Opinion ID: 546944
Heading Depth: 2
Heading Rank: 3

Heading: adversary complaint

Text: 36 The bankruptcy court granted the Bank's and Champlin's motions for summary judgment on all counts of the eight-count adversary complaint. Judgment was granted on Counts I through VI on the basis of the preclusion doctrines of res judicata and collateral estoppel. The bankruptcy judge held that the issues had been previously determined in the hearing on the motion to lift the stay. We hold that the determination of the Sec. 362 motion is not a bar to the prosecution of the adversary complaint. 37 As the bankruptcy court correctly stated, a hearing on a motion to lift the automatic stay under Sec. 362(d) is limited in scope. Questions of the validity of liens are not generally at issue in a Sec. 362 hearing, but only whether there is a colorable claim of a lien on property of the estate. Matter of Quality Electronics Centers, 57 B.R. 288 (Bankr.N.M.1986). The doctrine of collateral estoppel bars relitigation of issues that were actually and necessarily decided in prior litigation between the parties. White v. Elrod, 816 F.2d 1172, 1174 (7th Cir.), cert. denied, 484 U.S. 924, 108 S.Ct. 286, 98 L.Ed.2d 246 (1987). The doctrine of res judicata bars suit on matters which were raised or could have been raised in previous litigation between the parties. Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 2427-28, 69 L.Ed.2d 103 (1981). Collateral estoppel is not a bar because the only issues necessarily decided at the Sec. 362 hearing were whether the Bank had a colorable claim of a lien and whether the amount of that lien exceeded the value of the property. It was not necessary to reach questions of whether Champlin had colluded with the Bank, or questions of preferential transfers under Sec. 547, or questions of fraudulent conveyances under Sec. 548, or questions of commercial reasonableness of the sale under state law. Indeed, none of these issues could properly have been raised, and therefore the Sec. 362 hearing was not res judicata as to those issues. See Collier on Bankruptcy p 362.08 (15th ed.).
38 In Count I of the adversary complaint, the Trustee charged that the surrender to the Bank within 90 days before bankruptcy of goods acquired by Vitreous after 1981 (and therefore not covered by the Bank's financing statement) constituted a preferential transfer under Sec. 547 of the Bankruptcy Code. The possible avoidability of a transfer to a creditor under Sec. 547 is not part of the inquiry a court is required to conduct on a motion to lift the stay as we have described above. It follows that any decision on whether the repossession was avoidable was not necessary to the judgment on the Sec. 362 motion, and we believe the bankruptcy court was in error barring litigation of this claim under the doctrine of collateral estoppel. The court should have considered the Trustee's arguments. 39 To avoid a transfer under Sec. 547, the Trustee must show that the transfer (1) was to or for the benefit of a creditor; (2) was on account of an antecedent debt; (3) was made while the debtor was insolvent; (4) was made within 90 days before the filing of the bankruptcy petition; and (5) allowed the creditor to receive more than it would receive in a distribution under Chapter 7 of the Bankruptcy Code. Sec. 547(b). There is no controversy concerning the first four elements. There certainly was a transfer to a creditor on account of an antecedent debt within 90 days before bankruptcy, and all parties agree that Vitreous would not have been able to pay all creditors the entire amount they were owed. The only possible issue, then, is whether the Bank's position was improved when it took possession of the equipment in which it did not have a perfected security interest. 40 The answer is that it did improve its position. The Bank claimed that the value of the property repossessed (including the real estate) exactly equalled the amount Vitreous owed. To the extent that the Bank perfected its security interest in some of the property it repossessed, it improved its position in bankruptcy. Had the security interest in the after-acquired equipment not been perfected before the filing of bankruptcy, the security interest would have been unenforceable against the Trustee. Because the bankruptcy court found that the liquidation value of all of its collateral exactly equalled the amount of the Bank's debt, there would necessarily be some shortfall if some of those assets had to be shared by all the creditors. The Bank would collect only its proportionate share along with the other creditors in a Chapter 7 liquidation, and because the items in question are the only assets remaining in the estate, it is not possible that unsecured creditors will receive 100% of the value of their claims. By taking the transfer of the goods not covered in the financing statement (i.e., by perfecting its security interest), the Bank improved its position by that increment. 