*1 DRILLING, In re REXPLORE
INC., Debtor. PERKINS, Trustee,
J. Hunt
Plaintiff-Appellee,
v. COMPANY, INC.,
PETRO SUPPLY
Defendant-Appellant.
No. 91-6145.
United States Appeals, Court of
Sixth Circuit.
Argued April 1992. Aug.
Decided Miller,
Barry M. McKinstry (argued Taft briefed), Fowler, Bell, Lexing- & Measle & ton, Ky., plaintiff-appellee. *2 1220 Drilling continued Rexplore Although briefed), due. Wil- & (argued Wilson Allen R. em- remit to ceased it payroll, its to meet Owensboro, Ky., Presser, &
son, Johnson IRS. to the payments withholding ployee defendant-appellant. for as some as well computers company’s The by credi- Judge, MERRITT, repossessed were Chief equipment field Before: CONTIE, accounts bank company’s and Judge, The NORRIS, tors. Circuit and garnishments, numerous Judge. subjected to Circuit Senior to ac- funds its moving by responded it Judge. CONTIE, Circuit Senior company The names. different with counts work- high of 39 a ap- from staff Company office cut its Supply Petro Defendant October, to thirteen of 1984 in favor in late ers order court’s district peals the in Perkins, Hunt J. plaintiff affirming to bankruptcy, unable Drilling was Rexplore Because agreed an finding 16, May Petro, decision court’s on obligation its pay voidable was judgment material- state and mechanic’s 1985, filed Petro trans- preferential as a McLean, and Ohio in on leases liens man’s amount fer. in the Kentucky in counties Todd in Da- a lawsuit filed $16,195.54. Petro of I. on liens these to enforce Court Circuit viess a addition, filed Petro 22,1985. In October Kentucky ais Company Supply Petro $52,- of lien, amount in the materialman’s sell- of business in the engaged corporation Kentucky on County, 141.04, Grayson gas and oil supplies and equipment ing subsidiary Inc.’s Rexplore, held lease Petro and During 1984 producers. Petroleum. Compass gas and of oil worth $52,000.00 over sold debtor, for supplies problem and created lien equipment Grayson debtor, former- sale Drilling, Inc. The of its contract because Rexplore Inc. Rexplore, Inc., oil operated purchased Drilling, it Koil Coal, from which as ly known Pilgrim with corpora- companion keep its for gas leases required Compass, was Inc. Rexplore, Rexplore, Rexplore, Inc. tion, encumbrances. such of all free selling sale, interests the business its contract engaged on defaulted Inc. operat- 4, its money for to raise March on brought leases suit in the Pilgrim Drilling, Inc. mortgage. Rexplore on company, ing seeking foreclosure Grayson foreclosure, leases gas oil this settle attempt of the Most purchased Inc., and had been Rexplore, County, Compass, Pilgrim, In- Petroleum Compass negotiations from into Drilling Inc. entered Rexplore, Rexplore common Octo- acquiring On Inc., dustries, leases. Grayson concerning Pilgrim parent, into its from Compass entered 1985, parties stock ber debtor, Rexplore Agreement” Corporation. Coal Settlement “Second $550,- aof for guarantor Petro, Inc., providing including was Drilling, lienholders, given $5,000.00 until note promissory payments monthly the leases. satisfied purchase was interest Pilgrim Compass’ against lien allow- from fully paid, prohibited was was Inc. the debt Rexplore, Once in full. on the Compass. placed to be against liens third-party lien to release was If paid off. agreed settlement, was note until this properties part As property, other on the placed any of against any such liens proceed not to Ohio, to foreclose. right McLean, Todd given Pilgrim was on leases liens mind, turn a release background executed this With counties Grayson dispute. parties instant rise giving effect. the facts lien Drilling missed Rexplore if Drilling 1985, Rexplore spring theBy obli- amount entire payment, difficul- financial severe began suffer An immediately. due