AFD Fund Ex Rel. AmeriServe Food Distribution, Inc. v. Transmed Foods, Inc. (In Re AmeriServe Food Distribution, Inc.)AFD Fund Ex Rel. AmeriServe Food Distribution, Inc. v. Transmed Foods, Inc. (In Re AmeriServe Food Distribution, Inc.)
MEMORANDUM OPINION 1
The matter before the court is a motion for summary judgment filed on behalf of debtors AmeriServe Food Distribution, Inc., et al, in this preference action. Plaintiff AFD Fund is the representative of the post-confirmation estate of Debtor.
FACTS
On January 31, 2000, AmeriServe Food Distribution, Inc., et al., (“Debtors”) filed its chapter 11 bankruptcy petition. A liquidating plan of reorganization was confirmed on November 28, 2000. AFD Fund is the entity administering Debtors’ substantively consolidated post-confirmation estates. Debtors distributed food and food service products to franchised restaurants on a nationwide basis. In this context, Debtors purchased their primary supply of olives from defendant Transmed, an importer and wholesaler of olives, for approximately ten years prepetition.
As of December 3, 1999, Debtors owed Transmed $1,270,375 based on unpaid and outstanding invoices for olive shipments. Debtors paid Transmed $963,001.30 by 34 checks that cleared between December 3, 1999, and January 26, 2000. On May 9,
In October of 2002, Transmed filed a motion for summary judgment. Transmed averred that the transfers between December 3, 1999, and January 26, 2000, are unavoidable as a matter of law because they are (1) subject to the new value defense; (2) subject to the ordinary course of business defense, and (3) in violation of public policy. AFD Fund conceded the new value defense. See Plaintiffs Opposition to Motion for Summary Judgment, Dkt. No. 26, at 2. After deducting the value of Transmed’s new shipments after December 3, 1999, from $963,001.30, the amount now in dispute and which AFD Fund seeks to recover is $239,366.10.
On August 19, 2003, we issued a Memorandum Opinion and Order with respect to Transmed’s original motion for summary judgment. See Dkt. Nos. 21, 31. We found that the disputed amount of $239,366.10 was not subject to the ordinary course defense. See Memorandum Opinion at 10. We also denied Transmed’s public policy argument and noted Transmed’s remaining affirmative defenses. We declined to rule on the merits of these defenses, however, either because they were not the subject of Transmed’s motion or because, inter alia, Transmed had no standing. See Memorandum Opinion, Dkt. No. 31, at 2, nn. 3, 4. In January of 2004, after the parties failed to reach a settlement on the disputed amount of $239,366.10, we entered an order permitting the parties to address the complaint and Transmed’s remaining affirmative defenses. On January 30, 2004, AFD Fund filed a motion for summary judgment, seeking avoidance and recovery of $239,336.10. AFD Fund argued that the new value and ordinary course defenses had been previously resolved by the court, and are thus res judicata. Furthermore, AFD Fund argued that the transfers are not subject to Transmed’s two remaining affirmative defenses.
In February of 2004, Transmed filed its opposition to AFD Fund’s motion for summary judgment. Transmed argued that issues of material fact exist which preclude summary judgment because (1) res judica-ta does not apply to the ordinary course defense; (2) it was ordinary for Transmed to accommodate Debtors on its payment delays; (3) AFD Fund has not satisfied § 547(b)(5) because there was no analysis as to whether Transmed received more than it would have in a Chapter 7 bankruptcy; (4) AFD Fund should have sought relief through the claims process and § 502(d), and (5) the payments were not an interest of debtor in property within the meaning of § 547(b) because they were “earmarked” by Debtors’ lenders for payment to certain trade creditors.