41 There are no genuine issues of material fact in regard to this count, and this court thus may direct the entry of judgment for either party. 6 J. Moore, W. Taggart & J. Wicker, Moore's Federal Practice p 56.12 (2d ed. 1988). It is undisputed that the transfer of possession was for the benefit of a creditor, Sec. 547(b)(1), on account of an antecedent debt, Sec. 547(b)(2), made while the debtor was insolvent, Sec. 547(b)(3), Sec. 547(f), and made within ninety days before the filing of the bankruptcy petition. 4 The transfer enabled the transferee to receive more than it would have otherwise received in a Chapter 7 liquidation, Sec. 547(b)(5). There is no other factual issue that need be decided to determine whether a transfer may be avoided. The record holds no support for any contention that one of the exceptions to avoidance contained in Sec. 547(c) existed. We therefore direct that on remand judgment in an appropriate amount be determined and entered in favor of the Trustee on this count of the complaint.
42 A transfer may be avoided as fraudulent under 11 U.S.C. Sec. 548 5 for either of two reasons: actual intent to delay, hinder or defraud creditors, Sec. 548(a)(1), or the production of less than reasonably equivalent value for the estate, Sec. 548(a)(2). The Trustee raised both prongs of Sec. 548 in separate counts of the adversary complaint. The bankruptcy court rejected the actual intent to defraud claim, relying on its finding at the Sec. 362 hearing that Champlin and the Bank had not acted collusively. This was error. Allegations of collusion between the lienholder and the buyer at liquidation are not within the narrow scope of the Sec. 362 inquiry. It does not speak to whether the lienholder has a colorable claim--indeed, it assumes that the lienholder does have some claim. Before a question of the propriety of the conduct of a sale under Ind.Code Sec. 26-1-9-504 is reached, it must be assumed that the seller, the lienholder, has a legitimate legal right to conduct some sort of sale. Therefore the finding at the Sec. 362 hearing that the Bank and Champlin had not colluded was not necessary to the decision, and therefore is not to be given preclusive effect under the doctrine of collateral estoppel. White v. Elrod, 816 F.2d 1172, 1174 (7th Cir.), cert. denied, 484 U.S. 924, 98 L.Ed.2d 246 (1987). The court should have considered the Trustee's arguments. 43 With all due respect to the superior opportunity of the bankruptcy court judge to observe the demeanor of witnesses and to make credibility determinations, we are troubled by the court's finding that the Bank and Champlin had not acted collusively. The chronology of events leading up to the repossession and sale of Vitreous' assets in our opinion is suspect. Two days before repossession Champlin created a new corporation to compete directly against Vitreous, of which he was already majority shareholder and sole director. One day before repossession he took over $13,000 from the corporate treasury for expenses. On the same day he voluntarily turned all of Vitreous' assets over to the Bank, he obtained a contract to run the same business he had before, but now with a $2500 per week management fee. The time allowed by the Bank for sale to pay off Vitreous' debt did not leave enough time for an outside buyer to both decide the business was a good investment and allow an outside lender to do the necessary due diligence. Even though the Bank demanded cash in hand from the other bidders, the sale to Champlin and VITCO was a cashless transaction. If the Bank was willing to take the risk of Champlin running the business without further supply of outside money, why would they threaten to repossess? The only answer we can see is that the Bank and Champlin wanted the business shed of unsecured debt. The record contains Champlin's statement that in order for the company to succeed, you had to eliminate a good deal of that [general] debt. If elimination of the unsecured debt was the Bank's motive, then the Bank did act collusively to delay or defraud the unsecured creditors. Matter of Met-L-Wood, 861 F.2d 1012, 1019 (7th Cir.1988), cert. denied, --- U.S. ----, 109 S.Ct. 1642, 104 L.Ed.2d 157 (1989); Matter of Ambassador Riverside Investment Group, 62 B.R. 147 (M.D.La.1986). The court should carefully reexamine this question on remand. 44 The other branch of fraudulent transfer analysis is whether the estate received substantially equivalent value from the transfer. Sec. 548(a)(2). Our analysis is complicated by the lack of a specific finding by the bankruptcy court on the value of the personalty. Without such a finding, we are without a figure against which we can compare the price received. Because there never was a finding of fact on this issue at the Sec. 362 hearing, the Sec. 362 hearing cannot preclude litigation of the question of equivalent value. We therefore reverse the grant of summary judgment as to this count, and remand for a determination of the value of all property sold and a comparison of that value to the price received.
