Court Opinion

ID: 4517867
Source: CourtListenerOpinion
Date Created: 2020-03-19 16:00:39.002922+00
Date Added: 2024-06-11T09:22:00.968279
License: Public Domain

United States Bankruptcy Appellate Panel
                             For the Eighth Circuit
                          ___________________________

                                  No. 19-6013
                          ___________________________

                           In re: Gas-Mart USA, Inc.

                                              Debtor

                            ------------------------------

Richard S. Lauter, not individually but solely as Creditor Trustee of the Gas-Mart
                             USA, Inc. Creditor Trust

                                      Plaintiff - Appellant

                                         v.

                    Wells Fargo Bank, National Association

                                     Defendant - Appellee
                                  ____________

                 Appeal from United States Bankruptcy Court
               for the Western District of Missouri - Kansas City
                                ____________

                         Submitted: February 19, 2020
                            Filed: March 19, 2020
                                ____________

Before SALADINO, Chief Judge, SCHERMER and SHODEEN, Bankruptcy
Judges.
                             ____________

SCHERMER, Bankruptcy Judge
       Richard S. Lauter, as Trustee of the Gas-Mart USA, Inc. Creditor Trust
(Trustee), appeals the bankruptcy court’s1 decision applying the contemporaneous
exchange for new value preference defense under Bankruptcy Code §547(c)(1) to
except payments by Gas-Mart USA, Inc. (Debtor) to Wells Fargo Bank, National
Association (Wells Fargo) from avoidance as preferences. We have jurisdiction over
this appeal from the final judgment of the bankruptcy court. See 28 U.S.C. §158(b).
For the reasons that follow, we affirm.

                                       ISSUES
       There are four issues we need to address; each concerns the use of the
§547(c)(1) defense. The first is whether new value was provided by the release of
Wells Fargo’s junior liens where a senior lienholder voluntarily released its liens for
less than full payment of its debt. Second, whether Wells Fargo provided new value
to the Debtor when the Internal Revenue Service (IRS), a secured creditor senior to
Wells Fargo, was paid from the proceeds of a sale of the Debtor’s assets and
voluntarily released its liens. Third, whether a $100,000 payment made by the
Debtor to Wells Fargo one day before a sale closing was intended to be a
contemporaneous exchange. Fourth, whether Wells Fargo’s release of claims
against Phillips 66 and KCRC resulted in new value to the Debtor intended by the
parties to be a contemporaneous exchange. In each instance, we see no error in the
bankruptcy court’s application of §547(c)(1).

                                    BACKGROUND
       Gas-Mart USA, Inc. (Debtor) owned and operated gas stations and
convenience stores in multiple states. In July 2015, the Debtor and its affiliated
entities filed petitions for relief under Chapter 11 of the Bankruptcy Code. In the
confirmation order, the Trustee was appointed and vested with the power to
prosecute avoidance actions.

1
  The Honorable Dennis R. Dow, United States Bankruptcy Judge for the Western
District of Missouri.

                                          2
      Before its bankruptcy filing, the Debtor had deposits on account at Wells
Fargo. The Debtor issued checks in excess of its deposit balances in breach of the
terms of the parties’ account agreements. To resolve the Debtor’s breach, the parties
entered into a letter agreement setting forth repayment terms for the amount by
which the Debtor’s checks exceeded its account balances. The Debtor also granted
Wells Fargo security interests in substantially all its assets.

       In March 2015, the Debtor entered into an agreement to sell all its real and
personal property assets at 19 Gas-Mart locations for $27 million (Sale). The parties
also agreed to assign a value of approximately $600,000 to the inventory being sold.
Importantly, the Sale contract required the Sale of the assets to be free and clear of
liens. The Sale closed on April 30, 2015.

