* Pursuant to Local Rule 47.5, the court has determined that

this opinion should not be published and is not precedent except

under the limited circumstances set forth in Local Rule 47.5.4.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

______________________________

No. 96-20592

______________________________

In the Matter of: TRANS MARKETING HOUSTON, INC.,

Debtor,

JOHN M. WEAVER,

LIQUIDATING TRUSTEE,

Appellee/Cross Appellant,

versus

AQUILA ENERGY MARKETING

CORPORATION,

Appellant/Cross Appellee.

____________________________________________

Appeal From the United States District Court

for the Southern District of Texas

(H-95-4785)

____________________________________________

May 30, 1997

Before GARWOOD, WIENER, and DEMOSS, Circuit Judges.

WIENER, Circuit Judge: *

In this appeal, which arises from a preference avoidance2

action in bankruptcy, both Appellant/Cross Appellee Aquila Energy

Marketing Corporation (“Aquila”) and Appellee/Cross Appellant John

Weaver, Liquidating Trustee of Trans Marketing Houston, Inc. (“the

Trustee”) seek reversal of a decision of the district court that

reversed the bankruptcy co urt. We affirm the district court,

holding that (1) Aquila’s service of a garnishment writ constituted

a preferential transfer under 11 U.S.C. § 547(b), and (2) the

Trustee’s avoidance of that writ benefits the estate within the

meaning of 11 U.S.C. § 550(a).

I

FACTS AND PROCEEDINGS

The Debtor, Trans Marketing Houston, Inc. (“ TMHI” or “the

d ebtor”), was engaged in the petrochemical trading busine ss.

Beginning in 1986, TMHI’s operations were largely financed by

Banque Paribas, a French bank. During 1992 and 1993, Banque

Paribas extended $65 million in credit to TMHI through an ongoing

financing arrangement. In January 1993, the bank advanced an

additional $3 million as a working capital loan for general

corporate purposes. Banque Paribas held a security interest in

essentially all of TMHI’s assets

—— cash, inventory, accounts

receivable, goods, furniture, equipment and notes receiv able ——

including among other things funds deposited in two accounts with

Banque Paribas. Significantly, these two accounts were

contractually subject to Banque Paribas’ domi nion and control:3

TMHI had no right to withdraw the funds on deposit until all of its

debts to Banque Paribas were paid.

Aquila sold natural gas to TMHI on open account in early 1992.

TMHI failed to pay for the gas, so on March 17, 1993, Aquila sued

in Texas state court to collect approximate ly $1.83 million.

(Aquila later amended its petition to assert a claim of

approximately $3.4 million.) A week later, on March 23, 1993,

Aquila filed an application for a prejudgment writ of garnishment

against TMHI in the amount of $1,832,538.12. As TMHI had funds on

deposit at Banque Paribas in excess of the garnished amount, Aquila

had the writ served on the bank on March 25, 1993.

A week after that, on April 1, 1993, three significant events

transpired. First, the state district court denied TMHI’s motion

to dissolve the writ. Second, despite never having declared any of

TMHI’s loans to be in default and never having accelerated any of

TMHI’s lo ans, Banque Paribas “offset” the debts TMHI owed it

against all of TMHI’s approximately $4 million in funds on deposit

there, including the funds putatively garnished by Aquila. Third,

TMHI was advised by Banque Paribas that it would no t finance any

future operations and would on ly consider making a short term

debtor-in-possession loan for the limited purpose of facilitating

the unwinding of TMHI’s business. The loss of Banque Paribas’

financing left TMHI powerless to continue operations. On April 16,

1993, it filed a chapter 11 bankruptcy petition.

Following the commencement of the bankruptcy case, Aquila and1 During trial in the bankruptcy court, the Trustee asserted,

based upon a liquidation analysis of TMHI’s assets, that the value

of those assets was approximately $34 million as of April 15, 1993.

The bankruptcy court disallowed the Trustee’s liquidation

adjustments, however, and added back to asset values the values of

prepaid assets and expenses, a s well as the full book value of

TMHI’s furniture, fixtures, and equipment.