45 To determine whether a foreclosure sale was commercially reasonable under Ind.Code Secs. 26-1-9-501 et seq., the court must inquire into not only the price received at the sale, but also into the regularity of the advertising and conduct of the sale. The details of a potential sale that may occur after the lifting of the automatic stay should not be considered in the analysis of whether the stay should be lifted. Therefore it was unnecessary for the bankruptcy court to consider the reasonableness of the price received or the reasonableness of the manner in which the sale was conducted at the hearing on the motion to lift the stay. Thus the Trustee should not have been precluded from establishing in an appropriate forum that the Bank disposed of its collateral in an unreasonable manner or for an unreasonable price. On remand, the court should consider the Trustee's arguments.
46 In our discussion of the estate's equity in the Vitreous real property, supra pp. 1233-1234, we explained that the Bank's repossession resulting from the voluntary surrender of the equipment not covered by the Bank's financing statement was not a conversion under Indiana law. The entry of summary judgment for the Bank was proper because there is no genuine issue of material fact surrounding the repossession. Even though the bankruptcy court incorrectly applied the doctrine of res judicata to reach its result, this court may affirm a judgment for other reasons supported in the record. Shields v. Burge, 874 F.2d 1201 (7th Cir.1989).
47 Even if the bankruptcy court had found collusive conduct between the Bank and Champlin at the Sec. 362 hearing, that finding would not have destroyed the Bank's claim or its lien, nor the Bank's priority in bankruptcy if the stay were kept in place. The issues involved in determining whether the automatic stay should be lifted have nothing to do with priorities between creditors inside the bankruptcy proceedings. Therefore the issue of whether the Bank's claim should have been equitably subordinated to the claims of the general creditors under Sec. 510(c) was not necessary to the Sec. 362 decision. Thus the grant of summary judgment on grounds of collateral estoppel was improper. On remand, the bankruptcy court is obligated to make findings of fact as to whether the Bank's actions call for subordination of its debt under the balancing test of Matter of Mobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977). The court should consider whether (1) the claimant creditor has engaged in some sort of inequitable misconduct; (2) the misconduct has resulted in injury to other creditors or in unfair advantage to the miscreant; and (3) subordination of the debt is inconsistent with other provisions of the bankruptcy code. We recently held in Matter of Virtual Network Services Corp., 902 F.2d 1246 (7th Cir.1990), that it is not necessarily required that the creditor be found to have engaged in misconduct. We stated that the inquiry is to be made on a case-by-case basis focussing on fairness to the other creditors. The court should consider all the circumstances in determining whether the Bank's claim should be subordinated to that of the general creditors.
