MEMORANDUM OPINION AND ORDER
This is an appeal from an award of summary judgment to New York National Bank (the “Bank”) in an adversary proceeding in the bankruptcy court. CEPA Consulting, Ltd. (“CEPA”) appeals from the bankruptcy court’s determination on two grounds. First, appellant contends that a payment made in satisfaction of bank loans several days before the filing of the debtor’s Chapter 11 petition was an avoidable transfer under 11 U.S.C. § 547(b) because the loans were not secured as to the debtor. Second, appellant argues that the debtor’s repayment of bank loans more than 90 days before the filing of the petition is recoverable under 11 U.S.C. §§ 547(b)(4)(B) and 550(a) because the payment was made for the benefit of insiders. The Bank cross-appeals on the ground that the bankruptcy court erred in denying it leave to amend its answer to assert a statute of limitations defense which, it contends, would have been a frivolous defense under the law prevailing at the time of its original answer.
Facts
On December 15, 1986, Wedtech Corp. filed a voluntary petition for reorganization under Chapter 11.
In re Wedtech Corp.,
On September 4,1986, Wedtech made payments of $4.1 million to the Bank with the proceeds of a public stock offering. Id. On December 5, 1986, the debtor paid the remaining balance of $1,616,000 with the proceeds of a refinancing of the real property subject to the Bank’s security interest. Id.
CEPA was chosen to liquidate the debtor’s assets under a liquidating Chapter 11 plan confirmed on October 31, 1990.
Id.
at 141. On February 12, 1992, CEPA filed an adversary proceeding in the bankruptcy court to recover the payments to the Bank as preferential transfers. The Bank filed its answer on April 13, 1992. After the proceeding had been scheduled for trial, on October 4, 1993, the Bank moved to amend its answer to add the affirmative defense of statute of limitations. The bankruptcy court denied the Bank’s motion as untimely, and also on substantive grounds. The Bank then moved for judgment on the pleadings. The bankruptcy court treated the motion as one for summary judgment, and denied it without prejudice to the Bank’s right to renew the motion before trial. On January 11, 1994, the bankruptcy court granted the Bank’s renewed motion for summary judgment.
See In re Wedtech Corp.,
Discussion
The December Transfer
The December repayment was made within 90 days of the filing of the petition, and therefore would be an avoidable transfer under 11 U.S.C. § 547(b) if it enabled the Bank to receive more than it would have received in a Chapter 7 liquidation.
See
11 U.S.C. § 547(b)(4) & (5);
In re Auto-Train Corp.,
The bankruptcy court’s decision rests on a restrictive reading of Section 547(b) and a strained reading of the pledge agreement to conclude that the debtor had some interest in the collateral because the collateral could be used to repay the loans without creating any liability to the third-party owners of the collateral. Courts have held that when a debt is secured by collateral pledged by a third party, the security interest does not give rise to a secured claim against the debtor’s estate.
See In re Santoro Excavating, Inc.,
Section 547(b) allows the trustee to avoid a payment to a creditor made on a preexisting debt "within 90 days before the date of the filing of the petition if it “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.” 11 U.S.C. § 547(b)(5). Although a literal interpretation of the statute could lead to the conclusion reached by the bankruptcy court, “[wjhere the result of a literal interpretation of statutory language is absurd, or where the obvious purpose of the statute is thwarted by such slavish adherence to its terms, [the court] may look beyond the plain language” of the statute.
Grand Light & Supply Co. v. Honeywell, Inc.,
The bankruptcy court’s decision rested on the fact that the Bank received the same amount of money from the December repay *108 ment that it would have received in a Chapter 7 liquidation if the loans had not been repaid. In that sense, the Bank did not receive “more” than it would have received in a Chapter 7 liquidation. However, if the loans had not been paid, the Bank would have received the pledged property belonging to the officers and their associates, and not the debtor’s property. Thus, Wedtech’s repayment to the Bank did allow the Bank to receive property of the debtor that it would not have received in a Chapter 7 liquidation.
When the loans were repaid, the collateral was released to the third party owners of the collateral, not to the debtor. Treating such a transaction as authorized by the statute would permit a debtor to prefer a “secured” creditor without any corresponding benefit of release of collateral to the debtor’s estate for distribution to other creditors. This result is inconsistent with the purpose of preference avoidance, which is to provide for equal distribution of the debtor’s estate.
