United States Court of Appeals
Fifth Circuit
F I L E D
REVISED FEBRUARY 16, 2006
UNITED STATES COURT OF APPEALS January 23, 2006
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
No. 04-20752
In The Matter Of: RAMBA INC.
Debtor
LOWELL T. CAGE,
Appellant,
v.
WYO-BEN, INC.; GEORESOURCES, INC.; TRANS-CAPITAL,INC.;
M-I, LLC, doing business as Federal Wholesale Drilling
Mud; SCHLUMBERGER TECHNOLOGY CORP., doing business as
Dowell Schlumberger; AMCHEM, INC.; ENTERPRISE FLEET
SERVICES; DANOS & CUROLE MARINE CONTRACTORS, INC.;
MILWHITE, INC.; EXCALIBAR MINERALS, INC.
Appellees.
Appeal from the United States District Court
for the Southern District of Texas
Before REAVLEY, GARZA, and BENAVIDES, Circuit Judges.
BENAVIDES, Circuit Judge:
This case involves a trustee’s attempt to avoid transfers to
creditors in a Chapter 7 bankruptcy. The district court granted
summary judgment to the Appellees, holding that indirect transfers
to ten creditors did not constitute voidable preferences. It
reached this conclusion after holding that the transfers were in the
ordinary course of business and that the transfers were made from
property in which the debtor had no interest. We AFFIRM on the
grounds of the second holding and therefore do not reach the first.
The district court also considered one direct transfer. It erred
when it found that the transfer was in the ordinary course of
business. Therefore, we AFFIRM in part and VACATE and REMAND in
part.
I. FACTUAL AND PROCEDURAL BACKGROUND
On November 21, 2000, Ramba, Inc. filed for Chapter 7
bankruptcy. The Trustee, Lowell Cage, filed numerous proceedings
against entities who received transfers from Ramba, including
actions against the Appellees. The Appellees are ten vendors who
provided materials, equipment, and services to Ramba’s drilling
division.1 After a request for a jury trial, the proceedings were
removed to the district court and consolidated into one case.
All but one of the transfers at issue resulted from the sale
of Ramba’s drilling division to a subsidiary of Patterson Energy,
Inc. Ramba and Patterson entered an “Asset Purchase Agreement” on
September 30, 2000, two months prior to the bankruptcy filing, while
Ramba was doing business as Ambar, Inc. The transaction required
Ramba to sell all the assets of its drilling division, and, as part
1
The Appellees are: M-I, L.L.C.; Danos & Curole Marine
Contractors, Inc.; GeoResources, Inc.; Milwhite, Inc.; Excalibar
Minerals, Inc.; Amchem, Inc.; Schlumberger Technology Corp.; Wyo-
Ben, Inc.; Trans-Capital, Inc.; and Enterprise Fleet Services.
2
of the consideration, Patterson assumed some of Ramba’s liabilities.
Those liabilities included debts owed to the Appellees. Ramba also
sold Patterson the rights to the name “Ambar.” A Patterson
subsidiary later began doing business as “Ambar Drilling.”
Prior to the selling of the division, Ramba owed Citibank more
than $25 million under a credit agreement dated August 14, 1997.
Pursuant to that agreement, Ramba granted Citibank liens on all its
assets, including the assets ultimately sold to Patterson. The
result was that Citibank’s security interests wholly encumbered
Ramba’s assets, exceeding their fair market value. As part of and
essential to the sale to Patterson, Citibank agreed to release its
security interests in the assets of the drilling division and to
allow some of the purchase price to go toward paying Ramba’s debts.
The result of the deal was that Patterson received the assets “free
and clear” of all liens and paid Citibank $15.6 million in full and
final satisfaction of its liens. Patterson then paid the remainder
of the consideration, approximately $10 million, to Ramba’s
creditors, the Appellees.
The Trustee attempts to set aside as preferential the transfers
to the Appellees that resulted from the sale to Patterson and one
“direct” transfer made by Ramba to Appellee GeoResources. The
district court held that these transfers did not constitute voidable
preferences. The decision constituted an appealable final judgment.
See Zink v. United States, 929 F.2d 1015, 1020 (5th Cir. 1991) (“A
3
judgment is final when it terminates litigation on the merits and
leaves the court with nothing to do except execute the judgment.”)
