Court Opinion

ID: 2961565
Source: CourtListenerOpinion
Date Created: 2015-09-21 20:44:48.030926+00
Date Added: 2024-06-11T11:42:01.235782
License: Public Domain

USCA1 Opinion

	

             September 29, 1992                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________        No. 91-2250                             IN RE:  MELON PRODUCE, INC.,                                       Debtor,                                      __________                             JOSEPH BRAUNSTEIN, TRUSTEE,                                 Plaintiff, Appellee,                                          v.                                    PETER KARGER,                                Defendant, Appellant.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                   [Hon. Edward F. Harrington, U.S. District Judge]                                               ___________________                                 ____________________                                        Before                                 Breyer, Chief Judge,                                         ___________                             Lay,* Senior Circuit Judge,                                   ____________________                          and O'Scannlain,** Circuit Judge.                                             _____________                                 ____________________            Charles  W.  Morse, Jr.  with whom  Alan M.  Spiro and  Friedman &            _______________________             ______________      __________        Atherton were on brief for appellant.        ________            John  J.  Kuzinevich  with  whom  Isaac  H.  Peres  and  Riemer  &            ____________________              ________________       _________        Braunstein were on brief for appellee.        __________                                 ____________________                                         -1-                                 ____________________        _____________________        *  Of the Eighth Circuit, sitting by designation.        ** Of the Ninth Circuit, sitting by designation.                       BREYER,   Chief  Judge.    This  appeal  raises  a                                 ____________             technical question  about bankruptcy preferences.  Suppose a             Creditor  has a  security agreement  that covers  "rights to             money"  and  contains an  "after-acquired  property" clause.             Suppose at a  later time, within the  preference period, the             Debtor sells other property to third parties, accepts checks             from  those parties  as  payment, and  immediately  endorses             those checks over to the Creditor.  Does the Creditor have a             perfected  security  interest  in  those checks  or  in  the             "rights to  money" that  they represent,  thereby permitting             the  Creditor  to  receive payments  which  would  otherwise             constitute  an  unlawful "preference?"   The  district court             thought  the  answer  to  this  question  was  "no,"  and it             affirmed a  bankruptcy court decision that  the Creditor had             received  an unlawful  preference.   We affirm  the district             court's judgment.                                          I                                      Background                                      __________                       The appellant, Peter  Karger, says that, in  1984,             he  wanted to  lend about  $600,000 to  a company  called A.             Pellegrino   &  Sons,   then   in  Chapter   11   bankruptcy             proceedings.   In order to obtain security for his loan, and             with  the  approval  of  the bankruptcy  court,  Karger  had                                         -3-                                          3             Pellegrino transfer  two valuable  assets -- some  leases on             bays at the  New England  Produce Center and  some stock  in             that Center -- to a  new corporation (called Melon Produce),             which Karger owned.  Melon Produce then guaranteed repayment             to  Karger of the  $600,000 loan.   And, just to  be certain             that  Melon could pay if  necessary, Karger was  to obtain a             security interest in Melon's assets.                       If  Karger  has  accurately  described   what  was             supposed  to  happen, then,  when  the  parties drafted  the             relevant legal  documents, something  must have  gone wrong.             The   security   agreement   that   Karger   executed  (with             appropriate U.C.C.  filings) in August 1984  did not mention             Melon's two main assets -- the leases and the stock.  It did             mention,  however,  various  other  Melon  assets, including             "instruments"  and all  "rights  . .  .  to the  payment  of             money."    It also  specified  that Karger  would  receive a             security interest in all such assets "hereinafter acquired."                       Apparently, Pellegrino did not repay the loan, for             the parties agree that  three years later Melon  owed Karger             about $500,000.    In early 1987, Melon sold  its leases and             stock to third party  buyers for $430,000.  