IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
______________________________
No. 96-20592
______________________________
In the Matter of: TRANS MARKETING HOUSTON, INC.,
Debtor,
JOHN M. WEAVER,
LIQUIDATING TRUSTEE,
Appellee/Cross Appellant,
versus
AQUILA ENERGY MARKETING
CORPORATION,
Appellant/Cross Appellee.
____________________________________________
Appeal From the United States District Court
for the Southern District of Texas
(H-95-4785)
____________________________________________
May 30, 1997
Before GARWOOD, WIENER, and DEMOSS, Circuit Judges.
WIENER, Circuit Judge:*
In this appeal, which arises from a preference avoidance
*
Pursuant to Local Rule 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this opinion should not be published and is not precedent except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 Local Rule 47.5.4.
action in bankruptcy, both Appellant/Cross Appellee Aquila Energy
Marketing Corporation (“Aquila”) and Appellee/Cross Appellant John
Weaver, Liquidating Trustee of Trans Marketing Houston, Inc. (“the
Trustee”) seek reversal of a decision of the district court that
reversed the bankruptcy court. We affirm the district court,
holding that (1) Aquila’s service of a garnishment writ constituted
a preferential transfer under 11 U.S.C. § 547(b), and (2) the
Trustee’s avoidance of that writ benefits the estate within the
meaning of 11 U.S.C. § 550(a).
I
FACTS AND PROCEEDINGS
The Debtor, Trans Marketing Houston, Inc. (“TMHI” or “the
debtor”), was engaged in the petrochemical trading business.
Beginning in 1986, TMHI’s operations were largely financed by
Banque Paribas, a French bank. During 1992 and 1993, Banque
Paribas extended $65 million in credit to TMHI through an ongoing
financing arrangement. In January 1993, the bank advanced an
additional $3 million as a working capital loan for general
corporate purposes. Banque Paribas held a security interest in
essentially all of TMHI’s assets —— cash, inventory, accounts
receivable, goods, furniture, equipment and notes receivable ——
including among other things funds deposited in two accounts with
Banque Paribas. Significantly, these two accounts were
contractually subject to Banque Paribas’ dominion and control:
2
TMHI had no right to withdraw the funds on deposit until all of its
debts to Banque Paribas were paid.
Aquila sold natural gas to TMHI on open account in early 1992.
TMHI failed to pay for the gas, so on March 17, 1993, Aquila sued
in Texas state court to collect approximately $1.83 million.
(Aquila later amended its petition to assert a claim of
approximately $3.4 million.) A week later, on March 23, 1993,
Aquila filed an application for a prejudgment writ of garnishment
against TMHI in the amount of $1,832,538.12. As TMHI had funds on
deposit at Banque Paribas in excess of the garnished amount, Aquila
had the writ served on the bank on March 25, 1993.
A week after that, on April 1, 1993, three significant events
transpired. First, the state district court denied TMHI’s motion
to dissolve the writ. Second, despite never having declared any of
TMHI’s loans to be in default and never having accelerated any of
TMHI’s loans, Banque Paribas “offset” the debts TMHI owed it
against all of TMHI’s approximately $4 million in funds on deposit
there, including the funds putatively garnished by Aquila. Third,
TMHI was advised by Banque Paribas that it would not finance any
future operations and would only consider making a short term
debtor-in-possession loan for the limited purpose of facilitating
the unwinding of TMHI’s business. The loss of Banque Paribas’
financing left TMHI powerless to continue operations. On April 16,
1993, it filed a chapter 11 bankruptcy petition.
Following the commencement of the bankruptcy case, Aquila and
3
Banque Paribas each timely filed a proof of claim. Aquila asserted
a secured claim of approximately $1.83 million (the amount of the
garnishment writ) and an unsecured claim of approximately $1.6
million. Banque Paribas asserted a secured claim of approximately
$22 million. Although other documentary evidence submitted to the
bankruptcy court indicated that Banque Paribas had a secured claim
of approximately $18.7 million on the date of the bankruptcy
petition, the court ultimately found that as of March 31, 1993 (the
day before the state court denied TMHI’s motion to dissolve the
garnishment writ and also the day before Banque Paribas’ setoff)
Banque Paribas held a secured claim of approximately $22 million,
which included a contingent claim of $1.83 million for the amount
garnished by Aquila. In addition, even though the Trustee asserted
that the value of TMHI’s assets claimed by Banque Paribas as
collateral was approximately $34 million on the date of the
bankruptcy petition, the bankruptcy court found that as of March
31, 1993 TMHI owned approximately $48.7 million in assets of which
all but some $600,000 were claimed by Banque Paribas as its
collateral.1 In short, whether measured by its own assertions or
by the findings of the bankruptcy court, Banque Paribas was
1
During trial in the bankruptcy court, the Trustee asserted,
based upon a liquidation analysis of TMHI’s assets, that the value
of those assets was approximately $34 million as of April 15, 1993.
