In the Matter of Caro Products, Inc., Debtor.robert Hertzberg, Trustee, Plaintiff-appellee, v. H. Hirschfield and Sons, Inc., Defendant-appellant, 746 F.2d 349 (6th Cir. 1984)

This appeal arises out of the involuntary liquidation of Caro Products, Inc. under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 101-151326, which was enacted by the Bankruptcy Reform Act of 1978 (92 Stat. 2549). We are presented with the single issue of whether a trustee may invoke the new powers granted by the Act to avoid a transfer that occurred after the Act was passed but before the Act's effective date. The transferee, H. Hirschfield and Sons, Inc., maintains that the 1978 Reform Act does not apply and that, in any event, avoidance of the transfer would constitute a violation of the Fifth Amendment. The district court held that Congress intended the Act to apply to such transfers and that the avoidance was constitutional. We affirm.

The parties have stipulated the following facts. On August 15, 1979, Caro Products paid Hirschfield $17,733.91 for material that Hirschfield had delivered to Caro Products between April 27, 1979 and July 31, 1979. Caro was insolvent on the day of the payment, but Hirschfield neither knew nor had reason to know that Caro was insolvent. An involuntary petition was filed against Caro on October 17, 1979, within 90 days of the transfer to Hirschfield. The payment occurred after the enactment date (November 6, 1978) but before the effective date (October 1, 1979) of the Bankruptcy Reform Act of 1978.

The bankruptcy trustee brought an action under the voidable preference provision of the new Bankruptcy Code, 11 U.S.C. § 547(b), to set aside the transfer to Hirschfield.¹  This provision permits the trustee to avoid a transfer made within 90 days of the filing of a petition if the transfer was made while the debtor was insolvent, for the benefit of a creditor, on account of an antecedent debt and which enables the creditor to receive more than the creditor would receive under Chapter 7 of the Code. This provision marked an important departure from the prior bankruptcy law. Under the old law, the trustee could have avoided this transfer as a preference only if Hirschfield had known or had had reason to know that Caro Products was insolvent at the time of the transfer.² 

The parties agree that if the 1978 Reform Act controls transfers that occurred during the "gap period" between the date of enactment and the effective date, this transfer may be avoided. Hirschfield maintains, as stated, that the 1978 Reform Act was not intended to apply to transfers that were made during the gap period and, further, that such application to transfers made during that period would violate the Fifth Amendment.

The bankruptcy court held that Congress intended Sec. 547(b) to apply to the transfers at issue and that such an application did not violate the due process clause of the Fifth Amendment. In re Caro Products, Inc., 23 B.R. 245 (Bankr.E.D. Mich. 1982). The district court affirmed. The district court pointed out that Congress expressly directed that the Reform Act apply to all cases begun on or after October 1, 1979. This expression, the court found, implied that Congress also intended the new Act to govern transactions completed before the effective date. The retrospective application of Sec. 547(b) to the transfer now at issue, the court held, did not violate the due process or the taking clauses of the Fifth Amendment. The court noted that Hirschfield's interests were not completely destroyed because it joined the ranks of other creditors to whom the debtor's assets would be distributed. Hirschfield, moreover, had notice of the possibility of future avoidance because the transfer took place after the enactment date. As the district court stated, " [b]y virtue of the gap period, [Hirschfield] had the same notice of such possibility as a creditor who received such a transfer after the effective date of the Reform Act."

It appears to us that we should proceed, as did the Supreme Court in a case presenting an analogous problem (see post, III), by first determining whether application of the 1978 Reform Act to this transfer presents a substantial constitutional question. If we determine that it does, we would then determine whether it is fairly possible to construe the 1978 Reform Act to avoid this constitutional question.

We conclude that application of the 1978 Reform Act to this transfer during the gap period does not pose a substantial constitutional question and, further, that the Act was intended to apply to this transfer.

In United States v. Security Industrial Bank, 459 U.S. 70, 103 S. Ct. 407, 74 L. Ed. 2d 235 (1982), the Court considered the retrospective application of 11 U.S.C. § 522(f) (2), enacted by the 1978 Reform Act, which permits an individual debtor to avoid nonpossessory, nonpurchase-money liens on household furnishings. The liens in question, valid under state law, were created prior to the enactment of the 1978 Reform Act. The Court of Appeals had held that the 1978 Act was intended to apply retrospectively to liens created before enactment but held that such retrospective application violated the takings clause of the Fifth Amendment. The Supreme Court did not decide the constitutional question. It addressed this question solely to determine whether such retrospective application of the statute would raise a substantial constitutional question and thus bring into play the canon of construction that the constitutional question should be avoided if it is reasonably possible so to construe the statute. 459 U.S. at 78, 103 S. Ct. at 412.

