Ralar Distributors, Inc. v. Rubbermaid, Inc.

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 92-2463
IN RE RALAR DISTRIBUTORS, INC., ET AL.,
Debtors,

RALAR DISTRIBUTORS, INC.,
HALMAR DISTRIBUTORS, INC.,

Plaintiffs, Appellants,

v.

RUBBERMAID, INCORPORATED,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Frank H. Freedman, U.S. District Judge]

Before

Cyr and Boudin, Circuit Judges,

and Burns,* Senior District Judge.

Paul R. Salvage with whom Michael J. Coyne, Susan L. Burns and

Bacon & Wilson, P.C. were on brief for appellants.

Dustin F. Hecker with whom Cornelius J. Chapman, V. Denise

Saunders and McDermott, Will & Emery were on brief for appellee.

September 14, 1993

*Of the district of Oregon, sitting by designation.

CYR, Circuit Judge. Chapter 11 debtors Ralar Distri-
CYR, Circuit Judge.

butors, Inc. and Halmar Distributors, Inc. (hereinafter: "debtor"

or "R-H") appeal a district court order affirming a bankruptcy

court's award of summary judgment to Rubbermaid, Inc. ("Rubber-

maid") in R-H's adversary proceeding to recover a $453,000

preferential transfer. We affirm.

I

BACKGROUND

R-H, a wholesale distributor of household products,

sold Rubbermaid and non-Rubbermaid merchandise to several retail

store chains, including Caldor. Between 1987 and 1989,

Rubbermaid and Caldor entered into a series of annual contracts,

the latest executed in March 1989, which the parties refer to as

an "advertising support program" ("ASP"). Rubbermaid authorized

Caldor to incur expense for promotional ads of Rubbermaid

products subject to reimbursement by Rubbermaid. Rather than

reimburse Caldor directly for incurring these ASP expenses,

however, Rubbermaid arranged with R-H, which was never a

signatory to the ASP agreement, to serve as a go-between. Caldor

would incur the ASP expenses, then deduct them from the next

invoice it received from R-H. R-H routinely treated Caldor's ASP

expenses as credits against Caldor's account with R-H ("ASP

credit"). To offset these ASP credits, R-H in turn would reduce

its next payment for Rubbermaid merchandise by the amount of its

most recent ASP credit to Caldor. The net effect of the ASP

2

transaction on R-H's books was a "wash."

On October 16, 1989, R-H commenced its chapter 11

reorganization proceeding. In its adversary proceeding complaint

against Rubbermaid, R-H alleged that Rubbermaid received a

voidable preferential transfer "on or about" July 24, 1989, when

it authorized Caldor to offset ASP expenses totalling $453,000 as

ASP credits on Caldor's account with R-H. The bankruptcy court

entered summary judgment for Rubbermaid on the ground that the

ASP credits merely constituted a "recoupment of mutual rights

under one transaction." See infra notes 1 and 10. The district

court affirmed.

II

DISCUSSION

Bankruptcy Code 547(b) sets out the essential

elements of a voidable preference:

(b) Except as provided in subsection (c) of
this section [setting out defenses to avoid-
ance], the trustee may avoid any transfer of
an interest of the debtor in property

(1) to or for the benefit of a creditor
[viz., Rubbermaid];

(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
. . . ; 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 [11 U.S.C. 701-

3

766];
(B) the transfer had not been made; and
(C) such creditor received payment of
such debt to the extent provided by
the provisions of this title [11
U.C.S. 101-1330].

11 U.S.C. 547(b) (emphasis added). A "transfer" of the

debtor's "property," within the preference period, that enables a

creditor to realize more than it would have received on its claim

in a chapter 7 liquidation of the property of the debtor estate,

see Bankruptcy Code 726, 11 U.S.C. 726, violates the theme of

equality of distribution among all creditors of like class. H.R.

Rep. No. 595, 95th Cong., 2d Sess. 177-78, reprinted in 1978

U.S.C.C.A.N. 5787, 5963, 6138 [hereinafter: H.R. Rep. No. 595].

Section 547(b) is designed to deter creditors from

"dismember[ing] the debtor during [its] slide into bankruptcy."

Id. at 177.

