Southern Technical v. James W. Hood ( 1996 )


Menu:
  •                                   ___________
    No. 95-3832
    ___________
    Southern Technical College,            *
    Inc.,                                  *
    *
    Appellant,                  *
    * Appeals from the United States
    v.                                * District Court for the
    * Eastern District of Arkansas.
    James W. Hood,                         *
    *
    Appellee.                   *
    ___________
    No. 95-3833
    ___________
    Southern Technical College,           *
    Inc.,                                 *
    *
    Appellant,                 *
    *
    v.                               *
    *
    Graham Properties Partnership,        *
    *
    Appellee.                  *
    ___________
    Submitted:   April 10, 1996
    Filed:   July 25, 1996
    ___________
    Before BOWMAN, BEAM, and MURPHY, Circuit Judges.
    ___________
    BOWMAN, Circuit Judge.
    Southern Technical College (STC) filed a voluntary petition for
    bankruptcy reorganization on April 28, 1992.       These appeals arise out of
    adversary proceedings conducted in the context of the Chapter 11 bankruptcy
    proceedings.     STC leased nonresidential real property from both Graham
    Properties Partnership and James W. Hood.
    STC did not make its February 1992 rent payments on these properties until
    March 1992.     STC claims that it is entitled to recover the $16,900.67 late-
    rent payment to Graham and the $19,530 late-rent payment to Hood as
    avoidable preferential transfers under 11 U.S.C. § 547(b) (1994).           The
    Bankruptcy Court1 disagreed, concluding that while the transfers from STC
    to Graham and Hood were preferential transfers, STC could not recover them
    because they fell within the subsequent-advance-of-new-value exception, 11
    U.S.C. § 547(c)(4).       The District Court2 affirmed the grants of summary
    judgment by the Bankruptcy Court, and STC timely appeals.              We have
    jurisdiction over these appeals pursuant to 28 U.S.C. § 158(d) (1994), and
    we affirm the judgments of the District Court.
    In August 1987, STC began leasing property from Graham in Monroe,
    Louisiana.      STC paid a security deposit of $11,846.   After April 1989, the
    monthly lease payments were $16,900.67.      STC consistently made its payments
    during the first week of each month until January 1992, when Graham
    received the January 1992 check on January 17, 1992.        The February check,
    which is the subject of the litigation between STC and Graham, was dated
    February 28, 1992, and not received by Graham until March 2, 1992.          STC
    failed to pay any rent for March or April 1992.
    In May 1987, STC began leasing property from Wally Caldwell in
    Jackson, Mississippi, for $19,530 per month.         STC also paid a security
    deposit of $19,530.        Caldwell later assigned the lease to Hood.      STC
    typically made its monthly payments to Hood during the first week of each
    month.       The February 1992 check, which is the subject of the litigation
    between STC and Hood, was not received by
    1
    The Honorable Mary Davies Scott, United States Bankruptcy
    Judge for the Eastern District of Arkansas.
    2
    The Honorable Stephen M. Reasoner, Chief Judge, United States
    District Court for the Eastern District of Arkansas.
    -2-
    Hood until March 2, 1992.     STC failed to pay any rent for March or April
    1992.
    The Bankruptcy Court held that the two late-rent payments were
    preferential transfers within the meaning of § 547(b), and that conclusion
    is not challenged in these appeals.     The Bankruptcy Court also held that
    STC received subsequent new value from Graham and Hood in exchange for the
    late-rent payments, and thus STC could not recover those payments despite
    the fact that they were preferential transfers.     STC now argues that the
    Bankruptcy Court and the District Court erred when they held that Graham
    and Hood provided STC with new value after Graham and Hood received the
    preferential transfers.
    In bankruptcy cases, this court sits as a second court of review and
    applies the same standards as the district court.     United States v. Roso
    (In re Roso), 
    76 F.3d 179
    , 181 (8th Cir. 1996).      "We review de novo the
    granting of a summary judgment motion."    Maitland v. University of Minn.,
    
    43 F.3d 357
    , 360 (8th Cir. 1994).     If the record shows that there is no
    genuine issue of material fact and that the prevailing party is entitled
    to judgment as a matter of law, we will affirm the grant of summary
    judgment.    Id.; see also Fed. R. Civ. P. 56(c).
    STC argues that it received no new value within the meaning of
    § 547(c)(4) after its late-rent payments.    The Bankruptcy Court held that
    STC's continued use of the properties during March and April, without the
    payment of rent, constituted subsequent new value.                    Section
    547, in pertinent part, provides as follows:
    (c) The trustee may not avoid under this section a transfer --
    . . . .
    (4) to or for the benefit of a creditor, to the
    extent that, after such transfer, such creditor
    gave new value to or for the benefit of the debtor
    --
    -3-
    (A) not secured by an otherwise unavoidable security
    interest; and
    (B) on account of which new value the debtor did not
    make an otherwise unavoidable transfer to or for the
    benefit of such creditor . . . .
