Unsecured Creditors Committee v. Community Bank, E, No. 12-60234 (5th Cir. 2013)
Annotate this CaseThis opinion or order relates to an opinion or order originally issued on January 7, 2013.
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Case: 12-60234 Document: 00512103546 Page: 1 Date Filed: 01/07/2013 IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED January 7, 2013 No. 12-60234 Lyle W. Cayce Clerk STINSON PETROLEUM COMPANY, INCORPORATED Debtor THE UNSECURED CREDITORS COMMITTEE Plaintiff v. COMMUNITY BANK, ELLISVILLE MISSISSIPPI, a/k/a Community Bank Defendant - Appellee v. DEREK A. HENDERSON, Trustee - Appellant Appeal from the United States District Court for the Southern District of Mississippi 1 Before BARKSDALE, DENNIS, and GRAVES, Circuit Judges. 2 PER CURIAM:* * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. Case: 12-60234 Document: 00512103546 Page: 2 Date Filed: 01/07/2013 No. 12-60234 3 Stinson Petroleum Company ( Stinson ) engaged in a check-kiting scheme 4 using checking accounts Stinson held with Community Bank ( Community ) and 5 Bank of Evergreen ( Evergreen ).1 Stinson perpetrated the kite by depositing 6 worthless checks into its account with Community that were drawn on its 7 account with Evergreen while simultaneously depositing worthless checks into 8 the latter that were drawn on the former. By circulating worthless checks 9 between the two accounts, and by taking advantage of provisional credits that 10 both banks extended to deposits not yet collected, Stinson created the impression 11 of a positive account balance while substantial debt accrued. 12 As kites are prone to do, the scheme eventually collapsed. Evergreen was 13 the first to uncover the kite, so it did not incur any losses. Community, by 14 contrast, was not so lucky. Community ultimately determined that, because of 15 the kite, Stinson accumulated an overdraft of between $6 and $7 million in its 16 account with Community. Community met with Stinson and Evergreen and 17 agreed to receive two wire transfers worth $3.5 million from Stinson s Evergreen 18 account. 19 Stinson subsequently filed for bankruptcy under Chapter 11, and a 20 committee of unsecured creditors ( the Creditors ) commenced an adversary 21 proceeding against Community seeking to avoid the two wire transfers as 22 avoidable preferences under 11 U.S.C. § 547(b). The bankruptcy was later 23 converted to Chapter 7, and bankruptcy trustee Derek A. Henderson ( the 24 Trustee ) was substituted as the plaintiff. Ultimately, both the bankruptcy court 1 Check kiting consists of drawing checks on an account in one bank and depositing them in an account in a second bank when neither account has sufficient funds to cover the amounts drawn. Just before the checks are returned for payment to the first bank, the kiter covers them by depositing checks drawn on the account in the second bank. Due to the delay created by the collection of funds by one bank from the other, known as the float time, an artificial balance is created. United States v. Stone, 954 F.2d 1187, 1188 n.1 (6th Cir. 1992). 2 Case: 12-60234 Document: 00512103546 Page: 3 Date Filed: 01/07/2013 No. 12-60234 25 and the district court concluded that the wire transfers were not avoidable 26 preferences, and the Trustee appealed. 27 At issue is whether Community, because of the wire transfers, improved 28 its position, meaning that it fared better than it would have fared under 29 Stinson s Chapter 7 liquidation. The Bankruptcy Code provides that the Trustee 30 has the burden of demonstrating that Community would have received less 31 under Chapter 7 than it did via the prepetition transfers. We conclude that the 32 lower courts did not clearly err in determining that the Trustee failed to satisfy 33 this burden and therefore AFFIRM the judgment of the district court. BACKGROUND 34 35 Evergreen became suspicious of Stinson s activity sometime around the 36 weekend of July 4, 2009 and froze the company s account two days later. 