R-H contended that the net effect of the challenged ASP

credits was to permit Rubbermaid to receive the entire "benefit"

of the $453,000 ASP credit (i.e., the account receivable Caldor

owed R-H) which otherwise would have been apportioned among all

of R-H's unsecured creditors, not merely Rubbermaid, in the event

of a chapter 7 liquidation. The bankruptcy court disagreed, on

the ground that the ASP credits effected no "transfer of an

interest of the debtor in property."1

1The bankruptcy court explained its rationale as follows:

There are two difficulties with [the Debtors']
argument. First, there never was a $453,000 receivable
due to the Debtors from Caldor. The entire Caldor
receivable was, with the Debtors' consent, at all times

4

Appellant R-H characterizes the ASP transactions quite

differently: "On or about" July 24, 1989, Caldor owed R-H more

than $453,000 for merchandise previously purchased from R-H.

Thus, R-H held an account receivable an enforceable contract

claim in the amount of $453,000 against Caldor which assumedly

became property of the hypothetical R-H chapter 7 estate, see

Bankruptcy Code 541, 11 U.S.C. 541, hence available for pro

rata distribution among all R-H unsecured creditors, not merely

Rubbermaid. Instead, however, R-H in effect "released" Caldor

from its obligation to pay R-H the full $453,000 account receiv-

able, in order to effect reimbursement of the ASP expenses Caldor

was entitled to receive from Rubbermaid under their separate ASP

contract, thereby conferring an indirect "benefit" upon Rubber-

subject to advertising credits which turned out to be
$453,000. Second, there never was a $453,000 debt owed
by the Debtors to Rubbermaid. The entire indebtedness
owed Rubbermaid was at all times subject to the same
credit arrangement. To put it another way, the
agreement made among the Debtors, Caldor and Rubbermaid
prevented any calculation of indebtedness owed by
Caldor to the Debtors, or owed by the Debtors to
Rubbermaid, without taking into account the advertising
costs incurred by Caldor with respect to Rubbermaid
products. Because the parties expressly agreed to the
assertion of the advertising credits in their
respective sales transactions, application of the
credits constitutes recoupment of mutual rights under
one transaction. Without that agreement, the
advertising and sales would consist of separate
transactions and there would not even be the right of
setoff vis-a-vis Caldor and the Debtors or vis-a-vis
the Debtors and Rubbermaid. See, generally, on
recoupment and setoff, In re B & L Oil, 782 F.2d 155

(10th Cir. 1986) . . . .

Ralar Distribs. v. Rubbermaid, Inc. (In re Ralar Distribs.), No.

90-4222, slip op. at 3-4 (Bankr. D. Mass. Sept. 4, 1991).

5

maid. See Bankruptcy Code 101(54), 11 U.S.C. 101(54)

(broadly defining "transfer" as including both "direct" and

"indirect" modes of disposing of property); see also Kellogg v.

Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586, 591

(5th Cir. 1987) (mere "circuity of arrangement" cannot redeem a

transaction which has the effect of a preference) (citing

National Bank of Newport v. National Herkimer Cty. Bank, 225 U.S.

178, 184 (1912)).

Rubbermaid counters that such ASP arrangements are too

customary in wholesale-retail trade to be considered preferen-

tial, and that this voluntary ASP arrangement constituted a long-

established "course of dealing" among the parties. If a "trans-

fer" occurred at all, says Rubbermaid, R-H received the benefit

of the transfer because Rubbermaid accepted $453,000 less from

R-H for household merchandise previously purchased from

Rubbermaid, and if anyone received a voidable "transfer" from R-

H, it was Caldor. Furthermore, these ASP credits ultimately

produced a "wash" on R-H's books, documenting the fact that there

was no net diminution in either R-H's property or the property of

its hypothetical chapter 7 estate. Finally, recovery of these

transfers from Rubbermaid would result in an unjust enrichment to

R-H, which realized the benefits from the use of these ASP

credits in reducing its outstanding debt to Rubbermaid, but would

now recoverthe same$453,000 forthe benefitof itschapter 11estate.

There is surface appeal to the arguments of both

6

parties, though both are wide of their mark.2 If borne out by

the evidence, the contentions advanced by R-H arguably would

comport with the policy of equality of distribution, and R-H

correctly asserts that it is the effect of the alleged transfer,

not the subjective intent of the parties, which primarily governs

the section 547(b) analysis. See 4 Lawrence P. King, Collier on

Bankruptcy 547.01, at 547-13 (and cases cited therein)

[hereinafter: Collier]; but cf. infra note 5. We are persuaded,

nevertheless, by Rubbermaid's contention that R-H failed to carry

its burden of proof in opposition to Rubbermaid's motion for

summary judgment.