       Sun Life received over $14 million of the Sale proceeds in partial payment on
its debt. Although it was not paid in full, Sun Life voluntarily released its liens on
all assets of the 19 stores and consented to the Sale. Wells Fargo received $1.3
million of the Sale proceeds in partial payment on its debt. On April 29, 2015, the
Debtor paid Wells Fargo the amount of $100,000. Separately, the Debtor made
payments to Wells Fargo in the amount of $73,490.67 during the preference period.
In order to comply with the buyer’s requirement that the Sale be free and clear of
liens, Wells Fargo released its liens.

       Prior to the Debtor’s bankruptcy filing, certain stores managed by the Debtor
were owned by KCRC. KCRC’s affiliate, Phillips 66, supplied fuel to the Debtor.
When the Debtor became delinquent in its obligations to KCRC, it agreed to return
locations and inventory to KCRC in exchange for a credit toward the amount that it
owed KCRC. Wells Fargo claimed that because the inventory was subject to its
liens, the inventory should not have been transferred to KCRC without Wells
Fargo’s consent. In order to close the Sale, Phillips 66 agreed to provide credit to
the Debtor up to approximately $2 million to cover fuel purchases, provided Wells
Fargo released Phillips 66 from any liability relating to the inventory transfer. Wells

                                          3
Fargo released its claims against KCRC and Phillips 66 as part of an agreement
between Phillips 66, KCRC, and Wells Fargo.

       The Trustee filed an adversary proceeding seeking avoidance and recovery of
the $1.3 million, $100,000, and $73,490.67 payments to Wells Fargo as preferences.
After trial, the bankruptcy court held that the Trustee could avoid and recover the
$73,490.67 paid to Wells Fargo but ruled in favor of Wells Fargo in that $1.3 million
and $100,000 payments qualified for the §547(c)(1) defense.

                            STANDARD OF REVIEW
       We review the bankruptcy court's findings of fact for clear error and its
conclusions of law de novo. See Silverman Consulting, Inc. v. Canfovr Woods Prod.
Marketing (In re Payless Cashways, Inc.), 394 F.3d 1082, 1083 (8th Cir. 2005)
(citation omitted). “The existence of intent, contemporaneousness, and new value
are questions of fact.” Tyler v. Swiss Am. Secs., Inc. (In re Lewellyn & Co., Inc.),
929 F2d 424, 427 (8th Cir. 1998) (citation omitted); Official Plan Comm. v.
Expeditors Int’l of Washington, Inc. (In re Gateway Pacific Corp.), 153 F.3d 915,
918 (8th Cir. 1998) (citation omitted) (“The existence of contemporaneous intent is
a question of fact, the determination of which we review for clear error”).
“[I]nterpretation of the Bankruptcy Code is reviewed de novo.” Velde v. Kirsch, 543
F.3d 469, 472 (8th Cir. 2008).

                                     DISCUSSION
       Bankruptcy Code §547(b) allows a trustee to avoid pre-petition preferential
transfers. “In general, an avoidable preference is a transfer of the debtor's property
to or for the benefit of a creditor, on account of the debtor's antecedent debt, made
less than ninety days before bankruptcy while the debtor was insolvent, that enables
the creditor to receive more than she would in a Chapter 7 liquidation.” Lindquist v.
Dorholt (In re Dorholt), 224 F.3d 871, 873 (8th Cir. 2000) (citing 11 U.S.C.
§547(b)).

                                          4
       Section 547(c)’s contemporaneous exchange for new value defense prohibits
a trustee from avoiding a transfer under §547(b):

      (c) . . . (1) to the extent that such transfer was--
                      (A) intended by the debtor and the creditor to or for whose
                      benefit such transfer was made to be a contemporaneous
                      exchange for new value given to the debtor; and
                      (B) in fact a substantially contemporaneous exchange;

11 U.S.C. §547(c)(1). “[T]he creditor or party in interest against whom recovery or
avoidance is sought has the burden of proving the nonavoidability of a transfer under
subsection (c) of [§547].” 11 U.S.C. §547(g). “ ‘The critical inquiry in determining
whether there has been a contemporaneous exchange for new value is whether the
parties intended such an exchange.’ ” In re Lewellyn & Co., Inc., 929 F.2d at 428
(quoting Creditors’ Comm. v. Spada (In re Spada), 903 F.2d 971, 975 (3d Cir.
1990)). “The modifier ‘substantial’ makes clear that contemporaneity is a flexible
concept which requires a case-by-case inquiry into all relevant circumstances.”
Dorholt, 224 F.3d at 874 (citation and quotation marks omitted).