Although we clearly denied the ordinary course defense on its merits, Transmed still chooses to revisit the issue. We find,
infra,
that the law of the case doctrine bars Transmed from raising this defense. Even in the absence of the doctrine, Transmed’s arguments regarding the ordinary course defense are substantially identical to those it had asserted in the prior motion and will not be reconsidered on the
DISCUSSION
1. Transmed’s first remaining affirmative defense
Transmed avers that the earmarking defense renders the disputed transfers outside the definition of an “interest of the debtor in property” for purposes of 11 U.S.C. § 547(b). We disagree and find that the transfers were an interest of Debtors in property within the meaning of § 547(b).
Section 547(b) requires,
inter alia,
that the property transferred by the debt- or be an “interest of the debtor in property.” The Supreme Court has interpreted this to be “property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.”
Begier v. IRS,
In its answer to the Complaint, Transmed stated as an affirmative defense:
The correct characterization of the Debtor’s role in the transactions between the restaurants, Tricon and Transmed is ambiguous, as reflected by the contrast between Tricon’s disclaimer of liability in the context of AmeriServe, its prompt guarantee of all claims post-petition, and the absence of clarifying contracts. This impacts the preference analysis in that the property paid to Transmed may not have been property of the bankruptcy estate but property held in trust by AmeriServe for the benefit of Tricon.
Answer to Complaint, Dkt. No. 8, at 2, ¶ 1. Transmed failed to raise this defense in its subsequent motion for summary judgment or the brief filed in support thereof on October 10, 2002. See Dkt. Nos. 21, 22. Transmed enhanced this defense in its opposition to Debtor’s motion for summary judgment, dated February 19, 2004. Transmed argued that:
The alleged preferential transfers were not an interest of the Debtors in property because such payments originated from funds that were “earmarked” by Ameriserve’s lenders, pursuant to the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) dated September 30,1999 among Ameri-serve, Bank of America, N.A., and other lenders thereto (the “Lenders”), for payment to certain trade creditors of Amer-iserve, and as such, were merely held in trust by Ameriserve until they were paid to Transmed and other trade creditors.
Transmed Food, Inc.’s Opposition to Plaintiffs Motion for Summary Judgment, Dkt.
Under the “earmarking doctrine,” funds provided to a debtor for the purpose of paying a specific indebtedness may not be recoverable as a preference from the creditor to which they are paid, on the premise that the property “transferred” in such a situation was never property of the debtor and so the transfer did not disadvantage other creditors. One creditor has been substituted for another thus, when new funds are provided by the new creditor to or for the benefit of the debtor for the purpose of paying the obligation owed to the old creditor, the funds are said to be “earmarked” and the payment is held not to be a voidable preference.
5 Collier on Bankruptcy, ¶ 547.03[2], at 547-24 (15th ed.2002). The earmarking doctrine has been described as follows:
The fundamental concept underlying the earmark doctrine is that in situations where the debtor never had actual control over certain funds or assets, said funds or assets never became part of the bankrupt’s' estate available for distribution to the creditors of the estate and accordingly, a transfer of those assets or funds would not be preferential.... This doctrine is almost exclusively applied where a third party loans money to a debtor for the very specific purpose of repaying a designated debt. The funds are sometimes transferred to the creditor whose obligation is being satisfied, but the court in Coral Petroleum,[,] Inc. [v. Banque Paribas-London,797 F.2d 1351 (5th Cir.1986)] observed that the doctrine may still apply where the debt- or physically receives control of the funds but the debtor lacks dispositive control over the funds.
In re McLean Industries, Inc.,
In the instant case, Transmed unequivocally failed to establish the first part of the test. Attached to its Opposition to Plaintiffs Motion for Summary Judgment, Dkt. No. 49, Transmed presented various exhibits including excerpts from a September 30, 1999, Credit Agreement, Exhibit F, the Debtors’ Third Amended Disclosure Statement, Exhibit G, a Motion for Authority to Provisionally Pay Prepetition Claims of Essential Trade Creditors, Exhibit E, and an Affidavit of Waring S. Justis, Jr., Exhibit B, in support of its earmarking defense. None of these documents indicate an agreement between AmeriServe and its lenders that the loan was made on the condition that the loan, or even a portion of the loan, would be paid over specifically to Transmed for outstanding and unpaid debt (invoices). Transmed pointed to no language in these documents indicating any such agreement. Rather, the evidence presented indicates that the loan proceeds were used for general corporate purposes, including, but not limited to, the repayment of a number of prepetition obligations owed to critical vendors.
