant
Falcon Products
Not Party
First Insurance Funding
Appellee

Document Text:

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

_______________

No. 07-6036EM

________________

In re: *

*

Falcon Products, Inc., et al., *

*

Debtors. *

*

Falcon Creditor Trust, *

* Appeal from the United States

Plaintiff - Appellant, * Bankruptcy Court for the Eastern 

* District of Missouri

v. *

*

First Insurance Funding, *

*

Defendant - Appellee. *

_____

Submitted: December 10, 2007

Filed: January 28, 2008

_____

Before MAHONEY, FEDERMAN and VENTERS, Bankruptcy Judges.

_____

VENTERS, Bankruptcy Judge.

This is an appeal of the bankruptcy court’s determination on summary judgment

that certain payments made to the Defendant by Debtor Falcon Products, Inc., within

the 90-day preference period were not preferential under 11 U.S.C. § 547. We have

jurisdiction over this appeal pursuant to 28 U.S.C. § 158(b). For the reasons set forth

Appellate Case: 07-6036 Page: 1 Date Filed: 01/28/2008 Entry ID: 3395848
1

 Fed. R. Civ. P. 56(c), made applicable in bankruptcy cases by Fed. R.

Bankr. P. 7056; Williams v. Marlar (In re Marlar), 252 B.R. 743, 750 (B.A.P. 8th

Cir. 2000) (citing Dulany v. Carnahan, 132 F.3d 1234, 1237 (8th Cir. 1997)).

2

below, we reverse the decision of the bankruptcy court and remand this case for

further proceedings consistent with this opinion.

I. STANDARD OF REVIEW

 We review the bankruptcy court's grant of summary judgment de novo,

applying the same standard used by the bankruptcy court and viewing the evidence

in the light most favorable to the Plaintiff as the nonmoving party. Summary judgment

is appropriate if the record shows that there is no genuine issue as to any material fact

and that the moving party is entitled to judgment as a matter of law.1

II. BACKGROUND

The Panel adopts the factual findings of the bankruptcy court, which findings

are undisputed.

First Insurance Funding (“First Insurance”) is engaged in the business of

financing commercial insurance premiums. In November 2004, Falcon Products, Inc.

("Falcon") entered into a commercial premium finance agreement with First Insurance

to finance several insurance policies (“Policies”). The premiums for the Policies

totaled $1,889,409.68. Under its agreement with First Insurance, Falcon made a

$472,584.85 down payment on the Policies and agreed to repay the balance of

$1,416,824.83, plus interest, in ten monthly installments of $144,943.05, with the first

installment due December 1, 2004. Falcon granted First Insurance a security interest

in the unearned premiums under the Policies to secure the premiums financed. The

value of unearned premiums diminished each day by approximately $5,175.62 – the

value of the daily insurance coverage provided under the Policies. In the event Falcon

failed to make a payment to First Insurance, First Insurance had the right to 

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3

cancel the Policies and to apply any unearned premiums to the unpaid balance owed

to First Insurance.

On December 6, 2004, Falcon paid the first monthly installment of $144,943.05

to First Insurance. Immediately prior to this payment, Falcon owed First Insurance

$1,449,430.50, and the unearned premiums had a value of $1,690,422.54. Therefore,

the value of the unearned premiums (First Insurance's collateral) exceeded the debt

owed by Falcon by $240,992.04.

On January 10, 2005, Falcon paid the second monthly installment of

$144,943.04, plus a late charge of $7,247.08, for a total payment of $152,193.12.

Immediately prior to this payment, Falcon owed First Insurance $1,304,473.45, and

the unearned premiums had a value of $1,519,868.12. Therefore, the value of First

Insurance's collateral exceeded the debt by $215,394.67.

On January 31, 2005, Falcon Products, Inc.; Epic Furniture Group, Inc.; The

Falcon Companies International, Inc.; Falcon Holdings, Inc.; Howe Furniture

Corporation; Johnson Industries, Inc.; Madison Furniture Industries, Inc.; Sellers &

Josephson, Inc.; and Shelby Williams Industries, Inc. (collectively, "Debtors") filed

petitions for relief under Chapter 11 of the Bankruptcy Code. On the petition date,

Falcon owed First Insurance $1,159,527.41, and the unearned premiums had a value

of $1,418,601.44. Therefore, the value of the unearned premiums exceeded the debt

owed to First Insurance by Falcon by $259,074.03. 