In considering the constitutional question, the Court conceded that Sec. 522(f) (2) is a "rational exercise" of the authority of Congress with respect to bankruptcy and that, pursuant to this authority, Congress may retrospectively "impair contractual obligations." Id. at 74, 103 S. Ct. at 410. But the Court said, if this power is invoked "to defeat traditional property interests ... [t]he bankruptcy power is subject to the Fifth Amendment's prohibition against taking private property without compensation. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S. Ct. 854, 79 L. Ed. 1593 (1935)." 459 U.S. at 75, 103 S. Ct. at 410. In response to the contention that a taking analysis under the Fifth Amendment is inapposite since the government was not taking in the classical sense, the Court responded that such analysis "is not necessarily limited to outright acquisitions by the government for itself." Id. at 78, 103 S. Ct. at 412. The Court went on to hold that, in the light of these considerations, retrospective application of Sec. 522(f) (2) to defeat a vested property interest created before the provision was enacted would indeed raise a substantial constitutional question under the Fifth Amendment. The Court then, invoking the principle of construction that would, if fairly possible, avoid the constitutional question, determined that Congress did not intend that Sec. 522(f) (2) apply to liens created prior to its enactment.

Although to allow the trustee in the instant case to avoid the transfer to Hirschfield would "defeat a traditional property interest," we do not believe that the reasoning of Security Industrial Bank applies to the constitutional question presented.

Preliminarily, it should be noted that the Court there specifically stated that its holding does not apply to post-enactment but pre-effective date transfers. For the Court said in footnote 11:

Because all of the liens at issue in this case were established before the enactment date we have no occasion to consider whether Sec. 522(f) (2) should be applied to liens established after Congress passed the Act, but before it became effective.

459 U.S. at 82, 103 S. Ct. at 414.

There is no question but that Congress could have, consistent with the requirements of the Fifth Amendment, expressly made Sec. 547(b) of the 1978 Reform Act effective as of the date of enactment. Instead, Congress expressly provided that the Act would apply to cases commenced on or after the effective date, October 1, 1979, and that Sec. 547(b) would apply to transfers which occurred within 90 days of the filing of the petition. Congress therefore provided, expressly or at least by implication, that Sec. 547(b) would apply to this transfer, even though it was made prior to the effective date, since it was made within 90 days of the filing of the petition. Certainly, Congress can constitutionally do by implication that which it could have done by express provision. Moreover, as pointed out by Judge Schroeder, concurring in In re Webber, 674 F.2d 796, 804 (9th Cir. 1982), which involved application of Sec. 522(f) (2) to liens created during the gap period, Congress "gave some lead time for the public to gain familiarity with the new Act and to adjust debtor/creditor practice accordingly. The creditor can hardly claim to have been prejudiced by Congressional leniency in deferring the effective date." Accordingly, we conclude that application of Sec. 547(b) to the transfer involved here does not raise a substantial constitutional question, and therefore we need not apply the canon of construction that would have us seek to avoid application of Sec. 547(b) to this transfer.

As before indicated, the 1978 Reform Act expressly applies to bankruptcy matters begun on or after the effective date, October 1, 1979, and Sec. 547(b) expressly provides that it applies to transfers made within 90 days of the filing of the petition. In the instant case, the petition was filed on October 17, 1979, and the transfer was made on August 15, 1979, well within the 90 day period. Congress must have contemplated that, as occurred here, transfers would be made before October 1, 1979, but within 90 days of petitions filed on or after that date and thus Sec. 547(b) by its terms would be applicable to the transfers.

In Security Industrial Bank, the Court recognized that the lien avoidance provision involved there, Sec. 522(f) (2), might well be applicable to liens created during this gap period. In construing that provision to avoid the constitutional question raised by its application to pre-enactment liens, the Court said:Although the 1978 Act, in general, is effective for all cases commenced after its effective date, Congress might have intended that provisions that destroy previously vested property rights apply only to interests that came into effect after the enactment date. If Sec. 522(f) (2) is such a provision, the remainder of the 1978 Act would not affect the enforceability of these liens, but would still apply to these liens and these cases.

459 U.S. at 79, 103 S. Ct. at 413.

We therefore conclude that Sec. 547(b) means what it says or at least clearly implies, which is that, in this context, since this bankruptcy case was begun after the effective date by filing of the petition on October 17, 1979, this transfer may be avoided under Sec. 547(b) because it was made within 90 days of the filing of the petition.

The judgment of the district court is therefore AFFIRMED.