Unsecured Creditors Committee v. Community Bank, E

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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.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
1
“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).
2
Case: 12-60234 Document: 00512103546 Page: 3 Date Filed: 01/07/2013
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
3
Case: 12-60234 Document: 00512103546 Page: 4 Date Filed: 01/07/2013
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).
4
Case: 12-60234 Document: 00512103546 Page: 5 Date Filed: 01/07/2013
No. 12-60234
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—
5
Case: 12-60234 Document: 00512103546 Page: 6 Date Filed: 01/07/2013
No. 12-60234
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
6
Case: 12-60234 Document: 00512103546 Page: 7 Date Filed: 01/07/2013
No. 12-60234
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).
7
Case: 12-60234 Document: 00512103546 Page: 8 Date Filed: 01/07/2013
No. 12-60234
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 at184 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
8
Case: 12-60234 Document: 00512103546 Page: 9 Date Filed: 01/07/2013
No. 12-60234
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.
9