United States Court of Appeals,
Fifth Circuit.
No. 93-3289.
In the Matter of TOYOTA JEFFERSON, INC., Debtor.
Leonard LAKER, Chapter 7 Trustee for Bankruptcy ESTATE OF TOYOTA
OF JEFFERSON, Appellant,
v.
Francelle VALLETTE, Executrix for the Succession of Amelia
Schexnayder Normand, Appellee.
Feb. 28, 1994.
Appeal from the United States District Court for the Eastern
District of Louisiana.
Before KING, HIGGINBOTHAM and BARKSDALE, Circuit Judges.
KING, Circuit Judge:
Leonard Laker, as trustee of the bankruptcy estate of Toyota
of Jefferson, Inc., sought to recover for the estate three
allegedly preferential payments of money from the debtor to one of
its creditors, Amelia Schexnayder Normand, under 11 U.S.C. § 547.
The court below held that all three payments were voidable
preferences, but it nevertheless permitted him to recover only the
final transfer. This appeal followed.
I. BACKGROUND
A. Facts
Louis J. Normand, Sr., was the president and majority
shareholder of Toyota of Jefferson, Inc. (Toyota). Amelia
Schexnayder Normand, now deceased, was the mother of Louis Normand.
Francelle Vallette is the testamentary executrix for the succession
of Amelia Normand.
1
The dispute in the instant case involves a series of
transactions between Toyota and Amelia Normand in 1989 and 1990.
On May 30, 1989, Amelia Normand gave Toyota four checks totalling
$30,830.75. Toyota repaid this amount by two checks dated October
24, 1989, and Amelia Normand deposited the checks into a joint
account she shared with her son on October 25, 1989.
On January 8, 1990, Amelia Normand transferred $82,993 to
Toyota by check, which was deposited in Toyota's account the next
day. Toyota returned this amount to Amelia Normand in four checks
dated January 12-19, 1990. She deposited these checks into her
account over the period from January 17-26, 1990.
On February 22, 1990, Amelia Normand transferred $90,169 to
Toyota by check. Toyota repaid this amount over time, with seven
checks dated February 22, 1990, and two checks dated February 24,
1990. Amelia Normand deposited the checks from Toyota over the
period from March 1-14, 1990.
B. Procedural History
Toyota filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Eastern District of Louisiana on September
28, 1990. Leonard Laker was appointed as trustee for Toyota's
estate ("the bankruptcy trustee"), and he remained trustee after
the case was converted into a Chapter 7 proceeding on November 13,
1990. On October 23, 1991, the bankruptcy trustee filed an
adversary proceeding in the bankruptcy court against Vallette in
her capacity as executrix for the succession of Amelia Normand,
2
seeking to avoid and recover the payments made by Toyota to Amelia
Normand outlined above (totalling $203,992.75) under 11 U.S.C. §
547.
On May 26, 1992, the district court granted Vallette's
unopposed motion to withdraw reference of the adversary proceeding
from the bankruptcy court. After a telephone conference, the
parties consented to a bench trial before a United States
Magistrate Judge pursuant to 28 U.S.C. § 636(c). See McLeod,
Alexander, Powel & Apffel, P.C. v. Quarles, 925 F.2d 853, 855 (5th
Cir.1991) (noting that a magistrate judge acting under § 636(c) may
conduct a trial and enter judgment for the court in any civil
matter referred to it by the district court if the parties
consent). Trial was held on February 25, 1993. In its order and
reasons filed on March 31, 1993, the court held that the three sets
of payments from Toyota to Amelia Normand from October 25, 1989,
through March 14, 1990, were preferential payments within the
meaning of 11 U.S.C. § 547(b). The court considered and rejected
Vallette's arguments that the "contemporaneous exchange" and
"ordinary course of business" exceptions of § 547(c)(1) and (c)(2)
applied to the transactions. The court further held, however, that
only the final preferential payment, for $90,169, could be avoided
and recovered by the bankruptcy trustee, for the following reasons:
In sum, the Magistrate Judge finds that these payments
from Debtor to Creditor may be recovered by the bankruptcy
estate—they may be avoided. However, this was the same money
being passed back and forth.
