In Re Fulghum Construction Corporation
Bankr. L. Rep. P 69,201
In re FULGHUM CONSTRUCTION CORPORATION, Debtor,
Robert WALDSCHMIDT, Trustee, Plaintiff-Appellant, Cross-Appellee,
v.
Harry RANIER, Algin Nolan and Ranier & Associates,
Defendants-Appellees, Cross- Appellants,
First Security National Bank of Lexington and Liberty
National Leasing Company, Defendants-Appellees.
Nos. 81-5779, 81-5801.
United States Court of Appeals,
Sixth Circuit.
Argued March 8, 1983.
Decided May 9, 1983.
C. Kinian Cosner (argued), Robert H. Waldschmidt, Cosner, Waldschmidt & Crocker, Nashville, Tenn., for plaintiff-appellant, cross-appellee.
John Bailey, III, Nashville, Tenn., L. Weаren Hughes (argued), William L. Montague, Lexington, Ky., for Harry Ranier, Algin Nolan and Ranier & Associates.
David T. Stosberg (argued), Louisville, Ky., for Liberty Nat. Leasing Co.
Before CONTIE and KRUPANSKY, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.
KRUPANSKY, Circuit Judge.
This action joins inquiry into the long-standing judicially evolved аpplication of the "net result rule" as the criteria for determining a preferential transfer as defined in
Preferential transfers which mаy be avoided by the trustee are defined in
(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 antecеdent debt owned 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 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; and
(5) that enables such creditor to receive more than such creditor would rеceive 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 provision of this title.
As is facially evident from this provision, all five enumerated criteria must be satisfied before a trusteе may avoid any transfer of property as a preference. See: In re Bishop,
(c) The trustee may not avoid under this section a transfer--
* * *
* * *
(4) to or for the benefit of а creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor--
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which nеw value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor
In the action sub judice, the district court adjudged, and the pаrties do not dispute on appeal, that the criteria of Sec. 547(b)(1) through (b)(4) have been satisfied. In addressing the application of Sec. 547(b)(5) to the facts of the case at bar, however, the district court rеlied upon its equitable powers to justify its application of the net result with the following rationale:
[T]his Court must agree with the Bankruptcy Court that two "net result rules" actually exist in bankruptcy law. One, that of
The net result rule is a judicially created doctrine, predicated upon principles of equity, which evolved shortly аfter the enactment of the Bankruptcy Act of 1898 to presumably rectify what was judicially perceived to be inequities in bankruptcy law. See: In re Garland, supra,
Since the net result rule is "broader" in scоpe than the subsequent advance rule of Sec. 547(c)(4), engrafting the former doctrine upon Sec. 547(b)(5) as a threshold requirement for the qualifying preference would render the defense incorporated in Sec. 547(c)(4) impotent. The broader scope of the net result rule permits its utilization by the creditor irrespective of whether the value furnished by the creditor to the debtor is advanced either before or after the transfer from the debtor to the creditor. Contrawise, the subsequent advance rule of Sec. 547(c)(4) is more circumscribed in application and forecloses avoidance of the transfer by the trustеe only if the creditor provides additional value after the transfer from the debtor to the creditor.1 A "judicial gloss" which significantly restricts the statutory definition of "preference" and pragmatically emasculates the creditor defense thereto as intended by Congress in Sec. 547(c)(4) constitutes nothing less than legislation by judicial decree.
Moreover, judicial interposition of the net result rule into Sec. 547(b)(5) finds no sanctiоn in the legislative history of the Bankruptcy Reform Act of 1978. The legislative proceedings attendant to the promulgation of Sec. 547(b)(5) are significantly devoid of any allusion to the net result rule. Contrawise, the House Report discussing the subsequent advance rule, Sec. 547(c)(4), incorporates concise language reflecting the intent of Congress:
The fourth exception [Sec. 547(c)(4) ] codifies the net result rule in section 60c оf current law. If the creditor and the debtor have more than one exchange during the 90-day period, the exchanges are netted out according to the formula in paragraph (4). Any new value that the creditor advances must be unsecured in order for it to qualify under this exception. (Emphasis added).
H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 374, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6330. The Senate Report is identical. S.Rep. No. 95-989, 95th Cong., 2d Sess. 88, reprinted in 1978 U.S.Code Cоng. & Ad.News 5874. Thus, it would appear that the "net result rule" is an anachronism of Sec. 547(c). As has been noted,
Whatever the net result rule may have been under the prior Bankruptcy Act, Congress has indicated that, under the Bankruрtcy Code, the rule is to be applied accordingly to the formula set forth in
In re Garland, supra,
Accordingly, the judgment of the district court dismissing the trustee's complaint to avoid transfers from Fulghum to Ranier as preferential is hereby VACATED and this case is REMANDED for further proceedings consistent with this opinion. The judgment of the district court is AFFIRMED in all other respects, including the dismissal of (1) the trustee's amended complaint seeking to set aside the sale of construction equipment, and seeking to pierce Fulghum's corporate veil and (2) Ranier's claim for damages arising from the trustee's alleged improper retention of construction equipment, for the reasons articulated in the district court's memorandum opinion.
Notes
Bankruptcy Judge Robert Brauer appears to have recognized this dilemma:
I can think of no set of facts where, if the net result rule were to be applied under
In re Garland, supra,