See
Disclosure Statement, Dkt. No. 49, Exhibit G, at 26; Justis Affidavit, Dkt. No. 49, Exhibit B, at 6-7; Critical Vendor Motion, Dkt. No. 49, Exhibit E, at 4-5. The evidence, and indeed, the actual use of the loan proceeds, indicates that Debtors had the right to disburse the proceeds to whomev
2. Trcmsmed’s second remaining affirmative defense
Transmed avers in its answer to the Complaint:
The creation of the AFD [F]und and delegation of avoidance power is not authorized by the Bankruptcy Code, exceeds the jurisdiction conferred by statute, and is contrary to the policy of preference recovers being used for Creditors.
Answer to Complaint, Dkt. No. 8, at 2, ¶ 2. We disagree and find that AFD Fund has standing to commence the preference action on behalf of Debtors.
Section 1123(b)(3)(B) provides that a plan may provide for the retention and enforcement of a claim or interest by the debtor, by the trustee,
or by a representative
of the estate appointed for such purpose. According to Collier on Bankruptcy, there is a two-part test, endorsed by the Court of Appeals for the Tenth Circuit, for parties who are neither the debtor nor the trustee, but who seek to enforce a claim: (1) the party must first prove that it has been appointed, and (2) then must prove that it is a representative of the estate. 7 Collier on Bankruptcy, ¶ 1123.02[3][c], at 1123-21 (15th ed.2003), citing
Matter of Texas General Petroleum Corp.,
The second prong of the test requires the court to decide on a “case-by-case” basis whether a successful recovery by the appointed representative would benefit the debtor’s estate and, particularly, the debtor’s unsecured creditors.
Cf. In re Amarex, Inc.,
A successful recovery by AFD Fund in the instant preference action would directly benefit this bankruptcy estate by increasing its net assets and the distribution to unsecured creditors.
See
Plan at Dkt. No. 52, Exhibit A-2, ¶¶ 12.3, 13.2. Thus, the criteria are met and AFD Fund is a representative of the estate for purposes of § 1123(b)(3)(B).
Cf. Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery,
3. Transmed’s § 5f 7(b) (5) argument
Section 547(g) provides that the trustee has the burden of proving the avoidability of a transfer under 11 U.S.C. § 547(b). Thus, in order to avoid a payment as preferential, AFD Fund has the burden of proof as to all the elements of § 547(b). In the instant case, the only element in dispute is § 547(b)(5). We find that AFD Fund has satisfied its burden of proof as to § 547(b)(5).
Section 547(b)(5) provides that a transfer, in order to be preferential, must enable a creditor to receive more than such creditor would receive if the case were a case under Chapter 7, the transfer had not been made, and the creditor received payment of such debt to the extent provided by the provisions of title 11. Section 547(b)(5) codifies the holding of what Collier’s describes as the “seminal case” of
Palmer Clay Products Co. v. Brown,
The court in Elliot v Frontier Properties/LP (In re Lewis W. Shurtleff, Inc.) explained the application of the Palmer Clay Products analysis to section 547(b)(5): In determining the amount that an alleged preferential transfer enables the creditor to receive, the creditor must be charged what [sic] the value of what was transferred plus any additional amount that he would be entitled to receive from a Chapter 7 liquidation: net result is that, as long as the distribution in bankruptcy is less than one-hundred percent, any payment “on account” to an unsecured creditor during the preference period will enable that creditor to receive more than he would have received in liquidation had the payment not been made.”
5 Collier on Bankruptcy, ¶ 547.03[7], at 547-44 (15th ed.2002) (internal citations omitted). Thus, the relevant inquiry for this court is whether Transmed would have received a 100 percent payout from the estate in a Chapter 7 liquidation (the “greater percentage test”). If so, no preference can be recovered. If not, the requirements of § 547(b)(5) are met.
