Southmark Corp v. Schulte Roth & Zabel ( 2001 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 99-11401
_____________________
IN THE MATTER OF SOUTHMARK CORPORATION,
Debtor
SOUTHMARK CORPORATION,
Appellee
v.
SCHULTE ROTH & ZABEL,
Appellant
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
(3:97-CV-2332-L)
_________________________________________________________________
November 7, 2000
Before KING, Chief Judge, and REYNALDO G. GARZA and PARKER,
Circuit Judges.
PER CURIAM:*
Appellant Schulte Roth & Zabel (“Schulte”) appeals the
district court’s judgment finding Schulte liable for $1 million
*
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that this opinion should not be published and is not precedent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.
of a $3.3 million preferential transfer from Appellee Southmark
Corporation (“Southmark”) to the Parks Group. For the following
reasons, we AFFIRM in part and REVERSE in part.
I. FACTUAL AND PROCEDURAL HISTORY
At the center of this case is a Settlement Agreement by
which two entities resolved a proxy fight and several lawsuits.
In March 1989, the Parks Group, consisting of R&P Ventures
(“R&P”), Garson L. Rice, Sr., Herbert B. Parks, and Byron
Investments (“Byron”), disclosed to the Securities and Exchange
Commission its intention to propose nominees for election to
Southmark’s board of directors. On April 20, 1989, the Parks
Group publicly disclosed its plan to wage a proxy contest for
control of Southmark. Several lawsuits between the parties were
commenced around this time.
On May 24, 1989, the Parks Group and Southmark reached a
settlement of both the proxy contest and the lawsuits and
executed the Settlement Agreement. The Settlement Agreement
provided, inter alia, that (1) the proxy contest would be
terminated; (2) minority shareholders, including the Parks Group,
would have a voice on the Southmark board of directors; (3) three
Parks Group nominees would be appointed to the Southmark board of
directors; (4) the Parks Group would not engage in further proxy
solicitation against Southmark; and (5) the lawsuits would be
settled. Moreover, the Settlement Agreement provided for the
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reimbursement of all of the Parks Group’s expenses, including
attorney’s fees, that had been incurred with respect to the proxy
contest and the lawsuits. This reimbursement totaled $3.3
million, $1 million of which was earmarked for legal expenses.
From the time of the proxy contest to the execution of the
Settlement Agreement, the law firm of Schulte Roth & Zabel was
the Parks Group legal representative.
Also on May 24, and roughly four hours prior to the
Settlement Agreement’s execution, Southmark transferred $3.3
million to Schulte’s Citibank account by wire, where it was held
in escrow until the following morning. On May 25, the entire
$3.3 million was transferred by Citibank, at the request of
Schulte, to R&P. R&P then transferred $1 million to Byron, who,
in turn, issued a check payable to Schulte for $1 million for the
legal services it had rendered.
On July 14, 1989, Southmark filed a petition in Chapter 11
bankruptcy. Southmark then filed a complaint on June 19, 1991,
seeking to avoid the $3.3 million transfer to the Parks Group as
preferential under 11 U.S.C. § 547(b) and also sought recovery
from Schulte of the $1 million it received in legal fees. On
April 5, 1993, the bankruptcy court granted summary judgment in
favor of Schulte. However, in an opinion dated July 2, 1996, a
panel of this court, while recognizing that the case “presents a
rare if not unique fact situation,” held that the $3.3 million
transfer from Southmark to R&P was “for or on account of an
3
antecedent debt owed by [Southmark] before such transfer was
made,” declared it an avoidable preference under 11 U.S.C.
§ 547(b), and remanded the case to the bankruptcy court. See
Southmark Corp. v. Schulte Roth & Zabel (In re Southmark Corp.),
88 F.3d 311, 318 (5th Cir. 1996).
Upon remand, the bankruptcy court, in its March 24, 1997
Memorandum Opinion, granted partial summary judgment in favor of
Southmark, finding that Schulte could not avail itself of the
preference defense contained in 11 U.S.C. § 547(c)--that the $3.3
million transfer was a “contemporaneous exchange for new value.”
However, in its August 13, 1997 Memorandum Opinion, the
bankruptcy court found that Schulte was not liable to Southmark
as a subsequent transferee under 11 U.S.C. § 550(a) because
according to the “date of delivery” rule, Schulte had not
actually received any funds from the $3.3 million transfer. The
bankruptcy court also held that had Schulte been liable as a
subsequent transferee, it would have been unable to rely upon the
defense contained in 11 U.S.C. § 550(b)(1)--that it took for
value, in good faith, and without knowledge of the voidability of
the transfer. Finally, the bankruptcy court found that if
Southmark had succeeded in recovering the $1 million transfer
from Schulte, Schulte could assert a claim under 11 U.S.C.