In order to prevail, R-H ultimately must establish, by

a preponderance of the evidence, each essential element of a

2Several of Rubbermaid's arguments are beside the point.
First, although Rubbermaid did not receive a direct "transfer"
from R-H, a "transfer" to Caldor "for the benefit of" Rubbermaid
would be recoverable from either Rubbermaid or Caldor. See Bank-

ruptcy Code 550, 11 U.S.C. 550(a) (trustee may recover from
"the initial transferee" or from "the entity for whose benefit
the transfer was made"); Travelers Ins. Co. v. Cambridge Meridian

Group, Inc. (In re Erin Food Servs., Inc.), 980 F.2d 792, 797,

797 n.8 (1st Cir. 1992).
Second, Rubbermaid places great stock in the fact that these
ASP transactions produced a "wash" on R-H's books, suggesting
that the ASP credits resulted in no diminution of the hypotheti-
cal chapter 7 estate. Were this the standard, however, few
transfers would ever contravene 547(b). Instead, the 547(b)
focus is on the ultimate effect of the transfer. By their very
nature, most preferential transfers result in a "wash" on the
debtor's books, since the preferred transferee receives payment
on account of an antecedent debt and its allowable "claim"
against the chapter 7 estate is reduced accordingly.
Finally, arguably no "unjust" enrichment would result were
R-H to recover from Rubbermaid. If Rubbermaid were required to
disgorge, it could file a proof of claim for the amount of the
avoided transfer, id. 502(h), 502(d), which would be entitled

to a pro rata distribution from the R-H debtor estate.

7

voidable preference under section 547(b). See Bankruptcy Code

547(g), 1107(a), 11 U.S.C. 547(g), 1107(a); Travelers Ins.

Co. v. Cambridge Meridian Group, Inc. (In re Erin Food Servs.,

Inc.), 980 F.2d 792, 799 (1st Cir. 1992). Once the movant

presents sufficient competent evidence to entitle it to summary

judgment as a matter of law, the nonmovant cannot rest merely on

the averments and denials in its pleadings, but must set forth

specific facts demonstrating a genuine issue for trial. See Fed.

R. Bankr. P. 7056; Fed. R. Civ. P. 56(c), (e); Germain v. RFE

Inv. Partners IV (In re Wescorp, Inc.), 148 B.R. 161, 162-63

(Bankr. D. Conn. 1992); see also Marshack v. Sauer (In re

Palmer), 140 B.R. 765, 768 (Bankr. C.D. Cal. 1992). As to any

essential factual element of its claim on which the nonmovant

would bear the burden of proof at trial, its failure to come

forward with sufficient evidence to generate a trialworthy issue

warrants summary judgment for the moving party. See Christians

v. Crystal Evang. Free Church (In re Young), 148 B.R. 886, 889

(Bankr. D. Minn. 1992) (citing Celotex Corp. v. Catrett, 477 U.S.

317, 322 (1986)).

At trial, R-H would bear the burden of proving, inter

alia, that the challenged ASP credits effected a "transfer of an

interest of the debtor in property." Bankruptcy Code 547(b),

11 U.S.C. 547(b). See also Bankruptcy Code 547(e), 11 U.S.C.

547(e) ("[A] [preferential] transfer is not made until the

debtor has acquired rights in the property [transferred]."). A

prepetition debtor acquires "rights" in property for section

8

547(b) purposes if, but for the challenged transfer, its interest

would have been "property of the estate" under section 541 at the

filing of a chapter 7 petition. See Begier v. Internal Revenue

Serv., 496 U.S. 53, 58, 58 n.3 (1990).

Accordingly, at the summary judgment stage, R-H was

required to come forward with competent evidence that,

immediately prior to its "transfer" of these ASP credits, its

hypothetical chapter 7 estate owned an account receivable from

Caldor equal to the total unpaid price of the merchandise

previously sold to Caldor, and not merely in the net amount due

R-H after deducting Caldor's ASP credit from the total price of

the merchandise. Unless the hypothetical R-H chapter 7 estate

would have acquired the contract right to compel Caldor to pay

the full $453,000, with no offsetting ASP credit, the property of

the hypothetical R-H estate could not have been diminished. Id.

("[I]f the debtor transfers property that would not have been

available for distribution to his creditors in a bankruptcy

proceeding, the policy behind the avoidance power is not

implicated.").