       The Bankruptcy Code defines “new value” as “money or money's worth in
goods, services, or new credit, or release by a transferee of property previously
transferred to such transferee in a transaction that is neither void nor voidable by the
debtor or the trustee under any applicable law, including proceeds of such property,
but does not include an obligation substituted for an existing obligation.” 11 U.S.C.
§547(a)(2). The release of a lien can constitute new value. Velde v. Kirsch, 543
F.3d 469, 474 (8th Cir. 2008) (recognizing new value under §547(c)(1) by release
of a lien on debtor’s assets); Velde v. Reinhardt, 294 Fed. Appx. 242, 243 (8th Cir.
2008) (same). “Contemporaneous new value exchanges are excepted from
avoidance because they ‘encourage creditors to continue doing business with
troubled debtors who may then be able to avoid bankruptcy altogether,’ and ‘because
other creditors are not adversely affected if the debtor's estate receives new value.’”
Dietz v. Calandrillo (In re Genmar Holdings, Inc.), 776 F.3d 961, 963 (8th Cir. 2015)
(quoting Jones Truck Lines, Inc. v. Central States, S.E. and S.W. Area Pension Fund

                                           5
(In re Jones Truck Lines, Inc.), 130 F.3d 323, 326 (8th Cir. 1997)). “[A] transfer of
new value by a third party to the debtor may satisfy the ‘new value’ requirement of
§547(c)(1)(A).” Jones Truck Lines, Inc., 130 F.3d at 327 (citations omitted).

      Wells Fargo conceded the prima facie case under § 547(b) and does not appeal
the bankruptcy court’s award of $73,490.67 in favor of the Trustee. However, the
Trustee appeals the bankruptcy court’s decision that the $1.3 million and $100,000
payments to Wells Fargo were excepted from avoidance based on Bankruptcy Code
§547(c)(1).

I.    Did Sun Life’s release of its liens for less than full payment of its debt permit
      Wells Fargo’s lien releases to provide new value?

      The bankruptcy court’s decision is correct under Bankruptcy Code §547(c)(1)
standards and the court appropriately relied upon evidence in the record to decide
that Wells Fargo’s release of its liens on the Debtor’s furniture, fixtures, and
equipment (FF&E) resulted in new value to the Debtor exceeding the $1.4 million
in payments made to it in connection with the Sale.

       The Trustee does not dispute that that the analysis for determining new value
from a lien release requires a determination of the: (1) value of the underlying
property; and (2) amount and priority of other liens on the property. And he does
not contest the bankruptcy court’s valuation of the property upon which Wells Fargo
released its liens in an amount exceeding $1.4 million. The disagreement between
the parties lies in the bankruptcy court’s determination of the amount and priority of
other liens on the property. The Trustee believes that Wells Fargo’s release of its
liens did not constitute new value. We disagree.

      Wells Fargo held junior liens on the Debtor’s FF&E in each of the 19 stores
sold. The bankruptcy court properly determined the value of the senior liens on the
FF&E serving as Wells Fargo’s collateral and held that value was provided by the

                                          6
release of Wells Fargo’s liens.2 For three locations, Wells Fargo’s security interest
in the FF&E was junior to Equity Bank. For the other locations, Wells Fargo’s
security interest in the FF&E was junior to Sun Life. Equity Bank received full
payment from the Sale. Sun Life agreed to release its liens for payment of less than
the amount it was owed. As a result, funds were made available to pay Wells Fargo,
plus a sum for the Debtor. The record supports the bankruptcy court’s decision.