The same money was borrowed and repaid three times. To
allow the recovery of the total—$203,992.75—would be an unjust
increase of the bankruptcy estate (and an unjust decrease of
3
the deceased Creditor's estate). Only the final and largest
transfer from Debtor to Creditor, in the amount of $90,169.00,
may be avoided.
The bankruptcy trustee timely filed his notice of appeal to this
court, appealing the portion of the order limiting his recovery of
the preferential payments to $90,169.
II. STANDARD OF REVIEW
We review a judgment rendered by a magistrate pursuant to 28
U.S.C. § 636(c) as we would a judgment rendered by a district
judge. See 28 U.S.C. § 636(c)(3); James v. Hyatt Corp., 981 F.2d
810, 812 (5th Cir.1993). Thus, we review issues of law de novo and
findings of fact under the clearly erroneous standard. James, 981
F.2d at 812.
III. ANALYSIS
The sole issue for our decision is whether the court below
properly limited the bankruptcy trustee's recovery to $90,169, the
amount of the last preferential payment from Toyota to Amelia
Normand.1 The bankruptcy trustee argues that the court below erred
in limiting the bankruptcy estate's recovery from Amelia Normand to
less than the full $203,992.75 sought. In the trustee's view, once
the court below decided that neither § 547(c)(1) nor (c)(2) applied
1
The appellee, Vallette, argues in her brief that the court
below erred in holding that the "contemporaneous exchange" and
"ordinary course of business" exceptions did not apply. We
decline to consider her arguments because, absent a cross appeal,
the appellee cannot attack the decision of the court below with a
view either to enlarging her own rights thereunder [or lessening
the rights of her adversary.] Morley Constr. Co. v. Maryland
Casualty Co., 300 U.S. 185, 191, 57 S.Ct. 325, 327, 81 L.Ed. 593
(1937); Securities and Exch. Comm'n v. AMX, Int'l, Inc., 7 F.3d
71, 74 n. 4 (5th Cir.1993); Speaks v. Trikora Lloyd P.T., 838
F.2d 1436, 1439 (5th Cir.1988).
4
to the preferential payments, the court was bound to award the
bankruptcy estate the full amount of the preferential payments.
Vallette argues, however, that the "subsequent advance" exception
found in § 547(c)(4) supports the decision by the court below.
That section of the Bankruptcy Code provides as follows:
(c) The trustee may not avoid under this section a
transfer—
* * * * * *
(4) to or for the benefit of a creditor, to the extent
that, after such transfer, such creditor gave new value to or
for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security
interest; and
(B) on account of which new value the debtor did not
make an otherwise unavoidable transfer to or for the
benefit of such creditor[.]
11 U.S.C. § 547(c)(4). Although the court below did not expressly
rely on § 547(c)(4), Vallette is entitled to offer alternative
bases for upholding the judgment, provided there is record support
for her arguments. Cox v. Sunbelt Sav. Ass'n, 896 F.2d 957, 959 n.
2 (5th Cir.1990).
We consider first the role § 547(c)(4) was intended to play by
the drafters of the Code. The exception "most obviously applies to
revolving credit relationships." Raymond T. Nimmer, Security
Interests in Bankruptcy: An Overview of Section 547 of the Code,
17 HOUS.L.REV. 289, 299 (1980). Two policy considerations support
the exception. First, without the exception, a creditor who
continues to extend credit to the debtor, perhaps in implicit
reliance on prior payments, would merely be increasing his
5
bankruptcy loss. Id. at 300. Second, the limited protection
provided by the subsequent advance rule encourages creditors to
continue their revolving credit arrangements with financially
troubled debtors, potentially helping the debtor avoid bankruptcy
altogether. Id. at 300-01. Protecting the creditor who extends
"revolving credit" to the debtor is not unfair to the other
creditors of the bankrupt debtor because the preferential payments
are replenished by the preferred creditor's extensions of new value
to the debtor. Kroh Bros. Dev. Co. v. Continental Constr. Eng'rs,
Inc. (In re Kroh Bros. Dev. Co.), 930 F.2d 648, 652 (8th Cir.1991).
