1

United States Court of Appeals,

Fifth Circuit.

No. 96-30372.

Cynthia Lee TRAINA, Trustee, Appellant,

v.

WHITNEY NATIONAL BANK, Appellee.

April 8, 1997.

Appeal from the United States District Court for the Eastern

District of Louisiana.

Before HIGGINBOTHAM, DAVIS and BARKSDALE, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Trustee Cynthia Traina appeals the dismissal of her complaint

seeking to avoid transfers between bankruptcy debtor Imperial

Jewelry Corporation (Imperial) and Whitney National Bank (Whitney).

Because we conclude that the trustee fails to satisfy the elements

necessary to bring a revocatory action under Louisiana law, we

affirm.

I.

On May 30, 1991, Imperial executed a security agreement that

gave Whitney a security interest in all of Imperial's inventory,

accounts receivable, and deposit accounts. The borrower in

connection with this agreement was not Imperial, however, but

Russell Aronson, Imperial's owner, who owed the bank a substantial

amount of money. From February 20, 1990, to January 5, 1993,

Imperial paid $134,043.92 to Whitney in connection with Aronson's

debt. On January 4, 1993, Imperial transferred to the bank all of

its inventory and accounts receivable; in return, Aronson received
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a $25,000 credit on his debt. After January 4, 1993, Whitney was

paid $17,628.68 by account debtors of Imperial, which further

reduced Aronson's debt. On January 5, 1993, Imperial filed a

chapter 7 petition.

Before February 20, 1990, and through the date of filing,

Imperial had two revolving credit accounts with First Bankcard

Center that allowed Imperial to incur debt on an ongoing basis.

One account had a balance of $245.17 as of May 28, 1991, the

statement date immediately prior to the security agreement. The

June 27, 1991, statement shows that Imperial had paid $245.17 and

incurred additional charges of $466.63. The second account

reported a balance of $1,424.30 as of the May 13, 1991, statement

date; additional charges of $111.05 were incurred between May 13,

1991, and May 30, 1991, the date of the security agreement. By

October 7, 1991, Imperial had paid in full all sums due for

purchases made before May 30, 1991. While the pre-security

agreement debt had been paid off, however, Imperial still

maintained outstanding balances on both accounts. First Bankcard

filed a Proof of Claim in this case for $6,267.74.

The trustee seeks to avoid the security agreement between

Imperial and Whitney, the payments from Imperial to the bank, and

the transfer of Imperial's inventory and accounts receivable to the

bank by pursuing a revocatory action on First Bankcard's behalf.

The bankruptcy court found no statutory basis for avoiding the

agreement, and the district court affirmed. The trustee appeals

that decision.
 

1Both parties agree that First Bankcard is the only unsecured

creditor that could arguably bring a revocatory action under

Louisiana law. 

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II.

A.

This court reviews a bankruptcy court's conclusions of law de

novo and findings of fact for clear error. In re Kemp, 52 F.3d

546, 550 (5th Cir.1995). When the district court has affirmed the

bankruptcy court's findings, the review for clear error is strict.

Id.

B.

Under § 544(b) of the Bankruptcy Code, a "trustee may avoid

any transfer of an interest of the debtor in property or any

obligation incurred by the debtor that is voidable under applicable

law by a creditor holding an unsecured claim...." 11 U.S.C. §

544(b). Here, the "applicable law" at issue is the Louisiana

revocatory action, as codified in Louisiana Civil Code Art. 2036,

which provides:

An obligee has a right to annul an act of the obligor, or the

result of a failure to act of the obligor, made or effected

after the right of the obligee arose, that causes or increases

the obligor's insolvency.

Thus, under Louisiana and federal bankruptcy law, the trustee may

avoid Imperial's transfers to the bank by stepping into the shoes

of an unsecured creditor who could have avoided those transfers by

means of a revocatory action.1

Before the Louisiana Civil Code was revised in 1984, a

creditor pursuing a revocatory action had to demonstrate: (1)
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insolvency of the debtor; (2) injury to the creditor; (3) intent

to defraud the creditor by the transaction; and (4) pre-existing

and accrued indebtedness. Central Bank v. Simmons, 595 So.2d 363,

365 (La.App. 2d Cir.1992). In amending the articles relating to

revocatory actions, the Louisiana Legislature replaced the fraud

requirement with an objective test of whether the act caused or

increased the obligor's insolvency. LSA-C.C. Art. 2036 cmts. (a)

& (b); Succession of Neuhauser, 579 So.2d 437, 441 (La.1991).

More generally, the question is whether "prejudice to the obligee's

right has been caused by the obligor's act." Exposé des Motifs of

the Projet of Titles III and IV of Book III of the Civil Code of

Louisiana, Introductory Note from the Reporter of the Obligations

Committee of the Louisiana State Law Institute, La. Civ.Code Ann.

Vol. 7-8 at 64 (West 1987).

A creditor seeking to avoid a transfer now must prove that the

offending transaction: (1) was made or effected after the right of

the obligee arose and (2) caused or increased the obligor's

insolvency. LSA-CC Art. 2036 & cmts. (a) & (f); Simmons, 595

So.2d at 365. The bankruptcy court determined that Imperial's

grant of a security interest to Whitney increased its insolvency.

However, the court concluded that the anteriority element—that is,

the requirement that the offending act be "made or effected after

the right of the obligee arose"—was missing because all of the debt

that Whitney incurred prior to the offending security agreement had

been paid off. According to Louisiana Civil Code articles

governing imputation of payment, Imperial's payments to First
 

2Article 1868 of the Civil Code provides that "[i]f the

obligor had the same interest in paying all debts, payment must be

imputed to the debt that became due first." LSA-CC Art. 1868; see

Farlee Drug Center, Inc. v. Belle Meade Pharmacy, Inc., 464 So.2d

802, 806 (La.App. 5th Cir.1985). Additionally, article 1866 of the

Civil Code requires that "[a] payment made on principal and

interest ... be imputed first to interest." LSA-CC Art. 1866.