    The statute defines new value as "money or money's worth in goods,
    services, or new credit . . . ."   11 U.S.C. § 547(a)(2).   Section 547(c)(4)
    thus modifies the general rule that preferential transfers may be recovered
    by creating an exception for situations in which a creditor provides new
    value after the preferential transfer is made but before the filing of the
    debtor's bankruptcy petition.      The giving of new value alone is not
    sufficient for this exception to apply.    The debtor must not have paid for
    the new value by making "an otherwise unavoidable transfer to or for the
    benefit of the creditor."   
    Id. § 547(c)(4)(B).
      Additionally, the new value
    cannot be secured by "an otherwise unavoidable security interest."       
    Id. § 547(c)(4)(A).
      In this case, it is undisputed that STC has not paid for
    any new value that Graham and Hood have extended, but STC argues that its
    security deposits constitute an unavoidable security interest.       Such an
    interest could make § 547(c)(4) inapplicable to all or part of the
    preferential transfers at issue.   The first step in our inquiry, however,
    is to determine whether the rent-free use of the Graham and Hood properties
    constitutes new value.
    The purpose of § 547(c)(4) is "to encourage creditors to deal with
    troubled businesses in the hope of rehabilitation."      Kroh Bros. Dev. Co.
    v. Continental Constr. Eng'rs, Inc. (In re Kroh Bros. Dev. Co.), 
    930 F.2d 648
    , 651 (8th Cir. 1991).       As the Eleventh Circuit has noted, "[a]
    subsequent advance [of new value] is excepted because . . . a creditor who
    contributes new value in return for payments from the incipient bankrupt
    . . . should not later be deemed to have depleted the bankruptcy estate to
    the disadvantage of other creditors."     Charisma Inv. Co. v. Airport Sys.,
    Inc., (In re Jet Fla. Sys., Inc.), 
    841 F.2d 1082
    , 1083 (11th
    -4-
    Cir. 1988) (per curiam).       "Thus, the relevant inquiry under section
    547(c)(4) is whether the new value replenishes the estate."     Kroh 
    Bros., 930 F.2d at 652
    .
    STC argues that § 547(c)(4) does not apply to the late-rent payments
    because under the terms of STC's leases with Graham and Hood it had the
    right to occupy the properties in March and April even though it had not
    paid rent.   Graham and Hood, in response, contend that STC's argument
    misses the point.   According to Graham and Hood, STC's right to remain in
    possession of the property is irrelevant.    Instead, they argue that STC's
    actual use of the property for almost two months without paying any rent
    should be the focus of the § 547(c)(4) inquiry.   They contend that by using
    the leased properties during March and April, STC received new value for
    which it did not pay.
    We are persuaded by the arguments advanced by Graham and Hood.    Each
    month, a lessee receives new value from its lessor when it continues to use
    and occupy the rented property.     STC does not and could not dispute the
    fact that the continued use of the two leased premises enabled it to
    continue operations in Monroe, Louisiana, and Jackson, Mississippi, during
    March and April 1992.    Graham and Hood did not provide STC with money, but
    they certainly provided STC with "money's worth."       This new value, two
    rent-free months, facilitated STC's continued operation.         The income
    generated thereby replenished the estate, increased STC's chances of
    survival, and benefitted all of STC's creditors.       As the two rent-free
    months have not been paid for by STC, we conclude that Graham and Hood fit
    within the subsequent-advance exception of § 547(c)(4) and therefore STC
    cannot avoid the preferential transfers it made to them.
    Our decision is supported by the Eleventh Circuit's decision in the
    somewhat factually similar case of In re Jet Florida System, Inc., 
    841 F.2d 1082
    (11th Cir. 1988).    In that case the court of
    -5-
    appeals held that the lessee-debtor had not received new value, but only
    because the bankruptcy court found that the lessee-debtor "had made no use
    of the rental property throughout the preference period."           
    Id. at 1084.
    The court's reasoning, however, leads to the inescapable conclusion that
    continued use of leased property can constitute new value.        The subsequent-
    advance exception promotes the preference policies of the Bankruptcy Code
    "because its utility is limited to the extent to which the estate was
    enhanced by the creditor's subsequent advances during the preference
    period."     
    Id. at 1083-84
    (quoting 4 Collier on Bankruptcy, ¶ 547.12, at
    547-49 n.5 (15th ed. 1987)).       The court explained that
    courts have generally required a transfer which fits within the
    subsequent advance exception to provide the debtor with a
    material benefit. This focus upon whether a material benefit
    has been conferred has been explained in terms of insulating a
    preferential transfer to a particular creditor to the extent
    that that creditor thereafter replenishes the estate. In such
    a situation, the creditor pool would not be harmed to the
    extent of the offset and the fundamental goal of equality of
    distribution would be preserved.
