Source: https://law.justia.com/cases/federal/appellate-courts/F3/12/938/528003/
Timestamp: 2019-05-23 10:59:49
Document Index: 306335091

Matched Legal Cases: ['§ 547', '§ 158', '§ 158', '§ 547', '§ 365', '§ 365', '§ 365', '§ 1110', '§ 547', '§ 704']

In Re Lco Enterprises, Debtor.lincoln Alvarado; Patrician Associates, Inc.; Lpc Alvaradophase Ii, Appellees, v. Edward M. Walsh, Trustee, Appellant, 12 F.3d 938 (9th Cir. 1993) :: Justia
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In Re Lco Enterprises, Debtor.lincoln Alvarado; Patrician Associates, Inc.; Lpc Alvaradophase Ii, Appellees, v. Edward M. Walsh, Trustee, Appellant, 12 F.3d 938 (9th Cir. 1993)
US Court of Appeals for the Ninth Circuit - 12 F.3d 938 (9th Cir. 1993)
This appeal concerns the mechanics of applying the "greater amount" test of 11 U.S.C. § 547(b) (5) to determine whether a prepetition payment to a landlord constitutes a preference. The question before us is whether the bankruptcy court must hypothesize whether a hypothetical chapter 7 trustee would assume a lease, or whether the court must base its analysis on the fact that the lease was actually assumed in the chapter 11 proceedings. We conclude that the hypothetical chapter 7 analysis required by Sec. 547(b) (5)1 must be based on the actual facts of the case and affirm the decision of the Bankruptcy Appellate Panel.
Lincoln moved for summary judgment and argued that the Trustee could not prove that Lincoln improved its position, within the meaning of Sec. 547(b) (5), as a matter of law. The bankruptcy court denied Lincoln's motion. It held that there was a material issue of fact as to whether a hypothetical chapter 7 trustee would have assumed the lease. In re LCO Enters., 116 B.R. 188 (Bankr.N.D. Cal. 1990).2 The Bankruptcy Appellate Panel granted leave for an interlocutory appeal and reversed. In re LCO Enters., 137 B.R. 955 (9th Cir. BAP 1992).
The BAP had jurisdiction pursuant to 28 U.S.C. § 158(b). Our jurisdiction is premised on 28 U.S.C. § 158(d). We are in as good a position as the BAP to review the decision of the bankruptcy court. Thus, we review de novo the bankruptcy court's denial of summary judgment. Viewing the evidence in the light most favorable to the Trustee, we must determine whether there are any genuine issues of material fact and whether the bankruptcy court correctly applied the relevant substantive law. See In re United Energy Corp., 944 F.2d 589, 593 (9th Cir. 1991).
Section 547(b) of the Bankruptcy Code enables the Trustee to recover for the benefit of the estate certain payments made by a debtor to a creditor within the 90 days preceding the filing of the bankruptcy. A payment is avoidable as a preference only if the payment improved the creditor's position as compared to other creditors of the same class. 11 U.S.C. § 547(b) (5). Section 547(b) (5) provides that the trustee may avoid any transfer of an interest of the debtor in property:
This section, sometimes referred to as the "greater amount" test, requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7. See In re Ehring, 900 F.2d 184, 188 (9th Cir. 1990); In re Lewis W. Shurtleff, Inc., 778 F.2d 1416, 1420-22 (9th Cir. 1986); 4 Collier on Bankruptcy p 547.08 (Lawrence P. King, ed., 15th ed. 1993).
The starting point in the "greater amount" analysis is identification of the class to which the creditor belongs. See In re Lewis W. Shurtleff, 778 F.2d at 1421. That classification is the crux of this appeal. In an ordinary case, the amount and priority of an unsecured creditor's claim is fixed on the date of the filing of the petition. Similarly, on the date of the filing, a secured creditor's claim is fixed in amount, the value of the security as of that date can be ascertained and the claim will be either fully or partially secured. The debtor's lessor, however, stands in a different position. Although the amount of the debtor's prepetition default under the lease may be fixed on the date of the filing, the status of the lessor's right to payment from the estate is not yet fixed. That is because the lessor's position relative to other creditors depends on whether the lease is assumed or rejected. If the lease is assumed, the lessor is entitled to prompt payment in full of any default under the lease, and the debtor is entitled to continued use of the property. 11 U.S.C. § 365(b). If the lease is rejected, the lessor is entitled to immediate possession of his property and holds an unsecured claim for the unpaid rent. See In re Elm Inn, Inc., 942 F.2d 630, 633-34 (9th Cir. 1991).