§ 502(h) as an intended beneficiary of the Settlement Agreement
and could also have a claim under the doctrine of subrogation.
4
In a November 17, 1999 opinion, the district court reversed
the bankruptcy court’s determination that Schulte was not liable
under § 550(a) as a subsequent transferee. Moreover, the
district court affirmed the bankruptcy court’s determination that
Schulte could not avail itself of the § 550(b) defense. The
district court determined, however, that even though Schulte was
required to return the $1 million to Southmark, it was unable to
assert a claim under § 502(h).
Schulte timely appealed the district court’s judgment.
II. STANDARD OF REVIEW
When a decision by a bankruptcy court has been appealed to,
and reviewed by, a district court, and the case is then appealed
to us, we perform the same appellate review as the district
court. See Traina v. Sewell (In re Sewell), 180 F.3d 707, 710
(5th Cir. 1999). Therefore, this court reviews a bankruptcy
court’s findings of fact for clear error and its conclusions of
law de novo. See id.; Young v. Nat’l Union Fire Ins. Co. (In re
Young), 995 F.2d 547, 548 (5th Cir. 1993); see also FED. R. BANKR.
P. 8013. Under the clearly erroneous standard of review, the
bankruptcy court’s findings will be reversed only if, considering
all of the evidence, “we are left with the definite and firm
conviction that a mistake has been made.” Young, 995 F.2d at
548. Finally, this court reviews a bankruptcy court’s grant of
5
summary judgment de novo. See Century Indem. Co. v. Nat’l Gypsum
Co. Settlement Trust (In re Nat’l Gypsum Co.), 208 F.3d 498, 503
(5th Cir.), cert. denied, --- S. Ct. ----, 2000 WL 943857 (2000).
III. THE $3.3 MILLION TRANSFER WAS
NOT FOR “NEW VALUE”
As a preliminary matter, we believe that the prior panel’s
decision in this case, that the $3.3 million transfer from
Southmark to the Parks Group was an avoidable preference, drives
the outcome of the instant appeal, even though it may not
technically control it. We therefore set aside our own views
about a proper outcome. First, we must determine whether Schulte
may avail itself of the preference defense contained in
§ 547(c)(1), which prevents a preferential transfer from being
avoided if the transfer was intended as, and in fact was, a
“contemporaneous exchange for new value given to the debtor.” 11
U.S.C. § 547(c)(1).
The bankruptcy court found that Schulte did not establish
the affirmative defense that the $3.3 million was a
contemporaneous exchange for new value because the execution of
the Settlement Agreement did not result in “new value” for
Southmark. The district court found that this conclusion was not
clearly erroneous.
To defend itself under § 547(c)(1), Schulte must
demonstrate “intent, contemporaneousness and new value.” Tyler
6
v. Swiss Am. Sec. (In re Lewellyn & Co.), 929 F.2d 424, 427 (8th
Cir. 1991); Cimmaron Oil Co. v. Cameron Consultants, Inc., 71
B.R. 1005, 1008 (Bankr. N.D. Tex. 1987). Whether intent,
contemporaneousness, and new value exist are questions of fact.
See Tyler, 929 F.2d at 427; Creditors’ Comm. v. Spada (In re
Spada), 903 F.2d 971, 975 (3d Cir. 1990). However, because the
question of new value was decided on summary judgment, the
bankruptcy court’s decision must be reviewed de novo. See Nat’l
Gypsum Co., 208 F.3d at 503.
Section 547(a) 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). This definition of new value is
exclusive. See Energy Coop., Inc. v. SOCAP Int’l, Ltd. (In re
Energy Coop., Inc.), 832 F.2d 997, 1003 (7th Cir. 1987); Cimmaron
Oil Co., 71 B.R. at 1009 (“Congress could have allowed courts to
expand upon the doctrine of new value by legislating that new
value includes certain transactions. Instead, Congress stated
what new value means, which should retard case law expansion.”).
Furthermore, because the avoidable transfer is set off only to
the extent that new value is given, the creditor is required to
demonstrate the “specific measure” of the new value received by
7
the debtor. See In re Spada, 903 F.2d at 976-77; Jet Fla. Sys.,
Inc. v. Am. Airlines, Inc. (In re Jet Fla. Sys., Inc.), 861 F.2d
1555, 1558 (11th Cir. 1988).
