Court Opinion

ID: 814935
Source: CourtListenerOpinion
Date Created: 2013-01-08 00:09:16+00
Date Added: 2024-06-11T18:00:53.917166
License: Public Domain

Case: 12-60234       Document: 00512103546         Page: 1     Date Filed: 01/07/2013

               IN THE UNITED STATES COURT OF APPEALS
                        FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                        Fifth Circuit

                                                                                FILED
                                                                              January 7, 2013

                                           No. 12-60234                        Lyle W. Cayce
                                                                                    Clerk

    STINSON PETROLEUM COMPANY, INCORPORATED

                                                      Debtor

    THE UNSECURED CREDITORS COMMITTEE

                                                      Plaintiff
    v.

    COMMUNITY BANK, ELLISVILLE MISSISSIPPI, a/k/a Community Bank

                                                      Defendant - Appellee

    v.

    DEREK A. HENDERSON,

                                                      Trustee - Appellant

                       Appeal from the United States District Court
                         for the Southern District of Mississippi

1   Before BARKSDALE, DENNIS, and GRAVES, Circuit Judges.
2   PER CURIAM:*

           *
             Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
    be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
    R. 47.5.4.
          Case: 12-60234       Document: 00512103546          Page: 2     Date Filed: 01/07/2013

                                            No. 12-60234

 3          Stinson Petroleum Company (“Stinson”) engaged in a check-kiting scheme
 4   using checking accounts Stinson held with Community Bank (“Community”) and
 5   Bank of Evergreen (“Evergreen”).1 Stinson perpetrated the kite by depositing
 6   worthless checks into its account with Community that were drawn on its
 7   account with Evergreen while simultaneously depositing worthless checks into
 8   the latter that were drawn on the former. By circulating worthless checks
 9   between the two accounts, and by taking advantage of provisional credits that
10   both banks extended to deposits not yet collected, Stinson created the impression
11   of a positive account balance while substantial debt accrued.
12          As kites are prone to do, the scheme eventually collapsed. Evergreen was
13   the first to uncover the kite, so it did not incur any losses. Community, by
14   contrast, was not so lucky. Community ultimately determined that, because of
15   the kite, Stinson accumulated an overdraft of between $6 and $7 million in its
16   account with Community. Community met with Stinson and Evergreen and
17   agreed to receive two wire transfers worth $3.5 million from Stinson’s Evergreen
18   account.
19          Stinson subsequently filed for bankruptcy under Chapter 11, and a
20   committee of unsecured creditors (“the Creditors”) commenced an adversary
21   proceeding against Community seeking to avoid the two wire transfers as
22   avoidable preferences under 11 U.S.C. § 547(b). The bankruptcy was later
23   converted to Chapter 7, and bankruptcy trustee Derek A. Henderson (“the
24   Trustee”) was substituted as the plaintiff. Ultimately, both the bankruptcy court

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               “Check kiting consists of drawing checks on an account in one bank and depositing
     them in an account in a second bank when neither account has sufficient funds to cover the
     amounts drawn. Just before the checks are returned for payment to the first bank, the kiter
     covers them by depositing checks drawn on the account in the second bank. Due to the delay
     created by the collection of funds by one bank from the other, known as the ‘float’ time, an
     artificial balance is created.” United States v. Stone, 954 F.2d 1187, 1188 n.1 (6th Cir. 1992).

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                                       No. 12-60234