gation became Drilling Rexplore time, During this ties. Da- entered was they became its bills pay unable viess Circuit Court on November Ashland Oil in answer to the incorporating entirety of the Second garnishment, and the subsequent issue Agreement. Settlement stipulated It was second order that this was not secured. Judgment, all preferences constituted un- *3 der Revised 378.060, Statutes 22, On November Rexplore 1985 Drilling §§ 16, 378.070. May On 1991 the bankruptcy defaulted on the payment first due under court found that the Agreed Judgment the Agreed terms and Judgment. On 9, orders sought pursuant December 1985 issued garnish- a thereto ment order preferences, from the avoidable as Daviess Circuit Court and granted judgment order to attach funds held Ashland trustee in the Oil, $21,070.94. Inc. which amount Rexplore were owed The bankruptcy Drilling. paid $21,- Ashland court the sum of reasoned: 070.05 Petro in January, 1986. A subse- agreed The judgment against the debtor quent garnishment order again issued in favor of Petro judgment constitutes a on February 3,1986, which Ashland did not the debtor in contemplation pay, although it held additional funds be- of insolvency with design a prefer longing to Rexplore. Petro over other creditors. The terms of
On March Rexplore judgment 1986 Drilling consistent bankruptcy protection filed for with the Chap- terms of the Second Settlement ter 11. bankruptcy Agreement, The appointed objective J. of which was to Hunt Perkins keep as trustee on August debtor afloat making month- investigated The trustee ly payments those leas- key creditors, certain in- operated es by Rexplore Drilling in cluding which Petro. The garnishments issued title was held result, Ashland Oil. As a resulted transfers of it was determined that Ashland Oil held an Petro, debtor to $107,540.05 additional which was to be are transfers avoidable the trustee for Rexplore credited to Drilling. the benefit of generally. creditors
Rexplore Drilling along Appendix filed schedules Joint at 42-43. The district court Chapter petition listing total affirmed Bankruptcy Court’s decision $3,001,246.30 liabilities total valued Petro filed timely a appeal. notice of $682,652.60. assets of assets, Of the listed $636,223.10 in contingent claims were list- II. ed. listed, The schedules also at unde- Petro first bankruptcy that the values, termined interests in oil leases and court erred in applying K.R.S. partnerships. limited These leases were case, the facts this because that statute subject liens, to mechanic’s compli- EPA requires finding subjec- that obligations ance expenses. other tively intended to one creditor over
Therefore, it was difficult to approximate another, and since there was no evidence of their value. prefer, intent to is preparing When its statement of finan- not avoidable trustee. schedules, cial affairs and the debtor failed The trustee in bankruptcy argues, how- to list aas debt a $1.8 million ever, that subjective the debtor’s is belief the Indemnity Company Insurance determinative, not payment but that to a (“UNA”). North America Mr. Charles creditor violates the if a reasonable Boarman, Rexplore Drilling’s counsel, did debtor, light of all facts and circum- not list this mortgage liability as a because stances, should have known trans- he the loan “improvidently considered fer would preferential have had a effect. granted.” Both interpreted courts below the statute 21, 1988,
On March so require trustee com- as not subjective belief that menced adversary proceeding against preferential; instead, a transfer was alleging signing entry transfer would violate the statute if a debt- Judgment, $21,- payment or has “reason that it is know insolvent 544(b)). Thus, preference law is then the tion state the transfer ...