Schulte argues that by executing the Settlement Agreement,
the Parks Group furnished “new value” to Southmark in the form of
the termination of the proxy contest and the pending litigation,
support for Southmark’s board of director nominees, and an
agreement to refrain from nominating additional Parks Group
representatives. Based upon our review of the above authority,
however, we find that the bankruptcy court was correct in
concluding that no new value was exchanged for the $3.3 million.
The alleged “value” transferred to Southmark does not rise to the
level of “goods, services, or new credit” as required by the
exclusive definition of “new value.” There is no evidence in the
record that these acts added tangible value to the bankruptcy
estate so as to further the policy underlying this defense.1
Instead, these were, at most, intangible benefits that did not
enhance the worth of Southmark’s estate in real terms “‘so as to
offset the reduction in the estate that the transfer caused.’”
Miller v. Bodek & Rhodes, Inc. (In re Adelphia Automatic
1
The defense under § 547(c)(1) “‘is grounded in the
principle that the transfer of new value to the debtor will
offset the payments, and the debtor’s estate will not be depleted
to the detriment of other creditors.’” Gulf Oil Corp. v. Fuel Oil
Supply & Terminaling, Inc. (In re Fuel Oil Supply & Terminaling,
Inc.), 837 F.2d 224, 228 (5th Cir. 1988) (quoting A.I. Credit
Corp. v. Drabkin (In re Auto-Train Corp.), 49 B.R. 605, 612
(Bankr. D.C. 1985).
8
Sprinkler Co.), 184 B.R. 224, 228 (Bankr. E.D. Pa. 1995) (quoting
In re Aero-Fastener, Inc., 177 B.R. 120, 138 (Bankr. D. Mass.
1994)). Furthermore, Schulte has failed to provide a specific
measure of the value Southmark allegedly received.2 Accordingly,
we uphold the district court’s decision affirming the bankruptcy
court’s grant of partial summary judgment in favor of Southmark.
IV. SCHULTE WAS A SUBSEQUENT TRANSFEREE
LIABLE UNDER § 550(a)
Section 550(a) of the Bankruptcy Code provides that to the
extent a transfer is avoided, a trustee may recover the property
transferred, or if the court so orders, the value of such
property, from the initial transferee or any subsequent
transferee. See 11 U.S.C. § 550(a)(1), (2). Moreover,
§ 550(b)(1) provides that a subsequent transferee of a
preferential transfer cannot be liable to the debtor’s estate for
the return of such transfer to the extent the transferee took for
value, in good faith, and without knowledge of the voidability of
the transfer. See id. § 550(b)(1). In this case, we find that
the district court was correct in concluding that Schulte was a
2
Schulte contends that the minutes of an October 5, 1989
Southmark board meeting establish that “[t]o Southmark, damages
for [an alleged breach] of the Settlement Agreement [by the Parks
Group] were valued at in excess of $3.3 million.” We conclude
that this evidence falls far short of demonstrating a specific
measure of value. The subjective opinion of value to the debtor
does not satisfy the requirement that Schulte introduce specific
evidence that Southmark received $3.3 million in “goods,
services, or new credit.”
9
subsequent transferee of a portion of the $3.3 million transfer
between Southmark and the Parks Group. We also agree with the
district court that the bankruptcy court did not clearly err in
concluding that Schulte had sufficient knowledge of the
voidability of the $3.3 million transfer so as to lose the
protection of the § 550(b)(1) defense to liability.
A. Subsequent Transferee Liability Under § 550(a)
The district court declined to apply the “date of delivery”
rule employed by the bankruptcy court in its determination of
whether Schulte was a subsequent transferee of a portion of the
$3.3 million transfer. Instead, the district court chose to
apply the “date of honor” rule and to consider the several
interbank transfers as a whole to find that Schulte was a
subsequent transferee.
The Bankruptcy Code does not define “transferee.” See
Bonded Fin. Servs. Inc. v. European Am. Bank, 838 F.2d 890, 893
(7th Cir. 1988); see also Danning v. Miller (Bullion Reserve of
N. Am.), 922 F.2d 544, 548 (9th Cir. 1991). However, in
determining whether a person or entity is a subsequent transferee
under bankruptcy law, we agree with the district court that the
alleged “transferee” must have had dominion and control over the
funds in question. Cf. Sec. First Nat’l Bank v. Brunson (In re
Coutee), 984 F.2d 138, 140 (5th Cir. 1993) (adopting the
dominion-and-control test to determine whether a party was an
initial transferee for purposes of § 550(b)(1)). In making this
10
determination, courts are required to “‘step back and evaluate a
transaction in its entirety to make sure that their conclusions
are logical and equitable.’” Danning, 922 F.2d at 549 (quoting
Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848
F.2d 1196, 1199 (11th Cir. 1988)); see also In re Smith, 966 F.2d
1527, 1532 (7th Cir. 1992) (“We think that some answers to these
difficult questions may lie in considering the economic substance
of the transaction at issue.”).