The bankruptcy court disallowed the Trustee’s liquidation
adjustments, however, and added back to asset values the values of
prepaid assets and expenses, as well as the full book value of
TMHI’s furniture, fixtures, and equipment.
4
substantially oversecured both at the time of its setoff against
TMHI’s funds on deposit and at the time the debtor’s bankruptcy
petition was filed.
The instant adversary proceeding was initiated by TMHI, as
debtor-in-possession, to avoid Aquila’s state court garnishment
writ as a preference under 11 U.S.C. § 547. After confirmation of
a Liquidating Plan of Reorganization (the Plan), the Trustee was
substituted for TMHI as plaintiff in the avoidance action.
The Plan contained several provisions relevant to this
avoidance action. First, it enjoined Aquila from prosecuting the
state court garnishment action against TMHI and Banque Paribas, as
well as “any other action arising therefrom or in connection
therewith” during the pendency of this avoidance action. Second,
it released Banque Paribas from any liabilities to TMHI or the
estate, including any arising from its April 1, 1993, setoff of
TMHI’s funds on deposit. Third, it obligated the Trustee to
continue to prosecute this avoidance action against Aquila and
specified that if the Trustee abandoned the action or settled with
Aquila without Banque Paribas’ written consent, the bank’s allowed
secured claim would be increased by $1.83 million. Finally, it
provided that in the event Banque Paribas should incur any
financial obligation to Aquila by virtue of Aquila’s continued
prosecution of a state court action based on the bank’s setoff of
the garnished funds, Banque Paribas would acquire an additional
unsecured claim in the amount of its loss, not to exceed $1.83
5
million, plus attorneys’ fees not to exceed $200,000; Aquila’s
claim, in turn, would be reduced by the amount of any payment it
might receive from Banque Paribas.
Aquila objected to confirmation, complaining that (1) the Plan
does not generally provide a fair settlement for the estate,
(2) the injunction prohibiting Aquila from pursuing Banque Paribas
in state court is improper, and (3) the Plan does not treat Aquila
as a secured creditor. Aquila’s appeals of the confirmation of the
Plan were dismissed by the district court and this court solely on
the grounds of mootness, so the merits of Aquila’s objections to
confirmation were never reached on appeal.
In the instant avoidance action, which the Trustee —— pursuant
to the Plan —— continued to prosecute against Aquila, the
bankruptcy court acknowledged the undisputed fact that Aquila was
a creditor to whom TMHI owed an antecedent debt,2 and determined,
after extensive fact finding, that TMHI was insolvent at the time
Aquila’s garnishment writ was served on Banque Paribas.3 The
bankruptcy court ultimately found, however, that as Banque Paribas
had setoff TMHI’s account against the unpaid balance of its loans
after Aquila’s writ of garnishment was served but before the
bankruptcy petition was filed, Aquila had not received a benefit as
a creditor of TMHI, and thus would not receive more than it would
2
See 11 U.S.C. § 547(b)(1) & (2).
3
See 11 U.S.C. § 547(b)(3).
6
have received if this were a hypothetical chapter 7 case and the
garnishment writ had never been served.4 Therefore, concluded the
court, Aquila’s writ could not be avoided as a preferential
transfer under § 547(b).
In addition, the bankruptcy court ruled that the Trustee had
failed to demonstrate, as required under 11 U.S.C. § 550(a), that
avoidance of the writ would produce some “benefit to the estate,”
i.e., to unsecured creditors. This is so, reasoned the court,
because (1) it was Banque Paribas’ pre-petition set-off —— not
Aquila’s garnishment —— that removed the erstwhile garnished funds
from the estate, leaving as the only real dispute the one between
Aquila and Banque Paribas, two non-debtors; and (2) under the Plan,
either Aquila or Banque Paribas —— but not both —— will have an
unsecured claim for $1.83 million of those funds. The court
expressed the opinion that any other purported benefit —— such as
a speculative, de minimis savings of $200,000 in attorneys fees
that Banque Paribas might run up against the estate as an unsecured
claim in defending a state court action brought by Aquila based on
the setoff —— would flow from the “machinations of the confirmation
plan” and not from a successful prosecution of this avoidance
action.