       When, as in this case, a senior secured lender voluntarily releases its liens for
less than full payment and a junior secured creditor releases its liens, the requirement
for providing new value under §547(c)(1) by the junior creditor is satisfied.

       The Trustee believes a per se rule should apply that if a senior creditor is not
paid in full from the value of its collateral as the result of a sale, that release of junior
liens on the sale property should have no corresponding value for purposes of
§547(c)(1). We disagree. The situation in this case proves the exception to such a
rule. Like the bankruptcy court, we must consider the allocation of sale proceeds in
the context of Sun Life’s waiver of a portion of its liens. According to the Trustee,
a court must consider “the reality of the situation,” which he deems to be how the
Sale proceeds would be allocated without the waiver. The reality of the situation is
that Sun Life waived payment in full for release of its liens, providing value to Wells
Fargo.

       The Trustee disagrees with the bankruptcy court’s statement that the amount
accepted by Sun Life reflects the value it placed on its liens. He argues that Sun Life
took less than the amount it was owed because Wells Fargo demanded payment in
exchange for release of its junior liens, a demand that the Trustee believes was
improper. But the deal reached by the parties reflected the requirement of the buyer
that the Sale result in a purchase free and clear of liens. We see no error with the

2
 Wells Fargo does not claim that any value existed for real estate mortgages it held
or its liens on the Debtor’s inventory sold through the Sale. The dispute in this
appeal concerns only the value of Wells Fargo’s liens on the Debtor’s FF&E sold as
part of the Sale.
                                         7
bankruptcy court’s determination concerning the value that Sun Life placed on its
liens. It makes sense in the context of the situation. Sun Life’s waiver of full
payment facilitated the Sale closing by allowing funds for Wells Fargo (and the
Debtor) and causing Wells Fargo to release its liens.

II.   Did the IRS’s lien releases enable Wells Fargo’s lien releases to provide
      new value to the Debtor?

       According to the Trustee, the bankruptcy court should have treated the IRS as
having liens on the Debtor’s FF&E. The bankruptcy court acknowledged that Wells
Fargo did not attribute any value to its security interest in the Debtor’s inventory
because the IRS had a senior security interest in the inventory and the approximately
$600,000 in Sale proceeds allocated to the inventory were paid to the IRS. The court
also stated that the IRS agreed to release its liens. We agree with the bankruptcy
court’s determination. It is uncontested that the IRS filed a tax lien over a year
before the Sale for the amount greater than $1.5 million, that tax lien was senior to
Wells Fargo’s lien, and the IRS received approximately $600,000 from the Sale.
The Trustee argues that the IRS released only its security interest in the inventory,
not liens it had on the Debtor’s FF&E. Since the buyer required as a condition to
closing that all liens on the Sale property be released and the Sale closed with
payment to the IRS of only approximately $600,000, the lien of the IRS on the
Debtor’s FF&E was paid to its satisfaction.

      The bankruptcy court also pointed out that although the IRS initially filed
secured proofs of claim, it subsequently (after it received the $600,000) amended its
proofs of claim to eliminate any secured claim. It appropriately stated that the record
did not support the Trustee’s argument that the amendments to the IRS’s proof of
claim were the result of having received distributions from other asset sales in the
Debtor’s case. The bankruptcy court had ample evidence upon which to find that
the IRS released its liens on all assets at the Sale. In fact, this is shown by the sale
orders from the two major asset sales in the Debtor’s bankruptcy case.