4 Banque Paribas each timely filed a proof of claim. Aquila asserted

a secured claim of approximately $1.83 million (the amount of the

garnishment writ) and an unsecured claim of a pproximately $1.6

million. Banque Paribas asserted a secured claim of approximately

$22 million. Although other documentary evidence submitted to the

bankruptcy court indicated that Banque Paribas had a secured claim

of approximatel y $18.7 million on the date of the bankruptcy

petition, the court ultimately found that as of March 31, 1993 (the

day before the state court denied TMHI’s motion to dissolve the

garnishment writ and also the day before Banque Paribas’ setoff)

Banque Paribas held a secured claim of approximately $22 million,

which included a contingent claim of $1.83 million for the amount

garnished by Aquila. In addition, even though the Trustee asserted

that the value of TMHI’s assets claimed by Banque Paribas as

collateral was approximately $34 million on the date of the

bankruptcy petition, the bankruptcy court found that as of March

31, 1993 TMHI owned approximately $48.7 million in assets of which

all but some $600,000 were claimed by Banque Paribas as its

collateral. 1 In short, whether measured by its own assertions or

by the findings of the bankruptcy court, Banque Paribas was5

substantially oversecured both at the time of its setoff against

TMHI’s funds on deposit and at the time the debtor’s bankruptcy

petition was filed.

The instant adversary proceed ing was initiated by TMHI, as

debtor-in-possession, to avoid Aquila’s state court garnishment

writ as a preference under 11 U.S.C. § 547. After confirmation of

a Liquidating Plan of Reorganization (the Plan), the Truste e was

substituted for TMHI as plaintiff in the avoidance action.

The Plan contained several pr ovisions relevant to this

avoidance action. First, it enjoined Aquila from prosecuting the

state court garnishment action against TMHI and Banque Paribas, as

well as “any other action arising therefrom or in connection

therewith” during the pendency of this avoidance action. Second,

it released Banque Paribas from any liabilities to TMHI or the

estate, including any arising from its April 1, 1993, setoff of

TMHI’s funds on deposit. Third, it obligated the Trustee to

continue to prosecute this avoidance acti on against Aquila and

specified that if the Trustee abandoned the action or settled with

Aquila without Banque Paribas’ written consent, the bank’s allowed

secured claim would be increased by $1.83 million. Finally, it

provided that in the event Banque Paribas should incur any

financial obl igation to Aquila by virtue of Aquila’s continued

prosecution of a state court action based on the bank’s setoff of

the garnished funds, Banque Paribas would acquire an additional

unsecured claim in th e amount of its loss, not to exceed $1.832 See 11 U.S.C. § 547(b)(1) & (2).

3 See 11 U.S.C. § 547(b)(3).

6 million, plus attor neys’ fees not to exceed $200,000; Aquila’s

claim, in turn, would be reduced by the a mount of any payment it

might receive from Banque Paribas.

Aquila objected to confirmation, complaining that (1) the Plan

does not generally provide a fair settlemen t for the estate,

(2) the injunction prohibiting Aquila from pursuing Banque Paribas

in state court is improper, and (3) the Plan does not treat Aquila

as a secured creditor. Aquila’s appeals of the confirmation of the

Plan were dismissed by the district court and this court solely on

the grounds of mootness, so the merits of Aquila’s objections to

confirmation were never reached on appeal.

In the instant avoidance action, which the Trustee

—— pursuant

to the Plan

—— continued to pr osecute against Aquila, the

bankruptcy court acknowledged the undisputed fact that Aquila was

a creditor to whom TMHI owed an antecedent debt, 2 and determined,

after extensive fact finding, that TMHI was insolvent at the time

Aquila’s garnishment writ was served on Banque Paribas. 3 The

bankruptcy court ultimately found, however, that as Banque Paribas

had setoff TMHI’s account against the unpaid balance of its loans

after Aquila’ s writ of garnishment was served but b efore the

bankruptcy petition was filed, Aquila had not received a benefit as

a creditor of TMHI, and thus would not receive more than it would4 See 11 U.S.C. § 547(b)(5).

7 have received if this were a hypothetical chapter 7 case and the

garnishment writ had never been served. 4 Therefore, concluded the

court, Aquila’s writ could not be avoided as a preferential

transfer under § 547(b).

In addition, the bankruptcy court ruled that the Trustee had

failed to demonstrate, as required under 11 U.S.C. § 550(a), that

avoidance of the writ would produce some “benefit to the estate,”

i.e., to unsecured creditors. This is so, reasoned the court,

because (1) it was Banque Paribas’ pre-petition set-off

—— not

Aquila’s garnishment

—— that removed the erstwhile garnished funds

from the estate, leaving as the only real dispute the one between

Aquila and Banque Paribas, two non-debtors; and (2) under the Plan,

either Aquila or Banque Paribas

—— but not both

—— will have an

unsecured claim for $1.83 million of those funds. The court

expressed the opinion that any other purported benefit —— such as

a speculative, de minimi s savings of $200,000 in attorneys fees

that Banque Paribas might run up against the estate as an unsecured

claim in defending a state court action brought by Aquila based on

the setoff

—— would flow from the “machinations of the confirmation

plan” and not from a successfu l prosecution of this avoidance

action.

