Court Opinion

ID: 7391
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:27:45+00
Date Added: 2024-06-11T09:33:22.256823
License: Public Domain

UNITED STATES COURT OF APPEALS
                         for the Fifth Circuit
                         _____________________

                            No. 94-10774
                       _____________________
      IN THE MATTER OF: SOUTHMARK CORPORATION,

                        SOUTHMARK CORPORATION,

                                                   Plaintiff-Appellant,

                                VERSUS

                           D. VINSON MARLEY,

                                                 Defendant-Appellee.
        ______________________________________________________

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

                       ON PETITION FOR REHEARING

        (Opinion June 26, 1995, 5th Cir., 1995,         F.3d    )

                           (August 8, 1995)

Before LAY1, DUHÉ, and DeMOSS, Circuit Judges.

DUHÉ, Circuit Judge:

      We deny Appellant's motion for rehearing, but we vacate our

previous opinion, 55 F.3d 1071 (5th Cir. 1995), and substitute the

following:

      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

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

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

                                 2
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

     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 not

made on account of an antecedent debt.

     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.      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

                                 3
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.

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, 112 S.

Ct. 1386, 1389 (1992).

         Southmark first contends that it incurred its debt when it and

Marley signed the employment contract that called for payment of

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   "[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).

                                       4
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 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

                                5
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

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.             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 disagree.

                                       6
     State law governs the rights and duties of parties to a check

transaction.    Id. at 1389.   Barnhill recognizes that the obligee's

receipt of a check suspends the underlying obligation so long as

the check is presented to the drawee bank within a reasonable time.

Id. (citing U.C.C. § 3-802(1)(b) (1991)); In re Child World, 173

B.R. 473, 477 & n.3 (Bankr. S.D.N.Y. 1994).      Consequently, if the

debtor delivers a check before incurring a debt, the transfer is

not made on account of an antecedent debt because the underlying

obligation is suspended until the check clears.       Child World, 173

B.R. at 477.3

     In this case, Marley received his check simultaneously with

his termination.      His taking of the check suspended Southmark's

simultaneous obligation to pay his severance benefits until the

check was presented to the drawee bank. When the transfer occurred

at the time of honor, Southmark's simultaneous obligation was

discharged.     The   transfer,   therefore,   was   on   account   of   a

simultaneous debt, not an antecedent debt.

                               CONCLUSION

     For the foregoing reasons, the district court's judgment

affirming the bankruptcy court is AFFIRMED.

3
  The issue in Barnhill was whether the check transfer came within
the 90 day preference period of § 547(b)(4). Because the date of
honor rule allows the trustee to test more transfers as
preferences, that rule furthers the bankruptcy goal of distributive
equality among creditors. Child World, 173 B.R. at 477 n.2. In
contrast, treating check payments of simultaneous debts as
antecedent debt transfers potentially offers other creditors a
windfall at the expense of the check holder because he has offered
current consideration for the check. Id. at 477 & n.2.

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