Schulte contends that Southmark failed to demonstrate that
the $1 million that Schulte received from Byron in payment of its
legal fees could be traced to the $3.3 million as was required.
On May 30, 1989, Schulte’s bank, Citibank, presented Schulte’s $1
million check from Byron to Byron’s bank, Branch Bank and Trust
(BB&T). That same day, BB&T presented R&P’s check to R&P’s bank,
First Union. Schulte insists that the district court erred by
failing to determine which check cleared first and that Southmark
failed in its burden of proof to trace the funds in question to
establish Schulte’s subsequent transferee status. To do this,
Schulte wishes this court to ascertain the precise moment the
checks were honored in order to determine which entity is the
subsequent transferee of the funds. Schulte argues that because
Byron’s account was overdrawn when BB&T honored the Schulte
check, it was BB&T’s funds, not Southmark’s, that were used to
honor the check. Therefore, Schulte contends that it was
11
possible that Southmark’s money was expended to repay BB&T, not
Schulte, thus placing BB&T in the subsequent transferee position.
We find that our task here is to “‘look beyond the
particular transfers in question to the entire circumstance of
the transactions.’” Nordberg, 848 F.2d at 1199 (quoting In re
Chase & Sanborn Corp.), 813 F.2d 1177, 1181-82 (11th Cir. 1987).
The stipulated facts establish that Schulte received the $1
million check from Byron on May 26 and deposited it into its
Citibank account on that same day. Two substantial deposits were
placed in Byron’s BB&T account during the period from May 26 to
29--one deposit was the R&P check for $1 million, and the other
was a second R&P check for $975,000. The bankruptcy court found
that there were no other substantial deposits made to Byron’s
BB&T account between May 26 and 30. We agree with the district
court that the only funds credited to Byron’s BB&T account were
those from R&P, which came from Southmark. Moreover, we agree
that Byron intended to pay Schulte’s legal fees out of the funds
it received from R&P. Accordingly, the district court correctly
decided that Schulte was a subsequent transferee for the purpose
of § 550(a) liability.
B. Both Courts Correctly Determined that Schulte Had
Knowledge of the Voidability of the
$3.3 Million Transfer When It Received Payment
A subsequent transferee of an avoided transfer may defend
itself against § 550(a) liability if it demonstrates that it took
12
the transfer for value, in good faith, and without knowledge of
the voidability of the transfer avoided. See 11 U.S.C.
§ 550(b)(1). “Knowledge” means that “‘the transferee knew facts
that would lead a reasonable person to believe that the property
[transferred] was recoverable.’” CCEC Asset Mgmt. Corp. v.
Chemical Bank (In re Consol. Capital Equities Corp.), 175 B.R.
629, 638 (Bankr. N.D. Tex. 1994) (alteration in original)
(quoting 4 COLLIER ON BANKRUPTCY ¶ 550.03, at 550-17 (15th ed.
1992)). The bankruptcy court found that, although the “facts
present a close question,” Schulte “knew facts that would lead a
reasonable person to believe that the $3,000,000 transfer to the
Parks Group was recoverable”; therefore, Schulte did not take
“without knowledge.” The district court concluded that this
finding was not clearly erroneous. We agree.
Whether a defendant had knowledge of the voidability of a
transfer is a question of fact. See Leonard v. Mountainwest Fin.
Corp. (In re Whaley), 229 B.R. 767, 776 (Bankr. D. Minn. 1999)
(citing Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348,
1357 (8th Cir. 1995)). The record is replete with evidence
indicating knowledge on the part of Schulte that Southmark was on
the brink of bankruptcy. Although Schulte argues that the
Settlement Agreement between the Parks Group and Southmark placed
Southmark on the “road to financial recovery,” this is not enough
to offset the additional evidence in the record establishing that
Schulte had “reasonable cause to believe that a petition may be
13
filed.” Grove Peacock Plaza, Ltd. v. Resolution Trust Corp. (In
re Grove Peacock Plaza, Ltd.), 142 B.R. 506, 520 (Bankr. S.D.
Fla. 1992) (quoting 4 COLLIER ON BANKRUPTCY ¶ 550.03, at 550-10).
In the early days of May 1989, Schulte knew that Southmark
had issued a March 31, 1989 10-Q report showing that Southmark
was insolvent by $428 million. Moreover, media reports existed
prior to May 1989 discussing the potential for a Southmark
bankruptcy filing. We conclude that these and other findings by
the bankruptcy court were sufficient to support its decision that
Schulte had knowledge of the impending bankruptcy of Southmark.