25   and the district court concluded that the wire transfers were not avoidable
26   preferences, and the Trustee appealed.
27         At issue is whether Community, because of the wire transfers, improved
28   its position, meaning that it fared better than it would have fared under
29   Stinson’s Chapter 7 liquidation. The Bankruptcy Code provides that the Trustee
30   has the burden of demonstrating that Community would have received less
31   under Chapter 7 than it did via the prepetition transfers. We conclude that the
32   lower courts did not clearly err in determining that the Trustee failed to satisfy
33   this burden and therefore AFFIRM the judgment of the district court.
34                                  BACKGROUND
35         Evergreen became suspicious of Stinson’s activity sometime around the
36   weekend of July 4, 2009 and froze the company’s account two days later.
37   Consequently, the kite collapsed. Before Community learned that Evergreen
38   had uncovered the check-kiting scheme and, by returning checks for insufficient
39   funds, taken steps to protect itself, Community continued to grant Stinson
40   provisional credit, of which Stinson availed itself. This resulted in Stinson’s
41   overdraft with Community, which the bank determined to be between $6 and $7
42   million.
43         In light of this debt, Community met with representatives from Stinson
44   and Evergreen and agreed to receive a direct payment of $3.5 million via two
45   wire transfers from Stinson’s account with Evergreen. The first wire transfer
46   totaled $1,992,863 and included a notation in the written instructions that read,
47   “payment for checks #2226, 2231, 2229,” three checks drawn from Stinson’s
48   Evergreen account and deposited in its Community account on June 30, 2009.
49   The second wire transfer totaled $1,507,137 and included a notation in the
50   written instructions that read, “payment of returned checks.” According to
51   testimony later heard by the bankruptcy court, the purpose of the wire transfers

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                                       No. 12-60234

52   was to reimburse Community for the eighteen checks Evergreen returned to
53   Community after the kite collapsed.
54         Stinson later filed for Chapter 11 bankruptcy, at which point the Creditors
55   commenced their adversary proceeding against Community, the prosecution of
56   which was eventually charged to the Trustee once the bankruptcy was converted
57   from Chapter 11 to Chapter 7. Both the Trustee and Community cross-moved
58   the bankruptcy court for summary judgment, but the court denied both motions.
59   The parties tried the wire-transfer claims before the bankruptcy court over the
60   course of two days.     Noteworthy here, Community’s senior vice president
61   testified at trial that the bank may have been able to collect the $3.5 million via
62   Chapter 7.
63         The bankruptcy court found that the wire transfers were not avoidable
64   preferences. Specifically, the bankruptcy court found that, because Community
65   granted provisional credit to Stinson and because Stinson took advantage of this
66   credit,   Community held a perfected, first-priority security interest in the
67   eighteen returned checks and their proceeds and that the Trustee had failed to
68   prove that the transfers were not intended to satisfy Community’s security
69   interest. Consequently, the bankruptcy court ruled that the wire transfers did
70   not deplete Stinson’s bankruptcy estate and did not improve Community’s
71   position relative to how the bank would have fared via Chapter 7. The district
72   court affirmed the bankruptcy court’s ruling. The district court observed that
73   the Trustee had the burden of proving that Community would have received less
74   than $3.5 million via Chapter 7 liquidation and concluded that “the record
75   contains scant evidence to that effect.” The Trustee timely appealed.
76                             STANDARD OF REVIEW
77         We review a bankruptcy appeal from the district court “applying the same
78   standard to the bankruptcy court’s findings of fact and conclusions of law that
79   the district court applied.” In re Morrison, 555 F.3d 473, 480 (5th Cir. 2009).

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80    Namely, we review “findings of fact . . . for clear error[] and . . . conclusions of
81    law . . . de novo.” Id. We review mixed questions of law and fact de novo. In re
82    San Patricio Cnty. Cmty. Action Agency, 575 F.3d 553, 557 (5th Cir. 2009).
83    Whether a transfer constitutes an avoidable preference is a question of law;
84    however, we review the fact question underlying any element of the Trustee’s
85    preference claim for clear error. See In re Ramba, Inc., 416 F.3d 394, 401-02 (5th
86    Cir. 2005).
87          “A finding of fact is clearly erroneous only if on the entire evidence, the
88    court is left with the definite and firm conviction that a mistake has been
89    committed.” In re Duncan, 562 F.3d 688, 694 (5th Cir. 2009) (internal quotation
90    marks omitted). If the bankruptcy court’s view of the evidence “is plausible in
91    light of the record viewed in its entirety, [we] may not reverse it even though
92    convinced that had [we] been sitting as a trier of fact, [we] would have weighed
93    the evidence differently.” In re Martin, 963 F.2d 809, 814 (5th Cir. 1992)
94    (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985)) (internal
95    quotation marks omitted). In fact, “[if] there are two permissible views of the
96    evidence, the factfinder’s choice between them cannot be clearly erroneous.” Id.
97    (quoting Anderson, 470 U.S. at 574) (internal quotation marks omitted).
98                                      DISCUSSION
99                                              A.
100         The Trustee’s preference claim is based on Section 547(b), which provides:
101         (b)     Except as provided in subsections (c) and (I) of this section,
102         the     trustee may avoid any transfer of an interest of the debtor in
103                 property—
104                 (1)   to or for the benefit of a creditor;
105                 (2)   for or on account of an antecedent debt owed by the
106                       debtor before such transfer was made;
107                 (3)   made while the debtor was insolvent;
108                 (4)   made—