In the district court, each party appealed different elements
4
See 11 U.S.C. § 547(b)(5).
7
of the bankruptcy court’s decision.5 The district court first
reversed the bankruptcy court’s ruling that a preferential transfer
had not occurred under § 547(b). It reached this initial
conclusion by ruling, as a threshold matter, that notwithstanding
the bank’s pre-petition setoff a transfer of property did in fact
take place —— i.e., “a garnishor’s interest” was acquired —— at the
moment the writ of garnishment was served, as the “garnishor’s
status [was] converted from unsecured creditor to secured
creditor.”6 The district court found that the resulting “shift in
positions” from completely unsecured to potentially secured
creditor, effectuated by service of the writ, benefits Aquila and
may allow it to receive more (a greater percentage of its claim)
than it otherwise would have if the transfer had not occurred, thus
5
The district court opinion was published sub nom Weaver v.
Aquila Energy Marketing Corp., 196 B.R. 945 (S.D. Tex. 1996).
6
Id. at 953. In reaching this conclusion, the court relied
primarily on this court’s holding in In re Latham, 823 F.2d 108,
110 (5th Cir. 1987) (a transfer of property by garnishment occurs
at the moment of service) and declined to follow a recent Seventh
Circuit decision that calls our holding in In re Latham into doubt.
See In re Freedom Group, 50 F.3d 408, 412 (7th Cir. 1995)
(garnishment does not transfer money or other property, for
purposes of § 547(b), until a final order of garnishment is
issued). If we were to apply In re Freedom Group’s rule to the
facts of this case, we would be compelled to conclude that there
never was a completed transfer of money or other property during
the 90 day pre-petition preferential transfer period.
Consequently, the Trustee would have nothing to avoid, and Aquila
would not have a secured claim. We are not prepared to go as far
in this appeal as did the Seventh Circuit in In re Freedom Group
regarding the intricacies of applicable state garnishment law. It
suffices that we need not do so, and that we need not dwell long on
that case or distinguish it from the one before us.
8
satisfying § 547(b)(5).
Although the district court went on to agree with the
bankruptcy court that the Trustee must also satisfy the “benefit to
the estate” test under § 550(a) if the Trustee is to avoid the
preferential transfer represented by the garnishment writ,7 it
ultimately reversed the bankruptcy court’s finding that the
avoidance action does not benefit the estate. The district court
concluded that (1) even a relatively minor benefit to the estate ——
such as the Plan’s provision for a potential savings of up to
$200,000 in attorneys’ fees that would be charged to the estate
should this avoidance action spare Banque Paribas from having to
defend a state court action arising from its setoff —— cannot be
disregarded, and (2) the bankruptcy court itself had approved the
Plan, indicating the presence of some “benefit to the estate” in
the Plan’s provision obligating the Trustee to prosecute this
action.8
Finally, the district court rejected the five propositions
raised by Aquila on cross-appeal. First, it affirmed the
bankruptcy court’s factual finding that TMHI was insolvent on the
date the writ of garnishment was served. Second, it rejected a
judicial estoppel claim (which is not before this court). Third,
the court rejected Aquila’s argument that the bankruptcy court
7
Id. at 954-55.
8
Id. at 955-57.
9
erred by failing to dissolve the Plan, at least to the extent that
the Plan prohibits Aquila from suing Bank Paribas, noting, inter
alia, that the stay was only temporary and that only Aquila’s writ
of garnishment claim, not its conversion cause of action against
the bank, is subject to the bankruptcy court’s jurisdiction.9
Fourth, it rejected a standing claim (which is not before this
court). Fifth, the district court affirmed the bankruptcy court’s
denial of Aquila’s request for a jury trial.
II
ANALYSIS
A. Standard of Review
We review a bankruptcy court’s findings of fact under a
clearly erroneous standard and decide issues of law de novo.10 In
this appeal, the only factual findings subject to review for clear
error concern whether the debtor was insolvent at the time of the
purported transfer. The remainder of our review focuses on legal
issues and is therefore entirely plenary.
