Opinion ID: 197348
Heading Depth: 2
Heading Rank: 1

Heading: Disallowance of Claim

Text: A. Disallowance of Claim The petitioning unsecured creditors argue that Karger's claim should be disallowed, as Karger received a judicially determined preferential transfer and has not paid the amount for which he is liable because of the preferential transfer. Section 502(d) of the Bankruptcy Code governs the disallowance of claims. It reads as follows: (d) Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a -11- transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title. In 1992, this court held that Karger was the recipient of a voidable transfer. See In re Melon Produce, 976 F.2d at 76. The remaining issue, therefore, is to determine if Karger, as transferee, has paid over the amount for which he is liable under 11 U.S.C. 550. Petitioning unsecured creditors argue that Karger did not comply with the requirements of Section 502(d) because he did not pay the full amount of the judgment of $459,860.78 plus interest but rather settled the claim against him by means of a payment of a lesser sum, $400,000. The legal query presented appears to be unique since the parties have not cited nor have we found any authority which specifically addresses the precise issue presented here. Thus, we are left to the task of ascertaining the legislative purpose and intent, if possible, from the language employed by Congress. As we have stated previously, 'the task of interpretation begins with the text of the statute itself, and statutory language must be accorded its ordinary meaning.' In Re: Juraj J. Bajgar, 104 F.3d 495, 497 (1st Cir. 1997), quoting Telematics Int'l, Inc. v. NEMLC Leasing Corp., 967 F.2d 703, 706 (1st Cir. 1992). Wherever possible, statutes should be construed in a commonsense manner, avoiding absurd or counterintuitive results. U.S. v. Carroll, 105 F.3d 740, 744 (1st Cir. 1997) (citations omitted). -12- The language of Section 502(d) of the Bankruptcy Code is not complex. A proof of claim must be disallowed unless the preference recipient pays the amount for which he is liable under 11 U.S.C. 550. See 11 U.S.C. 502(d); Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1257 (1st Cir. 1991). Once the preference recipient complies with the payment or turnover order of the bankruptcy court, it may file a proof of claim. See Sugarman, 926 F.2d at 1257; see also In re First Intern. Services Corp., 37 B.R. 856, 860 (Bankr. D. Conn. 1984) (Pursuant to 11 U.S.C. 502(d), claims of creditors who have received void or voidable transfers must be disallowed unless the creditor surrenders the money or property transferred during the preference period.). The key phrase in this inquiry is the amount . . . for which such entity or transferee is liable . . . 11 U.S.C. 502(d). The difficulty with application of the term liable namely is that there are two court actions which determined that the preference recipient is liable, the judgment of the District Court and the Order of the Bankruptcy Court approving the settlement of the preference claim. The unsecured creditors argue that the legislative history of Section 502(d) is relevant to this inquiry. The ambiguity is not clarified by reference to the legislative history. In part, that history states: Subsection (d) . . . requires disallowance of a claim of a transferee of a voidable transfer in toto if the transferee had not paid the amount or -13- turned over the property received as required under the sections under which the transferee's liability arises. H.R. Rep. No. 95-595, at 354 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6310 (emphasis added). The petitioning unsecured creditors argue that the inclusion of the words in toto indicates that Congress intended that a creditor must relinquish the original preference amount, precluding any judicial adjustment of this figure. They also cite a North Dakota Supreme Court case as support for this proposition that a creditor must surrender all sums previously transferred. See North Dakota Public Service Com'n v. Central Sales Grain, Inc., 371 N.W.2d 767, 780 (N.D. 1985) (emphasis added). This opinion considered a state insolvency proceeding brought against a grain warehouseman. The court concluded that the claim of a creditor should be denied because the creditor had received a vaculator machine1 as a preferential transfer and had not returned it. The creditor claimed that he had since paid for the machine (apparently after the record was closed in the proceedings below). The court stated that the creditor could bring an appropriate motion for relief after its mandate issued. Although there is an obvious difference between the return of a 1 Although the term 'vaculator' is used sometimes to describe surgical devices for the removal of fluid from the human body and the like, in this context a 'vaculator machine' describes a system used to extract grain from containers and transfer it to other storage facilities. See Bunge Corp. v. American Commercial Barge Line Co., 630 F.2d 1236, 1241 (7th Cir. 1980); Mercantile National Bank of Chicago v. Quest, 303 F. Supp. 926, 928 (N.D. Ind. 1969). -14- tangible piece of machinery which Section 502(d) would seem to require (although we do not now determine that issue) and the payment of all or part of a monetary sum, there is nothing in the court's opinion which supports the contention