In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-2604
MELLON BANK, N.A., as agent for 14 prepetition senior
lenders of Qualitech Steel Corp.,
Plaintiff-Appellant,
v.
DICK CORPORATION and GE SUPPLY COMPANY,
Defendants-Appellees.
____________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. IP 02-0040-C-M/S—Larry J. McKinney, Chief Judge.
____________
SUBMITTED OCTOBER 20, 20031—DECIDED DECEMBER 4, 2003
____________
Before BAUER, POSNER, and EASTERBROOK, Circuit
Judges.
EASTERBROOK, Circuit Judge. Bankruptcy law entitles
debtors’ estates to recover preferential transfers, including
payments on account of antecedent debts made during the
1
This appeal is successive to In re Qualitech Steel Corp., 276 F.3d
245 (7th Cir. 2001), and has been submitted to the original panel
under Operating Procedure 6(b). The panel has decided that
further oral argument is unnecessary.
2 No. 03-2604
90 days before the commencement of the proceeding. 11
U.S.C. §547(b). Preferences are recovered “for the benefit of
the estate” (11 U.S.C. §550(a)) and thus profit all creditors
according to their statutory and contractual entitlements.
We must decide whether the right to recover a preference is
an asset of the estate that may be assigned or distributed
to a particular class of creditors to satisfy their
entitlements. A different way to put the same question is
whether a suit on behalf of all creditors in the money is “for
the benefit of the estate”. Either way the issue is character-
ized, our answer is “yes.”
The dispute arises from a complex series of transactions
that can be summed up simply. When Qualitech Steel
entered bankruptcy, it was in economic distress—that is to
say, it had a negative operating cash flow. (Financial
distress, by contrast, entails a positive cash flow that is not
large enough to retire existing debts.) Qualitech’s equity
was worthless. Secured debts exceeded the value of its
assets. Most creditors, both secured and unsecured, agreed
that the best step was to sell Qualitech promptly as a going
concern to someone willing to take the risk of trying to turn
the business around. In order to finance its operations for
the time necessary to effect a sale— Qualitech was burning
through cash at a monthly rate of $10 million—a syndicate
of lenders advanced some additional capital. In order to
mollify the prepetition secured creditors that did not want
to participate, the bankruptcy judge promised them that, if
their position deteriorated during the interim, they would
be entitled to dibs on as much as $30 million of Qualitech’s
remaining assets, including the value of any prefer-
ence-recovery actions. In re Qualitech Steel Corp., 276 F.3d
245 (7th Cir. 2001), held over the protest of the unsecured
creditors that this promise was within the bankruptcy
judge’s authority, and that the judge also properly found
that the secured creditors’ position had in fact deteriorated,
entitling them to the first $30 million of any prefer-
ence-recovery actions.
No. 03-2604 3
The sale price was insufficient to cover both the new
super-priority loans and the original secured loans. The
original secured lenders’ unsatisfied debts exceeded the
value of any anticipated preference recoveries. Because at
this point the estate was penniless, a committee of the
secured lenders advanced funds to finance preference
actions through Mellon Bank, which was appointed as the
creditors’ agent to collect on behalf of the (dissolved) debtor
in possession, Qualitech. Multiple preference-recovery
actions have been filed; recoveries to date exceed $10
million. But Dick Corp. and GE Supply Co. contended that
they need not return the roughly $1 million in last- minute
payments they received. They advanced two principal
arguments: first that the entitlement to pursue avoidance
actions had been sold with Qualitech’s business, and second
that recoveries that would flow straight to the pockets of
secured creditors are not “for the benefit of the estate” as
§550(a) uses that phrase. The bankruptcy judge agreed with
both lines of argument and dismissed the actions. On an
appeal under 28 U.S.C. §158(a), the district judge rejected
the first contention but accepted the second, and thus
affirmed the judgment. 2003 U.S. Dist. LEXIS 9427 (S.D.
Ind. May 9, 2003). We have jurisdiction of the creditors’
appeal, because the order under review is the final decision
in an adversary proceeding. 28 U.S.C. §158(d).
Dick and GE (collectively the “preference recipients”) ask
us to affirm on the theory that the buyer of Qualitech’s
assets, rather than the secured creditors, owns any enti-
tlement to recover preferential transfers. Although the
district judge disagreed with this contention, and the pre-
ference recipients did not file a cross-appeal, litigants
may offer on appeal any properly preserved argument
that supports the judgment. See Massachusetts Mutual
Insurance Co. v. Ludwig, 426 U.S. 479 (1976). It is enough
to say, however, that we agree with the district judge’s
treatment of this issue, for the reasons the judge gave.