We turn next to the elements of the § 547(c)(4) exception
itself. Commentators have noted that "[t]here are two keys to the
application of (c)(4). The creditor must have given (1) "new
value' and must have done so (2) after the preferential transfer."
1 DAVID G. EPSTEIN ET AL., BANKRUPTCY § 6-34, at 628 (1992). Two other
caveats must be observed. The new value given by the creditor must
not be secured by "an otherwise unavoidable security interest," §
547(c)(4)(A), and the debtor must not have made "an otherwise
unavoidable transfer to or for the benefit of such creditor" on
account of the new value, § 547(c)(4)(B).
The transfers in this case may be summarized as follows.
Preferential
Date Payment New Value
Oct. 1989 $30,830.75
Jan. 9, 1990 $82,993.00
Jan. 12-19, 1990 $82,993.00
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Feb. 1990 $90,169.00
Mar. 1990 $90,169.00
-----
Under the "net result rule," which was applied by some courts under
pre-Code bankruptcy law, bankruptcy courts would simply total the
preferential payments and the advances of new value and offset them
against each other. 1 EPSTEIN, supra, at 629. Because § 547(c)(4)
requires the new value to be given by the creditor after the
preferential transfer to the creditor, its scope is narrower in
operation than the net result rule. Id.; see also Waldschmidt v.
Ranier (In re Fulghum Constr. Corp.), 706 F.2d 171, 174 (6th Cir.)
("Congressional metamorphosis has transformed the judicially
created net result rule into what may be characterized as a
subsequent advance rule...."), cert. denied, 464 U.S. 935, 104
S.Ct. 342, 78 L.Ed.2d 310 (1983).
The bankruptcy trustee argues that none of the preferential
transfers made by Toyota qualify for the § 547(c)(4) exception
"because [Toyota] repaid all the funds that Amelia Normand lent it.
There was no subsequent advance by Amelia Normand which [Toyota]
did not repay." Phrased another way, the bankruptcy trustee's
argument is that the final preferential payment of $90,169
destroyed Amelia Normand's ability to rely on § 547(c)(4) to retain
the first two preferential payments.
We disagree with the bankruptcy trustee's interpretation of
§ 547(c)(4), believing it to be contrary to the statute's plain
language. As an aid to our analysis, we may compare the instant
7
case with the following hypothetical.
Preferential
Date Payment New Value
Oct. 1989 $30,830.75
Jan. 9, 1990 $82,993.00
Jan. 12-19, 1990 $82,993.00
Feb. 1990 $90,169.00
-----
It is clear that § 547(c)(4) would prevent the bankruptcy trustee
from setting aside either preferential payment in this
hypothetical. See Crichton v. Wheeling Nat'l Bank (In re Meredith
Manor, Inc.), 902 F.2d 257, 258-59 (4th Cir.1990); Boyd v. The
Water Doctor (In re Check Reporting Servs., Inc.), 140 B.R. 425,
439 (Bankr.W.D.Mich.1992). Each preferential payment has
effectively been returned to the estate by an even greater
extension of new value by the creditor. The transactions have not
harmed the other creditors of the bankruptcy estate, because they
have occasioned no diminution to the estate; indeed, they have
augmented it by almost $60,000. See In re Kroh Brothers, 930 F.2d
at 652 ("[T]he relevant inquiry under section 547(c)(4) is whether
the new value replenishes the estate."). Of course, if a creditor
has retained an unavoidable security interest in an extension of
new value, or if the debtor has subsequently repaid the new value
by means of "an otherwise unavoidable transfer," § 547(c)(4)(A) and
(B) prevent the creditor from relying on the exception because no
effective replenishment of the estate has occurred.
