Court Opinion

ID: 7259
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:26:31+00
Date Added: 2024-06-11T11:48:57.928575
License: Public Domain

United States Court of Appeals,

                            Fifth Circuit.

                            No. 94-10774.

          In the Matter of SOUTHMARK CORPORATION, Debtor.

                 SOUTHMARK CORPORATION, Appellant,

                                  v.

                     D. Vinson MARLEY, Appellee.

                            June 26, 1995.

Appeal from the United States District Court for the Northern
District of Texas.

Before LAY,1 DUHÉ, and DeMOSS, Circuit Judges.

     DUHÉ, Circuit Judge:

     Southmark Corporation, as debtor-in-possession, sought to

recover its $400,000 prepetition payment to D. Vinson Marley in an

adversary proceeding under Sections 547 and 548 of the Bankruptcy

Code.    The bankruptcy court denied recovery after a bench trial.

Southmark appealed only the court's ruling on the § 547 preference

action. Utilizing clear error review, the district court affirmed.

We affirm as well.

                              BACKGROUND

     Southmark and Marley signed an employment contract in 1982

that required Southmark to pay severance benefits in the event it

terminated the contract.    In 1986, Southmark transferred all its

employees to North American Mortgage Investors, Inc. (NAMI), a

wholly owned Southmark subsidiary, which in turn leased them back

     1
      Circuit Judge of the Eighth Circuit, sitting by
designation.

                                  1
to Southmark.   On April 28, 1989, Southmark and Marley executed a

settlement agreement, and Marley received a check for $400,000. By

signing the agreement, Marley released all Southmark severance

obligations under the employment contract ($357,000) and agreed to

provide consulting services to Southmark for ninety days hence

($43,000). The check bore NAMI's name and was drawn on Southmark's

Payroll Account.   The payor bank cleared the check on May 4, 1989.

     Southmark filed for a Chapter 11 reorganization in bankruptcy

on July 14, 1989, and asserted this action to recover the $400,000

payment to Marley.   In its preference cause of action, Southmark

alleged that the $357,000 payment of severance benefits was a

preference.   On cross motions for summary judgment, the bankruptcy

court determined that Southmark had satisfied all the elements of

a preference except for whether the funds transferred to Marley

were property of the estate.     In a ruling from the bench after

trial, the court denied the preference.     The court held that the

transferred funds were not property of the estate because Southmark

failed to prove an interest in them.        In addition, the court

applied the earmarking doctrine to hold that NAMI's payment to

Marley, to the extent that it released Southmark's liability to

him, merely substituted one creditor for another.   As an alternate

holding, the court reconsidered its summary judgment ruling and

held that the transfer was not a preference because it was not on

account of an antecedent debt.       Southmark contests the court's

three rulings on appeal.

                            DISCUSSION

                                 2
     While this appeal was pending, we decided Southmark Corp. v.

Grosz, 49 F.3d 1111 (5th Cir.1995).    Another Southmark preference

action, Grosz considered whether a Southmark subsidiary's check

drawn on Southmark's Payroll Account was property of Southmark's

estate.    We answered that question in the affirmative.     Id. at

1119.    Consequently, Southmark argues here that Grosz controls the

property of the estate issue and requires reversal on that ground.

We need not address Grosz or the bankruptcy court's application of

the earmarking doctrine because we hold that the transfer was a

contemporaneous exchange therefore not avoidable as a preference.

     In its summary judgment ruling, the bankruptcy court held that

Southmark established all the § 547(b) elements of a preference

with the exception of the property of the estate issue.   The court

also denied Marley's contemporaneous exchange defense asserted

under § 547(c)(1).    In its ruling after trial, however, the court

changed its mind.    It determined that Southmark's debt arose when

it terminated Marley.     Considering Marley's termination and the

transfer to have been simultaneous, the bankruptcy court concluded

that the transfer was not "for or on account of an antecedent

debt," which is an element of a preference.2     The district court

saw no error in the bankruptcy court's conclusion.

     Southmark challenges the bankruptcy court's conclusion that

the debt was not antecedent with three alternative arguments.

     2
      "[T]he trustee may avoid any transfer of an interest of the
debtor in property ... for or on account of an antecedent debt
owed by the debtor before such transfer was made...." 11 U.S.C.
§ 547(b)(2) (1988).

                                  3
First,    Southmark    contends   that    the   debt   arose   in    1982       when

Southmark and Marley executed the employment contract.                     Second,

Southmark contends that it terminated Marley in mid-April 1989, not

on April 28.    Third, even if the termination occurred on April 28,

Southmark argues that the transfer did not occur until May 4, when

the drawee bank paid the check.

