567 B.R. 326
Bankr. W.D. Tenn.2017Background
- Debtors Joseph and Loretta McNabb (and their farm partnership) executed a $183,950 promissory note to debtor Joseph’s mother, Emily McNabb, on May 1, 2015 to buy crop inputs; funds were disbursed in five installments between May and September 2015.
- The note recited a lien on 2015 crops but a UCC-1 financing statement perfecting an agricultural lien was not filed until October 2, 2015.
- The Debtors repaid the lender in full by three checks dated November 17, 2015 (totaling $183,950). Debtors filed chapter 7 on January 5, 2016.
- Trustee sued under 11 U.S.C. § 547(b) to avoid (1) the perfection of the security interest and (2) the November 17 payments as preferential transfers, and sought recovery under § 550(a).
- Court found four disbursements (totaling $173,950) represented transfers perfected more than 30 days after disbursement and within one year to an insider; one $10,000 disbursement (Sept. 9) was perfected within 30 days and not avoidable.
- Court concluded Trustee met all § 547(b) elements for $173,950, rejected defendant’s § 547(c)(2) ordinary-course defenses, and entered judgment for Trustee to recover $173,950 plus post-judgment interest.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Emily) | Held |
|---|---|---|---|
| Whether creation/perfection of security interest and November payments are avoidable preferences under §547(b) | Transfers were to an insider within one year, on account of antecedent debt, while debtors were insolvent, and enabled the creditor to receive more than in a hypothetical Chapter 7 | Perfection and repayment were legitimate loan transactions; some amounts were contemporaneously perfected or ordinary | The transfer of the security interest in the first four disbursements ($173,950) and the November 17 payments of that amount are avoidable; the $10,000 Sept. 9 disbursement (perfected within 30 days) is not avoided |
| Whether the security interest transfer was "on account of antecedent debt" given the timing of perfection under §547(e) | Perfection occurred >30 days after earlier disbursements, so the security-interest transfers relate to antecedent debt and are avoidable | Argued the September 9 disbursement was perfected within 30 days and should relate back, avoiding preferential status | Court applied §547(e)(2): four earlier disbursements perfected Oct. 2 are antecedent; Sept. 9 $10,000 perfected within 30 days and is not avoidable |
| Whether the ordinary-course-of-business defense (§547(c)(2)) shields the November 17 repayment | No; transfers were atypical family loans, interest-free, first-time, and circumstances (filing after notice of CPS suit) were not ordinary | Emily argued debt/payments were in ordinary course between parties and under industry terms | Court rejected both subjective and objective prongs: familial, interest-free, first-time loan and lack of industry proof; §547(c)(2) defense fails |
| Whether Trustee may recover under §550(a) and whether good-faith defense applies | Trustee seeks recovery of avoided transfers from initial transferee Emily | Emily claimed good faith; but initial transferees cannot assert §550(b)(1) defense | Emily was initial transferee and cannot use §550(b)(1); Trustee may recover $173,950; post-judgment interest awarded, pre-judgment interest/costs denied without prejudice |
Key Cases Cited
- Begier v. Internal Revenue Service, 496 U.S. 53 (relation of preference statute to property of the estate)
- Chase Manhattan Mortg. Corp. v. Shapiro (In re Lee), 530 F.3d 458 (timing of loan disbursement determines when debt was incurred for §547 purposes)
- Grover v. Gulino (In re Gulino), 779 F.2d 546 (preference provisions discourage secret liens and late perfecting of security interests)
- In re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458 (construction of hypothetical Chapter 7 distribution for §547(b)(5))