See In re Tire Kings of America, Inc.,
Bankruptcy courts generally take judicial notice of the documents in a case when making the “greater percentage” analysis.
See In re Saco Local Development Corp.,
A bankruptcy case is unique because it is composed of many individual parts. Within the debtor’s case itself, the bankruptcy judge considers many matters which affect the amount of the dividendto unsecured creditors, .... It would be impossible for bankruptcy judges to ignore all the other decisions they have made in a bankruptcy case and related proceedings when deciding the matter before them. In addition, bankruptcy judges would be remiss if they did not take this information into consideration. Bankruptcy judges may be the only individuals involved in a bankruptcy case with an overall view of the case. Id at 865.
In
In re Tire Kings, supra,
the court found that the plaintiff satisfied the burden of proof requirement based on the testimony that the liabilities of the debtor exceeded its assets on the date of the Chapter 11 petition filing.
In the instant case, the record shows no dispute that this case will not return one hundred percent to unsecured creditors. According to Debtors’ Third Amended Joint Liquidating Plan of Reorganization, all remaining net recoveries shall be shared between Tricon and holders of Allowed General Unsecured Claims, according to a specified distribution, until Tricon receives $220 million. See Plan at Dkt. No. 52, Exhibit A-2, ¶ 12.3. Although the amount of distribution is yet unknown, both Chief Financial Officers of AFD Fund have declared that the distribution to unsecured creditors, if any, “will certainly be far less than 100%.” See Exhibit 2, Declaration of Thomas Arnst at 3, to Plaintiffs Motion for Summary Judgment, Dkt. No. 45, and Declaration of Diana Moog at 7, Exhibit to Plaintiffs Opposition to Motion of Transmed Foods, Inc. for Summary Judgment ... and Cross Motion for Summary Judgment, Dkt. No. 26. Inasmuch as the record indicates that Transmed would receive less than a one hundred percent dividend in the event of a Chapter 7 liquidation, Debtor has satisfied the requirements of § 547(b)(5).
4. Transmed’s § 502(d) argument
As explained above, AFD Fund has satisfied its burden of proof as to § 547(b)(5). We will nonetheless address Transmed’s argument that § 502(d) precludes this preference action. Transmed contends that AFD Fund must sue under § 502(d) rather than under § 547:
AFD should not be permitted to argue to the Court that it is too burdensome to perform the foregoing analysis and comparison of the alleged preferential payments to Transmed. AFD decided to pursue relief under § 547 of the Bankruptcy Code, rather than through the claims process and § 502(d) of the Bankruptcy Code, which would have been a more efficient means for AFD to obtain its desired relief. If AFD believes a proper § 547(b)(5) analysis is too onerous, AFD should have objected to Transmed’s proof of claim and pursued its relief through § 502(d) of the Bankruptcy Code ....
Transmed Food, Inc.’s Opposition to Plaintiffs Motion for Summary Judgment, Dkt. No. 49, at 8.
Section 502(d) provides:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title,unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title..
Section 502(d) addresses the allowability of a creditor’s proof of claim where the creditor has received a voidable transfer, not the debtor’s ability to commence a preference action where the debtor fails to object to the creditor’s claim.
See In re Polaroid Corporation,
In the instant case, in order to benefit from § 502(d), AFD Fund must still prove the avoidability of a transfer which is a condition precedent to the operation of § 502(d).
2
This does not mean, as
5. The law of the case doctrine
In its motion for summary judgment, Transmed argued that the transfers are subject to the ordinary course defense because, inter alia, the billing and payment practices remained relatively constant during the preference period. In its opposition, AFD Fund disputed Transmed’s ordinary course defense. AFD Fund argued that payments were not made in the ordinary course of business within the meaning of § 547(c)(2)(B) because the timing of its invoice payments during the preference period (78 days) significantly exceeded the timing of invoice payments prior to the preference period (26.7 days). See Plaintiffs Opposition to Summary Judgment, Dkt. No. 26, at 9. After conducting our own analysis of Exhibit A to Transmed’s brief in support of its motion for summary judgment, Dkt. No. 21, we agreed with AFD Fund that the parties’ payment history during the preference period was not consistent with their prior practice. Consequently, we found that the remaining disputed amount of $239,366.10 was not subject to the ordinary course defense, and denied Transmed’s motion in this regard. See Memorandum Opinion, Dkt. No. 31, at 10.