8
We hold that the existence of the final preferential payment
in this case does not allow the bankruptcy trustee to overcome
Vallette's § 547(c)(4) defense to avoidance of the first two
preferential payments. In the words of one commentator:
The prevailing interpretation seems to be the correct
one. If the debtor has made payments for goods or services
that the creditor supplied on unsecured credit after an
earlier preference, and if these subsequent payments are
themselves voidable as preferences (or on any other ground),
then under section 547(c)(4)(B) the creditor should be able to
invoke those unsecured credit extensions as a defense to the
recovery of the earlier voidable preference. On the other
hand, the debtor's subsequent payments might not be voidable
on any other ground and not voidable under section 547,
because the goods and services were given C.O.D. rather than
on credit, or because the creditor has a defense under section
547(c)(1), (2), or (3). In this situation, the creditor may
keep his payments but has no section 547(c)(4) defense to the
trustee's action to recover the earlier preference. In either
event, the creditor gets credit only once for goods and
services later supplied.
Vern Countryman, The Concept of a Voidable Preference in
Bankruptcy, 38 VAND.L.REV. 713, 788 (1985) (emphases added)
(footnotes omitted); see also 1 EPSTEIN, supra, at 632 ("[T]he
debtor's payment of the new value does not affect the application
of (c)(4) if the payment itself is avoidable."). The final
preferential payment in the instant case is voidable; § 547(c)(4)
offers Vallette no solace because the $90,169 payment was not
followed by an extension of new value. Once this payment is
avoided, the situation is identical to the hypothetical presented,
supra, and fits neatly within Professor Countryman's analysis.
Many bankruptcy courts have adopted this approach to § 547(c)(4).
See, e.g., Brown v. Shell Canada, Ltd. (In re Tennessee Co.), 159
B.R. 501, 518 (Bankr.E.D.Tenn.1993); Successor Comm. of Creditors
9
Holding Unsecured Claims v. Bergen Brunswig Drug Co. (In re Ladera
Heights Community Hosp., Inc.), 152 B.R. 964, 967-68
(Bankr.C.D.Cal.1993); Hyman v. Stone Lumber Co. (In re Winter
Haven Truss Co.), 154 B.R. 592, 596 (Bankr.M.D.Fla.1993); Mosier
v. Ever-Fresh Foods Co. (In re IRFM, Inc.), 144 B.R. 886, 889-93
(Bankr.C.D.Cal.1992); Allied Companies, Inc. v. Broughton Foods
Co. (In re Allied Companies, Inc.), 155 B.R. 739, 743-44
(Bankr.S.D.Ind.1992); In re Check Reporting Services, 140 B.R. at
432, 439. The subsequent advances following the first two
preferential payments were repaid, but with preferences that were
not "otherwise unavoidable." The result reached by the court below
is therefore correct.2
IV. CONCLUSION
For the foregoing reasons, the judgment of the court below is
AFFIRMED.
2
Some of our sister circuits have, in dicta, described §
547(c)(4)(B) as requiring the subsequent advance to go "unpaid."
See In re Kroh Brothers, 930 F.2d at 652; New York City Shoes,
Inc. v. Bentley Int'l, Inc. (In re New York City Shoes, Inc.),
880 F.2d 679, 680 (3d Cir.1989); Charisma Inv. Co., N.V. v.
Airport Sys., Inc. (In re Jet Florida Sys., Inc.), 841 F.2d 1082,
1083 (11th Cir.1988); In re Prescott, 805 F.2d 719, 731 (7th
Cir.1986). Although this description may be an adequate
shorthand description of § 547(c)(4)(B), a more complete
statement of the (c)(4) exception would be that a creditor who
raises it has the burden of proving that (1) new value was
extended after the preferential payment sought to be avoided, (2)
the new value is not secured with an otherwise unavoidable
security interest, and (3) the new value has not been repaid with
an otherwise unavoidable transfer. Cf. In re Prescott, 805 F.2d
at 731 ("The creditor that raises a "subsequent advance' defense
has the burden of establishing that new value was extended, which
remains unsecured and unpaid after the preferential transfer.").
10