Bankr. L. Rep. P 76,766
In re RINE & RINE AUCTIONEERS, INC., Debtor.
RINE & RINE AUCTIONEERS, INC., Plaintiff,
v.
DOUGLAS COUNTY BANK & TRUST COMPANY; David Huddle,
Defendants-Appellees.
Richard D. Myers, Trustee-Appellant.
No. 95-1158.
United States Court of Appeals,
Eighth Circuit.
Submitted Sept. 13, 1995.
Decided Jan. 22, 1996.
Christopher D. Curzon, Omaha, NE, argued. David L. Crawford appeared on the brief, for appellant.
Thomas O. Ashby of Thomas Ashby, Omaha, NE, argued. Steven C. Turner appeared on the brief, for appellee.
Before McMILLIAN, HEANEY and MURPHY, Circuit Judges.
McMILLIAN, Circuit Judge.
Richard D. Myers (Trustee), trustee of the bankruptcy estate of Rine & Rine Auctioneers, Inc. (Debtor), appeals from an order entered in the United States District Court for the District of Nebraska, affirming the bankruptcy court's judgment in favor of Douglas County Bank & Trust Company (Bank) in an adversary proceeding brought by the Trustee pursuant to 11 U.S.C. Sec. 547, alleging that a payment in the amount of $6,761.48 made by Debtor to David Huddle and the Bank was an avoidable preferential transfer. Myers v. Douglas County Bank & Trust Co. (In re Rine & Rine Auctioneers, Inc.), No. 8:CV94-269 (D.Neb. Dec. 7, 1994), aff'g No. BK92-80770/A93-8098 (Bankr.D.Neb. Apr. 18, 1994). For reversal, the Trustee argues that the bankruptcy court erred in holding that the money paid by Debtor to Huddle and the Bank was held by the Debtor as an agent for its principal, Huddle, and it was therefore not property of the estate which the Trustee could recover under Sec. 547. For the reasons discussed below, we reverse the order of the district court and remand the case to the district court with instructions.
Background
The underlying facts are summarized as follows. Debtor was a corporation in the business of auctioning personal property for its customers. Debtor orally agreed with Huddle, an auto repair business owner, that Debtor would conduct an auction sale to dispose of Huddle's business assets. Huddle's business assets were the security for a loan which had been made by the Bank to Huddle. Debtor agreed to conduct the sale, collect the proceeds, deduct advertising expenses and its commission, and distribute the remainder to the financial institutions holding security interests in the assets sold; the remainder, if any, would be paid to Huddle. The Huddle sale occurred on December 18, 1991, and earned $23,737.50, which was deposited in Debtor's general bank account. Thereafter, Debtor issued a check in the amount of $6,761.48 payable to the Bank and Huddle. Huddle endorsed the check to the Bank, which received the full amount of the check as payment for Huddle's outstanding loan.1
On April 27, 1992, Debtor filed for relief under Chapter 7 of the United States Bankruptcy Code. The Trustee filed an adversary proceeding against the Bank and Huddle, seeking to set aside the payment made by Debtor to the Bank and Huddle on grounds that the payment was an avoidable preferential transfer under 11 U.S.C. Sec. 547(b).2 The Trustee maintained that Huddle was a creditor and the money in dispute was property of the bankruptcy estate which should be distributed in the normal course of the bankruptcy proceedings. Following a hearing, the bankruptcy court entered a written order in which it concluded that, under Nebraska law, Debtor and Huddle were in an agent-principal relationship, not a debtor-creditor relationship, and therefore the money was, at all relevant times, the property of Huddle. Because Huddle owned the money, the bankruptcy court reasoned, the money was never the property of Debtor and therefore the Trustee had failed to satisfy the threshold requirement that there be a transfer of "an interest of the debtor in property." 11 U.S.C. Sec. 547(b). Thus, the bankruptcy court held that Debtor's payment to the Bank and Huddle was not an avoidable preferential transfer. Slip op. at 2-3. The Trustee appealed the bankruptcy court's ruling to the district court. Upon review, the district court agreed with the bankruptcy court's analysis and affirmed. This appeal followed.
Discussion
Under the Bankruptcy Code, a trustee may avoid a pre-petition transfer of property by the debtor to a third party upon proof of several criteria. 11 U.S.C. Sec. 547(b). A threshold requirement of Sec. 547(b), however, is that the property transferred be "an interest of the debtor in property." Id. This requirement is satisfied in the present case if the money transferred to Huddle and the Bank was property of Debtor's estate at the time of the transfer. See Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.),
When a bankruptcy court's judgment is appealed to the district court, the district court acts as an appellate court and reviews the bankruptcy court's legal determinations de novo and findings of fact for clear error. Wegner v. Grunewaldt,
The bankruptcy court in the present case held that, because Debtor was the agent of Huddle, the Trustee had failed to meet his burden of proving that the money transferred to the Bank and Huddle was property of Debtor's estate. The bankruptcy court reasoned:
In Nebraska, the relationship between an auctioneer and the party who has employed the services of the auctioneer to sell personal property is that of principal and agent. Edwin Bender & Sons v. Ericson Livestock [Comm'n Co.],
In this case, the debtor entered into an oral contract with Mr. Huddle. The contract provided that Mr. Huddle would make his personal property available for sale and that the debtor would conduct an auction. Following the auction, the debtor would collect the proceeds of the sale and, after deducting sale expenses, including commission, would deliver the balance to [Huddle] or to [Huddle's] secured creditors.