More importantly, in this case the difference between assumption and rejection determines the outcome of the preference action. If the lease is assumed, the debtor must cure any default. 11 U.S.C. § 365(b). Thus, if rent payments had not been made prepetition, they had to be made at the time of assumption. LCO had to pay Lincoln the full amount of rent (or any lesser amount to which Lincoln agreed) either prepetition or at the time of assumption. For purposes of the "greater amount" test, Lincoln stands in a position similar to that of a secured creditor. If a creditor is fully secured, a prepetition transfer to him is not preferential because the secured creditor is entitled to 100% of his claim. See In re World Fin. Serv. Ctr., Inc., 78 B.R. 239, 241-42 (9th Cir. BAP 1987), aff'd, 860 F.2d 1089 (9th Cir. 1988); In re Ludford Fruit Prods., Inc., 99 B.R. 18, 22 (Bankr.C.D. Cal. 1989). On the other hand, if the lease is rejected, Lincoln would have possession of the property and hold an unsecured claim for unpaid rent. As long as the distribution to unsecured creditors is less than 100%, any rent paid to Lincoln within the preference period and outside the ordinary course of business would be preferential. See In re Lewis W. Shurtleff, 778 F.2d at 1421. The liquidation analysis in the disclosure statement estimated a 2.4% distribution to unsecured creditors. Accordingly, if the lease is considered to have been rejected, Lincoln must return the $92,007.46 LCO paid in April, May and June.
The Trustee justifies his position by claiming that the court can only consider the state of events on the date of the filing of the petition. Section 547 is silent regarding the point in time for analyzing whether a payment is preferential. The first four elements of Sec. 547(b) focus on the time the payment is made. 4 Collier, supra, p 547.08, at 547-42 n. 4. But Sec. 547(b) (5) has been construed to mean that the court must determine the relative positions of the creditors on the date the petition is filed. See Palmer Clay Prods. Co. v. Brown, 297 U.S. 227, 229, 56 S. Ct. 450, 451, 80 L. Ed. 655 (1936). In construing the preference provision of the former Bankruptcy Act, the Supreme Court observed that the preferential effect of the payment must 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 preferential payment was made, but by the actual effect of the payment as determined when bankruptcy results." Id.
The principle in Palmer Clay was applied by the Sixth Circuit in In re Tenna Corp., 801 F.2d 819 (6th Cir. 1986). There, the court held that the amount of postpetition debt, secured by a superpriority lien on all of the debtor's property pursuant to Sec. 364, should not be considered in constructing the hypothetical chapter 7 distribution. Id. at 823. The court did not establish an inflexible rule that no postpetition events were to be considered. Indeed, the court acknowledged that administrative expenses, which are necessarily incurred postpetition, should be included in the hypothetical liquidation analysis.
Neither Palmer Clay nor In re Tenna Corp. prohibit the court from considering the actual facts of the case in ascertaining Lincoln's classification. As Bankruptcy Judge Perris noted, "The hypothetical liquidation under section 547(b) (5) should not ... be conducted in a vacuum." In re LCO Enters., 137 B.R. at 959 (Perris, J., concurring). Here, the lease was assumed. That assumption fixed Lincoln's right to immediate payment in full of the prepetition rent in exchange for LCO's continued possession of the property. The legal effect of that assumption is that the rent payments of $92,007.46 made within the preference period did not operate to improve Lincoln's position.
The Trustee's insistence that the court can only consider the facts which existed on the date of the filing does not advance his position that Lincoln should be treated as if the lease had been rejected. In a chapter 7, the debtor has 60 days in which to decide whether to assume or reject a lease of commercial real property. 11 U.S.C. § 365(d). On the date of the filing, the fact was that LCO was in possession of the property and Lincoln was owed prepetition rent. If we focus on that day alone, as the Trustee would have us do, Lincoln's right to payment existed because LCO continued to possess the property. A lessor's right to payment is not converted to an unsecured claim for a sum of money until the lease is rejected and the property surrendered to the lessor. So, on the date of the filing, Lincoln had more than a simple unsecured claim for a sum of money. Lincoln had the right to full payment or return of its property.