B. Preferential Transfer under § 547(b)
Section 547(b) of the Bankruptcy Code empowers a trustee to
avoid “any transfer of an interest of the debtor in property” to a
9
This latter assertion is facially contradicted by the Plan’s
provision enjoining not only the state court garnishment action
against TMHI and Banque Paribas, but also “any other action arising
therefrom or in connection therewith.”
10
In re McDaniel, 70 F.3d 841, 842-43 (5th Cir. 1995).
10
non-insider only if each of the following five conditions is
present: The transfer was made (1) to or for the benefit of a
creditor; (2) for or on account of an antecedent debt; (3) while
the debtor was insolvent; (4) on or within 90 days preceding the
filing of the bankruptcy petition; (5) to enable the creditor to
receive more than he otherwise would have if the case were a
hypothetical chapter 7 proceeding and the transfer had not been
made.11 In this appeal, Aquila first argues that the district court
erred in finding that conditions (3) and (5) had been established
by the Trustee.
In regard to whether TMHI as debtor was insolvent at the time
when the purported preferential transfer occurred, Aquila’s
principal contention is that the bankruptcy court erred in not
assigning a premium or “going concern” value to TMHI as of March
25, 1993, the date the garnishment writ was served. As the
bankruptcy court observed, however, TMHI was already in a “state of
wreck” even before Banque Paribas exercised its setoff against
TMHI’s accounts and cut off further financing. That in turn made
it improbable that any person or entity would pay a premium to
purchase TMHI. Moreover, the bankruptcy court’s findings on the
state of TMHI’s financial condition are detailed and well reasoned.
The court listened to extensive testimony from financial experts
and gave Aquila the benefit of the doubt on a number of accounting
11
See 11 U.S.C. § 547(b).
11
disputes, but still found that TMHI was insolvent on the date of
service of the garnishment writ. Like the district court, we are
convinced that the bankruptcy court did not clearly err in
determining that TMHI was insolvent on the date of service of the
garnishment writ.
The issue of insolvency aside, § 547(b)’s fifth condition ——
that a transfer occurred that enables Aquila to receive more than
it would have if no transfer had occurred and this had been a
hypothetical chapter 7 case —— presents a point that has
consistently been one of the two principal thrusts of Aquila’s
argument in this litigation. Indeed, the bankruptcy court agreed
with the gist of Aquila’s basic contention that it had not received
and never would receive more from the debtor’s estate by virtue of
the garnishment writ than it would have received had the writ not
been served, because, given Banque Paribas’s pre-petition set-off,
the debtor’s estate no longer contained any property to which
Aquila’s garnishment lien could have attached at the commencement
of the bankruptcy case. In other words, by virtue of its setoff,
Banque Paribas, not the debtor, controlled or owned the funds to
which Aquila’s garnishment writ purportedly attached at the time of
the commencement of the bankruptcy case. It follows, Aquila has
argued and the bankruptcy court has agreed, that any funds Aquila
might receive as a result of the writ will come from Banque
Paribas, a non-debtor, not from the estate; and, therefore, the
Trustee cannot demonstrate the presence of the fifth element of
12
§ 547(b).
The Trustee responds to this contention with alternative
arguments. First and foremost, he asserts that Banque Paribas’
pre-petition setoff of the debtor’s funds on deposit was void
because it violated Texas’ garnishment law. In this vein, the
Trustee makes several observations about Texas garnishment law.
First, he notes that service of a garnishment writ effectively
impounds garnished funds in the hands of a garnishee and thus turns
the garnishee into an officer of or receiver for the court.12 The
Trustee next observes that Tex. Civ. Prac. & Rem. Code § 63.003
provides:
(a) After service of a writ of garnishment, the
garnishee may not deliver any effects or pay any
debt to the defendant . . .
(b) A payment, delivery, sale, or transfer made in
violation of Subsection (a) is void as to the
amount of the debt, effects, shares or interest
necessary to satisfy the plaintiff’s demands.
Finally, he points out simply that, in a garnishment proceeding, a
garnishor may attack transactions between debtors and garnishees.13
Accordingly, reasons the Trustee, even though Banque Paribas may
12
See Chandler v. El Paso Nat’l Bank, 589 S.W.2d 832, 836
(Tex. Civ. App.--El Paso 1979) (no writ); Intercontinental
Terminals v. Hollywood Marine, 630 S.W.2d 861, 863 (Tex. Civ. App.-
- Houston [1st Dist.] 1982) (writ ref’d n.r.e.).