In the district court, each party appealed different elements5 The district court opini on was published s ub nom Weaver v.

Aquila Energy Marketing Corp. , 196 B.R. 945 (S.D. Tex. 1996).

6 I d. at 953. In reaching this conclusion, the court relied

primarily on this court’s holdi ng in In re Latham , 823 F.2d 108,

110 (5th Cir. 1987) (a transfer of property by garnishment occurs

at the moment of service) and declined to follow a recent Seventh

Circuit decision that calls our holding in In re Latham into doubt.

See In re Freedom Group

, 50 F.3d 408, 412 (7th Cir. 1995)

(gar nishment does not transfer money or other property, for

purposes of § 547(b), until a final order of garnishment is

issued). If we were to apply I n re Freedom Group ’s rule to the

facts o f this case, we would be compelled to conclude that there

never was a completed transfer of money or other property during

the 90 day pre-petition preferential transfer period.

Consequently, the Trustee would have nothing to avoid, and Aquila

would not have a secured claim. We are not prepared to go as far

in this appeal a s did the Seventh Circuit in I n re Freedom Group

regarding the intricacies of applicable state garnishment law. It

suffices that we need not do so, and that we need not dwell long on

that case or distinguish it from the one before us.

8 of the bankruptcy c ourt’s decision. 5 The district court first

reversed the bankruptcy court’s ruling that a preferential transfer

had not occurred under § 547(b). It reached this initial

conclusion by ruling, as a threshold matter, that notwithstanding

the bank’s pre-petition setoff a transfer of property did in fact

take place

—— i.e., “a garnishor’s interest” was acquired

—— at the

moment the writ of garnishment was served, as the “garnishor’s

status [was] converted from unsecured creditor to secured

creditor.” 6 The district court found that the resulting “shift in

positions” from completely unsecured to potentially secured

creditor, effectuated by service of the writ, benefits Aquila and

may allow it to receive more (a greater percentage of its claim)

than it otherwise would have if the transfer had not occurred, thus7 Id. at 954-55.

8 Id. at 955-57.

9 satisfying § 547(b)(5).

Alt hough the district court went on to agree with the

bankruptcy court that the Trustee must also satisfy the “benefit to

the estate” test under § 55 0(a) if the Trustee is to avoid the

preferent ial transfer represented by the garnishment writ, 7 it

ultimately reversed the bankruptcy court’s findi ng that the

avoidance action does not benefit the estate. The district court

concluded that (1) even a relatively minor benefit to the estate

——

such as the Plan’s prov ision for a potential savings of up to

$200,000 in attorneys’ fees that would be charged to the estate

should this avoidance action spare Banque Paribas from having to

defend a stat e court action arising from its setoff —— cannot be

disregarded, and (2) the bankruptcy court itself had approved the

Plan, indicating the presence of some “benefit to the estate” in

the Plan’s provision obligating the Trustee to prosecute this

action. 8

Finally, the di strict court rejected the five propositions

raised by Aquila on cross-appeal. First, it affirmed the

bankruptcy court’s factual finding that TMHI was insolvent on the

date th e writ of garnishment was served. Second, it rejected a

judicial estoppel claim (which is not before this court). Third,

the court rej ected Aquila’s argument that the bankruptcy court9 This latter assertion is facially contradicted by the Plan’s

provision enjoining not only the state court garnishment action

against TMHI and Banque Paribas, but also “any other action arising

therefrom or in connection therewith.”

10 In re McDaniel , 70 F.3d 841, 842-43 (5th Cir. 1995).

10 erred by failing to dissolve the Plan, at least to the extent that

the Plan prohibits Aquila from suing Bank Paribas, noting, inter

alia, that the stay was only temporary and that only Aquila’s writ

o f garnishment claim, not its conversion cause of action agai nst

the bank, is subject to th e bankruptcy court’s jurisdiction. 9

Fourth, it rejected a standing claim (which is not before this

court). Fifth, the district court affirmed the bankruptcy court’s

denial of Aquila’s request for a jury trial.