II. STANDARD OF REVIEW
This Court reviews a district court’s grant of a summary
judgment de novo, applying the same standards as the district court.
Hirras v. Nat’l R.R. Passenger Corp., 95 F.3d 396, 399 (5th Cir.
1996). The evidence should be viewed in the light most favorable
to the nonmoving party, and the record should not indicate a genuine
issue as to any material fact. Am. Home Assurance Co. v. United
Space Alliance, 378 F.3d 482, 486 (5th Cir. 2004). This Court
reviews factual findings for clear error. In re Mercer, 246 F.3d
391, 402 (5th Cir. 2001).
III. DISCUSSION
A. Indirect Transfers to Appellees
Section 547(b) of the Bankruptcy Code establishes the six
elements of any preference action. To be a preference there must
be:
(1) “a transfer of an interest of the debtor in
property; ”
(2) “to or for the benefit of a creditor;”
(3) “for or on account of an antecedent debt owed by
the debtor before such a transfer was made;”
(4) “made while the debtor was insolvent;”
(5) “made on or within 90 days before the date of the
filing of the petition” (or one year if an insider);
4
and
(6) one “that enables such creditor to receive more
than such creditor would receive” if (A) the debtor
filed under Chapter 7, and (B) the transfer had not
been made.
11 U.S.C. § 547(b) (2000). The transfers at issue fail to meet the
first element.
A debtor has an interest in property if that property would
have been part of the debtor’s bankruptcy estate had the transfer
not occurred. See In re Criswell, 102 F.3d 1411, 1416 (5th Cir.
1997). A trustee cannot avoid transfers of property unless the
property would have been in the estate and therefore available to
the debtor’s general creditors. Warsco v. Preferred Technical
Group, 258 F.3d 557, 564 (7th Cir. 2001). Essentially, a voidable
preference must have depleted the estate. Gulf Oil Corp. v. Fuel
Oil Supply & Terminaling, Inc., 837 F.2d 224, 230–31 (5th Cir.
1988). A trustee bears the burden of proving that the debtor had
an interest in the transferred property. Warsco, 258 F.3d at 564.
The Bankruptcy Code offers further explanation of what assets
fall within a bankruptcy estate. Section 541 of the Code states:
Property in which the debtor holds, as of the
commencement of the case, only legal title and not an
equitable interest . . . becomes property of the estate
. . . only to the extent of the debtor’s legal title to
such property, but not to the extent of any equitable
interest in such property that the debtor does not hold.
11 U.S.C. § 541(d). There can be no preference when a debtor
transfers property in which the debtor has no equitable interest.
See In re Bean, 252 F.3d 113, 117 (2d Cir. 2001); In re Parham, 72
5
B.R. 604, 605 (Bankr. M.D. Fla. 1987); In re Central States Press,
57 B.R. 418, 422 (Bankr. W.D. Mo. 1985) (“Even the most liberal
rules permitting recovery under § 547 . . . apply only to the extent
that the value of the collateral transferred exceeds the
indebtedness of the debtor on the security interest.”).
In In re Maple Mortgage, Inc., 81 F.3d 592, 595 (5th Cir.
1996), we held that funds at issue in a preference dispute must have
been available for distribution to general creditors. “[I]f funds
cannot be used to pay the debtor’s creditors, then they generally
are not deemed an asset of the debtor’s estate for preference
purposes.” Id. While Maple Mortgage did not specifically address
whether a debtor’s bankruptcy estate includes fully encumbered
property, it recognized the common sense reasoning that funds must
be available to pay creditors. Other courts have reached similar
results, holding that a bankruptcy estate is made up of equity, as
opposed to legal title alone. See, e.g., In re Mahendra, 131 F.3d
750, 755 (8th Cir. 1997) (holding that “[a]ny portion of a debtor’s
property that is unencumbered by mortgage—the equity—is part of the
bankrupt’s estate.”); U.S. v. Rauer, 963 F.2d 1332 (10th Cir. 1992)
(same).2
2
When a debtor holds only legal title to fully encumbered
property during a Chapter 7 bankruptcy, the trustee typically
abandons the property because the estate cannot benefit from its
sale. For that reason, few cases exist that involve a dispute as
to whether fully encumbered property can be property of an
estate.