when makes to, of, adjunct those presumed.” Ap- design supplemental is Joint powers specifically provided for 14. . pendix at Bankruptcy Code which enable the trustee transfers. avoid certain A. reference to Barnhill v. dissent’s seek to may — Johnson, U.S.-, 112 S.Ct. prefer to a creditor as payment avoid (1992), L.Ed.2d determinative of law, 547(b), federal 11 U.S.C. ential under Barnhill, outcome here. In using provisions of state law or under the powers of section the avoidance invoked by 11 powers authorized the avoidance 547(b) Supreme Court and therefore *4 544(b). 544(b)permits the U.S.C. Section correctly federal. law determined that “preference” meaning should control any of an interest of to avoid transfer preference Bankruptcy Code’s under any obligation property in or the debtor case, provision. present in the by the that is voidable incurred debtor sought to avoid applicable law. law, permitted by as transfer under state (1979 544(b) “An 11 U.S.C. § &(Supp.). 544(b), meaning therefore the section and law,” beyond or appropriate federal state defined under “preference” must be powers avoidance contained law. Barnhill does not state substantive statute, 11 Bankruptcy preference Code’s 544(b) point sections to a conflict between 547, ‘preferences,’ “may invalidate U.S.C. § 547, suggest does it that resort to and nor trustee, using powers given and 544(b) would raise state law under section 544(b),may attempt him under section thus preemption. In problem of the absence preferential as and to set aside transfer precedent contrary, any clear case, In under such a law. invalid Congress to arm the conclude that intended preference outlined of a as elements bankruptcy trustee with the avoidance State) (usually or state statute will federal state, federal, prefer- powers of aswell controlling provisions of rather than the be law. ence 547.” re Associated Grocers section In 439, Inc., Coop., 445 62 B.R. Nebraska B. Indeed, (D.Neb.1986). the courts have governing preference law inconsistency no found that there is be codified at 378.060 payments is K.R.S. § Bankruptcy preference Code’s tween which reads: recovery preferential provision and the sale, assignment Any mortgage or made of the various transfers under laws any 544(b). pursuant to section states “[N]oth- defendant, any act or device done by a or legislative history suggests in debtor, contempla- in resorted to or Congress 547 to be intended section design insolvency tion available to the trustee exclusive vehicle creditors to the exclu- prefer one or more [preferential] In re Ken- avoid transfers.” others, sion, part, shall whole or 922, Marketing Corp., B.R. 931 69 val assignment operate as an and transfer Instead, legisla (Bankr.E.D.Pa.1987). debtor, shall all changes in history reveals “that tive creditors, his to the benefit of all inure designed simply preference provision were their proportion to the amount of ... recovery the trustee.” Id. facilitate including those respective demands 95-595, Cong. H.R.Rep. 95th 1st (citing No. contingent. which are future (1977) Cong. & Ad U.S.Code Sess. 177-78 (Baldwin KY.REV.STAT.ANN. see, 5787); p. e.g., re min.News 1981). Ass’n, Hospital Training 79 &
Provident
primarily
early
Ken-
(Bankr.N.D.Ill.1987) (recognizing
relies
B.R. 374
provision.
interpreting this
preference
tucky
law as
caselaw
availability of state
instance,
Grimes, Ky.
86
v.
attacking a
under sec- For
Grimes
means of
transfer
(1888)
Likewise,
while the
made
debtor is insolvent.
Zinn,
Ky.
Levis v.
(1893)
S.W.
court held
argues
nevertheless
that
that
prohibitions
section
applied
378.060’s
Agreed Judgment did not violate K.R.S.
types
(1)
to two
of situations:
transfers
Rexplore Drilling
378.060because
had
no
made while the debtor was actually insol-
knowledge
actual
of its insolvency, and
vent and he knew
about
fact of his
thus the
pre-
intent to
could
be
not
insolvency;
(2)
made
transfers
where
Instead,
sumed.
Rexplore
that
“contemplated
the debtor
becoming insol- Drilling
optimistic
was
that it
work
could
future,
vent in the
designed by
out its financial problems, and that
its
give preference
to
to the
[transfer]
[credi- Agreed Judgment with
just
was
Id.