II

ANALYSIS

A. Standard of Review

We revie w a bankruptcy court’s findings of fact under a

clearly erroneous standard and decide issues of law de novo

. 10 In

this appeal, the only factual findings subject to review for clear

error concern whether the debtor was insolvent at the time of the

purported transfer. The remainder of our review focuses on legal

issues and is therefore entirely plenary.

B. Preferential Transfer under § 547(b)

Section 547(b) of the Bankruptcy C ode empowers a trustee to

avoid “any transfer of an interest of the debtor in property” to a11 See 11 U.S.C. § 547(b).

11

non-insider only if each of the followi ng five conditions is

present: The transfer was made (1) to or for the benefit of a

creditor; (2) for o r on account of an antecedent debt; (3) while

the debtor was insolvent; (4) on or within 90 days preceding the

filing of the bankruptcy petition; (5) to enable the creditor to

receive more than he otherwis e would have if the case were a

hypothetical ch apter 7 proceeding and the transfer had not been

made. 11 In this appeal, Aquila first argues that the district court

erred in finding that conditions (3) and (5) had been established

by the Trustee.

In regard to whether TMHI as debtor was insolvent at the time

when the purported preferential transfer occurred, Aquila’s

principal contention is that the bankruptcy court erred in not

assigning a premium or “going con cern” value to TMHI as of March

25, 1993, the date the garnishment writ was served. As the

bankruptcy court observed, however, TMHI was already in a “state of

wreck” even before Banque Paribas exercis ed its setoff against

TMHI’s accounts and cut off further financing. That in turn made

it im probable that any person or entity would pay a premium to

purchase TMHI. Moreover, the bankruptcy court’s findings on the

state of TMHI’s financial condition are detailed and well reasoned.

The court listened to extensive testimony from fi nancial experts

and gave Aquila the benefit of the doubt on a number of accounting12

disputes, but still found that TMHI was insolvent on the date of

service of the garnishment writ. Like the district court, we are

convinced that the bankruptcy court did not clearly err in

determining that TMHI was insolvent on the date of service of the

garnishment writ.

The issue of insolvency aside, § 547(b)’s fifth condition ——

that a transfer occurred that enables Aquila to receive more than

it would have if no transfer had occurred and this had been a

hypothetical chapter 7 case

—— presents a point that has

consistently been one of the two principal thrusts of Aquila’s

argument in this litigation. Indeed, the bankruptcy court agreed

with the gist of Aquila’s basic contention that it had not received

and never would receive more from the debtor’s estate by virtue of

the garnishment writ than it would have received had the writ not

been served, because, given Banque Paribas’s pre-petition set-off,

the debtor’s estate no longer con tained any property to which

Aquila’s garnishment lien could have attached at the commencement

of the bankruptcy case. In other words, by virtue of its setoff,

Banque Paribas, not the debtor, controlled or owned the funds to

which Aquila’s garnishment writ purportedly attached at the time of

the commencement of the bankruptcy case. It follows, Aquila has

argued and the bankruptcy court has agreed, that any funds Aquila

might receive as a re sult of the writ will come from Banque

Paribas, a non-debtor, not from the estate; and, ther efore, the

Trustee cannot demonstrate the pr esence of the fifth element of12 See Chandler v. El Paso Nat’l Bank

, 589 S.W .2d 832, 836

(Tex. Civ. App.--El Paso 1979) (no writ); Intercontinental

Terminals v. Hollywood Marine

, 630 S.W.2d 861, 863 (Tex. Civ. App.-

- Houston [1st Dist.] 1982) (writ ref’d n.r.e.).

13 See Englert v. Englert

, 881 S.W.2d 517, 518 (Tex. App.--

Amarillo 1994) (no writ); see also Cohen v. Advance Imports, Inc.

, 597 S.W.2d 449, 452 (Tex. Civ. App. --Dallas 1980) (writ ref’d

n.r.e.) (after service of garnishment writ, garnishee acts at his

peril in delivering goods or paying money to defendant in main suit

and, if he does so, may be liable to garnishor for conversion).

13 § 547(b).

The Trustee respo n ds to this contention with alternative

arguments. First and foremost, he asserts that Banque Paribas’

pre-petition setoff of the debtor’s funds on deposit was void

because it violated Texas’ garnishment law. In this vein, the

Trustee makes several observations about Texas garnishment law.

First, he notes that service of a garnishment writ effectively

impounds garnished funds in the hands of a garnishee and thus turns

the garnishee into an officer of or receiver for the court. 12 The

Trustee next obser ves that Tex. Civ. Prac. & Rem. Code § 63.003

provides:

(a) After service of a writ of garnishment, the

garnishee may not deliver any effects or pay any

debt to the defendant . . .