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109                      (A)    on or within 90 days before the date of the filing
110                             of the petition; or
111                      (B)    between ninety days and one year before the date
112                             of the filing of the petition, if such creditor at the
113                             time of such transfer was an insider; and
114               (5)    that enables such creditor to receive more than such
115                      creditor would receive if—
116                      (A)    the case were a case under chapter 7 of this title;
117                      (B)    the transfer had not been made; and
118                      (C)    such creditor received payment of such debt to
119                             the extent provided by the provisions of this title.
120   11 U.S.C. § 547(b).
121         “Section 547(b) . . . allows a trustee to recover as a preferential payment
122   certain transfers made by a debtor to a creditor within the ninety-day period
123   prior to bankruptcy.” Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030,
124   1033 (5th Cir. 1987). Its purpose is twofold: (1) it permits a trustee to avoid pre-
125   bankruptcy transfers occurring on the eve of bankruptcy so as to discourage
126   creditors “from racing to the courthouse to dismember the debtor during his slide
127   into bankruptcy”; and (2) it ensures fair distribution among the creditors. Union
128   Bank v. Wolas, 502 U.S. 151, 161 (1991) (quoting H.R. REP. NO. 95-595, at 177
129   (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6138) (internal quotation marks
130   omitted).
131         In this case, Community conceded at trial that the Trustee could prove the
132   first four elements of § 547(b) and disputed only the Trustee’s claims under §
133   547(b)(5). Accordingly, at issue is “the requirement that before a trustee in
134   bankruptcy [may] avoid a preferential payment, the trustee must establish that
135   the payment enabled the creditor to receive more than the creditor would have
136   received upon liquidation under Chapter 7 of the bankruptcy code.” Braniff
137   Airways, 814 F.2d at 1034 (footnote omitted). This test is often referred to as the

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138   “greater percentage test” or the “improvement in position” test. See, e.g., In re
139   El Paso Refinery, LP, 171 F.3d 249, 253 (5th Cir. 1999); In re Clark Pipe &
140   Supply Co., 893 F.2d 693, 698 (5th Cir. 1990). Importantly, the Trustee bears
141   the burden on this point. 11 U.S.C. § 547(g); Braniff Airways, 814 F.2d at 1034
142   n.3.
143           Under this test, the bankruptcy court was required “to construct a
144   hypothetical Chapter 7 liquidation [based on the evidence that the parties
145   presented at trial] and determine what the creditor would have received had the
146   transfers not taken place.” In re N.A. Flash Found. Inc., 298 F. App’x 355, 359
147   (5th Cir. 2008) (citing In re ML & Assocs., Inc., 301 B.R. 195, 202 (Bankr. N.D.
148   Tex. 2003)). “If the creditor receives a greater percentage of its debt as a result
149   of the prepetition transfer than it would have in a bankruptcy distribution, the
150   transfer is preferential.” Id. (citing In re El Paso Refinery, 171 F.3d at 253-54).
151                                           B.
152           In analyzing whether Community received more via the wire transfers
153   than it would have received under Chapter 7, we must “consider how the debt
154   would have been treated in a Chapter 7 liquidation.” Braniff Airways, 814 F.2d
155   at 1034. Here, Community’s status as Stinson’s creditor is the locus of the
156   inquiry because “a fully secured creditor who receives a prepetition payment
157   does not receive a greater percentage than he would have in a bankruptcy
158   proceeding.” In re El Paso Refinery, 171 F.3d at 254. This is “because as a fully
159   secured creditor, [Community] would have recovered 100% payment in a
160   bankruptcy proceeding.” Id. Accordingly, “[p]ayments to a fully secured creditor
161   are not preferential because the creditor does not receive more than he would in
162   a Chapter 7 liquidation.” Braniff Airways, 814 F.2d at 1034 (alteration in
163   original) (quoting In re Mason & Dixon Lines, Inc., 65 B.R. 973, 977 (Bankr.
164   M.D.N.C. 1986)) (internal quotation marks omitted).