37 Consequently, the kite collapsed. Before Community learned that Evergreen 38 had uncovered the check-kiting scheme and, by returning checks for insufficient 39 funds, taken steps to protect itself, Community continued to grant Stinson 40 provisional credit, of which Stinson availed itself. This resulted in Stinson s 41 overdraft with Community, which the bank determined to be between $6 and $7 42 million. 43 In light of this debt, Community met with representatives from Stinson 44 and Evergreen and agreed to receive a direct payment of $3.5 million via two 45 wire transfers from Stinson s account with Evergreen. The first wire transfer 46 totaled $1,992,863 and included a notation in the written instructions that read, 47 payment for checks #2226, 2231, 2229, three checks drawn from Stinson s 48 Evergreen account and deposited in its Community account on June 30, 2009. 49 The second wire transfer totaled $1,507,137 and included a notation in the 50 written instructions that read, payment of returned checks. According to 51 testimony later heard by the bankruptcy court, the purpose of the wire transfers 3 Case: 12-60234 Document: 00512103546 Page: 4 Date Filed: 01/07/2013 No. 12-60234 52 was to reimburse Community for the eighteen checks Evergreen returned to 53 Community after the kite collapsed. 54 Stinson later filed for Chapter 11 bankruptcy, at which point the Creditors 55 commenced their adversary proceeding against Community, the prosecution of 56 which was eventually charged to the Trustee once the bankruptcy was converted 57 from Chapter 11 to Chapter 7. Both the Trustee and Community cross-moved 58 the bankruptcy court for summary judgment, but the court denied both motions. 59 The parties tried the wire-transfer claims before the bankruptcy court over the 60 course of two days. 61 testified at trial that the bank may have been able to collect the $3.5 million via 62 Chapter 7. Noteworthy here, Community s senior vice president 63 The bankruptcy court found that the wire transfers were not avoidable 64 preferences. Specifically, the bankruptcy court found that, because Community 65 granted provisional credit to Stinson and because Stinson took advantage of this 66 credit, 67 eighteen returned checks and their proceeds and that the Trustee had failed to 68 prove that the transfers were not intended to satisfy Community s security 69 interest. Consequently, the bankruptcy court ruled that the wire transfers did 70 not deplete Stinson s bankruptcy estate and did not improve Community s 71 position relative to how the bank would have fared via Chapter 7. The district 72 court affirmed the bankruptcy court s ruling. The district court observed that 73 the Trustee had the burden of proving that Community would have received less 74 than $3.5 million via Chapter 7 liquidation and concluded that the record 75 contains scant evidence to that effect. The Trustee timely appealed. 76 Community held a perfected, first-priority security interest in the STANDARD OF REVIEW 77 We review a bankruptcy appeal from the district court applying the same 78 standard to the bankruptcy court s findings of fact and conclusions of law that 79 the district court applied. In re Morrison, 555 F.3d 473, 480 (5th Cir. 2009). 4 Case: 12-60234 Document: 00512103546 Page: 5 Date Filed: 01/07/2013 No. 12-60234 80 Namely, we review findings of fact . . . for clear error[] and . . . conclusions of 81 law . . . de novo. Id. We review mixed questions of law and fact de novo. In re 82 San Patricio Cnty. Cmty. Action Agency, 575 F.3d 553, 557 (5th Cir. 2009). 83 Whether a transfer constitutes an avoidable preference is a question of law; 84 however, we review the fact question underlying any element of the Trustee s 85 preference claim for clear error. See In re Ramba, Inc., 416 F.3d 394, 401-02 (5th 86 Cir. 2005). 87 A finding of fact is clearly erroneous only if on the entire evidence, the 88 court is left with the definite and firm conviction that a mistake has been 89 committed. In re Duncan, 562 F.3d 688, 694 (5th Cir. 2009) (internal quotation 90 marks omitted). If the bankruptcy court s view of the evidence is plausible in 91 light of the record viewed in its entirety, [we] may not reverse it even though 92 convinced that had [we] been sitting as a trier of fact, [we] would have weighed 93 the evidence differently. In re Martin, 963 F.2d 809, 814 (5th Cir. 1992) 94 (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985)) (internal 95 quotation marks omitted). In fact, [if] there are two permissible views of the 96 evidence, the factfinder s choice between them cannot be clearly erroneous. Id. 97 (quoting Anderson, 470 U.S. at 574) (internal quotation marks omitted). 