We find the reasoning of the Eleventh Circuit in Seidle v. GATX Leasing Corp., 778 F.2d 659 (11th Cir. 1985), to be persuasive. In Seidle, GATX held a chattel mortgage on the debtor's aircraft which secured payments due under a note given by the debtor. Within the preference period, the debtor made partial payments on the note totaling $326,902.32. The debtor thereafter filed a chapter 11 petition. GATX had the right to repossess the aircraft on the 61st day of the bankruptcy unless the debtor cured its default on the note. 11 U.S.C. § 1110. GATX and the debtor entered a stipulation, approved by the bankruptcy court, which obligated the debtor to cure its default in exchange for the debtor's continued use of the aircraft. The debtor did not cure its default and GATX repossessed the aircraft. The chapter 11 trustee then sued GATX for $326,902.32 paid during the preference period.
Id. at 664. For purposes of the Sec. 547(b) (5) analysis, Secs. 365 and 1110 place the creditor in the same position and impose the same requirements upon the debtor. Both condition the debtor's continued use of the property on the cure of any default. The stipulation approved by the bankruptcy court in Seidle is the equivalent of the assumption of a lease. See In re Harris Management Co., Inc., 791 F.2d 1412, 1414 (9th Cir. 1986) (assumption of lease requires express approval of court upon notice to parties to lease). The Trustee seeks to avoid payments that it was obligated to make pursuant to the court-approved assumption of the lease through confirmation of the plan. The Trustee cannot use Sec. 547(b) to circumvent the requirements of Sec. 365(b).
Section 547(b) (5) requires the bankruptcy court to ascertain what the distribution to creditors would be in a chapter 7 case. The phrase "hypothetical chapter 7" which has been used to describe the "greater amount" test does not mean that the bankruptcy court can construct its own hypothetical from whole cloth or from only some of the facts. Specifically, in light of the facts before it, the court could neither speculate that there was no lease nor assume that the lease was rejected. Neither of those assumptions reflected the facts at any time.
Here, the lease existed on the date of bankruptcy and was assumed. That assumption fixed Lincoln's right to prompt payment in full and fixed LCO's right to possess the property. The Trustee would like to have us ignore the undeniable fact that the lease existed before the date of bankruptcy, on the date of bankruptcy, and after the date of bankruptcy. He would like to have us ignore the fact that LCO always had possession of the property. He would also like to have us overlook the fact that Lincoln's right to payment has always existed. However, the fog which sometimes surrounds bankruptcy issues would have to become much more inspissate before we would fail to see those facts. We cannot ignore them or the legal consequences which flow from them. Because the lease was assumed, Lincoln's position was not improved by the prepetition payments within the meaning of Sec. 547(b) (5).
In my opinion, the better approach is to follow the test outlined in Sec. 547(b) (5): a liquidation analysis as though "the case were under chapter 7 of this title." 11 U.S.C. § 547(b) (5) (1988). Chapter 7 it is, and chapter 7 it must be. As the majority concedes, courts have consistently held that the liquidation analysis should be conducted as of the date the petition in bankruptcy is filed. See Palmer Clay Prods. Co. v. Brown, 297 U.S. 227, 229, 56 S. Ct. 450, 450, 80 L. Ed. 655 (1936); Taunt v. Fidelity Bank (In re Royal Golf Prods. Corp.), 908 F.2d 91, 95 (6th Cir. 1990); Neuger v. United States (In re Tenna Corp.), 801 F.2d 819, 822 (6th Cir. 1986); McGoldrick v. Juice Farms, Inc. (In re Ludford Fruit Prods., Inc.), 99 B.R. 18, 24 (Bankr.C.D. Cal. 1989); 4 Collier on Bankruptcy p 547.08 at 547-42 (Lawrence P. King, ed., 15th ed. 1989).
On the date LCO filed its petition in bankruptcy, LCO's Plan of Reorganization had not yet been filed or confirmed. On that date, LCO was not required to assume the leases. Under Sec. 365(d) (1), if the trustee did not assume the leases within 60 days, the leases would be deemed rejected. Therefore, I agree with the bankruptcy court that a disputed issue of material fact remains: would a trustee in a hypothetical chapter 7 case assume or reject the leases on the petition date. See Walsh v. Lincoln Alvarado (In re LCO Enters.), 116 B.R. 188, 192 (Bankr.N.D. Cal. 1990). This inquiry requires an analysis of the leases' liquidation value on the filing date.