At  the closing,             on February 27, 1987, Melon transferred the leases and stock             to  the  buyers;  the   buyers  gave  Melon's  clerk  checks                                         -4-                                          4             totalling $430,000; the clerk  endorsed the checks to Karger             in partial satisfaction of Melon's debt; and Karger (through             an agent) took the checks and deposited them in his account.                       Within a  year Melon, too, was  bankrupt.  Melon's             bankruptcy trustee, noting that  Karger was an "insider" and             that the February  27, 1987 transfer  took place within  the             year preceding bankruptcy, claimed  that the transfer was an             unlawful  "preference," which  Karger  must  return  to  the             bankruptcy  estate.  11 U.S.C.    547(b).  As  we have said,             the bankruptcy  court found that the  transfer constituted a             preference;  the  district court  affirmed;  and  Karger now             appeals.                                          II                                       Analysis                                       ________                       A "preference" is a transfer of a debtor's assets,             during a specified pre-bankruptcy period, that unjustifiably             favors the transferee over other creditors. See 4 Collier on                                                         ___   __________             Bankruptcy   547.01 at 547-14 (15th ed. 1992) ("A preference             __________             is an infraction of the rule of equal distribution among all             creditors.").  The preference section of the Bankruptcy Code             permits  the bankruptcy  trustee to  "avoid any  transfer of             property" made (1) to an  "insider" creditor; (2) on account                                         -5-                                          5             of "an antecedent debt;" (3) while the debtor was insolvent;             (4)  within one  year before  the  filing of  the bankruptcy             petition; (5) that enables the creditor to receive more than             he  would have received in liquidation in the absence of the             transfer. 11 U.S.C.   547(b).   We assume that the transfers             to  Karger  satisfy  the  first  three   criteria  (insider,             antecedent debt,  and insolvency).   And, February  1987 was             within one  year  of Melon's  bankruptcy filing.   But  what             about  the  final  requirement?   Did  the  transfer  of the             $430,000 unjustifiably favor Karger  by giving him more than             he would have received in liquidation?                       Karger  must  concede  that  in February  1987  he             received $430,000  that would otherwise have  gone to Melon.             But, Karger makes an argument that we simplify, place within             the  relevant  legal context,  and  paraphrase, as  follows:             'The  funds that Karger received amounted to no more than he             would have received anyway in liquidation, in the absence of             the  transfer.   In  a  Chapter  7  liquidation,  a  secured             creditor  normally receives  the  value of  the property  in             which he holds perfected  security interests (at least where             no other creditor enjoys  a higher priority).  4  Collier on                                                               __________             Bankruptcy   547.08  at 547-43 (15th ed. 1992);  see also 11             __________                                       ___ ____             U.S.C.    544  (trustee in  bankruptcy  has  status of  lien                                         -6-                                          6             creditor  under  state law);  Mass.  Gen. L.  ch.  106,   9-             301(1)(b), (3) (lien creditor receives priority over secured             creditor only  if such creditor's interest  is unperfected).             And  (says  Karger),  Karger  was a  secured  creditor  with             perfected security interests, both in Melon's "instruments,"             (namely, the  buyers' checks that Melon  endorsed to Karger)             and in "rights to money," (namely, Melon's rights to payment             for the leases and stock that Melon sold).  Thus, (concludes             Karger) the  February 1987 transfer did not give Karger more             than that to  which he  would anyway  (in liquidation)  have             been entitled.'                       We  cannot accept  this  argument, for  we do  not             agree that Karger held a perfected security interest, either             in "instruments" or in "rights  to money" that would entitle             him  to obtain  the  $430,000 ahead  of  other creditors  in             liquidation.  That  is because the  creation of a  perfected             security interest  in property  is itself a  preference when                                                ______             the creation or perfection takes place during the preference             period  (and the other criteria  are satisfied).   See In re                                                                ___ _____             Taco Ed's, 63  Bankr. 