What constitutes "property," within the meaning of

Bankruptcy Code 541, is a question of federal law, see Koch

Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1343 (7th

Cir. 1987) (citing H.R. Rep. No. 595, at 367-68), cert. denied,

485 U.S. 906 (1988), and it is well established that a debtor's

contractual right to recover an account receivable is property of

the chapter 7 estate, see Crysen/Montenay Energy Co. v. Esselen

9

Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098,

1101 (2d Cir. 1990) (citing In re Chauteguay Corp., 78 B.R. 713,

725 (Bankr. S.D.N.Y. 1987)); Glenshaw Glass Co. v. Ontario Grape

Growers Mktg. Bd. (In re Keystone Foods, Inc.), 145 B.R. 502, 508

(Bankr. W.D. Pa. 1992). On the other hand, the nature and extent

of the debtor's enforceable "interest" or "rights" in an account

receivable are defined by state law in this case, by state

contract law. See, e.g., Griffel v. Murphy (In re Wegner), 839

F.2d 533, 538-39 (9th Cir. 1988) (under Montana law, prior mutual

rescission of executory contract divested debtor of "rights" in

cattle); see also Glinka v. Bank of Vermont (In re Kelton Motors,

Inc.), 153 B.R. 417, 419 (D. Vt. 1993) (because 547(b) is

silent, courts must "look to state law" for definition of

"interest" in property); see generally Collier 547.03, at 547-

22.1.

Here, R-H alleged a "transfer." Rubbermaid, the movant

at summary judgment, presented competent extracontractual

evidence that the contract between R-H and Caldor gave rise to an

account receivable only in the net amount of the unpaid price of

the merchandise less Caldor's ASP credits. Indeed, even on

appeal R-H readily concedes that it invariably honored Caldor's

ASP credits from the inception of the ASP arrangement in 1987.3

The deposition testimony revealed that Caldor, like many other

3As further confirmation of the parties' understanding,
their prepetition settlement agreement of Caldor's debt to R-H in
September 1989 reflects a deduction for all ASP credits then due
Caldor.

10

trade retailers, routinely asserted this sort of "charge back"

for manufacturers other than Rubbermaid.

Under state law,4 R-H's contract rights against

Caldor, if indefinitely expressed in their contract, would be

informed by their prior course of dealing, course of performance,

or usage of trade. See Mass. Gen. L. ch. 106, 2-202 (1990)

(providing that parol evidence of prior course of dealing or

usage of trade is admissible to explain or supplement contract

terms); id. 1-205(1) (defining "course of dealing" as "a

sequence of previous conduct between the parties to a particular

transaction which is fairly to be regarded as establishing a

common basis of understanding for interpreting their expressions

and other conduct"); id. 1-205(3); id. 2-208(1) ("Where the

contract for sale involves repeated occasions for performance by

either party with knowledge of the nature of the performance and

opportunity for objection to it by the other, any course of

performance accepted and acquiesced in without objection shall be

relevant to determine the meaning of the agreement."); id.

1-205(2) (defining "usage of trade" as any practice or method

of dealing having such regularity of observance in a place,

vocation or trade as to justify an expectation that it will be

4We assume for present purposes that Massachusetts law would
apply to the contract for the sale of goods between R-H, a Mas-
sachusetts corporation, and Caldor. The Massachusetts Uniform
Commercial Code, on "course of performance and dealing" and
"usage of trade" evidence, substantially conforms with that in
other states.

11

observed with respect to the transaction in question").5

Bypassing these procedural concerns, R-H urges on

appeal that "[w]hether an account receivable from Caldor ever

existed on the Debtors [sic] books is a [question] of fact which

should be determined by the Bankruptcy Court on remand."

However, once Rubbermaid came forward with its undisputed

evidence of prior course of dealing, performance, and usage of

trade, R-H was left with the laboring oar. As the nonmovant at

summary judgment, R-H had the burden to establish that its agree-

ment with Caldor contained an express contract term which (i)

would have precluded resort to such extracontractual evidence in

interpreting the contractual rights of the parties, or (ii) would

at least have given rise to a trialworthy factual issue bearing

on the proper interpretation of their contract. See Mass. Gen.

L. ch. 106, 1-205(4) (1990) (express contract terms "trump"

inconsistent "course of dealing" evidence); see also Lancaster

5In many respects, this is precisely the type of evidence
which would be needed to establish Rubbermaid's 547(c)(2)
defense to preference avoidance for payments made in the

"ordinary course of [the debtor's] business." See Collier

547.01, at 547-13 n.20 (noting that, though state of mind
generally is immaterial to overall 547 analysis, intent "may be

a dispositive factor in determining certain elements of a
preference . . . ."). But because this "transfer" involves R-H's
alleged "release" of a preexisting obligation by Caldor, and R-H
has the threshold burden to establish all essential 547(b)

elements before the burden shifts to Rubbermaid to establish a
547(c) defense to avoidance, the burden remained with R-H to

establish a contract right to recover the full price of the

merchandise with no offsets for Caldor's ASP credits.