The majority protests that it refuses to ignore the "actual fact" that LCO agreed to assume the leases as part of its Plan of Reorganization. Unfortunately, the majority's fidelity to the "actual facts" ignores the command of the "actual statute"--Sec. 547(b) (5). We must evaluate the alleged preference under the principles of chapter 7, while LCO decided to assume the lease in the context of chapter 11. LCO assumed the leases because they were critical to the continued operation of LCO's business. Under chapter 7, a trustee will only assume a lease if she can cure the defaults and sell the lease to another party at a profit. Or, the trustee may assume a lease for a brief period of time to accomplish an orderly liquidation. See 11 U.S.C. §§ 704, 724 (1988). The trustee's goal is not the continued operation of the business, rather, it is the maximization of the estate's liquidation value for the benefit of the creditors.
The Sixth Circuit's decision in In re Tenna is a good example of how Sec. 547(b) (5) should be applied. The majority briefly discusses the decision, but I think a fuller explanation will highlight the majority's departure from the sound approach of In re Tenna. In that case, Tenna originally filed for chapter 11 bankruptcy. During the chapter 11 proceedings, Tenna borrowed additional money, and the bankruptcy court granted superpriority liens to the new lenders. Nevertheless, the reorganization was unsuccessful, and ten months later the case was converted to a chapter 7 proceeding. The chapter 7 trustee then filed a preference action against the Internal Revenue Service attacking a tax payment made within ninety days prior to the filing of the chapter 11 petition. The critical issue was the date on which the Sec. 547(b) (5) liquidation analysis should occur. If it was the date the original petition was filed, the tax payment was not a preference. If it was the date of the subsequent adversary hearing, the tax payment was a preference because of the intervening superpriority liens.
The Sixth Circuit held the chapter 7 analysis should occur as of the filing date of the bankruptcy petition. Tenna, 801 F.2d at 822. The court rejected the trustee's argument that the "actual result" language of Palmer Clay required the inclusion of the postpetition debt incurred pursuant to a chapter 11 reorganization. Id. The court believed Congress' concern for equality of distribution among creditors prevented the estate's trustee from controlling the timing of the Sec. 547(b) (5) test. Id. at 823.
Instead, the majority finds the reasoning of the Eleventh Circuit in Seidle v. GATX Leasing Corp., 778 F.2d 659 (11th Cir. 1985), persuasive. I do not. First, the Seidle court failed to discuss the case law requiring that the chapter 7 analysis occur as of the filing date of the bankruptcy petition. See Gosch v. Burns (In re Finn), 86 B.R. 902, 904 (Bankr.E.D. Mich. 1988) (rejecting Seidle because Sec. 547(b) (5) analysis "must be undertaken as of the moment of bankruptcy, and not some later, unspecified date"), aff'd 111 B.R. 123 (E.D. Mich. 1989), rev'd on other grounds, 909 F.2d 903 (6th Cir. 1990). Second, the Seidle court's conclusion that the creditor did not improve its position because a postpetition agreement entitled the creditor to all the preferential payments does not apply to the present case. The debtor in Seidle promised to pay its creditor and cure all defaults pursuant to a court-approved stipulation, which the majority describes as equivalent to LCO's assumption of the leases. However, LCO did not agree to cure all defaults as a condition of assuming the leases. In fact, the Plan of Reorganization provided that Lincoln waived any and all claims it held for overdue rents owed as of May 31, 1989.
I cannot join the majority's opinion because I think it ignores the text of Sec. 547(b) (5) in its attempt to reach an "equitable" result. If the statute requires a chapter 7 analysis to be conducted in a "vacuum," excluding postpetition events, then into the vacuum we must go. If Lincoln and LCO wanted to avoid being sucked into the vacuum of Sec. 547(b) (5), the Plan of Reorganization should have addressed the $92,007.46 in rent payments made by LCO on the verge of bankruptcy.
The bankruptcy court also granted the Trustee's cross-motion for partial summary judgment on the ground that Lincoln could not assert the ordinary course of business defense under Sec. 547(c) (2) as a matter of law. That issue was not appealed to the BAP and is not before us