913,  925 (N.D. Ohio  1986) and  cases             _________             cited therein; 11 U.S.C.   101 (defining "transfer"  broadly             to include  "retention of title as a  security interest"); 4             Collier on  Bankruptcy    547.03 at  547-18 (15th  ed. 1992)             ______________________                                         -7-                                          7             ("transfer" encompasses  any  transfer  of  an  interest  in             property).    Although  Karger  received  perfected security             interests in the checks and rights to money, those interests             were  transferred in  February 1987,  during the  preference             period, and not before.                       Karger's  basic strategy is  the following: (1) He             claims  that he obtained a  security interest (a) in Melon's             rights  to money from the buyers of its leases and stock and             (b) in the checks that the buyers gave Melon.  He notes that             Melon's right to money  arose out of its sales  contract and             existed  despite the receipt of the checks, until the checks             were  honored.   Cf. Barnhill  v. Johnson,  112 S.  Ct. 1386                              __  ________     _______             (1992) (transfer of assets  takes place when creditor's bank             receives funds  and credits his  account, not when  check is             initially  received).    (2)   He  points  to  his  security             agreement's coverage of "instruments" and "rights to money,"             to its "after-acquired property"  clause, and to the Uniform             Commercial Code provision that  creates a perfected security             interest in  collateral covered  by that clause  dating from                                                                     ____             the time of filing of the U.C.C. financing statement.  Mass.             ____________________________________________________             Gen.  L.  ch. 106,    9-204(1)  ("A  security agreement  may             provide that any or all obligations covered by the  security             agreement are to be secured by after-acquired collateral . .                                         -8-                                          8             . ."); Mass. Gen. L. ch.  106,     9-302, 9-304 (setting out             U.C.C.  filing   requirements).     (3)  He  concedes   some             difficulty  in  applying  this  provision  to  his  security             interest in  the checks in light of  other U.C.C. provisions             that  normally  date  perfection  of security  interests  in             instruments from the time of physical possession. Mass. Gen.             L.  ch. 106,   9-304(1).   But, he says, the "relation-back"             applies, at least, to his  security interest in the  "rights             to money."    And, (4) it means that  the bankruptcy trustee             must  consider  the  "transfers"  to him  of  the  perfected             security  interests (at least  in the "rights  to money") to             have taken place in 1984,  well before the preference period             began  to run.  Hence, (5) the February 1987 actual transfer             of  funds  (presumably from  the  buyers'  bank accounts  to             Karger's bank account) gave him nothing beyond that to which             he was entitled (by  a pre-1987 perfected security interest)             in its absence.                       This result  makes one  hesitate.  Can  a creditor             (say,  a creditor  without  fraudulent intent  who is,  like             Karger, able  to control  a debtor corporation),  up to  the             very moment of bankruptcy, simply exchange the corporation's             unsecured assets for assets covered by a previously executed             security  agreement's  after-acquired  property  clause  and                                         -9-                                          9             thereby  obtain those  assets ahead of  unsecured creditors?             The answer to this question, in general, is "no."  The fatal             flaw  in  Karger's argument  is  that  a perfected  security             interest in  Melon's after-acquired  "rights to money"   may             relate back  to his 1984 U.C.C.  (security agreement) filing             for  U.C.C.  security  interest  priority  purposes.     The             ___________________________________________________             interest  does  not  relate   back  to  1984,  however,  for                             ___                                      ___             Bankruptcy Code preference purposes.               ___________________________________                       In  order to  obtain the  "relation back"  that he             needs,  Karger would  have  to argue  successfully that  his             secured  interest  in  "rights  to money"  fits  within  the             special exception for "receivables" (and "inventory") in the             Bankruptcy Code's preference section. 11 U.S.C.   547(c)(5).             That   exception  recognizes   that  a   company's  specific             receivables   (and  inventory)  tend  to  turn  over,  often             quickly, as  the company collects the  receivables due (say,             from the sale of goods) in one year and (through more sales)             generates more receivables due the next year.  