On October 18, 2005, the bankruptcy court confirmed the Debtors' Third

Amended Joint Plan of Reorganization pursuant to which the Debtors' cases were

substantively consolidated. Under the Plan, the authority to prosecute avoidance

actions under Chapter 5 of the Bankruptcy Code vested in the Falcon Creditor Trust

(“Trust”).

Appellate Case: 07-6036 Page: 3 Date Filed: 01/28/2008 Entry ID: 3395848
2

 11 U.S.C. § 547(g).

4

On January 12, 2007, the Trust filed a complaint to avoid and recover under 

§§ 547 and 550 of the Bankruptcy Code Falcon’s December and January Payments

to First Insurance, totaling $297,136.17. 

III. DISCUSSION

To avoid a transfer as a preference, a trustee (or entity imbued with the powers

thereof) must establish every element of 11 U.S.C. § 547(b),2

 which provides: 

Except as provided in subsections (c) and (i) of this section, the trustee

may avoid any transfer of an 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;

(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.

In this case, only the last element is in dispute – whether the $297,136.17 in

payments the Debtor made to First Insurance in December 2006 and January 2007

enabled First Insurance to receive more than it would have received under a

hypothetical Chapter 7 liquidation had those transfers not been made. The resolution

of this dispute turns on an issue over which the courts are divided, namely: For

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3 Compare In re Rocor Intern., Inc., 2007 WL 4376026 (B.A.P. 10th Cir.

December 17, 2007) (“Rocor”)(conducting hypothetical liquidation test as of the

transfer date); Savage & Assoc. P.C. v. A.I. Credit Corp. (In re Teligent) 337 B.R.

39, 47 (Bankr. S.D. N.Y. 2005) (same); Telesphere Liquidating Trust v. Galesi (In

re Telesphere), 229 B.R. 173 (Bankr. N.D. Ill. 1999) (same); Schwinn Plan

Committee v. Transamerica Insurance Finance Corp. (In re Schwinn Bicycle Co.),

200 B.R. 980 (Bankr. N.D. Ill. 1996) (same) (“Schwinn”), with Sloan v. Zions First

National Bank (In re Castletons, Inc.) 900 F.2d 551 (10th Cir. 1993) (conducting

hypothetical liquidation test as of the petition date); Gray v. A.I. Credit Corp. (In re

Paris Industries Corp.), 130 B.R. 1 (Bankr. D. Me. 1991) (same); Kroh Brothers

Development Co. v. Commerce Bank of Kansas City, N.A. (In re Kroh Brothers

Development Co.), 86 B.R. 186 (Bankr. W.D. Mo. 1983) (same). See also, Palmer

Clay Products Co. v. Brown, 297 U.S. 227, 56 S.Ct. 450, 80 L.Ed. 655 (1936)

(stating that the hypothetical liquidation test must be conducted as of the date of

the petition); Barry v. Crancer, 192 F.2d 939 (8th Cir. 1951) (same).

5

purposes of applying the hypothetical liquidation test to an allegedly preferential

payment made to a secured creditor, should the collateral be valued as of the date of

the transfer(s) or as of the petition date?3

 Or, expressed in the terms of the statute,

should the hypothetical liquidation test of § 547(b)(5) be conducted as of the transfer

date or as of the petition date?

The bankruptcy court sided with the courts holding that the hypothetical

liquidation test should be conducted as of the date of the allegedly preferential

transfer. And in this case, because the undisputed evidence established that the value

of First Insurance’s collateral – the unearned insurance premiums – exceeded the

amount of debt owed to First Insurance on the dates of both of the allegedly

preferential transfers, the bankruptcy court concluded that neither of the transfers

sought to be avoided by the Trust enabled First Insurance to receive anything more

than it would have if the Debtor had been liquidated under Chapter 7 of the

Bankruptcy Code and the transfers had not been made. The bankruptcy court granted

summary judgment in favor of First Insurance accordingly.

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4 United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct.

1026, 103 L.Ed.2d 290 (1989) (quoting Caminetti v. United States, 242 U.S. 470,

485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)).

5

 11 U.S.C. §547(b)(5)(B).

6

The Trust, on the other hand, argues that Supreme Court and Eighth Circuit

Court of Appeals precedent require, and the better reasoned case law supports,

conducting the § 547(b)(5) hypothetical liquidation test as of the petition date. As of

the petition date, the unearned premiums had a value of $1,418,601.44, and the debt

owed to First Insurance totaled $1,456,663.58, representing the then current debt

($1,159,527.41) plus the amount of the transfers assumed not to have been made

($297,136.17). Because the amount of the debt exceeded the amount of the collateral

(by $38,062.14), the Trust concludes, the transfers at issue enabled First Insurance to

receive more than it would have in a Chapter 7 case, and the bankruptcy court's order

granting summary judgment in favor of First Insurance should be reversed.