13
See Englert v. Englert, 881 S.W.2d 517, 518 (Tex. App.--
Amarillo 1994) (no writ); see also Cohen v. Advance Imports, Inc.,
597 S.W.2d 449, 452 (Tex. Civ. App.--Dallas 1980) (writ ref’d
n.r.e.) (after service of garnishment writ, garnishee acts at his
peril in delivering goods or paying money to defendant in main suit
and, if he does so, may be liable to garnishor for conversion).
13
have had the right to setoff the funds in TMHI’s account, the
bank’s exercise of that right after service of the garnishment writ
contravened § 63.003(a)&(b) and was otherwise unlawful to the
extent of the amount of the garnishment writ. As the set-off was
void, the Trustee continues, Banque Paribas still owed the
deposited funds to TMHI’s bankruptcy estate, and the estate, in
turn, retained a property interest in those funds, subject to the
writ of garnishment. It follows, insists the Trustee, that
Aquila’s garnishment writ still provided it with a viable lien
against the debtor’s property (the garnished funds) at the time
that the bankruptcy petition was filed, albeit that property was in
the hands of Banque Paribas. Thus, the Trustee concludes, Aquila’s
garnishment writ still has value and, if not avoided, will have the
potentiality of permitting Aquila to receive more than it would if
the writ not been served and this were a hypothetical chapter 7
case. As such, the crucial fifth element for avoiding the
garnishment writ as a preferential transfer pursuant to § 547(b) is
satisfied.14
14
Indisputably, transfers that do in fact change the status
of a creditor from an unsecured to a secured one are preferential,
when, as here, evidence indicates that no unsecured creditor would
receive full payment on liquidation. See In re Crisswell, 102 F.3d
1411, 1415 (5th Cir. 1997) (“the fixing of a non-statutory judicial
lien . . . is avoidable as a preferential ‘transfer’”); In re
Hagen, 922 F.2d 742, 745 (11th Cir. 1991) (“the creation of a lien
in favor of a previously unsecured creditor is a transfer” that
“satisfies the fifth element of Section 547(b)”); Porter v. Yukon
Nat’l Bank, 866 F.2d 355, 359 (10th Cir. 1989)(change in priority
status is sufficient to establish the last element of a
preferential transfer); In re Enserv Co., Inc., 64 B.R. 519, 521
14
Although we harbor serious doubts about the validity of
Trustee’s claim that Banque Paribas’ setoff was void or in any way
in contravention of Texas law,15 we must acknowledge that Aquila has
espoused the same position in supplemental briefing requested by
this court, asserting that Banque Paribas’ setoff was improper and
(B.A.P. 9th Cir. 1986), aff’d, 813 F.2d 1230 (9th Cir. 1987)
(levy on bank account to satisfy judgment is transfer that can be
a preference).
15
We observe, as Banque Paribas has argued in its post-
argument amicus brief, that a garnishor can only enforce against a
bank, as garnishee, such rights as the debtor himself might have
against that bank. See Rome Industries, Inc. v. Instel Southwest,
683 S.W.2d 777, 779 (Tex. App.--Houston (14th Dist.) 1984) (writ
ref’d n.r.e.); Bullock v. Foster Cathead Co., 631 S.W.2d 208, 211
(Tex. App.--Corpus Christi 1982) (no writ); Beggs v. Fite, 106
S.W.2d 1039, 1042 (Tex. 1937). In other words, the garnishor
merely steps into the shoes of its debtor and can never stand in a
better position than the debtor relative to the funds on deposit.
Farmers & Merchants State Bank of Teague v. Setzer, 185 S.W. 596,
597 (Tex. Civ. App.--Dallas 1916) (no writ). Relying on this
fundamental principle of garnishment law, Texas courts have
expressly held on several occasions that when a bank possesses a
right of set-off against funds garnished by a creditor of a
depositor, the bank may immediately apply the funds on deposit to
the depositor’s indebtedness then due to the bank. See id.; Gill
v. Oak Cliff Bank & Trust Co., 331 S.W.2d 832, 834 (Tex. Civ. App.-
-Amarillo 1959) (no writ); Sunbelt Savings F.S.B. v. Bank One,
Texas N.A., 816 S.W.2d 106, 110 (Tex. App.--Dallas 1991), rev’d on
other grounds, 824 S.W.2d 557 (Tex. 1992) (set-off clearly
available as a defense to garnishment action if bank can establish
elements). In fact, a bank’s failure so to act may even be
considered a waiver of its set-off rights. Holt’s Sporting Goods
Co. of Lubbock v. American Nat’l Bank of Amarillo, 400 S.W.2d 943,
945 (Tex. Civ. App.--Amarillo 1966) (writ dism’d). Finally, a bank
will have a right to setoff a debtor’s indebtedness against funds
on deposit when (1) the debt matures, (2) the debtor is insolvent,
or (3) the bank has a contractual right to accelerate the debt.