(b) A payment, delivery, sale, or transfer made in

violation of Subsection (a) is void as to the

amount of the debt, effect s, shares or interest

necessary to satisfy the plaintiff’s demands.

Finally, he points out simply that, in a garnishment proceeding, a

garnishor may attack transactions between debtors and garnishees. 13

Accordingly, reasons the Trustee, even though Banque Paribas may14 Indisputably, tra nsfers that do in fact change the status

of a creditor from an unsecured to a secured one are preferential,

when, as here, evidence indicates that no unsecured creditor would

receive full payment on liquidation. S ee In re Crisswell

, 102 F.3d

1411, 1415 (5th Cir. 1997) (“the fixing of a non-statutory judicial

lien . . . is avoidable as a preferential ‘transfer’”); I n re

Hagen

, 922 F.2d 742, 745 (11th Cir. 1991) (“the creation of a lien

in favor of a previously unsecured creditor is a transfer” that

“satisfies the fifth element of Section 547(b)”); Porter v. Yukon

Nat’l Bank , 866 F.2d 355, 359 (10th Cir. 1989)(change in priority

status is sufficient to establish the last element of a

preferential transfer); In re Enserv Co., Inc.

, 64 B.R. 519, 521

14 have had the right to setoff the funds in TMHI’s account, the

bank’s exercise of that right after service of the garnishment writ

contravened § 63.003(a)&(b) and was otherwise unlawful to the

extent of the amount of the garnishment writ. As the set-off was

void, the Trustee c ontinues, Banque Paribas still owed the

deposited funds to TMHI’s bankruptc y estate, and the estate, in

turn, retained a property interest in those funds, subject to the

writ of garnishment. It follows, insists the Trustee, that

Aquila’s garnishment writ still provided it with a viable lien

against the debtor ’s property (the garnished funds) at the time

that the bankruptcy petition was filed, albeit that property was in

the hands of Banque Paribas. Thus, the Trustee concludes, Aquila’s

garnishment writ still has value and, if not avoided, will have the

potentiality of permitting Aquila to receive more than it would if

the writ not been served and this were a hyp othetical chapter 7

case. As such, the crucial fifth element for avoiding the

garnishment writ as a preferential transfer pursuant to § 547(b) is

satisfied. 14(B.A.P. 9th Cir. 1986), aff’d

, 813 F.2d 1230 (9th Cir. 1987)

(levy on bank account to satisfy judgment is transfer that can be

a preference).

15 We observe, as Banque Pariba s has argued in its postargument amicus brief, that a garnishor can only enforce against a

bank, as garnishee, such rights as the debtor himself might have

against that bank. See Rome Industries, Inc. v. Instel Southwest

, 683 S.W.2d 777, 779 (Tex. App.--Houston (14 th Dist.) 1984) (writ

ref’d n.r.e.); Bullock v. Foster Cathead Co. , 631 S.W.2d 208, 211

(Tex. App.--Corpus Christi 1982) (no writ); Beggs v. Fite

, 106

S.W.2d 1039, 1042 (Tex. 1937). In other words, the garnishor

merely steps into the shoes of its debtor and can never stand in a

better position than the debtor relative to the funds on deposit.

Farmers & Merchants State Bank of Teague v. Setzer , 185 S.W. 596,

597 (Tex. Civ. App.--Dallas 1916) (no writ). Relying on this

fu ndamental principle of garnishment law, Texas courts have

expressly held on several occasions that when a bank possesses a

right of set-off against funds garnished by a creditor of a

depositor, the bank may immediately apply the funds on deposit to

the depositor’s indebtedness then due to the bank. See id. ; Gill

v. Oak Cliff Bank & Trust Co.

, 331 S.W.2d 832, 834 (Tex. Civ. App.-

-Amarillo 1959) (no writ); Sunbelt Savings F.S.B. v. Bank One,

Texas N.A.

, 816 S.W.2d 106, 110 (Tex. App.--Dallas 1991), rev’d on

other grounds

, 824 S.W.2d 557 (Tex. 1992) (set-off clea rly

available as a defense to garnishment action if bank can establish

elements). In fact, a bank’s failure so to act may even be

considered a waiver of its set-off rights. Holt’s Sporting Goods

Co. of Lubbock v. American Nat’l Bank of Amarillo

, 400 S.W.2d 943,

945 (Tex. Civ. App.--Amarillo 1966) (writ dism’d). F inally, a bank

will have a right to setoff a debtor’s indebtedness against funds

on deposit when (1) the debt matures, (2) the debtor is insolvent,

or (3) the bank has a contractual right to accelerate the debt.