See In re Santoro,
The bankruptcy court also rested its decision on the fact that the third-party collateral had been pledged according to a “hy-pothecation agreement” under which the Bank could dispose of the collateral “exactly as if the hypothecated property were owned and had been pledged by [Wedtech].” (R. 350.) The bankruptcy court relied on 11 U.S.C. § 506(a) which defines secured claims in bankruptcy:
An allowed claim of a creditor secured by a hen on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property.
The bankruptcy court reasoned that the hy-pothecation agreement gave Wedtech an interest in the collateral equal to the outstanding balance of the loans. However, the hy-pothecation agreement did not give Wedtech a genuine interest in the collateral. This provision was strictly for the Bank’s protection and did not make any property available to Wedtech. If Wedtech had not repaid the loans, the Bank could have disposed of the collateral “as if’ the collateral were pledged by Wedtech; but once Wedtech repaid the loans, the collateral was released to the pled-gors. For the same policy reasons discussed above regarding the interpretation of Section 547(b), I hold that the hypothecation agreement did not create a secured claim against the debtor’s estate that survived repayment of the loans.
There is a dispute in this case as to who owned the collateral. The Bank points out that CEPA originally pleaded in its complaint that “the collateral pledged by [the debtor’s officers] was the proceeds of moneys wrongfully diverted, defalcated, or stolen by these officers from Wedtech and its creditors.” (Compl. ¶ 16.) The Bank admitted in its answer that “any collateral pledged to [the Bank] as security for loans to Wedtech was property of Wedtech and was pledged by Wedtech.” (Answer ¶ 16.) The Bank then moved for judgment on the pleadings, since, if the debtor pledged its own property, no preference existed.
See In re Santoro Excavating Inc.,
Additionally, the Bank points to assignment documents, which the officers appear to have signed in their capacity as officers of Wedtech, as evidence that the collateral was owned by the debtor, rather than by the officers. The Bank argues that these documents refute CEPA’s argument that Wed-tech did not have any interest in the collateral.
See In re Advanced Turbo Products, Inc.,
Because there are genuine issues of fact with respect to the ownership of the collateral and whether therefore, the Bank would have received less in a Chapter 7 liquidation than it did through the pre-petition payments, it was error for the bankruptcy court to grant summary judgment to the Bank on the December payments.
The September Transfers
CEPA argues that the extended preference period should apply to allow it to recover the September repayments under 11 U.S.C. § 547(b)(4)(B) and § 550(a) because the loan repayments reduced the liability of “insiders” of the debtor. CEPA cites several decisions which allowed recovery of payments to creditors which served to reduce the liability of corporate insiders during the extended preference period.
See Levit v. Ingersoll Rand Financial Corp. (In re V.N. Deprizio Constr. Co.),
Under the
Deprizio
line of cases, there is little doubt that CEPA would be allowed to recover payments made to an outside creditor during the extended preference period if the transfers benefited an inside creditor.
1
However, since the Second Circuit has not ruled on the issue of whether the joint application of Sections 547(b)(4)(B) and 550(a) permits recovery from a non-insider creditor of a payment that benefitted an insider, the Southern District is not bound to follow that line of cases. In the only case in the Southern District of New York in which the question has been considered, the judge chose not to follow
Deprizio
because “as a policy matter, ... the
[Deprizio
] rule would likely impede the availability of credit to ailing businesses.”
In re Rubin Bros. Footwear, Inc.,
Courts and commentators have questioned the wisdom of the
Deprizio
rule.
See In re Erin Food Services, Inc.,
Courts have used different approaches to avoid the
Deprizio
rule.
Compare In re Beck Builder Inc.,
It is doubtful that Congress considered the interaction of Sections 547(b) and 550(a) when it enacted the Bankruptcy Code. While it seems clear that Congress intended to create an additional source of recovery for the trustee, it is unclear that Congress meant to eradicate the distinction between transfers to insiders and transfers to non-insiders set out in Section 547(b). See Brands, supra, at 541-49 (arguing that close examination of legislative history shows that Congress did not consider the situation in which the payment was made to a non-insider for the benefit of an insider outside of the 90-day preference period).