6
At the time of the drilling division sale, it is undisputed
that Ramba’s assets were fully encumbered by Citibank’s liens.3
Ramba had no equity in the proceeds of the sale, and, therefore, the
funds never would have been available to general creditors in the
bankruptcy. The Trustee argues that upon Citibank’s acceptance of
$15.6 million from Patterson, the “assumed liability” portion of the
purchase price was converted into unencumbered funds, which
presumably Ramba could then distribute to creditors as it wished in
the resulting bankruptcy. This theory fails because there is no
evidence that Citibank agreed to create equity for the benefit of
Ramba. The consideration from the sale of Citibank’s collateral
belonged to Citibank, the secured lender.
The problem with Ramba’s lack of equity is illustrated by the
remedy the Trustee is requesting. The Trustee wants a refund of the
$10 million paid to the Appellees by Patterson. By doing so, he
essentially is asking for the benefit of the deal with Patterson
while cancelling one of the underlying terms of the bargain. The
district court points out that without the debt assumption
provision, it is likely that there would never have been a deal with
Patterson. The court opined, “A drilling outfit that has difficulty
getting basic materials like mud and care is not an attractive
3
During oral argument, the attorney for the Trustee admitted
that “the debt and the assets are roughly equivalent,” describing
the assets as “fully encumbered.” Indeed, the record shows that
the Trustee stipulated to the fact that “Citibank was owed in
excess of the fair market value of the Debtor’s total assets.”
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asset.” The Patterson transaction was structured so that the
drilling division would operate without interruption, as seen by
Patterson’s choice in adopting the “Ambar” name. The district court
found that only one of the Appellees even knew the division had a
new owner. The Trustee’s request threatens to undo the entire
Patterson transaction. Such an undoing would leave Citibank holding
liens on the drilling division and the Trustee having an asset that
would not benefit general creditors.
The Trustee’s reliance on In re Conard Corporation, 806 F.2d
610 (5th Cir. 1986), is misplaced. In Conard, the debtor sold pizza
restaurants to a third party. As part of the transaction, the buyer
agreed to assume and be bound by eighty-four installments on an
unpaid promissory note. Id. at 611. This Court held that those
payments were voidable preferences because the assumption of debt
provision prevented the debtor’s estate from benefitting from a
higher selling price. Id. Conard, however, is easily
distinguished. The restaurants were unencumbered at the time of the
sale, giving the debtor an equitable interest in the asset. Here,
Ramba only held legal title at the time of the Patterson
transaction. Had Patterson been willing to pay a higher price for
the assets rather than assuming the debt, the increase in funds
would have gone to Citibank, not the estate.4
4
The Trustee also fails in his argument that the district
court and the Appellees misinterpret section 541(d). He says
“equitable” as used in section 541(d) only applies to secondary
8
Ramba had no interest in the transferred property other than
bare legal title. This is insufficient for avoiding the transfers
to the Appellees. Because we affirm on this ground, we need not
address the district court’s holding that the transfers occurred in
the ordinary course of business. Similarly, we need not address
alternative arguments presented by the Appellees.5
B. Direct Transfer to Appellee GeoResources
The Trustee attempts to recover one “direct” payment to
GeoResources in the amount of $28,396.83 paid on September 8, 2000.6
The September payment totaled $31,899.03, but only $28,396.83 is at
mortgage situations where a real estate purchaser has paid the
full amount due but has not yet received a deed. Id. He
concludes that section 541(d) does not apply to Ramba and relies
on section 541(a)(1), which provides that the bankruptcy estate
is comprised of “all legal and equitable interests.” 11 U.S.C. §
541(a)(1) (emphasis added). The United States Supreme Court and
this Court, however, have applied section 541(d) outside the
equitable mortgage context. See, e.g., Begier v. IRS, 496 U.S.
53, 59 (1990) (examining trust funds paid to the IRS under
section 541(d)); In re Haber Oil Co., Inc., 12 F.3d 426 (5th Cir.