Baldwin v. Peoples Nat’l Bank of Tyler, 327 S.W.2d 616, 619-620
(Tex. Civ. App.--Texarkana 1959) (no writ). In this instance
conditions (2) and (3) were arguably present, so it appears that
Banque Paribas’ set-off action may well have been justified and
lawful.
15
in contravention of Aquila’s superior rights to the deposited funds
by virtue of the garnishment writ.16 We also recognize that Aquila
has no choice but to champion this position if it hopes to maintain
a basis for the conversion claim it will pursue in state court once
the injunction issued under the Plan is lifted.17 The identicalness
of the Trustee’s and Aquila’s conclusions on this issue leads us to
conclude, for purposes of this avoidance action,18 that the
garnishment writ (1) created a lien at the moment it was served
16
Aquila argues principally that Banque Paribas’ setoff was
improper under Bandy v. First State Bank Overton, 835 S.W.2d 609,
(Tex. 1992), in which the Texas Supreme Court (1) reiterated the
general rule that a bank may equitably setoff a debtor’s deposited
funds against a debtor’s indebtedness when either the debt has
matured or the debtor is insolvent, Id. at 619, (2) declared that
“a debtor is not insolvent, as to a particular creditor, if the
debtor ‘holds property against which the creditor may enforce a
lien for the payment of the debt,’” Id. at 621 (citing Smith v.
Ojerholm, 53 S.W. 341, 342 (Tex. 1889)), but (3) ultimately held
that a bank’s right to setoff an unmatured claim against a deceased
customer’s deposits exists whether or not the decedent’s estate is
solvent. Id. at 622. Whether Bandy’s second proposition —— that
a debtor is not insolvent, as to a creditor, if that creditor is
oversecured —— applies beyond the narrow factual circumstances of
that case or the 19th century Texas precedent from which it derived
is a question we need not resolve.
17
Under Texas law, conversion is defined as “the wrongful
exercise of dominion and control over another’s property in denial
of or inconsistent with his rights.” Bandy, 835 S.W.2d at 622
(quoting Tripp Village Joint Venture v. MBank Lincoln Centre, N.A.,
774 S.W.2d 746, 750 (Tex. Civ. App.--Dallas 1989) (writ denied));
see also Estate of Townes v. Townes, 867 S.W.2d 414, 4119-20 (Tex.
App.--Houston [14th Dist..] 1993) (writ denied) (an action for
conversion of money will lie when the money is, inter alia, “not
the subject of a title claim by the keeper”) (citation omitted).
18
This part of our opinion is not intended to preclude a Texas
court, once this avoidance action is final, from interpreting Texas
garnishment law in the event that Aquila should prosecute any state
court action arising from Banque Paribas’ setoff.
16
that has the potential of enabling Aquila to receive more than it
would have had the writ not been served; (2) has retained value to
Aquila because Banque Paribas’ setoff was putatively void or
improper under Texas law; and (3) is therefore subject to avoidance
as a preference under § 547(b).19
Predictably, the Trustee’s inconsistent alternative argument
on this issue, replicated by Banque Paribas in its amicus argument
to this court, takes as its premise the opposite view of the
propriety of Banque Paribas’ setoff and reasons that if the setoff
was proper, rendering Aquila’s garnishment writ valueless, then
Aquila has no basis on which to assert a secured claim against the
debtor’s bankruptcy estate or a conversion claim against Banque
Paribas in state court. In short, if the setoff was proper,
concludes the Trustee, then Aquila is left in the same position in
which it would find itself if the setoff were void —— it would have
only an unsecured claim against the estate for the garnished
amount. We fail to discern a flaw in this reasoning and therefore
find the Trustee’s argument compelling.
C. Benefit to the Estate under § 550(a)
Both the bankruptcy and district courts recognized that for
the Trustee to prevail in this preference avoidance action he had
to demonstrate not only that service of the garnishment writ
created a security interest that qualified as an avoidable
19
See supra note 14.
