United States Court of Appeals,
Fifth Circuit.
No. 96-30372.
Cynthia Lee TRAINA, Trustee, Appellant,
v.
WHITNEY NATIONAL BANK, Appellee.
April 8, 1997.
Appeal from the United States District Court for the Eastern
District of Louisiana.
Before HIGGINBOTHAM, DAVIS and BARKSDALE, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Trustee Cynthia Traina appeals the dismissal of her complaint
seeking to avoid transfers between bankruptcy debtor Imperial
Jewelry Corporation (Imperial) and Whitney National Bank (Whitney).
Because we conclude that the trustee fails to satisfy the elements
necessary to bring a revocatory action under Louisiana law, we
affirm.
I.
On May 30, 1991, Imperial executed a security agreement that
gave Whitney a security interest in all of Imperial's inventory,
accounts receivable, and deposit accounts. The borrower in
connection with this agreement was not Imperial, however, but
Russell Aronson, Imperial's owner, who owed the bank a substantial
amount of money. From February 20, 1990, to January 5, 1993,
Imperial paid $134,043.92 to Whitney in connection with Aronson's
debt. On January 4, 1993, Imperial transferred to the bank all of
its inventory and accounts receivable; in return, Aronson received
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a $25,000 credit on his debt. After January 4, 1993, Whitney was
paid $17,628.68 by account debtors of Imperial, which further
reduced Aronson's debt. On January 5, 1993, Imperial filed a
chapter 7 petition.
Before February 20, 1990, and through the date of filing,
Imperial had two revolving credit accounts with First Bankcard
Center that allowed Imperial to incur debt on an ongoing basis.
One account had a balance of $245.17 as of May 28, 1991, the
statement date immediately prior to the security agreement. The
June 27, 1991, statement shows that Imperial had paid $245.17 and
incurred additional charges of $466.63. The second account
reported a balance of $1,424.30 as of the May 13, 1991, statement
date; additional charges of $111.05 were incurred between May 13,
1991, and May 30, 1991, the date of the security agreement. By
October 7, 1991, Imperial had paid in full all sums due for
purchases made before May 30, 1991. While the pre-security
agreement debt had been paid off, however, Imperial still
maintained outstanding balances on both accounts. First Bankcard
filed a Proof of Claim in this case for $6,267.74.
The trustee seeks to avoid the security agreement between
Imperial and Whitney, the payments from Imperial to the bank, and
the transfer of Imperial's inventory and accounts receivable to the
bank by pursuing a revocatory action on First Bankcard's behalf.
The bankruptcy court found no statutory basis for avoiding the
agreement, and the district court affirmed. The trustee appeals
that decision.
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II.
A.
This court reviews a bankruptcy court's conclusions of law de
novo and findings of fact for clear error. In re Kemp, 52 F.3d
546, 550 (5th Cir.1995). When the district court has affirmed the
bankruptcy court's findings, the review for clear error is strict.
Id.
B.
Under § 544(b) of the Bankruptcy Code, a "trustee may avoid
any transfer of an interest of the debtor in property or any
obligation incurred by the debtor that is voidable under applicable
law by a creditor holding an unsecured claim...." 11 U.S.C. §
544(b). Here, the "applicable law" at issue is the Louisiana
revocatory action, as codified in Louisiana Civil Code Art. 2036,
which provides:
An obligee has a right to annul an act of the obligor, or the
result of a failure to act of the obligor, made or effected
after the right of the obligee arose, that causes or increases
the obligor's insolvency.
Thus, under Louisiana and federal bankruptcy law, the trustee may
avoid Imperial's transfers to the bank by stepping into the shoes
of an unsecured creditor who could have avoided those transfers by
means of a revocatory action.1
Before the Louisiana Civil Code was revised in 1984, a
creditor pursuing a revocatory action had to demonstrate: (1)
1
Both parties agree that First Bankcard is the only unsecured
creditor that could arguably bring a revocatory action under
Louisiana law.
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insolvency of the debtor; (2) injury to the creditor; (3) intent
to defraud the creditor by the transaction; and (4) pre-existing
and accrued indebtedness. Central Bank v. Simmons, 595 So.2d 363,
365 (La.App. 2d Cir.1992). In amending the articles relating to
revocatory actions, the Louisiana Legislature replaced the fraud
requirement with an objective test of whether the act caused or
increased the obligor's insolvency. LSA-C.C. Art. 2036 cmts. (a)
& (b); Succession of Neuhauser, 579 So.2d 437, 441 (La.1991).
More generally, the question is whether "prejudice to the obligee's
right has been caused by the obligor's act." Exposé des Motifs of
the Projet of Titles III and IV of Book III of the Civil Code of
Louisiana, Introductory Note from the Reporter of the Obligations
Committee of the Louisiana State Law Institute, La. Civ.Code Ann.
Vol. 7-8 at 64 (West 1987).
A creditor seeking to avoid a transfer now must prove that the
offending transaction: (1) was made or effected after the right of
the obligee arose and (2) caused or increased the obligor's
insolvency. LSA-CC Art. 2036 & cmts. (a) & (f); Simmons, 595
So.2d at 365. The bankruptcy court determined that Imperial's
grant of a security interest to Whitney increased its insolvency.
However, the court concluded that the anteriority element—that is,
the requirement that the offending act be "made or effected after
the right of the obligee arose"—was missing because all of the debt
that Whitney incurred prior to the offending security agreement had
been paid off. According to Louisiana Civil Code articles
governing imputation of payment, Imperial's payments to First
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Bankcard were applied to debts that first became due and to accrued
interest.2 The bankruptcy court, after reviewing the evidence,
found that Imperial had paid off all of the debt it incurred before
the signing of the security agreement. While Imperial maintained
outstanding, unpaid balances under both credit agreements through
the date of bankruptcy filing, the only debt remaining at the time
of bankruptcy accrued after the security agreement was signed.