1994) (examining constructive trusts under section 541(d)). In
addition, this Court reads section 541(d) in conjunction with
section 541(a)(1) rather than as two distinct, inconsistent
provisions. In re Maple Mortgage, 81 F.3d at 595 (explaining
that section 541(d) “further explains” section 541(a)(1)).
5
Appellees argue that the payments are not voidable
preferences because Ramba contemporaneously received new value in
exchange for the transfers. Appellees also argue that they did
not receive more than they would have under a liquidation, a
requirement under section 547(b).
6
The briefs varied in their descriptions of the direct
transfer payments at issue. At oral argument, the attorney for
the Trustee clarified the discrepancies, stating that the Trustee
only sought to avoid $28,396.83 of the September payment.
9
issue. This payment came directly from Ramba as opposed to being
paid by Patterson.
The parties disagree as to whether the GeoResources payment
satisfies the Bankruptcy Code’s exception for payments made in the
ordinary course of business. The disagreement centers on the timing
of the payments and whether the timing met the requirement that the
payment be “made according to ordinary business terms.” 11 U.S.C.
§ 547(c)(2)(C). The record shows that this payment was for invoices
more than 180 days old. The district court found that the industry
standard for payment of invoices was 120 days.7 Therefore, this
issue turns on the sixty-day difference between the industry
standard and the actual payment date.
In In re Gulf City Seafoods, Inc., this Court adopted an
“objective test” for determining when a credit arrangement is within
the ordinary course of business. 296 F.3d 363, 367–68 (5th Cir.
2002). “[T]he question must be resolved by consideration of the
practices in the industry—not by the parties dealings with each
other.” Id. at 369. This Court was careful to ensure that the test
did not “place businessmen in a straightjacket” by enforcing “strict
conformity” to a standard or requiring “identical” credit
7
The court stated that the parties “admitted” that this was
the correct standard. The Trustee, however, disputes this
standard and asserts that he never made such an admission.
Whether or not the Trustee ever admitted the standard was 120
days is not significant here. No fact issue was created as the
only summary judgment evidence presented with respect to this
issue was that the standard was 120 days.
10
arrangements. Id. at 368. Instead, the ordinary business term
“sets an outer boundary to the parties’ practices” presenting the
question of “whether a particular arrangement is so out of line with
what others do that it fails” to be ordinary. Id. at 369.
The district court found that although the GeoResources payment
was “outside the industry standard, [it] reflected historical
relations between GeoResources and Ambar.” The district court’s
analysis contradicts the test outlined in Gulf City Seafoods.
According to the teachings of Gulf City Seafoods, the “historical
relations” between GeoResources and Ambar should not be the focus
of an objective inquiry. The Appellees argue that the payment still
satisfies the “ordinary business” requirement, pointing to cases
that have held that late payments are not per se “unordinary.” See
In re Grand Chevrolet, Inc., 25 F.3d 728, 732 (9th Cir. 1994);
Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991);
In re Yurika Foods Corp., 888 F.2d 42, 44 (6th Cir. 1989).
The Gulf City Seafoods test allows for some late payments, as
seen by its language that warns against enforcing “strict
conformity” or requiring “identical” transactions. Gulf City
Seafoods, 296 F.3d at 368. The question under Gulf City Seafoods
becomes whether the sixty-day delay fails to be in the ordinary
course of business because it is “so out of line with what others
do.” Id. at 369. The GeoResources payment was approximately sixty
days late according to its own witnesses. The 180 days it took to
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pay GeoResources is 150 percent of the industry standard. The
Trustee challenges the accuracy of the “120 day” figure, suggesting
that in practice it is much shorter. Even under the “120 day”
standard, the payment to GeoResources is significantly out of line
with what others do. The delay in payment here cannot be deemed
ordinary. For these reasons, it fails to be in the ordinary course
of business and therefore is a voidable preference.
VI. CONCLUSION
The district court did not err in its holding that Ramba had
no interest in the property transferred during the Patterson
transaction. For that reason, the court’s judgment that the
indirect transfers did not constitute voidable preferences is
AFFIRMED. The district court did err in its determination that a
direct transfer to GeoResources was made in the ordinary course of
business. For that reason, we VACATE the court’s judgment that the
direct transfer did not constitute a voidable preference and REMAND
for a decision consistent with this opinion.
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