While Imperial maintained outstanding balances on both accounts, it

also made regular payments to First Bankcard that must be imputed

first to the pre-security agreement debt. 

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Bankcard were applied to debts that first became due and to accrued

interest.2 The bankruptcy court, after reviewing the evidence,

found that Imperial had paid off all of the debt it incurred before

the signing of the security agreement. While Imperial maintained

outstanding, unpaid balances under both credit agreements through

the date of bankruptcy filing, the only debt remaining at the time

of bankruptcy accrued after the security agreement was signed.

Because First Bankcard was not prejudiced by the security agreement

with respect to debt accrued after the transfer, the court

concluded that the debt existing at the time of bankruptcy could

not support a revocatory action.

The trustee argues that First Bankcard's right as obligee

arose not when Imperial incurred separate and discrete debts, but

rather when Imperial and First Bankcard first entered into the

credit agreements requiring Imperial to pay all debts incurred

under those agreements and allowing Imperial to incur debt without

entering into new contracts. This court must determine whether

First Bankcard's right was created as of the date the credit card

contracts were entered into or, as the lower courts found, as of

the date that the debt accrued.
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The Louisiana Civil Code defines obligation as "a legal

relationship whereby a person, called the obligor, is bound to

render a performance in favor of another, called the obligee.

Performance may consist of giving, doing, or not doing something."

LSA-CC Art. 1756. The Code further provides that an obligation may

give an obligee the right to "[e]nforce the performance that the

obligor is bound to render." LSA-CC Art. 1758. The trustee

contends that the credit agreements represent a legal relationship

creating an "obligation" that, in turn, gives rise to a "right" as

defined by article 2036.

We disagree. The existence of the credit agreements, alone,

does not give rise to a "right" necessary to support a Louisiana

revocatory action. The Code's definition of "obligation" requires

more than the mere existence of a legal relationship; rather, it

demands a legal relationship under which "an obligor[ ] is bound to

render a performance in favor of another." Here, Imperial was

bound to repay any advance of credit obtained under its credit

agreements. However, this obligation arose only upon incurrence of

debt. No obligation existed until Imperial charged transactions to

the individual credit accounts. Because Imperial was not bound to

render its performance—payment of debt—until it actually incurred

debt, the relationship between Imperial and First Bankcard at the

time the credit agreements were entered into did not constitute an

"obligation" as defined by the Civil Code. In addition, given that

Imperial has paid off the debt existing at the time of the

offending security agreement, First Bankcard is unable to
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demonstrate how it has been prejudiced by that agreement.

Commentary accompanying the revised articles relating to

revocatory actions supports our conclusion that an obligee must

demonstrate the existence of some debt—liquidated or otherwise—at

the time of the offending transfer to maintain a revocatory action.

See Thomassie v. Savoie, 581 So.2d 1031, 1034 (La.App. 1st

Cir.1991) (stating that Legislature's substitution of "obligor" and

"obligee" for "debtor" and "creditor" in 1984 revision was intended

to expand scope of revocatory action to cover unliquidated claims

(citing art. 2041 cmt. (b))). The anteriority element is defined

"in accordance with traditional doctrine received by the Louisiana

jurisprudence." LSA-CC Art. 2036 cmt. (f). Courts reviewing the

anteriority element in pre-revision transactions consistently held

that the revocatory action was available only to creditors showing

preexisting and accrued indebtedness at the time of the offending

transfer. See, e.g., Copher v. Ormond Builders, Inc., 467 So.2d

1344, 1346 (La.App. 5th Cir.1985); Adams v. Laborde, 430 So.2d

381, 384 (La.App. 3d Cir.1983); Morgan v. Gates, 396 So.2d 1386,

1389 (La.App. 2d Cir.1981). Even after the revision, at least one

Louisiana court has continued to require "pre-existing and accrued

indebtedness." See Security Ctr. Protection Servs., Inc. v. AllPro Security, Inc., 650 So.2d 1206, 1214 (La.App. 4th Cir.1995);

see also In re Lenard, 849 F.2d 974 (5th Cir.1988); Bruce V.

Schewe, Debtors in Solido: On Plain Language and Uncertainty with

Mention of the Revocatory Action, 32 LOYOLA L. REV. 13, 41 & n. 128

(1986) (asserting that new article 2036 carries forth the timing
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rule of old article 1993, which provided that "[n]o creditor can

... sue individually to annul any contract made before the time his

debt accrued"). Finally, comments to article 2036 state that the

revised language "changes the law insofar as it abandons the notion

of fraud contained in the source articles. Otherwise it reproduces

the substance of" those articles. The source articles require the

presence of a "debt" owed to the creditor. See LSA-CC Arts. 1971,

1972, 1975, 1977 (repealed).

The trustee relies on two bankruptcy court decisions

interpreting the law of other jurisdictions to support her claim

that a revolving credit agreement can support a revocatory action.

In re Aluminum Mills Corp., 132 B.R. 869 (Bankr.N.D.Ill.1991); In

re Structurlite Plastics Corp., 193 B.R. 451 (Bankr.S.D.Ohio 1995).

Assuming these courts reached the correct result under Illinois and

Ohio law, for reasons discussed above, Louisiana law requires a

different conclusion.

Because we conclude that the bankruptcy court correctly

dismissed the trustee's revocatory action, we need not address

Whitney's other arguments.

III.

For these reasons, the district court's decision dismissing

Traina's complaint is AFFIRMED.

AFFIRMED.