Upon review of the statutory language of § 547(b) and the case law applying

it and its predecessor provision in the Bankruptcy Act, the Panel concludes that the

hypothetical liquidation test must be conducted as of the petition date. Consequently,

the record in this case supports a finding that the $297,136.17 in transfers received by

First Insurance within the 90 days prior to the petition date enabled it to receive more

as a result of those transfers than First Insurance would have received if this was a

case under Chapter 7 and the transfers had not been made.

When a statute's language is plain, “the sole function of the courts is to enforce

it according to its terms.”4

 Here, § 547(b)(5) does not specifically indicate whether

the hypothetical liquidation test should be conducted as of the transfer date or as of

the petition date, but it does state unequivocally that the test assumes that the transfers

had not been made.5

 Recognition of this assumption, which has been referred to as

the “add-back” method, is important because it forecloses one of the arguments used

Appellate Case: 07-6036 Page: 6 Date Filed: 01/28/2008 Entry ID: 3395848
6 See In re Rocor, 2007 WL 4376026, *3; In re Schwinn Bicycle Co., 200

B.R. at 990 (citations omitted).

7 In re Rocor Int’l, Inc., 2007 WL 4376026 , *3; In re Schwinn Bicycle Co.,

200 B.R. at 990.

8

 297 U.S. 227, 56 S.Ct. 450, 80 L.Ed. 655 (1936). See also, Barry v.

Crancer, 192 F.2d 939, 941 (8th Cir. 1941) (stating that Palmer settled the issue of

whether the effect of a preference is to be determined on the transfer date or as of

the date of the petition). 

7

against conducting the test as of the petition date. For reasons that are unclear, several

cases have conclusorily determined that the add-back method does not apply to

transfers to fully secured creditors because payments to a fully secured creditor cannot

be preferential.6

 But this statement still begs the question: Should transfer-date or

petition-date values be used to determine a secured creditor’s status? Moreover, the

plain language of § 547(b)(5) simply does not support a departure from the add-back

method. 

Upon inspection, the rejection of the add-back method in these cases is more

of a veiled rejection of a petition-date hypothetical liquidation test than a true

objection to the add-back method since the status of the secured creditors in these

cases was determined using the add-back method, i.e., by considering the creditor’s

secured status immediately prior to the transfer.7

 Therefore, the only real issue is the

timing of the hypothetical liquidation test, and Supreme Court precedent requires that

the hypothetical liquidation test be conducted as of the petition date.

This precedent is found in Palmer Clay Products Co. v. Brown,8 wherein the

Supreme Court stated:

Whether a creditor has received a preference is to be determined, not by

what the situation would have been if the debtor's assets had been

liquidated and distributed among his creditors at the time the alleged

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9 Palmer, 297 U.S. at 229.

10 See, e.g., In re Telesphere, 229 B.R. at 179; In re Schwinn, 200 B.R. 990.

11 Bankruptcy Act § 60a provides in pertinent part: “A person shall be

deemed to have given preference if, being insolvent, he has, within four months

before the filing of the petition, or after the filing of the petition and before the

adjudication * * * made a transfer of any of his property, and the effect of the

enforcement of such * * * transfer will be to enable any one of his creditors to

obtain a greater percentage of his debt than any other of such creditors of the same

class.” 

8

preferential payment was made, but by the actual effect of the payment

as determined when bankruptcy results.

* * *

We may not assume that Congress intended to disregard the actual result,

and to introduce the impractical rule of requiring the determination, as

of the date of each payment, of the hypothetical question: What would

have been the financial result if the assets had then been liquidated and

the proceeds distributed among the then creditors?9

Despite this apparently unequivocal statement that the preferential effect of a

preference – i.e., the hypothetical liquidation test – is to be determined as of the

petition date, the bankruptcy court did not address Palmer, and First Insurance argues

that it is not applicable to transfers to secured creditors. 

First Insurance and the cases upon which it relies contend Palmer is not

controlling because it dealt only with payments on unsecured claims.10 But there is

nothing in the language of Palmer which expresses such a limitation, and the Panel

finds no basis to impart or create one. The law applied in Palmer – § 60a of the

Bankruptcy Act – is substantially similar to § 547(b) of the Bankruptcy Code,11 and

the concern raised by the Supreme Court over the “impracticality” of conducting the

hypothetical liquidation test on the date of each payment is no less (and is probably

greater) when payments on secured claims are involved.