The exception             essentially permits a creditor  with, say, a "floating lien"             on the "receivables" of such a company to maintain that lien             as  the  specific  accounts  receivable are  paid  off,  and             replaced by new ones, without fear that a future  bankruptcy             trustee  will  mount a  preference  attack  on new  accounts                                         -10-                                          10             receivable  arising  during the  "preference"  period.   The             exception   protects   new   receivables   from   preference             challenges, however, only insofar as they substitute for old                                                       __________             ones.  Insofar  as the grant of  a security interest in  the             new  collateral  (receivables or  inventory that  comes into             existence  during   the  preference  period)   improves  the                                                            ________             creditor's  position  (compared  to  his  position  at   the             beginning of  the preference period), the  grant of security             constitutes a  preference to the extent  of the improvement.             11  U.S.C.     547(c)(5).    See  generally   4  Collier  on                                          ___  _________      ___________             Bankruptcy   547.13 at 547-59-61 (15th ed. 1992) (explaining             __________             the "improvement in position" test).                         The "rights to money" arising from Melon's sale of             its  leases and stock fall  within the literal  scope of the             Bankruptcy  Code's  definition  of  "receivable,"  namely  a             "right to payment, whether or not such right has been earned             by performance." 11 U.S.C.   547(a)(3).  Nonetheless, Karger             cannot take advantage of this exception because he fails the             "improvement in position" test.  Karger began the preference             period with his $500,000 debt totally unsecured.  He himself             argues  that he ended the period with $430,000 in "rights to             money" securing  that same debt.   Consequently, he improved             his position vis-a-vis other  creditors by that same amount.                                         -11-                                          11             Thus,  the special  exception for "receivables"  cannot help             him.                          There is another reason  why the exception may not             help him.   To  apply  the Bankruptcy  Code's definition  of             "receivable"  literally,  to  cover  Melon's  rights,  would             extend the special exception  for "receivables"  well beyond             the kind of receivables that  tend to turn over, in a  flow,             as a firm collects  old accounts and generates new  ones  --             the kind of "accounts receivable" to which the U.C.C. refers             through its related definition of "account."  See Mass. Gen.                                                           ___             L. ch. 106,   9-106  (defining "account" more restrictively,             as "any  right to payment  for goods  sold or leased  or for             services rendered which is not evidenced by an instrument or             chattel  paper,  whether  or  not  it  has  been  earned  by             performance").   And,  we  are uncertain  just  how far  the             Bankruptcy  Code definition  of  "receivable"  is  meant  to             extend the scope of  the "receivables" preference exception.             We  have not  found authority  for the proposition  that the             exception extends to a single right  to payment arising from             a major corporate  change outside of the ordinary  course of             business -- such as a debtor's sale of all its major assets,             as occurred here.  The definition of "receivable" under  the             Bankruptcy Code  is not settled  law.  Cf.  Vern Countryman,                                                    __                                         -12-                                          12             Andrew  L. Kaufman,  & Zipporah Batshaw  Wiseman, Commercial                                                               __________             Law  288 (2d  ed. 1982)  (noting  uncertainty as  to whether             ___               547(a)(3)'s  definition  of "receivable"  includes chattel             paper and  instruments).   The  issue has  not been  argued.             Given  the fact  that, even  if the  "receivables" exception             applied, Karger  would  fail the  "improvement in  position"             test  to the extent of his entire security interest, we need             not answer  the  question of  how  far the  Bankruptcy  Code             definition   of  "receivable"   departs   from  the   U.C.C.             definition of "account."  And, we state expressly that we do             not do so.                       Since Melon's "rights to money" do not fall within             the  special "receivables" exception,  they come  within the             scope of a more  general "preference" provision that states,             "a transfer is not made until the debtor has acquired rights                                               ______             in  the   property  transferred."    11  U.S.C.    547(e)(3)             (applicable   to  all   after-acquired  property   with  the             exception of  inventory and receivables, which  are governed             by   547(c)(5)).  