98 DISCUSSION 99 A. 100 The Trustee s preference claim is based on Section 547(b), which provides: 101 102 103 (b) the Except as provided in subsections (c) and (I) of this section, trustee may avoid any transfer of an interest of the debtor in property 104 (1) to or for the benefit of a creditor; 105 106 (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; 107 (3) made while the debtor was insolvent; 108 (4) made 5 Case: 12-60234 Document: 00512103546 Page: 6 Date Filed: 01/07/2013 No. 12-60234 109 110 (A) on or within 90 days before the date of the filing of the petition; or 111 112 113 (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) 114 115 that enables such creditor to receive more than such creditor would receive if 116 (A) the case were a case under chapter 7 of this title; 117 (B) the transfer had not been made; and 118 119 (C) such creditor received payment of such debt to the extent provided by the provisions of this title. 120 11 U.S.C. § 547(b). 121 Section 547(b) . . . allows a trustee to recover as a preferential payment 122 certain transfers made by a debtor to a creditor within the ninety-day period 123 prior to bankruptcy. Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 124 1033 (5th Cir. 1987). Its purpose is twofold: (1) it permits a trustee to avoid pre- 125 bankruptcy transfers occurring on the eve of bankruptcy so as to discourage 126 creditors from racing to the courthouse to dismember the debtor during his slide 127 into bankruptcy ; and (2) it ensures fair distribution among the creditors. Union 128 Bank v. Wolas, 502 U.S. 151, 161 (1991) (quoting H.R. REP. NO. 95-595, at 177 129 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6138) (internal quotation marks 130 omitted). 131 In this case, Community conceded at trial that the Trustee could prove the 132 first four elements of § 547(b) and disputed only the Trustee s claims under § 133 547(b)(5). Accordingly, at issue is the requirement that before a trustee in 134 bankruptcy [may] avoid a preferential payment, the trustee must establish that 135 the payment enabled the creditor to receive more than the creditor would have 136 received upon liquidation under Chapter 7 of the bankruptcy code. Braniff 137 Airways, 814 F.2d at 1034 (footnote omitted). This test is often referred to as the 6 Case: 12-60234 Document: 00512103546 Page: 7 Date Filed: 01/07/2013 No. 12-60234 138 greater percentage test or the improvement in position test. See, e.g., In re 139 El Paso Refinery, LP, 171 F.3d 249, 253 (5th Cir. 1999); In re Clark Pipe & 140 Supply Co., 893 F.2d 693, 698 (5th Cir. 1990). Importantly, the Trustee bears 141 the burden on this point. 11 U.S.C. § 547(g); Braniff Airways, 814 F.2d at 1034 142 n.3. 143 Under this test, the bankruptcy court was required to construct a 144 hypothetical Chapter 7 liquidation [based on the evidence that the parties 145 presented at trial] and determine what the creditor would have received had the 146 transfers not taken place. In re N.A. Flash Found. Inc., 298 F. App x 355, 359 147 (5th Cir. 2008) (citing In re ML & Assocs., Inc., 301 B.R. 195, 202 (Bankr. N.D. 148 Tex. 2003)). If the creditor receives a greater percentage of its debt as a result 149 of the prepetition transfer than it would have in a bankruptcy distribution, the 150 transfer is preferential. Id. (citing In re El Paso Refinery, 171 F.3d at 253-54). 151 B. 152 In analyzing whether Community received more via the wire transfers 153 than it would have received under Chapter 7, we must consider how the debt 154 would have been treated in a Chapter 7 liquidation. Braniff Airways, 814 F.2d 155 at 1034. Here, Community s status as Stinson s creditor is the locus of the 156 inquiry because a fully secured creditor who receives a prepetition payment 157 does not receive a greater percentage than he would have in a bankruptcy 158 proceeding. In re El Paso Refinery, 171 F.3d at 254. This is because as a fully 159 secured creditor, [Community] would have recovered 100% payment in a 160 bankruptcy proceeding. Id. Accordingly, [p]ayments to a fully secured creditor 161 are not preferential because the creditor does not receive more than he would in 162 a Chapter 7 liquidation. Braniff Airways, 814 F.2d at 1034 (alteration in 163 original) (quoting In re Mason & Dixon Lines, Inc., 65 B.R. 973, 977 (Bankr. 