United States Court of Appeals,
Fifth Circuit.
No. 94-40240.
In the Matter of LAMAR HADDOX CONTRACTOR, INC., Debtor.
ORIX CREDIT ALLIANCE, INC., f/k/a Credit Alliance Corp.,
Appellant,
v.
James Allen HARVEY, Jr., Estate Representative, on Behalf of
Lamar Haddox Contractor, Appellee.
Dec. 20, 1994.
Appeal from the United States District Court for the Western
District of Louisiana.
Before JONES and STEWART, Circuit Judges, and DUPLANTIER,* District
Judge.
DUPLANTIER, District Judge:
In this adversary proceeding, the bankruptcy court concluded
that three payments made by Lamar Haddox Contractor, Inc.
("Debtor") to the adversary proceeding defendant, Orix Credit
Alliance, Inc. ("Credit Alliance"), a non-insider creditor, over
five months before the Debtor filed for bankruptcy were voidable
preferences. 11 U.S.C. §§ 547(b), 550(a)(1) (1993).1 The
bankruptcy court entered judgment in favor of the estate
representative plaintiff and against appellant Credit Alliance for
the total amount of the three payments. Credit Alliance appealed
to the district court, which affirmed the bankruptcy court's
*
District Judge for the Eastern District of Louisiana,
sitting by designation.
1
11 U.S.C. § 550(a) was amended in October, 1994.
1
judgment. Because the estate representative failed to prove that
the Debtor was insolvent at the time the payments were made to
Credit Alliance, we REVERSE.
During the year preceding the Debtor's filing for bankruptcy,
the Debtor, a construction company, made a series of payments on
four promissory notes held by Credit Alliance; these notes were
secured by mortgages of construction equipment owned by the Debtor.
Lamar Haddox, the president and founder of the Debtor, personally
guaranteed all four notes; his brother, Douglas, personally
guaranteed three of them.
The bankruptcy petition was filed on April 13, 1989. At the
beginning of the preceding year, the Debtor owed Credit Alliance
over $1,100,000. During that year, the Debtor made the following
payments to Credit Alliance:
Payment Date Payment Amount
4/29/88 5,806.69
4/29/88 11,000.49
6/ 7/88 2,889.00
7/ 1/88 25,658.00
7/20/88 31,222.97
9/27/88 30,971.00
9/30/88 30,971.00
11/ 3/88 30,728.00
Total $169,247.15
These payments reduced the balance owed on the notes to
$942,363.17. The Debtor continued operating its business in
2
Louisiana and Arkansas until December 20, 1988, when it shut down
its Arkansas operations "for the winter." On February 24, 1989,
the Debtor sold the equipment securing the notes to a non-related
third party for $826,780.00, which sum was paid to Credit Alliance.
Credit Alliance financed the sale, forgave the Debtor the
$115,583.17 deficiency, and released the Haddox brothers from their
personal guarantees. On April 13, 1989, the Debtor filed a
petition for relief under Chapter 11 of the Bankruptcy Reform Act
(the "Bankruptcy Code").
James Allen Harvey, Jr., as estate representative, instituted
this adversary proceeding to recover from Credit Alliance the
amount of the above-listed payments made to Credit Alliance during
the year preceding the bankruptcy filing.2 After trial on the
merits, the bankruptcy court held that the three payments made on
and after September 27, 1988 were voidable preferences under the
Bankruptcy Code. The court concluded that the Debtor became
insolvent on September 27, 1988, that the payments were not made in
the ordinary course of business, and that the transfers to the
non-insider creditor occurred within a year of the filing for
bankruptcy and benefitted insider creditors, 11 U.S.C. §§ 550, 557;
Southmark Corp. v. Southmark Personal Storage, Inc., 993 F.2d 117
(5th Cir.1993); Levit v. Ingersoll Rand Fin. Corp. (In re V.N.
Deprizio Constr. Co.), 874 F.2d 1186 (7th Cir.1989) (transfer to
non-insider creditor occurring within a year of the filing for
2
There was no attempt to avoid the payment of the proceeds
from the sale of the collateral securing the notes.