Therefore, the district court was correct in finding that the
bankruptcy court did not clearly err in holding that Schulte
could not avail itself of the defense contained in § 550(b)(1).
V. SCHULTE MAY ASSERT A CLAIM UNDER § 502(h)
Section 502(h) provides:
A claim arising from the recovery of property under
section 522, 550, or 553 of this title shall be
determined, and shall be allowed under subsection (a),
(b), or (c) of this section, or disallowed under
subsection (d) or (e) of this section, the same as if
such claim had arisen before the date of the filing of
the petition.
11 U.S.C. § 502(h). The bankruptcy court found that it was
“axiomatic” that Schulte had a claim against Southmark’s estate.
Having a claim, however, does not of itself entitle Schulte to
share in the distribution of the assets of Southmark’s estate;
the claim must also be allowed. If the debtor objects to the
14
claim, such claim is “allowable” only to the extent that it is
enforceable against the debtor. See id. § 502(b)(1).
Southmark argues that Schulte does not have an enforceable
claim against the estate. Schulte contends that it was a third-
party beneficiary to the Settlement Agreement. Moreover, Schulte
asserts that it may “stand in the shoes” of the Parks Group and
recover under equitable subrogation. Under the theories of
intended beneficiary and equitable subrogation,3 the bankruptcy
court found that Schulte had an independent claim against the
Southmark estate. The district court reversed.
State law is applied to determine what claims are valid
under § 502. See Vanston Bondholders Protective Comm. v. Green,
329 U.S. 156, 161 (1946); Kellogg v. United States (In re W. Tex.
Mktg. Corp.), 54 F.3d 1194, 1196 (5th Cir. 1995). The Settlement
Agreement is governed by and construed according to New York
state law. After our review of New York state law and the
relevant evidence, we agree with the bankruptcy court’s
determination that Schulte was an intended beneficiary of the
Settlement Agreement.
Although a person is not a party to a contract, he or she
may sue for breach of that contract if he or she is an intended
beneficiary. Under New York state law, a third party may assert
3
We need not address whether Schulte has an independent
claim against Southmark under the doctrine of equitable
subrogation because our examination of whether Schulte was an
intended beneficiary is the dispositive inquiry.
15
a claim as an intended beneficiary if “(1) ‘no one other than the
third party can recover if the promisor breaches the contract’ or
(2) ‘the language of the contract otherwise clearly evidences an
intent to permit enforcement by the third party.’” Piccoli A/S
v. Calvin Klein Jeanswear Co., 19 F. Supp. 2d 157, 162 (S.D.N.Y.
1998) (quoting Fourth Ocean Putnam Corp. v. Interstate Wrecking
Co., 485 N.E.2d 208, 212 (N.Y. 1985)). Regarding the second
alternative, the third party need not be mentioned by name in the
agreement; however, the intent to benefit that party must be
shown on the face of the agreement. See id.; Cauff, Lippman &
Co. v. Apogee Fin. Group, Inc., 807 F. Supp. 1007, 1020 (S.D.N.Y.
1992) (“[T]he parties’ intention to benefit the third party must
be gleaned from the face of the contract[.]”). We agree with the
bankruptcy court that the parties to the Settlement Agreement
intended to benefit Schulte when executing the Agreement.
Schulte was specifically mentioned by name as the escrow
agent for the $3.3 million transfer. In addition, the bankruptcy
court found it was undisputed that Southmark was aware that
Schulte was the Parks Group’s legal counsel. Furthermore, the
Settlement Agreement stated that a portion of the $3.3 million
was to go to the payment of legal fees. Therefore, we agree that
this is sufficient evidence to provide Schulte with an allowable
claim against Southmark’s estate as an intended beneficiary. Cf.
Cauff, Lippman, 807 F. Supp. at 1020 (“New York courts have held
that where a broker is expressly identified in a contract which
16
references an obligation to pay a broker its commission, the
broker is entitled to recover as a third party beneficiary.”).
Accordingly, we conclude that the bankruptcy court was
correct in finding that Schulte has an enforceable claim against
Southmark’s bankruptcy estate as an intended beneficiary of the
Settlement Agreement. We reverse the district court on this
issue.
VI. CONCLUSION
For the foregoing reasons, the district court’s decision is
AFFIRMED in part and REVERSED in part, and the case is REMANDED
to the district court and thence to the bankruptcy court for a
determination of the exact amount of the allowable claim to
offset the recovery to Southmark. Each party shall bear its own
costs.
17