164 M.D.N.C. 1986)) (internal quotation marks omitted). 7 Case: 12-60234 Document: 00512103546 Page: 8 Date Filed: 01/07/2013 No. 12-60234 165 Relevant here is section 75-4-210(a) of the Mississippi Code, which 166 provides: 167 168 (a) A collecting bank has a security interest in an item and any accompanying documents or the proceeds of either: 169 170 171 (1) In case of an item deposited in an account, to the extent to which credit given for the item has been withdrawn or applied; 172 173 174 175 (2) In case of an item for which it has given credit available for withdrawal as of right, to the extent of the credit given, whether or not the credit is drawn upon or there is a right of charge-back; or 176 (3) If it makes an advance on or against the item. 177 MISS. CODE ANN. § 75-4-210(a). The Trustee acknowledges that this provision 178 means that a bank that extends provisional credit on a deposited check prior to 179 actually collecting funds on that check automatically obtains a perfected security 180 interest in the check and its proceeds and that this is precisely the situation in 181 which Community found itself. Nonetheless, and despite case law providing that 182 a fully secured creditor who receives a prepetition payment has, as a matter of 183 law, not received a preferential transfer, see In re El Paso Refinery, 171 F.3d at 184 254; Braniff Airways, 814 F.2d at 1034, the Trustee argues that Community 185 could not guarantee when and whether it would have received any payment and 186 thus faults the district court for improperly assuming that Community would 187 have received $3.5 million from Stinson via Chapter 7. 188 We do not accept the Trustee s argument. The relevant inquiry is whether 189 Community, because of the $3.5 million wire transfers, improved its position 190 relative to how well it would have fared in a hypothetical Chapter 7 liquidation. 191 Specifically, the Trustee has the burden of showing that the payment enabled 192 the creditor to receive more than the creditor would have received upon 193 liquidation under Chapter 7 of the bankruptcy code. Braniff Airways, 814 F.2d 194 at 1034 & n.3. Phrased another way, the Trustee must prove that Community 8 Case: 12-60234 Document: 00512103546 Page: 9 Date Filed: 01/07/2013 No. 12-60234 195 would have received less under Chapter 7. Here, the district court did not 196 improperly assume that Community would have recouped $3.5 million via 197 Chapter 7; rather, the district court did not clearly err in concluding that the 198 Trustee failed to satisfy his burden of proving that Community would not have 199 received at least $3.5 million in a Chapter 7 liquidation. 200 Given that the Trustee concedes that Community was a fully secured 201 creditor by operation of section 75-4-210 of the Mississippi Code, the prepetition 202 payment Community received is, as a matter of law, not a preferential transfer 203 avoidable under 11 U.S.C. § 547(b). See In re El Paso Refinery, 171 F.3d at 254; 204 Braniff Airways, 814 F.2d at 1034. Moreover, the district court s conclusion is 205 supported by the record. Community s senior vice president testified that the 206 bank may have been able to collect the $3.5 million via Chapter 7. Given two 207 permissible views of the evidence, the [bankruptcy courts] s choice between them 208 cannot be clearly erroneous. In re Martin, 963 F.2d at 814 (quoting Anderson, 209 470 U.S. at 574) (internal quotation marks omitted). We therefore conclude that 210 the lower courts did not clearly err in determining that the $3.5 million wire 211 transfers were not avoidable preferences under § 547(b). 212 CONCLUSION 213 For these reasons, we AFFIRM the judgment of the district court. 9
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