3
bankruptcy may be avoided as preferential when the transfer
benefitted an insider creditor). The bankruptcy court entered
judgment in favor of the plaintiff estate representative in the
amount of $92,670.18, the total of the last three payments to
Credit Alliance. The district court affirmed the judgment.
Credit Alliance contends that the judgment of the bankruptcy
court, as affirmed by the district court, should be reversed on
several grounds. Inter alia, Credit Alliance argues that Deprizio
was incorrectly decided, that Southmark's approval of Deprizio is
dictum not binding upon us, and that the 1994 amendment to Section
550 of the Bankruptcy Code, Section 202 of the Bankruptcy
Amendments of 1994, Pub.L. 103-394, 108 Stat. 4106 (1994), which
rejected the Deprizio line of cases, effected no change but instead
made explicit what was always the proper interpretation of the
statute. We consider none of those issues nor other grounds for
reversal urged by appellant, because we agree with appellant's
contention that the estate representative failed to prove that the
Debtor was insolvent at the time of the allegedly preferential
transfers.
We must accept the bankruptcy court's findings of fact unless
they are clearly erroneous. Wilson v. First Nat'l Bank (In re
Missionary Baptist Found. of Am., Inc.), 796 F.2d 752, 756 (5th
Cir.1986). A finding of fact is clearly erroneous when " "although
there is evidence to support it, the reviewing court is left with
the definite and firm conviction that a mistake has been
committed.' " Id. at 756 (citation omitted). The bankruptcy
4
court's determination that the Debtor was insolvent at the time of
the three allegedly preferential transfers is a finding of fact
subject to the clearly erroneous standard of review. Clay v.
Traders Bank of Kansas City, 708 F.2d 1347, 1350 (8th Cir.1983).
Mindful that "[s]trict application of the clearly-erroneous rule is
"particularly important where, as here, the district court has
affirmed the bankruptcy judge's findings,' " Wilson, 796 F.2d at
755 (citation omitted), in reviewing the record we are nevertheless
left with the definite and firm conviction that the bankruptcy
court committed a mistake when it concluded that the Debtor was
insolvent on the dates of the payments to Credit Alliance.
The estate representative may avoid a transfer of property as
a preference if the estate representative establishes that such
transfer was made:
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor
before such transfer was made;
(3) made while the debtor was insolvent;
(4) made
(A) on or within 90 days before the date of the filing
of the petition; or
(B) between ninety days and one year before the date of
the filing of the petition, if such creditor at the
time of such transfer was an insider; and
(5) that enables such creditor to receive more than such
creditor would receive if
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the
5
extent provided by the provisions of this title.
11 U.S.C. §§ 547(b), (g) (1993). To avoid a transfer as
preferential, the plaintiff must prove that the Debtor was
insolvent at the time the allegedly preferential transfer occurred.
11 U.S.C. § 547(b)(3). There is a presumption of insolvency for
the ninety days preceding the filing of bankruptcy, but that
presumption is not applicable to this case because the allegedly
preferential payments were made over five months before the Debtor
filed for bankruptcy. 11 U.S.C. § 547(f). Thus, the plaintiff
estate representative has the burden of proving insolvency by a
preponderance of evidence, without the benefit of a presumption.
A corporate debtor is insolvent when its "financial condition
[is] such that the sum of [its] debts is greater than all of [its]
property, at a fair valuation...." 11 U.S.C. § 101(32)(A). Courts
often refer to this test as a balance sheet test, and then engage
in the "fair valuation" of the debts and property shown on the
balance sheet, as required by the statute. See, e.g., In re Taxman
Clothing Co., Inc., 905 F.2d 166, 169-70 (7th Cir.1990). Needless
to say, a fair valuation may not be equivalent to the values
assigned on a balance sheet. Financial statements reflect the book
value of assets, ordinarily the cost of the property reduced by
accumulated depreciation. The rate of depreciation is usually the
maximum allowed by income tax regulations. The fair value of
property is not determined by asking how fast or by how much it has
been depreciated on the corporate books, but by "estimating what
the debtor's assets would realize if sold in a prudent manner in
6
current market conditions." Pembroke Dev. Corp. v. Commonwealth
Sav. & Loan Ass'n, 124 B.R. 398, 402 (Bankr.S.D.Fl.1991) (holding
that a transfer was not voidable because of the lack of any
evidence, such as appraisals or opinion testimony, of the actual
value of real properties).