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12 2007 WL 4376026 (B.A.P. 10th Cir. December 17, 2007).

13 Id. at *4-5 (citing In re Schwinn Bicycle Co., 200 B.R. at 993). See also,

In re Telesphere, 229 B.R. at 180. 

9

The impetus to limit Palmer to situations involving payments on unsecured

claims is understandable – it seems almost illogical to find that a payment on a claim

fully secured at the time of the transfer might be preferential under § 547(b). But the

resolution of that illogic does not lie in refashioning the hypothetical liquidation test

of § 547(b)(5) to incorporate elements of § 547(c) preference defenses, as many courts

have done; rather, it comes in the separate application of those defenses to the

preferential transfer at issue.

A case recently decided by the Bankruptcy Appellate Panel for the Tenth

Circuit, In re Rocor,12 which relies on many of the same cases cited by the bankruptcy

court, illustrates how courts have improperly conflated a preference analysis with a

preference defense analysis. In determining that a creditor (also an insurance

premium financier) did not receive a preference because it was fully secured by

unearned insurance premiums on the date of the transfer, even though it would have

been under-secured as of the petition date, the Rocor court reasoned: 

If a creditor is fully secured, then it follows that a payment to that

creditor merely reduces the secured claim, and releases from the

security interest the same amount of the collateral. . . . If the payment to

the creditor results in a release of an equivalent value of collateral, then

the newly released value would theoretically be made available to the

rest of the bankruptcy estate. Under such circumstances, there is no

such diminution to the estate by the payment, and the secured creditor

did not receive anything more than it would have received had the

payment not been made.13

The logic applied here is sound, but it is misplaced. To wit, it improperly

conflates a preference analysis with the analysis implicated by the “contemporaneous

Appellate Case: 07-6036 Page: 9 Date Filed: 01/28/2008 Entry ID: 3395848
14 Section 547(c)(1) provides:

The trustee may not avoid under this section a transfer—

(1) to the extent that such transfer was--

(A) intended by the debtor and the creditor to or for whose benefit

such transfer was made to be a contemporaneous exchange for new

value given to the debtor; and

(B) in fact a substantially contemporaneous exchange.

15 Palmer, 297 U.S. at 229.

16 11 U.S.C. § 547(c)(1) and (4).

10

exchange for new value” defense set forth in 11 U.S.C. § 547(c)(1).14 Section 547(b),

by itself, does not contemplate any consideration of what a debtor receives in

exchange for a transfer. As Palmer instructs, it is concerned solely with the impact

the transfer has on the bankruptcy estate as of the petition date.15 A consideration of

what a debtor may have received in exchange for the transfer – contemporaneously

or subsequently – comes into play only when the appropriate preference defense is

raised.16 Conflating these two analyses might be expedient, in that payments on fully

secured claims will likely be shielded from avoidance under § 547(c)(1) because, as

noted above, “the payment to the creditor results in a release of an equivalent value

of collateral,” but it is important to keep them separate – as an analytical and a

practical matter, especially where (as in this case) the case is before a court on

summary judgment under § 547(b), and neither party has had an opportunity to

advance or refute the applicability of preference defenses under § 547(c).

Finally, the bankruptcy court grounded its decision to conduct the hypothetical

liquidation test as of the time of the transfers in dispute on the assumption that First

Insurance would have asserted its right to cancel the Policies and to obtain the

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17 Cf. Schwinn, 200 B.R. at 994-95 (“[T]here is nothing in the Bankruptcy

Code that prohibits the court from considering what actually would have occurred

had an allegedly preferential transfer not been made.”). The Panel is not persuaded

that the absence of such a prohibition is justification for engaging in speculation

about what a creditor would have done if it had not been paid, especially in light of

Palmer’s directive to conduct the hypothetical liquidation test as of the petition

date. 

11

unearned premiums if Falcon failed to make either of the payments in dispute. But

this assumption is not warranted by the law or supported by the record.17

IV. CONCLUSION

For the reasons stated above, we reverse the bankruptcy court’s decision on

summary judgment and remand this case so that the bankruptcy court may consider

any evidence in support of the Defendant’s § 547(c) defenses and determine the actual

effect of the transfers, as directed by the Supreme Court in Palmer Clay Products v.

Brown.

 

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