In Re C-L Cartage Co., Inc.
B. Timothy Pirtle (argued), McMinnville, Tenn., for defendant-appellant cross-appellee.
Before JONES and NORRIS, Circuit Judges, and McQUADE, District Judge.*
ALAN E. NORRIS, Circuit Judge.
This appeal presents a question of statutory interpretation of first impression for our circuit: whether
In March 1983, Carlos Foster, president of C-L Cartage Company (“Cartage“), the debtor, approached City Bank and Trust Company (“the bank“) for financing. The bank refused to lend money to the company but agreed to make a personal loan to Carlos of $30,000, on the condition that his mother, Della Foster, cosign the note and secure it with certificates of deposit. In December 1983, the bank made a second personal loan to Carlos for $20,000, which Della Foster also cosigned. Carlos transferred the funds to Cartage to finance its business operations. No promissory notes were signed or delivered by Cartage to the Fosters.
On March 2, 1984, Cartage filed for reorganization under Chapter 11 of the Bankruptcy Code. That action was later converted to a Chapter 7 liquidation in December 1984, and a trustee was appointed.
Within the year preceding the filing of the bankruptcy petition, Cartage made nine payments of $1,399.31 each on the first loan. Six were made by checks payable directly to the bank, while three were made by checks payable to Della Foster who, in turn, endorsed them over to the bank. Two of the nine payments were within the ninety days preceding bankruptcy. On the second loan, Cartage paid $957.45 directly to the bank, within ninety days of the filing of the petition.
The parties have stipulated that Cartage was insolvent when these loan payments were made, and the bank concedes that the Fosters were insiders within the meaning of
Because the Fosters were “creditors,” both courts concluded that the payments to the bank were “to or for the benefit of creditors” within
The bank appeals the district court‘s determination that the Fosters were creditors within the meaning of the code, and argues that Cartage‘s payments do not otherwise meet
II.
The bankruptcy code attempts to ensure that all creditors similarly situated receive equal treatment, by allowing the trustee to recover certain payments or transfers of property which prefer some creditors over others. To that end,
The district court concluded that the Fosters were “creditors” of Cartage by virtue of their having transferred to Cartage the proceeds from the two loans, with the intention that Cartage would repay the bank. “Creditor” is defined broadly in
Whether viewed as creditors or guarantors, the Fosters fall within the broad definition of “creditor” in
The remaining statutory requirement to classify these payments as voidable preferences is contained in
The bank claims its loans to the Fosters are fully secured by four certificates of deposit and security interests in two trucks. The “creditor” contemplated by
III.
“Transferee” is not defined by the code, but transfer is defined broadly in
The bank concedes it is a transferee under this definition but contends that it is not the initial transferee and that recovery should be limited to the Fosters.
A literal reading of
It might be argued that a literal application of
Other courts have adopted what has been dubbed as the “two-transfer” theory, which treats the single payment as two separate and independent transfers since both the insider and the outsider separately benefit from the single payment. See Goldberger v. Davis Jay Corrugated Box Corp. (In re Mercon Industries), 37 B.R. 549 (Bankr.E.D.Pa.1984); Levit v. Melrose Park Nat‘l Bank (In re V.N. Deprizio), 58 B.R. 478, 481 (Bankr.N.D.Ill.1986), rev‘d sub nom. Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir. 1989). Under the two-transfer theory,
Sections
547 and550 both speak of a transfer being avoided; avoidability is an attribute of the transfer [debtor‘s payment] rather than of the creditor. While the lenders want to define transfer from the recipients’ perspectives, the Code consistently defines it from the debtor‘s. A single payment therefore is one transfer, no matter how many persons gain thereby.
Id. at 1195-96. By creating two transfers from a single payment, the two-transfer theory adopts a “tortured construction of the statute.” See Note, The Interplay Between Sections 547(b) and 550 of the Bankruptcy Code, 89 Colum.L.Rev. 530, 540 (1989).
We prefer a literal reading of the statute permitting recovery from non-insider transferees for payments made during the extended preference period which benefit insider creditors or guarantors. Insiders, using their knowledge and control over the debtor, have an incentive to cause the debtor to prefer particular outside creditors when the insiders themselves derive benefits from those payments. In this case, the Fosters, using their knowledge and control over Cartage, had an incentive to prefer the bank throughout the extended preference period since every payment Cartage made reduced the Fosters’ liability to the bank. Favoring certain creditors over others similarly situated is precisely what sections
The bank was the “initial transferee” for six payments on the first loan and the single payment on the second loan because the payments were made directly payable to the bank from Cartage‘s account. The trustee may recover these payments under
IV.
The decision of the district court is affirmed in part and reversed in part, and remanded for further proceedings according to law and consistent with this opinion.
Notes
Section 547(b) provides:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor--
(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 90 days and one year before the date of the filing of the petition, if such creditor, at the time of such transfer--
(i) was an insider; and
(ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer;
(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.
Section 550, in relevant part, provides:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from--
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under section (a)(2) of this section from--
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
(c) The trustee is entitled to only a single satisfaction under subsection (a) of this section.
Transfer is defined in section 101(40) as
every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property....