17
preference under §547(b), but also that avoiding the writ would
result in a recovery “for the benefit of the estate” under
§ 550(a),20 that is, a recovery “for the benefit of all unsecured
creditors.”21 The district court expressly rejected the Trustee’s
textual and structural arguments that § 550(a)’s “benefit to the
estate” requirement has no nexus with or bearing on a trustee’s
independent avoidance powers when an avoidance action under § 547
is not coupled with an affirmative attempt under the aegis of
§ 550(a) to recover “property transferred” or “the value of such
property,” but instead simply seeks to avoid a non-possessory
judicial lien. Although we agree with the district court’s
thoughtful explanation of why the “benefit of the estate” test
still must be met in a §547 avoidance action like the one before
us,22 we conclude that here such statutory construction dispute is
20
11 U.S.C. § 550(a) provides:
Except as otherwise provided in this section, to the
extent that a transfer is avoided under section . . . 547
. . . the trustee may recover, for the benefit of the
estate, the property transferred, or, if the court so
orders, the value of such property from——
(1) the initial transferee of such transfer or the
entity for whose benefit such transferee was made,
or;
(2) any immediate or mediate transferee of such
initial transferee (emphasis added).
21
5 Collier on Bankruptcy (Lawrence P. King ed.) ¶ 550.02[2],
at 550-6 (15th ed. Rev. 1997).
22
The district court reasoned that (1) Congress’ enactment of
separate avoidance and recovery sections in the Bankruptcy Code, as
opposed to the Bankruptcy Act, did not overrule bankruptcy law’s
longstanding refusal to allow a debtor to avoid a lien, including
a garnishment lien, when only the debtor, and not the general
18
entirely academic because in this instance the avoidance of
Aquila’s garnishment writ will in fact result in a meaningful
benefit to the estate, i.e. to the unsecured creditors.
The district court reversed the bankruptcy court’s finding
that the avoidance action does not benefit the estate for two
reasons: (1) The bankruptcy court’s own approval of the Plan, which
obligated the Trustee to prosecute this avoidance action, indicates
the presence of some benefit to the estate in the successful
avoidance of the garnishment writ; and (2) successful prosecution
of the avoidance action could save the estate up to $200,000 in
attorneys’ fees that Banque Paribas might incur in defending a
state court action brought by Aquila based on the bank’s setoff.
Although we agree with the district court’s conclusion that the
benefit to the estate test was satisfied, we do so for a reason
that is different and (we believe) more compelling, and that is
independently supported by the record.23
First, we are not comfortable with the simplistic conclusion
creditors, benefits, and (2) the Trustee’s action to avoid the
garnishment lien is still an attempt to recover “property” under §
550(a) because (a) what the Trustee in fact seeks to recover is a
security interest and (b) a security interest is a property
interest under Texas law. Id. at 954-55.
23
See Ballard v. United States, 17 F.3d 116, 118 (5th Cir.
1994) (Court of Appeals may affirm decision district court entered
after bench trial on grounds other than those relied on by district
court); Chauvin v. Tandy Corp., 984 F.2d 695, 697 (5th Cir. 1993)
(Court of Appeals may affirm on grounds other than those relied
upon by district court when the record contains adequate and
independent basis for that result).
19
that the bankruptcy court’s in globo approval of the Plan as
beneficial necessarily demonstrates that each provision of the Plan
is independently beneficial to the estate; neither are we
comfortable with the conclusion that in an eight-figure bankruptcy
a somewhat manufactured potential savings of not more than $200,000
can have any salutary benefit. Rather, the real benefit that the
Trustee’s avoidance of the garnishment writ bestows on the
unsecured creditors in this case arises from the fact that Banque
Paribas was oversecured at the time the debtor’s bankruptcy
petition was filed and at the time of the bank’s setoff as well.