court un clearly insolvent Drilling was oil Rexplore gas and these assuming thát Even test and sheet balance million, Rexplore’s der both $1 worth leases were they became when debts pay “inability to more million nearly $3.5 still debts the time at inquiry, due” Therefore, reasonable assets. than its Rexp- 12. at Appendix Judgment. Joint insol- it was known have should total liabili listed Drilling’s schedules lore “opti- was Rexplore Simply because vent. assets total $3,001,246.30 and ties out itself work it could and believed mistic” addition, the $682,652.60. enough reason difficulty is not financial sched that, preparing found court would Petro which a transfer sustain into to take failed had ules, the debtor creditors. other disadvantage operate mortgage debt million a $1.8 account transfer that the presumption Though the Rexp- testimony of Moreover, IINA. may be intent was made during the attorney revealed lore’s lower Grimes, at 6 S.W. rebutted, pay its not able it was of 1985 autumn for the explanation Rexplore’s found business, and regular course debts Joint credible. than to be less transfer had not been taxes withholding that federal Therefore, presump- Appendix at Un 66-67. Id. mid-1985. paid since a violation to establish tion sufficient rea circumstances, believe der these result Any other this case. its exceeded debtor, debts whose sonable unreal- hide behind debtors would allow and who million nearly $4.5 assets over- spite optimism, istic claims they became pay debts able de- insolvency, and whelming evidence insol of its aware been due, 378.- of K.R.S. § *6 aims legislative the feat thus transfer and the time at the vency 060. presumed. can be an intent Rexp- downplay attempts to Petro III. by paint insolvency knowledge of lore’s if in even argues that next Petro its financial picture brighter a does 378.060 K.R.S. required, § is not tent bankruptcy the that argues It health. the avoid trustee the authorize not into ac take failed assessment court’s re “it did not Judgment because Agreed inter gas oil and Rexplore’s all of count actually harmed was preference a ceive over $3 worth to be ests, it estimated which Brief at Appellant’s- agreement.” the by however, court, The'bankruptcy million. by harm it that asserts Petro $1,022,277 to only value assigned a McLean, Grayson, the on up its liens giving consid after gas leases oil and Rexplore’s exchange in county leases and Todd Ohio by presented testimony expert ering the However, as Judgment. Agreed the for authority the have do not We parties. both court, Pe- bankruptcy the determined factu court’s bankruptcy the to reevaluate subor was Grayson leases lien on the tro’s credibility the especially where findings, al million $1.8 prior dinate to they are involved, unless is of witnesses the the value exceeded IINA Caldwell, 851 re In clearly erroneous. County lien was Grayson Thus, the leases. Cir.1988). circuit “This (6th F.2d Fur Rexplore. the hands noof value fact findings of that clearly enunciated has determined bankruptcy court thermore, the dis not be aof McLean, Ohio liens that the cogent ‘most there ... unless turbed un unenforceable county leases Todd jus miscarriage of or mistake evidence ” enforcement because 376.090 K.R.S. § der M. Johnson re Edward In tice.’ Likewise, year. one sought within not Cir.1988). was (6th Assoc., F.2d real interest concerned liens since insolven debtor’s question Since that requires 452.900 K.R.S. property, § one, agree, we a factual primarily cy was brought be actions enforcement circumstances, accept present Petro existed. interest county which of in- determination bankruptcy court’s never procedure. followed this As the erential transfer. Although somewhat un- out, pointed clear, Petro did give up not appears Petro that, to be arguing right to Agreed foreclose as a while the Judgment result of the may constitute Agreed Judgment, preference, garnishment but rather as a function pursu- issued Agreed of its own ant to that properly Judgment failure to prefer- enforce the is not such, because, ential. This is contends, liens. As court found debtor could not have rights that “no or appear valuable intended garnishment that the yielded Rather, would occur. been Petro.” Appendix Joint it merely was consequence. fortuitous 15. We concur lower court’s Appellant’s Reply Brief Likewise, at 16. analysis that Petro not was harmed. It appears dissent troubled the fact nothing had by entering lose into the that debtor could not have “designed” Agreed Judgment, and posi- therefore its another, one creditor over thus tion could not have suffered. placing garnishment beyond prefer- alternative, In the ence statute. harmed, if it was gained even it nothing preceding Because the discussion makes Agreed Judgment. Rexp- Because