Additional evidence that
Deprizio
and cases that have followed it may not have correctly read Congress’ intention regarding the interaction of the two sections of the Bankruptcy Code is a statute enacted on October 22, 1994. That statute amends Section 550 to add a new subsection (c) that provides: “If a transfer made between 90 days and one year before the filing of the petition (1) is avoided under section 547(b) of this title; (2) was made for the benefit of a creditor that at the time of such transfer was an insider; the trustee may not recover under subsection (a) from a transferee that is not an insider.” Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106 (1994). Although the new law is only to be applied prospectively, Congress’ action suggests that the courts were not applying the Code as Congress intended.
See In re Artha Mgmt., Inc.,
Therefore, I hold that the bankruptcy court correctly refused to apply the Deprizio rule, and its award of summary judgment as to the September transfers is affirmed. Statute of Limitations Defense
The Bank cross-appeals from the denial of its motion for leave to amend its answer and contends that the bankruptcy court abused its discretion in refusing to allow amendment of the answer to add a statute of limitations defense. CEPA responds that the bankruptcy court properly denied the Bank leave to amend because the Bank’s motion to add the statute of limitations defense came 18 months after its answer was filed.
The Bank argues that at the time it filed its answer, the only judges who had decided the matter in the Southern District of New York
2
(and many courts of other jurisdictions)
3
had held that the two year statute of limitations for a proceeding under Section 547 of the Bankruptcy Code did not begin to run until a trustee was appointed.
4
In 1993,
*111
the Ninth Circuit rejected the prevailing interpretation of the statute of limitations in
In re Softwaire Centre Int’l, Inc.,
The bankruptcy judge stated in open court that he was denying the motion on both procedural and substantive grounds. He stated: “Procedurally, I think you have come too late. I think you should have raised your affirmative defense and the Statute of Limitations when you served your Answer- I think it should have been raised, and I think it’s much too late to raise that affirmative defense. You are required to do that and you didn’t.” (R. 438.) As to the substantive grounds, the judge stated that he found the Softwaire decision to be “entirely without merit.” (R. 438.)
Although the bankruptcy court’s substantive assessment is in error since the Second Circuit has adopted the reasoning of
Softwaire,
it was not an abuse of discretion for the bankruptcy court to deny the motion to amend the answer on procedural grounds. Fed.R.Civ.P. 8(c) requires a defendant to “set forth affirmatively” the affirmative defense of statute of limitations in its answer.
5
The statute of limitations defense must be asserted in a party’s responsive pleading “at the earliest possible moment” and is waived if not promptly pleaded.
Davis v. Bryan,
The bankruptcy court rested'its decision on the fact that the Bank had made no attempt to assert the statute of limitations affirmative defense until after the adversary proceeding was called for trial, and at a time by which the trial would have been completed if jury trials had not been delayed by a budgetary shortfall. (Tr. of Proe., Nov. 17, 1993, at 14.) The bankruptcy court noted at oral argument of the motion that there was authority for asserting the statute of limitations defense at the time that the Bank filed its answer.
(Id.
at 4.) In fact, at the time defendant filed its answer, at least four cases had held that the two year statute of limitations applied to debtors-in-possession.
See Zilkha Energy Co. v. Leighton,
Conclusion
For the foregoing reasons, the decision of the bankruptcy court is affirmed in part and reversed in part.
SO ORDERED.
Notes
. The bankruptcy court questioned whether the insiders who received the benefit in this case could be considered "creditors” under Section 547(b). “Creditor” is defined by 11 U.S.C. § 101(10)(A) as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debt- or." 11 U.S.C. § 101(5)(A) defines "claim” as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Congress intended this definition to be "the broadest possible definition.”
In re Robinson,
.
See In re Korvettes, Inc.,
.
See, e.g., In re Pullman Constr. Indus.,
. Until October 22, 1994, 11 U.S.C. § 546(a) provided:
[a]n action or proceeding under section 544, 545, 547, 548 or 553 of this title may not be commenced after the earlier of—
(1) two years after the appointment of a trustee under section 702, 1104, 1163, 1302, ■
(2) the time the case is closed or dismissed. The revised statute enacted on October 22, 1994 amends Section 546(a)(1) to read "the later of (A) two years after the entry of the order for relief; or (B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or election occurs before the expiration of the period specified in subparagraph (A).”
. Rule 8(c) applies in adversary proceedings in the bankruptcy court. See Fed.R.Bankr.P. 7008.