The debtor did conduct the auction and collect the proceeds. The fact that the debtor deposited the proceeds into the debtor's own account does not change the ownership of the proceeds. The relationship of the parties was that of agent and principal. The agent, the debtor, held the property, the proceeds of the sale, for the principal, Mr. Huddle. Mr. Huddle did not at any time agree that the proceeds of the sale would become the property of the debtor.
Slip op. at 2.
Citing Wright & Souza, Inc. v. DM Properties,
In Bender & Sons, the Nebraska Supreme Court noted generally that an auctioneer, in selling property for another at an auction, acts as the agent for its customer, and therefore the auctioneer's rights and liabilities arising out of the auction sale are governed by the general principles of agency law.
Wright & Souza, on the other hand, although factually not on point, is more instructive in its statement of the applicable law. In Wright & Souza, a loan broker sued a prospective borrower for anticipatory breach of contract and prevailed before a jury.
Likewise, in the case before us, application of the Wright & Souza factors indicates that Debtor was not Huddle's agent at the time the auction proceeds were deposited in Debtor's account and subsequently paid over to Huddle and the Bank. Debtor was engaging in a distinct occupation, unsupervised by Huddle and entirely independent of Huddle's business. The method of payment was not based on an hourly rate but was determined by the extent to which Debtor successfully performed its services. Debtor kept the auction proceeds in its general bank account, where the money lacked any indicia of Huddle's ownership, was intermingled with other funds, and was subject to any claims by Debtor's creditors. Certainly, at that point, Huddle exercised no control over Debtor's conduct with respect to the auction proceeds. We therefore hold that the bankruptcy court erred in concluding that, at the time Debtor paid Huddle and the Bank the $6,761.48 in proceeds from the auction sale, Debtor was acting as Huddle's agent under Nebraska law. Accord Restatement (Second) of Agency Sec. 398 cmt. c (1958) ("In the case of certain professional agents, such as auctioneers and factors, it is customary, and hence ordinarily understood, that the agent can properly mingle his funds with those of his principal.... If the funds are properly mingled, the inference is that the agent becomes a debtor to the amount received for the principal, but that he agrees to maintain enough in the fund to pay the principal, who has a charge upon the fund to the amount of the debt.").
Having determined that the bankruptcy court erred in holding that, under Nebraska law, Debtor acted as Huddle's agent at the time the payment was made, we consider an alternative theory advanced by the Bank to support its claim that the money transferred was nevertheless not "an interest of the debtor in property," within the meaning of Sec. 547(b). The Bank suggests that, even if Debtor was not acting as Huddle's agent when it retained and delivered the proceeds from the auction sale, the Trustee still cannot establish a transfer of an interest of Debtor in property because the money that was transferred to Huddle and the Bank was presumably derived from later auctions and therefore belonged to other auction customers. In other words, the Bank argues that, regardless of whether the property actually belonged to the transferees or some other party, the money was not property of the estate at the time of the transfer and therefore cannot be recovered.
The Trustee, on the other hand, urges us to follow the reasoning in Franzwa v. Knez Building Material Co. (In re Walker Indus. Auctioneers, Inc.),
In analyzing the issue of whether the transfer involved an interest of the debtor in property, for purposes of applying Sec. 547(b), we agree with the reasoning in Walker. In Walker, the bankruptcy court considered, among other things, that, under the relevant auction contracts, the auctioneer had the right to deposit auction proceeds in its general account and to use funds derived from an auction sale during the time between the date of the sale and the date when the net proceeds would become due to the customer, twenty days after the sale.
Similarly, in Salem v. Lawrence Lynch Corp. (In re Farrell & Howard Auctioneers, Inc.),
The wording of the contract, as well as the Debtor's actions, are conclusive on ownership of the sales proceeds. The contract imposed no obligation to segregate the proceeds or hold them in trust. It merely required the Debtor to pay the [customer] the net proceeds, less commission, within fourteen business days following the auction. Consistent with these terms, the Debtor deposited the proceeds in its general operating account, intermingling them with other sales proceeds and drawing checks upon the account for the Debtor's expenses and payments to other sellers. All of this, particularly the agreement's terms, establishes that the parties' relationship following the auction was that of debtor and creditor rather than trustee and beneficiary. This is so even though the arrangement with the property prior to sale was a consignment.