Baldwin v. Peoples Nat’l Bank of Tyler

, 327 S.W.2d 616, 619-620

(Tex. Civ. App.--Texarkana 1959) (n o writ). In this instance

conditions (2) and (3) were arguably present, so it appears that

Banque Paribas’ set-off action may well hav e been justified and

lawful.

15 Although we harbor serious doubts about the validity of

Trustee’s claim that Banque Paribas’ setoff was void or in any way

in contravention of Texas law, 15 we must acknowledge that Aquila has

espoused the same position in supplemental briefing requested by

this court, asserting that Banque Paribas’ setoff was improper and16 Aquila argues principally that Banque Paribas’ setoff was

improper under Bandy v. First State Bank Overton , 835 S.W.2d 609,

(Tex. 1992), in which the Texas Supreme Court (1) reiterated the

general rule that a bank may equitably setoff a debtor’s deposited

funds against a debtor’s indebtedness when either the debt has

matured or the debtor is insolvent, Id. at 619, (2) declared that

“a debtor is not insolvent, as to a p articular creditor, if the

debtor ‘holds property agai nst which the creditor may enforce a

lien for the payment of the debt,’” Id. at 621 (citing Smith v.

Ojerholm

, 53 S.W. 341, 342 (Tex. 1889)), but (3) ultimately held

that a bank’s right to setoff an unmatured claim against a deceased

customer’s deposits exists whether or not the decedent’s estate is

solvent. Id. at 622. Whether Bandy ’s second proposition —— that

a debtor is not insolvent, as to a creditor, if that creditor is

oversecured —— applies beyond the narrow factual circumstances of

that case or the 19th century Texas precedent from which it derived

is a question we need not resolve.

17 Under Texas law, conversion is defined as “the wrongful

exercise of dominion and control over another’s property in denial

o f or inconsistent with his rights.” B andy

, 835 S.W.2d at 62 2

(quoting Tripp Village Joint Venture v. MBank Lincoln Centre, N.A.

, 774 S.W.2d 746, 750 (Tex. Civ. App.--Dallas 1989) (writ denied));

see also Estate of Townes v. Townes

, 867 S.W.2d 414, 4119-20 (Tex.

App.--Houston [14th Dist. .] 1993) (writ denied) (an action for

conversion of money will lie when the money is, inte r alia, “not

the subject of a title claim by the keeper”) (citation omitted).

18 This part of our opinion is not intended to preclude a Texas

court, once this avoidance action is final, from interpreting Texas

garnishment law in the event that Aquila should prosecute any state

court action arising from Banque Paribas’ setoff.

16 in contravention of Aquila’s superior rights to the deposited funds

by virtue of the garnishment writ. 16 We also recognize that Aquila

has no choice but to champion this position if it hopes to maintain

a basis for the conversion claim it will pursue in state court once

the injunction issued under the Plan is lifted. 17 The identicalness

of the Trustee’s and Aquila’s conclusions on this issue leads us to

conclude, for purposes of this avoid ance action, 1 8 that the

g arnishment writ (1) created a lien at the moment it was s erved19 See supra note 14.

17

that has the potential of enabling Aquila to receive more than it

would have had the writ not been served; (2) has retained value to

Aquila beca use Banque Paribas’ setoff was putatively void or

improper under Texas law; and (3) is therefore subject to avoidance

as a preference under § 547(b). 19

Predictably, the Trustee’s inconsistent alternative argument

on this issue, replicated by Banque Paribas in its amicus argument

t o this court, takes as its premise the opposite view of the

propriety of Banque Paribas’ setoff and reasons that if the setoff

was proper, render ing Aquila’s garnishment writ valueless, then

Aquila has no basis on which to assert a secured claim against the

debtor’s bankruptcy estate or a conversio n claim against Banque

Paribas in state court. In short, if the setoff was proper,

concludes the Trustee, then Aquila is left in the same position in

which it would find itself if the setoff were void

—— it would have

only an u nsecured claim against the estate for the garnished

amount. We fail to discern a flaw in this reasoning and therefore

find the Trustee’s argument compelling.