48 This count, as we have noted supra footnote 3, was ignored as moot by the courts below. Because the Trustee has succeeded on at least one count of the adversary complaint, there is something in the estate for distribution to other creditors, and the viability of the Weil Trust note, now held by Champlin, is a question of importance to the unsecured creditors. The record is not exactly clear as to whether the Note is still secured. When Champlin signed the Bank's mortgage of November 1, 1986, he promised that that mortgage constituted a first lien on the property. The record is silent as to whether Champlin has in fact released the collateral pertaining to the Weil Trust loan he purchased on July 10, 1986. If the note is enforceable and the collateral has not been released, then the Weil Trust debt has priority over all other claims to proceeds from sale of the property. If the note is enforceable and the collateral has been released, there is another major unsecured creditor (Champlin) with a right to share in the distribution of the estate. 49 The note provides that payment cannot be made if the payment would cause Vitreous to be in violation of its loan agreement with the Bank. That agreement provides that Vitreous may make payments on the Trust note only from profits from the preceding quarter, and only when the loan from the Bank is not in default. But the note also includes this provision: 50 It is understood that the provisions hereof are intended solely for the purpose of defining the relative rights of the holder of this Note, on the one hand, and the Bank as holder of the Senior Indebtedness on the other hand. Nothing contained herein is intended, or shall impair, as between Vitreous and its creditors other than the Bank, the obligation of Vitreous which is unconditional and absolute, to pay the Trustee [of the Weil Trust] the principal of and interest on this Note as and when the same shall become due and payable in accordance with the terms hereof. 51 The interpretation of an unambiguous contract is a matter of law, International Ass'n of Machinists v. General Electric, 865 F.2d 902 (7th Cir.1989), and if this contract is unambiguous this court can direct the entry of summary judgment for the proper party. Whether a contract is ambiguous is a question of law, which this court decides de novo. Samuels v. Wilder, 871 F.2d 1346 (7th Cir.1989). Nonetheless, we are without the benefit of the opinions of the courts below on these questions, and the parties have not fully argued them before us. Because of the limited record before us, we do not feel we are in a position to proceed. Thus we remand this question to the bankruptcy court for the development of a complete record and sufficient findings of fact.
52 The bankruptcy court rejected the Trustee's claim that the payment to Champlin of $13,800 on the day before the Bank repossessed all of Vitreous' assets constituted a fraudulent transfer on the grounds that, at that time, Vitreous was paying all its debts as they came due, and was therefore not insolvent within the meaning of Sec. 548(a)(2)(B)(i). While it is true that, after Champlin took over the operations of Vitreous, Vitreous paid for all new purchases on a cash basis and paid all new bills as they became due, it is also true that Vitreous did not pay anything on debts which had become due before July 10, 1986. Vitreous was in default to the Bank, and was also sufficiently in default to other creditors to become the subject of an involuntary Chapter 7 proceeding. Given the bankruptcy court's almost simultaneous finding that the value of all of Vitreous' assets was only sufficient to pay off the Bank without a penny left over for the remaining creditors, the finding that Vitreous was not insolvent at the time of the payment to Champlin was clearly erroneous. Furthermore, the record fails to set forth an itemized listing of expenses for which Champlin was being reimbursed. He claimed in his testimony at the Sec. 362 hearing that the money was for travel expenses incurred some time back, but Champlin had been an employee of Vitreous only since July 10, 1986. That meant that between that time and August 29, 1986 when VITCO began operating the plant for the Bank, there was only a period of fifty days during which Champlin could have been travelling as a Vitreous employee before the reimbursement--hardly some time back. The large amount of the reimbursement suggests that it might very well have taken more than fifty days to incur the amount of debt. That in turn suggests that Champlin may have taken reimbursement from Vitreous for expenses he incurred in taking control of the company. The company itself got no benefit from a transfer of its stock on the secondary market, and can hardly be said to have received equivalent value within the meaning of Sec. 548(a)(2)(A) when it paid for such a transfer. On remand the bankruptcy court should demand an account of all the expenses claimed and paid out and from this information and other information gained at a full and complete hearing determine whether Vitreous received reasonably equivalent value for the August 28, 1986 transfer of $13,800 to Champlin. 6