Id. at 716 (footnotes omitted).
Finally, although neither party has cited Bellanca I, a decision from this circuit, or the bankruptcy court's decision on remand,
On remand, the bankruptcy court stated:
A preferential transfer must involve a transfer of property in which the debtor has an interest.... To avoid the transfer, it must be shown that the transfer deprived the debtor's estate of something of value which could have been used to satisfy claims of the creditors....
Bellanca was ultimately successful in selling the three AGCO-owned aircraft to third parties. The funds received in payment of the sales were transmitted to Bellanca who deposited the funds in its general corporate account. These deposited funds became the property of Bellanca since it had legally unrestricted use of the funds and the funds were commingled with other funds.... "[A]ny funds under the control of the debtor, regardless of the source, are properly deemed to be the debtor's property, and transfers that diminish that property are subject to avoidance." In re Chase & Sanborn Corp. (Nordberg v. Sanchez),
Bellanca II,
The bankruptcy court then observed that AGCO had not instructed Bellanca to segregate the payments received from the third-party purchasers of the aircraft, and, moreover, the facts clearly indicated that AGCO consented to Bellanca's conduct. Id. The bankruptcy court also noted that the funds had been deposited in Bellanca's corporate account, were commingled with other funds, and were subject to the claims of Bellanca's creditors; thus, no third party inspecting Bellanca's bank account could have known that a certain portion of the funds were ultimately to be paid to AGCO, nor could it be determined how much was owed to AGCO. Id. at 915-16. Accordingly, the bankruptcy court concluded that Bellanca's transfer of the payments to AGCO was a transfer of property of the debtor and constituted a voidable preference.5 Id. at 915, 917. Accord Carlson v. Farmers Home Admin. (In re Newcomb),
In the present case, the bankruptcy court's factual findings indicate that Huddle had not instructed Debtor to segregate the payments received from the auction sale and that the payments were deposited in Debtor's general bank account where they were commingled with other funds and were subject to the claims of Debtor's creditors. No third party inspecting Debtor's bank account could have determined that some of the funds were owed to Huddle or Huddle's creditors, or how much was owed. In view of these facts, we hold that the auction proceeds retained by Debtor were property of the estate once they were deposited in Debtor's general bank account and, therefore, the transfer of the check in the amount of $6,761.48 from Debtor to Huddle and the Bank constituted a transfer of an interest of the debtor in property, within the meaning of Sec. 547(b).6
Conclusion
The bankruptcy court erred in holding that, under Nebraska law, Debtor was Huddle's agent at the time the check for $6,761.48 was transferred to Huddle and the Bank and that the payment was not a transfer of an interest of Debtor in property, within the meaning of 11 U.S.C. Sec. 547(b). The order of the district court affirming the judgment of the bankruptcy court is therefore reversed and the case is remanded to the district court. Because the findings of the bankruptcy court are not sufficient to make a full determination of whether the Trustee should prevail under Sec. 547,7 the district court is instructed to remand this case to the bankruptcy court for further proceedings consistent with this opinion.
Notes
Because the Bank received the full amount of the $6,761.48 payment from Debtor, Huddle has no real interest in this controversy and therefore has not participated in the litigation
Section 547(b) (emphasis added) provides:
Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property--
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made--
(A) on or within 90 days before the date of the filing of the petition; or
(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) that enables such creditor to receive more than such creditor would receive if--
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
We note that both the bankruptcy court and the district court considered the state law agency issue and the federal statutory issue as one and the same under the facts of the present case. While we agree that, in many cases (as in the present case), the two issues will be closely intertwined, we caution that disposition of the state law agency issue will not, in every instance, conclusively decide whether or not property retained by the debtor shall be treated as property of the estate under the Bankruptcy Code. Each case will depend on its specific facts
As in the present case, the defendant-customer also argued, in the alternative, that the transfer occurred in the ordinary course of business under 11 U.S.C. Sec. 547(c)(2) and therefore the trustee could not recover the funds. Salem v. Lawrence Lynch Corp. (In re Farrell & Howard Auctioneers, Inc.),
We note that, in Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.),
Our decision in the present case is not inconsistent with Dolph Clothiers, Inc. v. Salomon (In re Martin Fein & Co.,),
The Bank additionally argued on appeal that the Trustee failed to prove one or more of the criteria for a voidable preferential transfer enumerated in subsections (1) through (5) of Sec. 547(b) and that, in any case, the limitations on recovery of preferential transfers under 11 U.S.C. Secs. 547(c)(2), 550(b) preclude the Trustee from recovering the funds received by the Bank. Because the bankruptcy court did not reach these issues, and did not make sufficient factual findings upon which we could address them, we leave them to the bankruptcy court's initial consideration on remand. See Wegner v. Grunewaldt,