When a primary secured creditor like Banque Paribas is in fact
oversecured on its own claims against the debtor, the excess
collateral securing that primary creditor’s claims is available for
distribution among the general unsecured creditors. Consequently,
if Aquila were permitted to preserve its otherwise preferential
garnishment writ, thereby allowing Aquila to obtain a secured claim
in the portion of Banque Paribas’ collateral that exceeds its
secured claim, the amount of such excess funds available for
distribution among unsecured creditors would be diminished, dollar
for dollar, by the amount recovered by Aquila through its
garnishment. Thus, if Banque Paribas were oversecured, avoidance
of the garnishment clearly would benefit the estate. Conversely,
if Banque Paribas were undersecured, a successful defense by Aquila
of the Trustee’s avoidance action would make no difference to the
remaining unsecured creditors. This is so because all of the
20
assets encumbered by security interests of Banque Paribas would go
either entirely to the bank or partially to the bank and partially
to Aquila, but none to the estate or the unsecured creditors; and
either Aquila or Banque Paribas —— but not both —— would ultimately
have and assert the $1.83 million claim as an unsecured claim. In
short, failure to avoid the garnishment in an undersecured
situation would merely (1) shift a portion of Banque Paribas’
already inadequate security to Aquila, (2) increase the gap between
Banque Paribas’ claim and the amount of secured assets available to
satisfy that claim, and (3) shift Aquila’s originally unsecured
$1.83 million claim to Banque Paribas. Although this would produce
changes in security and debt satisfaction between these two
creditors, it would neither increase nor decrease the quantum of
funds available for distribution to the other unsecured creditors.
As the evidence in this case clearly shows that Banque Paribas was
oversecured by millions of dollars both at the time of the
bankruptcy petition and at the time of its setoff,24 we must
conclude that the trustee’s avoidance of the lien created by the
garnishment writ would redound to “the benefit of the estate”
within the meaning of §550(a).
D. Additional Issues
24
According to the Trustee, the excess value of the collateral
securing the bank’s claims over the amount of the claims themselves
was approximately $15.3 million on the date of the bankruptcy
petition. According to the bankruptcy court’s findings, the amount
of excess collateral was even greater, approximately $26 million,
on the date of Banque Paribas’ setoff.
21
Aquila has advanced two more contentions in this appeal:
(1) The district court impermissibly refused to dissolve or modify
the injunction preventing Aquila from pursuing Banque Paribas, and
(2) the district court improperly denied Aquila’s request for a
jury trial. With regard to the first additional issue, we are
satisfied that any question about the propriety of the injunction
imposed under the Plan is now moot in light of our resolution of
the Trustee’s avoidance action. This is so because the injunction
will henceforth be lifted, enabling Aquila to proceed in state
court with any state law claim that remains viable.
With regard to the second additional issue —— Aquila’s
assertion that it was entitled to a jury trial in this action —— we
conclude that Aquila’s position is unmeritorious. A litigant has
a right to a jury trial only if the cause of action is legal in
nature, not equitable, and involves a matter of private right.25
Thus, when a bankruptcy creditor files a proof of claim, it submits
itself to the bankruptcy court’s equitable powers and thereby
waives its right to a jury trial.26 Here, Aquila filed a proof of
claim in the TMHI bankruptcy and was denied a jury trial in this
resulting avoidance action. Aquila’s contention that this case
does not involve an issue of claim allowance or disallowance
25
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 40-47,
109 S.Ct. 2782, 2790-93, 106 L.Ed.2d 26 (1989).
26
Lagenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 331, 112
L.Ed.2d 343 (1990).
22
ignores the fact that this avoidance action has the effect of
disallowing Aquila’s $1.83 million secured claim. Consequently,
the district court did not err in rejecting Aquila’s argument that
the bankruptcy court should have granted it a jury trial in the
instant avoidance action.
III
CONCLUSION
Our affirmance today of the district’s decision does not mean
that we agree with all of its reasoning. We have, for example,
found that the Trustee’s avoidance action results in a benefit to
the estate under §550(a) for reasons different from those espoused
by the district court. With regard to whether Aquila’s garnishment
writ constituted an avoidable preference under § 547(b), our
reasoning hinges on the fact that, in the peculiar circumstances of
this case, Aquila was bound to see its garnishment writ avoided as
a pre-petition preferential transfer or, if not avoided, at least
rendered incapable of producing a secured claim against the
debtor’s estate, due to Banque Paribas’ pre-petition setoff.
Consequently, our holdings are narrowly limited to the unusual
combination of facts peculiar to this case. This said, we hold
that the Trustee may avoid Aquila’s garnishment writ as a
preferential transfer under §547(b) and find that this avoidance
benefits the estate within the meaning of §550(a). For these
reasons, the district court’s decision reversing the bankruptcy
23
court and rendering judgment for the Trustee is, in all respects,
AFFIRMED.
24