                                           8
III.   Did the parties intend for Wells Fargo’s $100,000 payment to be a
       contemporaneous exchange?

        The Trustee argues that the parties did not intend for the $100,000 payment to
Wells Fargo on April 29, 2015 to be substantially contemporaneous with Wells
Fargo’s lien releases because the $100,000 payment was made by the Debtor only
as a requirement for further communications with Wells Fargo, not in exchange for
the lien releases. Based on the record, we see no clear error in the bankruptcy court’s
decision that these transactions were all made as part of one deal and the parties
intended the $100,000 payment to be made as an advance payment for the deal
already reached by the parties regarding the April 30 Sale. Nothing in the record
causes us to question those findings. The fact that this amount was paid prior to the
date of the Sale closing and was not paid from the Sale proceeds does not change the
result.

IV.    Did Wells Fargo’s release of its claims against Phillips 66 and KCRC result
       in: (a) new value to the Debtor; (b) that the parties intended to be a
       contemporaneous exchange?

        Value was provided to the Debtor in connection with Wells Fargo’s release of
claims against Phillips 66 and KCRC for the inventory transferred. As the
bankruptcy court found, the evidence shows that Wells Fargo’s release was made as
a condition to a two year and two month restructuring of the Debtor’s obligation to
Phillips 66 to pay for past fuel purchased, and for Phillips 66 to extend new credit to
the Debtor for fuel purchases. The record supports the bankruptcy court’s statement
that without the credit provided by Phillips 66, the Debtor would have been out of
business. The court also appropriately pointed out that the Debtor needed to keep
its relationship with Phillips 66 in place because the buyer intended to assume the
Phillips 66 agreement as part of the Sale.

      The Trustee argues that the bankruptcy court incorrectly found that the parties
intended a contemporaneous exchange for new value in connection with the Phillips
66 release because the only deal in place as of the April 30 Sale closing was for a
90-day forbearance from collecting old debt, which is not new value. The value
                                          9
from the Phillips 66 restructuring was documented in a promissory note executed 60
days after the Sale closing, on July 1, 2015. The Trustee believes that the bankruptcy
court erred when it considered the promissory note to be the documentation of a deal
made earlier. There is ample support in the record for the bankruptcy court’s
decision and it makes sense in the context of the proceedings. Each party pointed
to testimony and other evidence that it believes support its decision. We give
deference to the bankruptcy court’s assessment of the credibility of witnesses and
we see no clear error with the bankruptcy court’s review of the evidence.

       The bankruptcy court appropriately quantified the value received by the
Debtor in exchange for the Phillips 66 release, i.e., the value of the new credit given
to the Debtor by Phillips 66, as $552,000. Because of the new credit extended by
Phillips 66, the Debtor was able to continue to receive gasoline sales revenue from
its operations in May and June 2015. The $552,000 amount consists of $276,000
per month for each of those months. To establish that amount, the court
appropriately looked to the amount that Phillips 66 was willing to pay the Debtor
post-bankruptcy for the right to receive the Debtor’s gasoline sales revenues under
the Debtor’s post-petition court approved consignment arrangement with Phillips
66. As part of the consignment arrangement, Phillips 66 agreed to provide fuel at
the Debtor’s locations if it retained ownership of the fuel and received the proceeds
of the fuel sales. Phillips 66 paid the Debtor $12,000 per month for each of the
Debtor’s locations, which amounted to $276,000 per month for all of the Debtor’s
locations.

       The Trustee argues that Wells Fargo failed to provide sufficient evidence of
new value because the $276,000 per month under the consignment arrangement was
attributable, at least in part, to fees for certain services provided by the Debtor post-
petition, not to the right to receive fuel sales at the Debtor’s locations. We see no
error with the bankruptcy court’s interpretation of the consignment arrangement and
application of it to determine the amount of the new value. And as the bankruptcy
court pointed out, its adoption of $552,000 as the amount of new value from the
Phillips 66 release was a conservative estimate. It pointed to specific additional

                                           10
possible sources of value: sales of items inside the Debtor’s stores made possible
only by having fuel to sell to customers; and data showing that actual gas purchases
may have been higher than $276,000 each month.

                                    CONCLUSION
      For the reasons stated, the decision of the bankruptcy court is AFFIRMED.
                           ____________________________

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