    
    Id. at 1084
    (citations omitted).       We think the present case presents just
    such a situation.    Graham and Hood provided STC with the leased properties
    after the preferential transfer and before the filing of the bankruptcy
    petition.    STC did not pay for the use of the properties.        The rent-free
    use of the properties conferred a material benefit on STC:        the ability to
    continue operations on and generate income from the leased properties
    between the date of the preferential transfer and the filing of the
    bankruptcy petition.        Thus Graham and Hood replenished the bankruptcy
    estate by giving STC rent-free use of the leased properties.        Accordingly,
    we hold that STC may not avoid the preferential transfer to the extent that
    the   new   value--nearly    two   rent-free   months--remains   unpaid   for   and
    unsecured.    See   11 U.S.C. § 547(c)(4).      STC clearly
    -6-
    derived a material benefit from the new value advanced by Graham and Hood.
    Even though we have concluded that Graham and Hood provided new value
    to STC, our inquiry is not at an end.   In order to fit within the exception
    carved out by § 547(c)(4), a preferential transfer must be both unpaid for
    and unsecured.   In this part of the opinion, we address the Graham and Hood
    properties separately.   In each case, if the new value conferred upon STC
    by the lessor, consisting of close to two months of free rent, exceeded the
    amount of the February-rent payment plus the security deposit,3 then the
    amount of the February-rent payment is not recoverable as a preference.
    With respect to the property leased from Graham, STC argues that the
    new value provided by Graham does not exceed the amount of the security
    deposit held by Graham plus the amount of the preferential transfer.    When
    STC entered into the lease agreement with Graham, STC paid Graham a
    security deposit of $11,846.    In March and April 1992, the monthly rent
    payment was $16,900.67, and the Bankruptcy Court did not clearly err when
    it used this figure as the basis for its calculation of new value.     Graham
    received the preferential payment at issue on March 2, 1992, and STC filed
    its bankruptcy petition on April 28, 1992.        Only new value that was
    extended between these two dates may be considered for purposes of
    § 547(c)(4).   Thus the new value provided is equal to 29/31 of the rent due
    for March plus 28/30 of the rent due for April, which in turn equals
    $31,584.86.    This amount exceeds the amount of the preferential transfer
    plus the security deposit, $28,745.67 ($16,900.67 plus $11,846).     Thus the
    Bankruptcy Court correctly concluded that STC could not avoid any part of
    the preferential transfer to Graham.
    3
    It is undisputed that the security deposits paid by STC
    constitute unavoidable security interests under § 547(c)(4)(A).
    -7-
    STC makes the same argument with respect to the property leased from
    Hood.       STC argues that it may recover a portion of the preferential
    transfer to Hood because the new value provided does not exceed the amount
    of the preferential payment plus the security deposit.        STC, however,
    failed to make this argument to the Bankruptcy Court.4     Rather, STC made
    the all-or-nothing argument that the new value was secured by the security
    deposits and that the statute did not differentiate between secured and
    undersecured new value; thus, according to STC, the entire amount of any
    new value received was secured and the preferential transfers did not fall
    within the subsequent-advance exception.     Memorandum Brief in Support of
    Response to Defendant's Motion for Summary Judgment at 9-10, STC v. Hood
    (In re STC), No. 94-4063 (Bankr. E.D. Ark. March 8, 1995) (brief filed).
    The argument advanced by STC in this Court was raised for the first time
    on appeal to the District Court and is not properly before us.           We
    therefore decline to consider it.     See Abbott Bank-Thedford v. Hanna (In
    re Hanna), 
    912 F.2d 945
    , 948 (8th Cir. 1990).
    In sum, we hold that the Bankruptcy Court properly concluded as a
    matter of law that STC could not avoid the preferential transfers to Graham
    and Hood because the undisputed material facts established that the STC
    received unsecured new value for which it had not paid.        We therefore
    affirm the judgments of the District Court affirming the judgments of the
    Bankruptcy Court.
    4
    In the litigation with Graham in the Bankruptcy Court, STC
    raised the argument that the new value did not exceed the sum of
    the late rent and the security deposit during the proceedings on
    Graham's motion to amend or alter the judgment. Throughout those
    proceedings, a summary judgment motion was pending in the
    litigation with Hood.      The Bankruptcy Court granted summary
    judgment in favor of Hood only after it had already decided the
    issue of whether the new value given by Graham exceeded the amount
    of the security deposit plus the amount of the preferential
    transfer, and STC had not raised the issue in its briefs in
    opposition to Hood's motion for summary judgment. The procedural
    differences between these two cases account for STC's failure to
    raise the issue in one case but not the other.
    -8-
    A true copy.
    Attest:
    CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
    -9-