C. Benefit to the Estate under § 550(a)

Both the bankruptcy and district courts recognized that for

the Trustee to prevail in this preference avoidance action he had

to demonstrate not only that service of the garnish ment writ

created a security interest that qualified as an avoidable20 11 U.S.C. § 550(a) provides:

Except as otherwise provided in this section, to the

extent that a transfer is avoided under section

. . . 547

. . . the trustee may recover, f or the benefit of the

estate , the property transferred, or, if the court so

orders, the value of such property from——

(1) the initial transferee of such transfer or the

entity for whose benefit such transferee was made,

or;

(2) any immediate or mediat e transferee of such

initial transferee (emphasis added).

21 5 Collier on Bankruptcy (Lawrence P. King ed.) ¶ 550.02[2],

at 550-6 (15th ed. Rev. 1997).

22 The district court reasoned that (1) Congress’ enactment of

separate avoidance and recovery sections in the Bankruptcy Code, as

oppos ed to the Bankruptcy Act, did not overrule bankruptcy law’s

longstanding refusal to allow a debtor to avoid a lien, including

a garnishment lien, when only the debtor, and not the general

18 preferenc e under §547(b), but also that avoiding the writ would

result in a recovery “for the benefit of the estate” under

§ 550( a), 2 0 that is, a recovery “for the benefit of all unsecured

creditors.” 21 The district court expressly rejected the Trustee’s

textual and structural arguments that § 550(a)’s “benefit to the

estate” requirement has no nexus with or bearing on a trustee’s

independent avoidance powers when an avoidance action under § 547

is not coupled with an affirmative attempt under the aegis of

§ 550(a) to recover “property transferred” or “the value of such

property,” but instead simply seeks to avoid a non-possessory

judicial lien. Although we agree with the district court’s

thoughtful explanation of why the “benefit of the estate” test

still must be met in a §547 avoidance action like the o ne before

us, 22 we conclude that here such statutory construction dispute iscreditors, benefits, and (2) the Trustee’s action to avoid the

garnishment lien is still an attempt to recover “property ” under §

550(a) because (a) what the Trustee in fact seeks to recover is a

security interest and (b) a security interest is a property

interest under Texas law. Id. at 954-55.

23 See Ballard v. United States

, 17 F.3d 116, 118 (5th Cir.

1994) (Court of Appeals may affirm decision district court entered

after bench trial on grounds other than those relied on by district

court); Chauvin v. Tandy Corp. , 984 F.2d 695, 697 (5th Cir. 1993)

(Court of Appeals may affirm on grounds other than those relied

upon by di strict court when the record contains adequate and

independent basis for that result).

19 entirely academic because in this instance the av oidance of

Aquila’s garn ishment writ will in fact result in a meaningful

benefit to the estate, i.e. to the unsecured creditors.

The district court reversed t he bankruptcy court’s finding

that the avoidance action does not benefit the estate for two

reasons: (1) The bankruptcy court’s own approval of the Plan, which

obligated the Trustee to prosecute this avoidance action, indicates

the presence of some benefit to the estate in the successful

avoidance of the garnishment writ; and (2) successful prosecution

of the avoidance a ction could save the estate up to $200,000 in

attorneys’ fees that Banque Paribas might incur in defending a

state court action brought by Aquila based on the bank’s setoff.

Although we agree wit h the district court’s conclusion that the

benefit to the estate test was satisfied, we do so for a reason

that is different and (we believe) more compelling, and that is

independently supported by the record. 23

First, we are not comfortable with the simplistic conclusion20

that the bankruptcy court’s in globo approval of the Plan as

beneficial necessarily demonstrates that each provision of the Plan

is independently beneficial to the estate; neither are we

comfortable with the conclusion that in an eight-figure bankruptcy

a somewhat manufactured potential savings of not more than $200,000

can have any salutary benefit. Rather, the real benefit that the

T rustee’s avoidance of the garnishment writ bestows on th e

unsecured creditors in this case arises from the fact that Banque

Paribas was oversecured at the time the debtor’s bankruptcy

petition was filed and at the time of the bank’s setoff a s well.

When a primary secured creditor like Banque Paribas is in fact

over s ecured on its own claims against the debtor, the excess

collateral securing that primary creditor’s claims is available for

distribution among the general unsecured creditors. Consequently,

if Aquila were permitted to preserve its oth erwise preferential

garnishment writ, thereby allowing Aquila to obtain a secured claim

in the portion of Banque Paribas’ collateral that exceeds its

secured claim, the amount of such excess funds available for

distribution among unsecured creditors would be diminished, dollar

for dollar, by the amount recov ered by Aquila through its

garnishment. Thus, if Banque Paribas were over secured, avoidance

of the garnishment clearly would benefit the estate. Conversely,

if Banque Paribas were under secured, a successful defense by Aquila

of the Trustee’s avoidance action would make no difference to the

remaining unsecured creditors. This is so because all of the24 According to the Trustee, the excess value of the collateral

securing the bank’s claims over the amount of the claims themselves

was approximately $15.3 million on the date of the bankruptcy

petition. According to the bankruptcy court’s findings, the amount

of excess collateral was even greater, approximately $26 million,

on the date of Banque Paribas’ setoff.