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165         Relevant here is section 75-4-210(a) of the Mississippi Code, which
166   provides:
167         (a)   A collecting bank has a security interest in an item and any
168               accompanying documents or the proceeds of either:
169               (1)    In case of an item deposited in an account, to the extent to
170                      which credit given for the item has been withdrawn or
171                      applied;
172               (2)    In case of an item for which it has given credit available for
173                      withdrawal as of right, to the extent of the credit given,
174                      whether or not the credit is drawn upon or there is a right of
175                      charge-back; or
176               (3)    If it makes an advance on or against the item.
177   MISS. CODE ANN. § 75-4-210(a). The Trustee acknowledges that this provision
178   means that “a bank that extends provisional credit on a deposited check prior to
179   actually collecting funds on that check automatically obtains a perfected security
180   interest in the check and its proceeds” and that this is precisely the situation in
181   which Community found itself. Nonetheless, and despite case law providing that
182   a fully secured creditor who receives a prepetition payment has, as a matter of
183   law, not received a preferential transfer, see In re El Paso Refinery, 171 F.3d at
184   254; Braniff Airways, 814 F.2d at 1034, the Trustee argues that Community
185   could not guarantee when and whether it would have received any payment and
186   thus faults the district court for improperly assuming that Community would
187   have received $3.5 million from Stinson via Chapter 7.
188         We do not accept the Trustee’s argument. The relevant inquiry is whether
189   Community, because of the $3.5 million wire transfers, improved its position
190   relative to how well it would have fared in a hypothetical Chapter 7 liquidation.
191   Specifically, the Trustee has the burden of showing “that the payment enabled
192   the creditor to receive more than the creditor would have received upon
193   liquidation under Chapter 7 of the bankruptcy code.” Braniff Airways, 814 F.2d
194   at 1034 & n.3. Phrased another way, the Trustee must prove that Community

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195   would have received less under Chapter 7. Here, the district court did not
196   improperly assume that Community would have recouped $3.5 million via
197   Chapter 7; rather, the district court did not clearly err in concluding that the
198   Trustee failed to satisfy his burden of proving that Community would not have
199   received at least $3.5 million in a Chapter 7 liquidation.
200         Given that the Trustee concedes that Community was a fully secured
201   creditor by operation of section 75-4-210 of the Mississippi Code, the prepetition
202   payment Community received is, as a matter of law, not a preferential transfer
203   avoidable under 11 U.S.C. § 547(b). See In re El Paso Refinery, 171 F.3d at 254;
204   Braniff Airways, 814 F.2d at 1034. Moreover, the district court’s conclusion is
205   supported by the record. Community’s senior vice president testified that the
206   bank may have been able to collect the $3.5 million via Chapter 7. Given “two
207   permissible views of the evidence, the [bankruptcy courts]’s choice between them
208   cannot be clearly erroneous.” In re Martin, 963 F.2d at 814 (quoting Anderson,
209   470 U.S. at 574) (internal quotation marks omitted). We therefore conclude that
210   the lower courts did not clearly err in determining that the $3.5 million wire
211   transfers were not avoidable preferences under § 547(b).
212                                   CONCLUSION
213         For these reasons, we AFFIRM the judgment of the district court.

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