that an unsecured creditor may file a claim only if the judgment against the creditor for a preferential transfer of money is paid in full. The legislative history thus becomes pertinent to our analysis, even if it does not pinpoint a specific result. The unsecured creditors place emphasis upon the use of the term in toto in the House of Representatives historical record. What the unsecured creditors have overlooked is the fact that the term in toto refers to the unsecured claim of the recipient of a preferential transfer and not, as they would have it, the amount for which the transferee is liable. Thus, this legislative history does not clarify the purpose of Congress. We must ask, how would Congress have answered this question? Guided by the actual language used, we may look to the practical effect of the arguments made. See Dames & Moore v. Regan, 453 U.S. 654, 673-74 (1981); Chapman v. Houston Welfare Rights Org., 441 U.S. 600, 616 (1979). There is guidance in the cogent language used by the Bankruptcy Court that to accept the unsecured creditors' contentions would rob post-judgment settlements of their essential vitality. See In re Melon Produce, 162 B.R. at 388. It is an unfortunate axiom that a judgment does not always guarantee collection. Indeed, the easiest judgment to obtain is usually one that will never be -15- paid. The circumstances of the settlement with Karger suggest that collection of the full amount could have been an impossible task and could have involved the estate in lengthy, expensive litigation to the detriment of the unsecured creditors. Thus a construction of the statute which requires the last penny to be paid could cause the unsecured creditors to, in effect, submit to an all-or-nothing situation. The petitioning unsecured creditors' argument would preclude half or any part of the loaf from being satisfactory, thereby preventing the bankrupt estate from being at least partially nourished. The purpose ought to be to encourage the collection of the largest amount possible to provide a dividend or a better dividend to the unsecured creditors. Experience suggests that few unsecured creditors can expect satisfaction of their claims in whole or in substantial part. More than two decades ago it was reported that unsecured creditors in business bankruptcies receive an average of 8% of the amounts proved and allowed, while general creditors in personal bankruptcies receive an average of 7% of their allowed claims. See David Stanley & Marjorie Girth, Bankruptcy: Problem, Process, Reform 130 (1971). There is nothing to signify that there has been any recent substantial improvement in the extent of the recoveries of unsecured creditors. The Administrative Office of the U.S. Courts reports a higher average dividend in Chapter 11 reorganization cases - 32% - but that figure includes both the amounts actually paid and the amounts that debtors -16- promised to pay after the reorganization case was closed. See Admin. Office of the U.S. Cts., Tables of Bankruptcy Statistics A-32 (1978). However, the latter may be merely paper obligations which may be discounted again in a recurrence of the debtor's financial difficulties. See id. Despite the lack of any recent empirical studies, certainly it is safe to expect that in almost every bankruptcy unsecured creditors are likely to receive only a small percentage of their legitimate claims. The estate is protected against manipulation because settlements must be approved by the Bankruptcy Court after a consideration of the circumstances of the settlement. Approval is a discretionary function and may be reviewed for abuse. Hence, a small settlement which results in a substantial dividend to the preferential transferee is not likely to pass muster. Finally, this result is consistent with the overall purpose of Section 502, which was not to punish, but to give creditors an option to keep their transfers (and hope for no action by the trustee) or to surrender their transfers and their advantages and share equally with other creditors. Tidwell v. Atlanta Gas Light Co. (In re Georgia Steel, Inc.), 38 B.R. 829, 839 (Bankr. M.D. Ga. 1984). Karger chose the latter option and paid $400,000 to the Trustee. If faced with the option of paying the full amount of the judgment in order to file his claim as an unsecured creditor (apart from whether or not he had the wherewithal to do so), the result might well have been a lengthy and only partially successful or even an unsuccessful effort to -17- obtain satisfaction of the judgment in full. The expenses incurred to collect the judgment in full or in part could have diminished the return to the estate to less than $400,000. The practical effect of the position advocated by the petitioning unsecured creditors compels us to conclude that Congress did not intend that unsecured creditors be denied their claims, if having received a preferential transfer, they do not satisfy a judgment arising out of the transfer in full and with interest. We believe that Congress intended some play in the joints and that a court-approved settlement of such a judgment satisfies the requirement that the preferential transferee has paid that for which he is liable. We therefore agree with the Bankruptcy Court. We hold that pursuant to Section 550(a)(1) Karger was liable for the sum of $400,000 and therefore his unsecured claim was properly allowed.