21 assets encumbered by security interests of Banque Paribas would go

either entirely to the bank or partially to the bank and partially

to Aquila, but none to the estate or the unsecured creditors; and

either Aquila or Banque Paribas

—— but not both

—— would ultimately

have and assert the $1.83 million claim as an unsecured claim. In

short, fa ilure to avoid the garnishment in an u nder secured

situation would merely (1) shift a portion of Banque Pa ribas’

already inadequate security to Aquila, (2) increase the gap between

Banque Paribas’ claim and the amount of secured assets available to

satisfy that claim , and (3) shift Aquila’s originally unsecured

$1.83 million claim to Banque Paribas. Although this would produce

changes in security and debt satisf action between these two

creditors, it would neither increase nor decrease the q uantum of

funds available for distribution to the other unsecured creditors.

As the evidence in this case clearly shows that Banque Paribas was

oversecured by millions of dollars both at the time of the

bankruptcy petition and at the time of its setoff, 24 we must

conclude that the trustee’s avoidance of the lien created by the

garnishment writ would redound to “the benefit of the estate”

within the meaning of §550(a).

D. Additional Issues25 Granfinanciera, S.A. v. Nordberg

, 492 U.S. 33, 40-47,

109 S.Ct. 2782, 2790-93, 106 L.Ed.2d 26 (1989).

26 Lagenkamp v. Culp

, 498 U.S. 42, 44, 111 S.Ct. 330, 331, 112

L.Ed.2d 343 (1990).

22 Aquila has advanced two more contentions in this appeal:

(1) The district court impermissibly refused to dissolve or modify

the injunction preventing Aquila from pursuing Banque Paribas, and

(2) the dist rict court improperly denied Aquila’s request for a

jury tria l. With regard to the first additional issue, we are

satisfied that any question about the propriety of the injunction

imposed under the Plan is now moot in light of our resolution of

the Trustee’s avoidance action. This is so because the injunction

will henceforth be lifted, enabling Aquila to proceed in state

court with any state law claim that remains viable.

With regard to the second additional issue —— Aquila’s

assertion that it was entitled to a jury trial in this action

—— we

conclude that Aquila’s position is unmeritorious. A litigant has

a right to a jury trial only if the cause of action is legal in

nature, not equitable, and involves a matter of private right. 25

Thus, when a bankruptcy creditor files a proof of claim, it submits

itself to the bankruptcy court’s equitable powers and thereby

waives its right to a jury trial. 26 Here, Aquila filed a proof of

claim in the TMHI bankruptcy and was denied a jury trial in this

resulti ng avoidance action. Aquila’s contention that this case

does not involve an issue of claim allowance or disallowance23

ignores the fact that this avoidance action has the effect of

disallowing Aquila’s $1.83 million secure d claim. Consequently,

the district court did not err in rejecting Aquila’s argument that

the bankrupt cy court should have granted it a jury trial in the

instant avoidance action.

III

CONCLUSION

Our affirmance today of the district’s decision does not mean

that we agree with all of its reasoning. We have, for example,

found that the Trustee’s avoidance action results in a benefit to

the estate under §550(a) for reasons different from those espoused

by the district court. With regard to whether Aquila’s garnishment

wri t constituted an avoidable preference under § 547(b), our

reasoning hinges on the fact that, in the peculiar circumstances of

this case, Aquila was bound to see its garnishment writ avoided as

a pre-petition preferential transfer or, if not avoided, at least

rendered incapable of producing a secured clai m against the

debtor’s estate, due to Banque Paribas’ pre-petition setoff.

Consequently, our holdings are narrowly limited to the unusual

combination of fact s peculiar to this case. This said, we hold

that the Trustee may avoid Aquila’s garnishment writ as a

preferential transfer under §547(b) and find that this avoidance

benefits the estate within the meaning of §550(a). For these

re asons, the district court’s decision reversing the bankruptcy24

court and rendering judgment for the Trustee is, in all respects,

AFFIRMED.