Plaintiff sought to establish that the Debtor was insolvent
at the time of the allegedly preferential transfers solely through
the testimony of Milton Kelley, a certified public accountant who
had prepared the Debtor's tax returns and financial statements
since 1976. However, Mr. Kelley's testimony established only that
as of September 30, 1988, the date on which the Debtor's fiscal
year ended, the company's preliminary unaudited financial
statements and its general ledger showed an excess of liabilities
over assets (a deficit equity position) of $216,000. He testified
that the company had suffered a loss of over $2,000,000 during its
preceding fiscal year and that such loss had reduced the company's
positive equity position of $1,787,000 on September 30, 1987 to a
deficit equity position of $216,000 on September 30, 1988. Based
on the large operating loss and the resulting balance sheet deficit
equity position, he concluded that the Debtor was "probably
bankrupt" on September 30, 1988.
The estate representative presented no evidence whatsoever of
the fair value of the Debtor's property. The accountant testified
that he had no information as to the fair value of the equipment:
"I don't know what the appraised value would be of fixed assets,
but if they were worth more than the value on the books" the
7
company could be solvent. He could not determine whether the fair
value was greater than the book value because there are "so many
factors: how long, you know, how well it's maintained, what the
market is for it."
There is evidence that the book value of the assets probably
was not reflective of the property's fair value. The bulk of the
Debtor's assets consisted of heavy equipment, much of which was
over ten years old, substantially depreciated on the corporate
books.3 If the fair value of the equipment exceeded the book value
of the equipment by more than $216,000, the Debtor was solvent when
the allegedly preferential payments were made. There was neither
testimony nor a financial record from which a court could determine
what either the book value or the fair value of the equipment was
on September 30, 1988.
While the Debtor's insolvency does not have to be established
through documentary evidence, see Porter v. Yukon Nat'l Bank, 866
F.2d 355, 356-57 (10th Cir.1989) (stating that insolvency does not
have to be proved by a "thoughtful, well-documented analysis of
Debtor's assets and liabilities"), such evidence would have helped
the court to determine the fair market value of the assets. The
estate representative's counsel declined to introduce such
evidence, even though the accountant offered the 1988 unaudited
3
Because no financial statements were introduced into
evidence, neither the rate nor the amount of depreciation can be
determined.
8
financial statements and the general ledger to the court.4 As a
result, the court was left with only conclusory opinion testimony
as to insolvency, without any evidence necessary to support the
conclusions.
The opinion testimony was not sufficient to establish the
debtor's insolvency, because substantial questions remain as to the
fair value of the Debtor's property. No witness had any
information as to the fair value of the property, only its book
value. Much of the equipment which constituted a large percentage
of the corporate assets was over ten years old and therefore
substantially depreciated on the corporate books. There was no
evidence as to the extent of that depreciation on the critical
dates. Therefore, we must conclude that the courts below were
clearly erroneous in finding that the estate representative had
carried the burden of proof that the Debtor was insolvent on and
after September 27, 1988, an essential element of his claim that
the payments to appellant were preferential transfers.
The district court's judgment in favor of the plaintiff, James
Allen Harvey, Jr., estate representative, is REVERSED and the case
4
Q (by plaintiff's counsel): "And can you give us, narrow a
time period as to the beginning of insolvency?"
A (by accountant): "No. As I said, I don't get any
interim financial statements so I don't have any figures at
any period during that year. It just goes from October 1st
of "87 through 9/30 of "88. I have the financial statements
and the general ledger with me. It might show better what I
got."
(By plaintiff's counsel): "At this time we're not
going to need you to introduce those."
9
is REMANDED with instructions to enter judgment for Credit
Alliance.
REVERSED AND REMANDED.
10
Matter of Lamar Haddox Contractor, Inc.
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