clear that a debtor need not subjec- have a lore did not transfer a valuable tive plan, contrive, intent to scheme, ar- interest there was no “transfer” under intend, range or the above concerns will 378.060, K.R.S. preference. hence no § not influence our analysis of whether the recognize giv- that Petro was garnishment preference. constitutes a We right en the Agreed Judg- enforce its agree with the in bankruptcy ment, which it did case obtaining garnishment and the garnishment garnishment order. This separated cannot purposes be of our $21,000 order allowed Petro to collect over analysis under K.R.S. 378.060. But for Oil, from Ashland which held funds which Agreed Judgment, right Petro had no owing Rexplore. Although the garnish funds held on behalf Rexplore benefit received tangible Petro was not Drilling; simply direct, provided Petro with the means enforcing means of Judgment. recovering tangible fact, property. Therefore, we are unable to draw sale, K.R.S. “any states that *7 meaningful Agreed distinction between the assignment by made a debtor Judgment garnishment and the any judgment suffered a defen- would differently allow us to treat them dant” is included within the definition of a under K.R.S. 378.060. Were we not to § preferential transfer. Since Petro secured interpret the way, statute this an insolvent an Judgment against Rexplore preference debtor could effect a by enter- Drilling, this would appear to be encom- and, into an failing passed by express statute, of the terms pay according thereof, per- to the terms “any judgment which bars a mit a creditor gar- to collect means of defendant,” irrespective of whether it had nishment. We do not believe that K.R.S. effect. beneficial incongruous 378.060intended such an re- § Therefore, because it made no errors Therefore, of sult. properly the trustee law, and because its factual determinations avoided against Petro’s lien deference, must be accorded substantial funds held for the garnishee, conclude that both the bankruptcy Ashland Oil. court and the district correctly applied V. K.R.S. to the case. reasons, For the foregoing the decision hereby court is district AFFIRMED.
IV. MERRITT, Judge, dissenting. Chief Petro next garnish that its against lien Rexplore’s ment funds held The time limits substance may Ashland Oil not be pref- avoided as a Kentucky preference flatly statute are in- Kentucky stat- transfer erential” provisions preference consistent of a “de- evidence find cannot ute. I Act, 11 U.S.C. Bankruptcy another, over one creditor prefer” mind my sign to question a serious there is a “de- that such presume in- I would not of preemption the doctrine whether any evidence.” absence sign the use exists allows state law consistent from dissent respectfully Accordingly, I by the trustee state statute Bankruptcy panel. by the the views or its enforcement recently re- Supreme Court theAs Court. to state leaves us, bankruptcy law minded but rights property definition law “preference” is a of what not the definition Johnson, v. Barnhill or a “transfer.” — 1386, 118 U.S.-, S.Ct. Trustee, are matters (1992). These L.Ed.2d BRESSLER, N. Marcus integrally a are Preferences law. federal Plaintiff-Appellee, (bankruptcy, proceeding of collective part v. pro- receivership, and such composition, TUNE, A DIVISION debt- FOR of a assets ceedings that marshall INC., Defendant TIME proceeding OF collective or), a federal and once Appellant. policy federal rules and begun, federal has question conflicts This prevail. No. 91-5601. case, I would of this the heart goes to Appeals, Court States United ap- on the issue to brief parties order Circuit. Sixth below, Ior not raised although it was peal, issue remanded would 23, 1992. Argued Jan. there. for consideration Court Bankruptcy 6, 1992. Aug. Decided preemption possible to the In addition Rehearing En Banc Rehearing and clear that it is problem, 16, 1992. Oct. Denied Al- case. in this applies preference to as is referred though KRS 378.060 statute, fact it is in preference Under proceeding: collective
begin a state “operate[s] preference the statute all assignment and transfer The statute 378.060. KRS
of the debtor.” collec- an alternative provide appears existing law under state proceeding tive *8 proceed- alongside the federal pro- appear to does not
ing. recovery of a simply for avoidance vide transfer.
particular agree I do not issue state law
theOn here in question de- ... “judgment on a creditors more one or sign to prefer bankrupt of others.” ...
exclusion judg- into forced company was would the time which by a lawsuit ment in disas- ended otherwise likely have most being simply punished The creditor
ter. insisting on than rather settling its case would a contested “pref- as a qualified
no circumstances