      A debt is antecedent under § 547(b) if the debtor incurs it

before     making    the   alleged   preferential      transfer.           In     re

Intercontinental           Publications,        131    B.R.         544,        549

(Bankr.D.Conn.1991);         Tidwell v. AmSouth Bank (In re Cavalier

Homes), 102 B.R. 878, 885 (Bankr.M.D.Ga.1989); 4 Lawrence P. King,

Collier on Bankruptcy ¶ 547.05 (15th ed. 1995).                     Our focus,

therefore, is on the date the debt was incurred and the date the

transfer occurred. The determinations of these dates involve mixed

questions of law and fact, which we review de novo.             See Barnhill

v. Johnson, 503 U.S. 393, 396-98, 112 S.Ct. 1386, 1389, 118 L.Ed.2d

39 (1992).

         Southmark first contends that it incurred its debt when it

and Marley signed the employment contract that called for payment

of severance benefits in the event of termination.                    The Code

defines "debt" as "liability on a claim."              11 U.S.C. § 101(12)

(1988).    A debtor incurs a debt when he becomes legally obligated

to pay it.          In re Emerald Oil Co., 695 F.2d 833, 837 (5th

Cir.1983);     see also Sherman v. First City Bank (In re United

Sciences of Am.), 893 F.2d 720, 724 (5th Cir.1990) (explaining, in

setoff context, that bank incurred debt when right to payment

                                      4
arose, not when bank asserted right).

       Under the Code, a party to an executory contract has a claim

against the debtor only when the debtor has rejected the contract.

See 11 U.S.C. §§ 365(g), 502(g) (1988);         Wainer v. A.J. Equities,

984 F.2d 679, 684-85 (5th Cir.1993) (per curiam).         Consequently, a

debtor who breaches an executory contract incurs a debt only at the

time of breach.    See Wainer, 984 F.2d at 685.      Courts have reached

the same conclusion in preference actions. See In re Energy Coop.,

832 F.2d 997, 1002 (7th Cir.1987) (holding that purchaser incurred

debt when it anticipatorily repudiated contract to buy crude oil);

In re Gold Coast Seed Co., 751 F.2d 1118, 1119 (9th Cir.1985)

(holding that seed buyer became obligated to pay at time of

shipment, not when parties executed contract for future shipment).

       In Intercontinental Publications, the debtor terminated an

employee whose employment contract provided for severance benefits

payable in installments after termination.         The debtor brought a

preference action, and the bankruptcy court considered whether the

installment payments were on account of an antecedent debt.                The

court held that the debtor incurred its debt when the debtor

terminated its employee.      131 B.R. at 550.     Likewise, we conclude

that   Southmark   incurred   its   debt   to   Marley   at   the   time    it

terminated him.

       The bankruptcy court found that Marley's termination occurred

simultaneously with the execution of the settlement agreement.             We

review a bankruptcy court's factual findings for clear error, and

we adhere strictly to that standard of review when the district

                                    5
court has affirmed those findings.           In re Young, 995 F.2d 547, 548

(5th Cir.1993).       Southmark contends that Marley was terminated in

mid-April     1989,    before   the   parties    executed      the    settlement

agreement    on   April   28.    As   sole    support   of    its    contention,

Southmark cites the deposition of its Chief Executive Officer,

Arthur G. Weiss.      Weiss's deposition testimony, however, does not

support Southmark's contention;        instead, Weiss explained that the

settlement agreement provided payment to Marley in termination of

the employment contract.        The bankruptcy court's finding is not

clearly erroneous.

         Finally, Southmark contends, even if it incurred the debt on

April 28, that the transfer occurred on May 4 when the bank paid on

the check.     Southmark cites Barnhill for the proposition that a

transfer by check occurs, for purposes of § 547(b), on the date of

honor, not the date of delivery.           503 U.S. at 400, 112 S.Ct. at

1391.     Because Barnhill makes the date of transfer later than the

date Southmark incurred the debt, Southmark contends that the

transfer was on account of an antecedent debt.               We agree.

         Nevertheless, the transfer comes under the contemporaneous

exchange exception of § 547(c)(1).3 A contemporaneous exchange for

new value occurs when a debtor incurs a debt and pays it by check

at the same time, and the exchange is substantially contemporaneous

if the payor bank honors the check.            In re Standard Food Servs.,

     3
      The trustee may not avoid a transfer that 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) (1988).

                                       6
723 F.2d 820, 821 (11th Cir.1984);      S.Rep. No. 95-989, 95th Cong.,

2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5874.            In

other words, § 547(c)(1) treats the payment of a valid check as a

cash   transaction.     Southmark   delivered   the   check,   terminated

Marley, and received new value from the release on execution of the

settlement agreement.    The payor bank then honored the check.        We

conclude that the transfer is a contemporaneous exchange under §

547(c)(1) and, therefore, not avoidable as a preference.

                              CONCLUSION

       For the foregoing reasons, the district court's judgment

affirming the bankruptcy court is AFFIRMED.

                                    7