Bankr. L. Rep. P 73,937,
In the Matter of KROH BROTHERS DEVELOPMENT COMPANY; Kroh
Brothers Equity Company; Kroh Brothers Realty Company;
Krоh Investments I, Inc.; Kroh Telecommunities, Inc.; Ward
Parkway Corp., a Missouri Corporation, Debtors.
KROH BROTHERS DEVELOPMENT COMPANY; Kroh Brothers Equity
Company; Kroh Brothers Realty Company; Kroh Investments I,
Inc.; Kroh Telecommunities, Inc.; Ward Parkway Corp.; and
the Kroh Operating Limited Partnership, Appellants/Cross-Appellees,
v.
CONTINENTAL CONSTRUCTION ENGINEERS, INC., Appellee/Cross-Appellant.
Nos. 90-1799, 90-1822.
United States Court of Appeals,
Eighth Circuit.
Submitted Nov. 15, 1990.
Decided April 18, 1991.
Johnathan A. Margolies, Kansas City, Mo., for appellants/cross-appellees.
Kenneth C. Jones, Kansas City, Mo., for appellee/cross-appellant.
Before BOWMAN and BEAM, Circuit Judges and HARRIS,* District Judge.
BEAM, Circuit Judge.
The debtor, Kroh Brothers Develoрment Corporation, brought this adversary proceeding in bankruptcy court against Continental Construction Engineers, Inc. to recover preferential transfers of $57,400.13. In response, Continental asserted that it gave new value of $29,490.14 to or for the benefit of Kroh Brothers. See 11 U.S.C. Sec. 547(c)(4) (1988).1 The bankruptcy court allowed Continental to assert the new value defense and awarded Kroh Brothers $27,909.94 plus interest. See Kroh Bros. Dev. Co. v. Aoki Landscape Maintеnance (In re Kroh Bros. Dev. Co.),
On appeal, Kroh Brothers contends: (1) that the lower courts erred in holding that the date a check is delivered is the date of transfer for purposes of section 547(c)(4); (2) that Continental is not entitled to assert a new value defense because it was paid for the new value by sources other than Kroh Brothers; and (3) that the lower courts erred in the finding of the date on which Kroh Brothers' interest in a particular development project was terminated. On cross-appeal, Continental argues that the lower courts erroneously computed the amount of new value it gave to Kroh Brothers. We affirm in part, reverse in part, and remand.
I. BACKGROUND
Kroh Brothers, formerly one of Kansas City's largest real estate development companies, filed a chapter 11 petition on February 13, 1987. Continental is a civil engineering firm which had done contracting work for Kroh Brothers since 1981. Prior to the bankruptcy filing, Continental was working on several projects for Kroh Brothers, including one in which Kroh Brothers had an ownership interest. This appeal concerns Kroh Brothers' concededly preferential payments to Continental for these projects.
The first payment was for twelve invoices in the amount of $46,887.34 and was made by check dated December 12, 1986. The check was paid by the drawee bank on December 22, 1986. The second check was for three invoices in the amount of $10,512.79 and was dated December 15, 1986. This check was paid on January 6, 1987. The bankruptcy court concluded that, although the payments were preferences, Continental could offset them with construction services provided to Kroh Brothers until the date of filing. Because the bankruptcy court concluded that the date of transfer for purposes of section 547(c)(4) is the date a check is dеlivered, it calculated the new value from December 13, 1986, just after the first preferential payment, to February 13, 1987, the date of filing. Thus, the bankruptcy court awarded judgment to Kroh Brothers for $27,909.94, the amount of the two preferential transfers less the new value advanced.
The district court affirmed these findings as well as the bankruptcy court's conclusion that Continental was entitled to assert a new value defense even though it had been paid for at least some of the new value. The bankruptcy court found that while none of Continental's invoices for the services constituting new value were paid by Kroh Brothers, "Continental received payment on the ... projects from sources other than Kroh." In re Kroh Bros.,
II. DISCUSSION
A. Transfer on delivery
For purposes of calculating new value under section 547(c)(4), the bankruptcy court concluded that the preferential transfers occurred when the checks were delivered, not when they were paid. In re Kroh Bros.,
While the courts are not unanimous on this issue, by far the majority hold that, for purposes of section 547(c)(4), the transfer occurs when the check is delivered.2 Ferguson, Does Payment by Check Constitute a Transfer upon Delivery or Payment?, 64 Am.Bankr.L.J. 93, 95 & n. 5 (1990) (citing cases). But cf. Foreman Indus. v. Broadway Sand & Gravel (In re Foreman Indus.),
The courts are in general agreement that section 547(c)(4) seeks to encourage creditors to deal with troubled businesses in the hope of rehabilitation. See In re New York City Shoes,
B. Payment for new value
Kroh Brothers also argues that Continental cannot rely on section 547(c)(4) because Continental was paid for the services constituting the new value. Both the bankruptcy and district court relied on In re Isis Foods,
First, the creditor must have received a transfer that is otherwise avoidable as a preference under Sec. 547(b). Second, after receiving the preferential transfer, the preferred creditor must advance "new value" to the debtor on an unsecured basis. Third, the debtor must not have fully compensated the creditor for the "new value" as of the date that it filed its bankruptcy petition.