12

GlassCorp. v. PhilipsECG, Inc., 835F.2d 652, 659(6th Cir. 1987).6

The record does not disclose the relevant terms of the

Caldor - R-H agreement nor is there documentation from which its

terms might reasonably be inferred.7 Moreover, there is no evi-

dence that Rubbermaid accelerated its recourse to the ASP credit

arrangement in anticipation of R-H's chapter 11 petition, as by

inducing Caldor to increase the amount or frequency of its ASP

credits over previous levels.8 Consequently, given its failure

to confront Rubbermaid's evidence of prior course of dealing,

performance, and usage of trade, R-H demonstrated no trialworthy

dispute that it had any cognizable "interest" in the $453,000 ASP

credit which would have become property of the estate in the

6Similarly, R-H did not generate a trialworthy issue as to
whether the ASP credits could have replaced the "released" Caldor
accounts receivable as R-H "assets," since the hypothetical R-H
chapter 7 estate could never have required Rubbermaid to honor
the ASP credits by paying the R-H estate $453,000 in cash. Under
the contract between Rubbermaid and R-H, as informed by prior
course of dealing, any ASP credits held by R-H could be used only

to reduce R-H's accounts payable to Rubbermaid.

7R-H's Exhibit H is merely a redacted transcription of
certain relevant book entries, prepared solely for litigation
purposes, hence not probative of the terms of the agreement
between R-H and Caldor. Similarly, although a former R-H officer
testified that R-H could have refused to accept Caldor's ASP
credits at any time, he identified no contractual basis for the
supposed right of refusal, nor did he suggest that R-H had ever
exercised such a right.

8Nowhere does R-H suggest or show that Caldor's ASP credits
exceeded the authorized 1989 fixed percentage rate (13.75% of
total 1989 merchandise sales to Caldor), or that the 1989 level
differed significantly from the authorized fixed-percentage
rates, or ASP credits claimed, in 1987 or 1988.

13

event of a chapter 7 liquidation.9

III

CONCLUSION

We hold that R-H did not establish a trialworthy issue

as to whether a section 547(b) "transfer" occurred, as was its

burden under Fed. R. Bankr. P. 7056 and Fed. R. Civ. P. 56(c),

(e). Thus, we need take no position on the voidability of duly

established ASP credit transactions as preferential transfers

under section 547(b).10

9R-H's Rule 7056 proffer was seriously deficient on more
than one front. The 90-day preference period extended back to
July 19, 1989. But the evidence shows that Caldor claimed
$294,000 of the $453,000 in ASP credits by assessing "charge
backs" against R-H on June 25, 1989. Since R-H's acceptance of

these "charge backs" constituted the alleged "transfer," R-H
arguably did not meet its burden of proving that these transfers
of $294,000 in ASP credits fell within the applicable preference
period under 547(b)(4)(A) (transfer "made . . . on or within 90
days before the date of the filing of the petition").

10The bankruptcy court premised its decision on the
equitable doctrine of recoupment, see supra note 1, citing In re

B & L Oil Co., 782 F.2d 155 (10th Cir. 1986). Where a chapter 7

estate and its creditor hold "counterclaims" arising out of a
contractual "transaction" which bridges the date of the chapter 7
petition, it is often deemed inequitable to allow the estate to
recover its postpetition claim in full from the creditor, while

the same creditor is allowed only a pro rata dividend on its

prepetition claim against the estate. Recoupment allows the
creditor to abate its payment to the chapter 7 estate by the
amount of its prepetition claim. Since we rely on other grounds,
we need not address the problematic application of the recoupment
theory in this case. See Electronic Metal Prods., Inc. v.

Honeywell, Inc., 95 B.R. 768, 770 (D. Colo. 1989) (recoupment

must be narrowly construed as a preference defense); compare

Raleigh v. Mid American Nat'l Bank & Trust Co. (In re Stoecker),

131 B.R. 979, 983 (Bankr. N.D. Ill. 1991) (recoupment not a
viable defense on merits of preference avoidance action as it is
not an enumerated defense in 547(c)(1)-(7)), with Visiting

Nurse Ass'n of Tampa Bay, Inc. v. Sullivan (In re Visiting Nurse

14

Affirmed; cost to appellees.

Assoc. of Tampa Bay, Inc.), 121 B.R. 114, 121 n.4 (Bankr. M.D.

Fla. 1990) (recoupment "well recognized" defense to preference
avoidance).

15