The  object of this statutory  language is             to  "prevent[]  after-acquired  property  from  being deemed             perfected at  the date of the  original security agreement."             4  Collier on Bankruptcy   547.19 at 547-85 (15th ed. 1992);                _____________________             In re Northwest Electric  Co., 84 Bankr. 400, 403  (W.D. Pa.             _____________________________                                         -13-                                          13             1988); In  re R & T  Roofing Structures, 42 Bankr.  908, 912                    ________________________________             n.11  (D. Nev. 1984).    Thus,  Massachusetts commercial law             might give  Karger priority over  a similar creditor  with a             later-filed  security  interest.     But,  regardless,   for                                                                      ___             purposes of determining bankruptcy preferences, the transfer             ______________________________________________             of the  perfected security interest  to Karger did  not take             place  before Melon  acquired  the "property"  in  question.             Melon's rights to money arose  (and it obtained the  checks)             in February  1987.   Hence, any perfected  security interest             that  Karger  obtained  in   that  property  amounted  to  a             "transfer"  to him of that interest in February 1987, during             the preference period, not in 1984.                        The upshot of this analysis is that the transfers             of security interests were voidable preferences.  Therefore,             Karger  was an unsecured creditor of Melon.  As an unsecured             creditor, Karger would not have received in liquidation what             he  received  through  the  February  1987  money  transfer.             Hence,  the  February 1987  transfer  of  $430,000 from  the             buyers  to  Karger  was,   like  the  transfer  of  security             interests, a voidable preference.                                          III                                   Summary Judgment                                   ________________                                         -14-                                          14                       Karger also  disputes a  matter that until  now we             have  assumed in favor of  the trustee, namely,  that at the             time of transfer  (February 1987) Melon was  insolvent.  The             trustee  moved for summary judgment on this point.  In doing             so,  he noted that Melon owed Karger $500,000 and he pointed             to other proofs of  claim amounting to about $342,000.   The             trustee  also  stated  that  Melon had  assets  worth  about             $430,000.   Cf., e.g., In  re Lewis, 80  Bankr. 39, 40 (E.D.                         ___  ____  ____________             Pa. 1987) (proof of claim is competent evidence when offered             against  a debtor);  In re  Trans Air,  103 Bankr.  322, 325                                  ________________             (S.D. Fla. 1985) (court  adjudicating a preference challenge             can take notice  of debtor's schedule of  debts to determine             insolvency issue); In  re F.H.L., Inc.,  91 Bankr. 288,  295                                ___________________             (D.N.J. 1988) (same).                       Fed. R. Civ. P.  56 (made applicable by Bankruptcy             Rule 7056) requires  a party opposing  a motion for  summary             judgment to "set forth specific facts showing  that there is             a genuine issue for trial."  Fed R. Civ. P. 56(e).  The only             specific  fact  that  Karger   set  forth  consists  of  his             statement  in  an affidavit  that  Melon  had owned  various             pieces  of  furniture,  equipment,  and  other  items   that             Karger's brother, who  operated Melon, stole.   We can  read             the  affidavit as pointing to a Melon asset that the trustee                                         -15-                                          15             did  not take into account,  namely, a claim  that Melon may             have  against  Karger's  brother  for the  value  of  stolen             furniture and equipment.  But, we cannot read that affidavit             as setting  forth specific facts indicating  that this asset             is worth a  significant amount of money.   Consequently, the             court correctly concluded that Karger had failed to  raise a             "genuine" issue of "material" fact in respect to insolvency.                       One  final  point:    appellant  argues  that  the             judgment was not sufficiently  "final" to permit the appeal.             See 28 U.S.C.   1291.  The record reveals, however, that the             ___             district  court,  on  December  13, 1991,  entered  a  final             judgment appealable under Fed. R. Civ. P. 54(b), along  with             the  statement of reasons that the rule requires.  Any claim             of non-appealability is without merit.                       The judgment of the district court is                       Affirmed.                           ________                                                       -16-                                          16