4 No. 03-2604
Another potential show-stopper also requires little
discussion. According to 11 U.S.C. §547(b), a trustee or a
debtor in possession may prosecute a preference-recovery
action, and Mellon Bank is neither. See also Hartford
Underwriters Insurance Co. v. Union Planters Bank, N.A.,
530 U.S. 1 (2000) (enforcing similar limitation in 11 U.S.C.
§506(c)). But Mellon Bank has stepped into the shoes of the
dissolved Qualitech, acquiring the debtor’s claim by means
of the order we affirmed in Qualitech Steel. The Supreme
Court’s decision in Hartford Underwriters did not disturb
decisions allowing a lineal descent of statutory rights. 530
U.S. at 13 n.5. Thus we need not determine whether
creditors ever may pursue avoidance actions while a debtor
in possession or trustee exists, and over their opposition, by
a rationale along the lines of shareholders’ derivative
actions in corporate law. See In re Xonics Photochemical,
Inc., 841 F.2d 198, 203 (7th Cir. 1988). Cf. Unsecured
Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d
Cir. 2003) (en banc).
Thus we arrive at the question whether a recovery for the
use of secured creditors can be “for the benefit of the
estate”. We say “can be” rather than “is” because, by the
time Mellon Bank filed the first preference-recovery action,
there was no “estate”; Qualitech is gone and its assets are
in new hands. But an ex post inquiry misses the real
benefit. The potential to recover funds from preference
recipients was put to use for the estate’s benefit—at a time
when Qualitech still existed and had unsecured credi-
tors—when the bankruptcy court promised this value to the
objecting secured lenders to compensate them for risk while
new super-secured funds were raised and the assets were
sold. Instead of calling off the sale, or distributing some
assets to the secured creditors, or taking some other step
that (the bankruptcy judge believed at the time) would have
made creditors as a whole worse off, the judge used the
value of these assets to protect the secured creditors’
No. 03-2604 5
position and thus facilitate what appeared to be the most
productive course of action. Qualitech’s assets were sold,
and unsecured creditors received a bonus of $7.5 million.
(The record does not reveal why the secured creditors
agreed to this departure from absolute priority.)
Having put the prospect of preference recoveries to work
for the benefit of all creditors (including the unsecured
creditors) ex ante by effectively selling them to the secured
creditors in exchange for forbearance—and in the process
facilitating a swift sale that was beneficial all around—the
bankruptcy judge did not need to use them ex post a second
time, for still another benefit to the estate; there was no
further benefit to be had. We established in P.A. Bergner &
Co. v. Bank One, Milwaukee, N.A., 140 F.3d 1111, 1118 (7th
Cir. 1998), that §550(a) is satisfied by an indirect benefit to
the estate, and the point hardly seems arguable even as an
original matter. (There are no decisions to the contrary,
other than the one under review.) The estate’s ex ante
benefit is all that the statute requires. That much would be
clear if the secured creditors had purchased for $30 million
in cash (paid into Qualitech’s estate before its assets were
sold) the right to pursue the preference-recovery actions; it
is no less clear when the incoming cash takes the form of
DIP financing that is secured in part by the promise that
preference-recovery actions can be used to make good any
losses the secured lenders otherwise must absorb.
Lest this way of resolving the issue be taken to assume
that §550(a) requires that some benefit flow to unsecured
creditors, we add that the statute does not say this. Section
550(a) speaks of benefit to the estate—which in bankruptcy
parlance denotes the set of all potentially interested
parties—rather than to any particular class of creditors.
What happens to recoveries that reach the estate’s coffers
depends on contractual and statutory entitlements. To see
this, consider a business that is reorganized under judicial
6 No. 03-2604
supervision rather than auctioned off. Suppose this firm has
$10 million in cash (including receivables) plus assets that
could be sold for $90 million, and $150 million in secured
debt. The security interest includes a floating lien on
inventory, cash on hand, and receivables. This firm belongs
to the secured creditors; unsecured creditors are not legally
entitled to a dime; any influx of cash will go to the benefit
of secured lenders to reduce the deficiency. Yet no one
doubts that this debtor in possession (or a trustee) could
bring a preference-recovery action under §547. The operat-
ing business counts as an “estate” without regard to the
identity (and priority) of those who will receive distribu-
tions eventually. We cannot see any reason why a firm with
the same financial attributes—that is, one in which both
equity investors and unsecured creditors will be wiped
out—can bring avoidance actions if the business is reorga-
nized under the supervision of the senior lenders, but not if
these lenders and the judge decide to sell the business as a
going concern to a third party. Such a sale does not injure
preference recipients (or unsecured creditors), so there is no
reason why it should entitle the preference recipients to
keep the money.
A legal rule that the quick sale of a business precludes
avoidance actions by eliminating any benefit to the estate
would derail many beneficial sales (because selling the
business would reduce its value by abandoning opportuni-
ties to recover last-minute payouts). Likewise it would
encourage the managers to make preferential transfers to
favored vendors (who would not need to repay the firm).
Neither of these consequences would be desirable. Our prior
opinion establishes that using the prospect of avoidance
actions as additional collateral promoted an efficient
disposition of Qualitech’s business (or so, at least, the
bankruptcy judge was entitled to conclude at the time the
financing was secured). That would not have been possible
No. 03-2604 7
if, as the preference recipients argue here, the transaction
vaporized the collateral sought to be used. Our reading of
the Bankruptcy Code avoids these problems and enables the
judge and the creditors to choose between in-court reorgani-
zation and immediate sale by reference to their economic
benefits rather than legal artifacts.
REVERSED AND REMANDED
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-4-03