Because First Bankcard was not prejudiced by the security agreement
with respect to debt accrued after the transfer, the court
concluded that the debt existing at the time of bankruptcy could
not support a revocatory action.
The trustee argues that First Bankcard's right as obligee
arose not when Imperial incurred separate and discrete debts, but
rather when Imperial and First Bankcard first entered into the
credit agreements requiring Imperial to pay all debts incurred
under those agreements and allowing Imperial to incur debt without
entering into new contracts. This court must determine whether
First Bankcard's right was created as of the date the credit card
contracts were entered into or, as the lower courts found, as of
the date that the debt accrued.
2
Article 1868 of the Civil Code provides that "[i]f the
obligor had the same interest in paying all debts, payment must be
imputed to the debt that became due first." LSA-CC Art. 1868; see
Farlee Drug Center, Inc. v. Belle Meade Pharmacy, Inc., 464 So.2d
802, 806 (La.App. 5th Cir.1985). Additionally, article 1866 of the
Civil Code requires that "[a] payment made on principal and
interest ... be imputed first to interest." LSA-CC Art. 1866.
While Imperial maintained outstanding balances on both accounts, it
also made regular payments to First Bankcard that must be imputed
first to the pre-security agreement debt.
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The Louisiana Civil Code defines obligation as "a legal
relationship whereby a person, called the obligor, is bound to
render a performance in favor of another, called the obligee.
Performance may consist of giving, doing, or not doing something."
LSA-CC Art. 1756. The Code further provides that an obligation may
give an obligee the right to "[e]nforce the performance that the
obligor is bound to render." LSA-CC Art. 1758. The trustee
contends that the credit agreements represent a legal relationship
creating an "obligation" that, in turn, gives rise to a "right" as
defined by article 2036.
We disagree. The existence of the credit agreements, alone,
does not give rise to a "right" necessary to support a Louisiana
revocatory action. The Code's definition of "obligation" requires
more than the mere existence of a legal relationship; rather, it
demands a legal relationship under which "an obligor[ ] is bound to
render a performance in favor of another." Here, Imperial was
bound to repay any advance of credit obtained under its credit
agreements. However, this obligation arose only upon incurrence of
debt. No obligation existed until Imperial charged transactions to
the individual credit accounts. Because Imperial was not bound to
render its performance—payment of debt—until it actually incurred
debt, the relationship between Imperial and First Bankcard at the
time the credit agreements were entered into did not constitute an
"obligation" as defined by the Civil Code. In addition, given that
Imperial has paid off the debt existing at the time of the
offending security agreement, First Bankcard is unable to
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demonstrate how it has been prejudiced by that agreement.
Commentary accompanying the revised articles relating to
revocatory actions supports our conclusion that an obligee must
demonstrate the existence of some debt—liquidated or otherwise—at
the time of the offending transfer to maintain a revocatory action.
See Thomassie v. Savoie, 581 So.2d 1031, 1034 (La.App. 1st
Cir.1991) (stating that Legislature's substitution of "obligor" and
"obligee" for "debtor" and "creditor" in 1984 revision was intended
to expand scope of revocatory action to cover unliquidated claims
(citing art. 2041 cmt. (b))). The anteriority element is defined
"in accordance with traditional doctrine received by the Louisiana
jurisprudence." LSA-CC Art. 2036 cmt. (f). Courts reviewing the
anteriority element in pre-revision transactions consistently held
that the revocatory action was available only to creditors showing
preexisting and accrued indebtedness at the time of the offending
transfer. See, e.g., Copher v. Ormond Builders, Inc., 467 So.2d
1344, 1346 (La.App. 5th Cir.1985); Adams v. Laborde, 430 So.2d
381, 384 (La.App. 3d Cir.1983); Morgan v. Gates, 396 So.2d 1386,
1389 (La.App. 2d Cir.1981). Even after the revision, at least one
Louisiana court has continued to require "pre-existing and accrued
indebtedness." See Security Ctr. Protection Servs., Inc. v. All-
Pro Security, Inc., 650 So.2d 1206, 1214 (La.App. 4th Cir.1995);
see also In re Lenard, 849 F.2d 974 (5th Cir.1988); Bruce V.
Schewe, Debtors in Solido: On Plain Language and Uncertainty with
Mention of the Revocatory Action, 32 LOYOLA L. REV. 13, 41 & n. 128
(1986) (asserting that new article 2036 carries forth the timing
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rule of old article 1993, which provided that "[n]o creditor can
... sue individually to annul any contract made before the time his
debt accrued"). Finally, comments to article 2036 state that the
revised language "changes the law insofar as it abandons the notion
of fraud contained in the source articles. Otherwise it reproduces
the substance of" those articles. The source articles require the
presence of a "debt" owed to the creditor. See LSA-CC Arts. 1971,
1972, 1975, 1977 (repealed).
The trustee relies on two bankruptcy court decisions
interpreting the law of other jurisdictions to support her claim
that a revolving credit agreement can support a revocatory action.
In re Aluminum Mills Corp., 132 B.R. 869 (Bankr.N.D.Ill.1991); In
re Structurlite Plastics Corp., 193 B.R. 451 (Bankr.S.D.Ohio 1995).
Assuming these courts reached the correct result under Illinois and
Ohio law, for reasons discussed above, Louisiana law requires a
different conclusion.
Because we conclude that the bankruptcy court correctly
dismissed the trustee's revocatory action, we need not address
Whitney's other arguments.
III.
For these reasons, the district court's decision dismissing
Traina's complaint is AFFIRMED.
AFFIRMED.
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