Transmed argues that
res judicata
does not preclude it from re-asserting the ordinary course of business defense because “res judicata applies only to a final judgment on the merits, and is therefore, inapplicable to the denial of summary judgment.”
See
Transmed Food, Ine.’s Opposition to Plaintiffs Motion for Summary Judgment, Dkt. No. 49, at 3, quoting
Milltex Industries Corp. v. Jacquard Lace Co., Ltd.,
The modern interpretation of
res judicata
uses the term “claim preclusion.” Claim preclusion generally refers to the effect of a prior judgment in foreclosing successive litigation of the very same claim, whether or not relitigation of the claim raises the same issues as the earlier suit. A related concept is “issue preclusion”, which generally refers to the effect of a prior judgment in foreclosing successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, whether or not the issue arises on the same or a different claim.
See New Hampshire v. Maine,
Neither claim nor issue preclusion applies to this summary judgment motion as this motion is the second stage of the same preference action. Rather, the law of the case doctrine applies to this proceeding because it is concerned with whether a ruling in one stage of the same litigation governs in later stages. Under the law of the case doctrine, “when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case .... This rule of practice promotes the finality and efficiency of the judicial process by ‘protecting against the agitation of settled issues.’ ”
Christianson v. Colt Industries Operating Corp.,
The Court of Appeals for the Third Circuit has recognized three exceptions to the law of the case doctrine that permit reconsideration of an issue previously decided in a case. First, a successor judge may entertain a timely motion to reconsider the conclusions of an unavailable predecessor.
Hayman Cash Register Co. v. Sarokin,
The law of the case doctrine applies to this case. Transmed is bound by this Court’s previous decision denying the ordinary course defense and is precluded from re-asserting this defense.
CONCLUSION
We find that the transfers in dispute are not subject to Transmed’s remaining affirmative defenses. We also find that AFD
An appropriate order will be entered.
JUDGMENT ORDER
AND NOW, this 28th day of September, 2004, for the reasons expressed in the foregoing Memorandum Opinion, it is ORDERED, ADJUDGED, and DECREED that the motion for summary judgment of Plaintiff AFD Fund is GRANTED. Judgment in the amount of $239,366.10 is entered in favor of Plaintiff AFD Fund and against Defendant Transmed Foods, Inc.
It is FURTHER ORDERED that the Clerk shall close this adversary.
Notes
. The court's jurisdiction is not at issue. This Memorandum Opinion constitutes our findings of fact and conclusions of law.
. Under Bankruptcy Rule 3007, when an objection to the allowance of a claim is joined with a demand for relief under Rule 7001, which includes, inter alia, the recovery of money or property, the matter becomes an adversary proceeding. Thus, AFD Fund could have requested § 502(d) relief in this adversary. However, it is unnecessary because § 502(d) is a mandatory provision ("the court shall disallow any claim of an entity ... that is a transferee of a transfer avoidable under ... 547 ...."). Section 502 has nothing to do with proof of the avoidability of the transfer. It merely recognizes that where an entity already has received more than it would have received in a Chapter 7 liquidation and has not repaid the avoided transfer to the estate, it will not be permitted any other distribution from the estate until it repays the avoided transfer. Upon repayment, the transferee then holds a claim for the amount repaid, which is to be addressed, along with any other claim it holds, in the distribution to creditors in its class. The purpose of § 502(d) is to promote the pro rata sharing of the bankruptcy estate among all creditors as well as the coercion of the payment of judgments obtained by the trustee.