In re New York City Shoes,
The trustee is able to avoid preferences in bankruptcy for the sake of equality of distribution of assets among creditors. Therefore, a preference does not merely diminish the estate, it does so unfairly. See H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 177-78, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6138. A creditor who subsequently advances to the estate new value in an amount equal to the preference, however, "in effect returns the preference to the estate." Erman v. Armco (In re Formed Tubes),
As indicated, the bankruptcy court, while conceding "that the majority of courts apply an 'unpaid new value' requirement," In re Kroh Bros.,
From this, we are uncertain what the lower courts held. Both parties argue on appeal that this case requires that we consider whether a creditor who has been paid for new value by some party other than the debtor can assert section 547(c)(4) as a defense. However, both the bankruptcy court and the distriсt court expressly limited their holdings in such a way as to avoid this third-party issue. As the district court wrote: "The court below declined to rule on the issue of whether new value is considered unpaid if paid for by a party other than the debtor. This Court will similarly limit its holding to the facts of the case at bar." Id. at 662. See also In re Kroh Bros.,
To the extent that the opinions of the bankruptcy and district courts can be read to hold that a creditor who has been paid for new value by the debtor can nevertheless аssert a new value defense, we disagree. Rather, we think that section 547(c)(4) is not available to a creditor to the extent the creditor has received payment from the debtor for the goods or services constituting new value. To the extent, however, that this case presents the issue of the availability of section 547(c)(4) in the third-party context, we must inquire further.
Apparently only one bankruptcy court has considered this question. In In re Formed Tubes, the debtor, a manufacturer of industrial tubing, regularly purchased steel from the creditor Armco. Armco was the beneficiary in all shipments to Formed Tubes of irrevocable letters of credit. On August 17, 1981, within ninety days of filing a chapter 7 petition, Formed Tubes owed Armco approximately $300,000. Before the bankruptcy filing, however, Formed Tubes paid Armco $109,000 on the indebtedness, and Armco made further shipments in excess of $109,000. After the bankruptcy filing, Armco drew on the letters of credit for payment of the new value shipments. Thus, when the trustee sought to avoid the $109,000 payment to Armco and Armco asserted section 547(c)(4) as a defense, the court was left to consider whether the defense should be available to a creditor who had been paid for the new value by a third party.
In answering the question, the bankruptcy court considered whether the estate had been replenished. "Since Armco shipped steel to the dеbtor with a value in excess of $109,000 after it received the $109,000 payment, it has a defense to the trustee's action unless the new value was either directly or indirectly removed from the estate." In re Formed Tubes,
We agree with this analysis. Normally, a creditor able to assert a new value defense because the new value has not been paid will be in the same position as if the preference had not been made. That is, because of the defense, the сreditor will be entitled to offset the preference against the unpaid new value, while retaining an unsecured claim for the antecedent debt. In effect, section 547(c)(4) "puts the debtor on a C.O.D. basis. It is as if the creditor is being paid in advance of shipments, rather than being paid for antecedent debts." Columbia Packing Co. v. Allied Container Corp. (In re Columbia Packing Co.),
As the court in In re Formed Tubes correctly determined, if the creditor receives payment from a third party who has a secured claim against the estate, the relative positions of the creditor and estate change. If allowed to assert the new value defense, the creditor would be entitled to retain the preference to offset against the new value even though the creditor also received a cаsh payment for the new value from the third party. The position of the creditor would be better than if the preference had not been made. This beneficial effect on the creditor, however, is not decisive. The rationale behind preference avoidance, distributive equality, compels us to consider whether the preference retention is to the detriment of other creditors. In the case of payment by a secured third pаrty, the estate would indeed be diminished. Because the third party who paid the creditor would be able to assert a secured claim against the estate for the amount of the new value, the new value would deplete rather than replenish the estate insofar as unsecured creditors are concerned. See In re Formed Tubes,
III. CONCLUSION
We cannot, hоwever, apply this analysis to the facts of the case before us. From the record, it is unclear for which services constituting new value Continental received payment, by whom, and when. It is similarly unclear whether the third parties making such payments were secured or unsecured creditors, or neither.4 Accordingly, we affirm the judgment of the district court that the date a check is delivered is the date of transfer for purposes of section 547(c)(4). The district сourt's judgment that Continental is entitled to assert a new value defense regardless of payment by third parties, however, is reversed and remanded for proceedings not inconsistent with this opinion. In all other respects, including those on which Continental cross-appeals, the judgment of the district court is affirmed.
Notes
The Honorable Oren Harris, Senior United States District Judge for the Eastern/Western Districts of Arkansas, sitting by designation
Section 547(c) provides:
(c) The trustee may not avoid under this section а transfer--
....
(4) to or for the benefit of a 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; new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.
11 U.S.C. Sec. 547(c) (1988).
We are apparently the first circuit to decide this question under section 547(c)(4). The issue was before us once before but not decided. See Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.),
Like section 547(c)(4), sections 547(c)(1) and (2), dealing with contemporaneous exchanges and payments in the ordinary course of business, also seek to encourage dealings with distressed businеsses "by insulating normal business transactions from the trustee's avoidance power." Ferguson, supra, at 103; Remes v. Acme Carton Corp. (In re Fasano/Harriss Pie Co.),
Even though Kroh Brothers has hinted at it, see Reply Brief for Appellants at 10, we have trouble believing the third possibility--that the third parties who paid Continental for its services had no claim against the estate. As Kroh Brothers' argument implies, payment by third parties without any claim probably has more to do with whether new value has been given to or for the benefit of the debtor than with the application of section 547(c)(4) in the third-party context. In other words, perhaps the value extended by certain entities was for the benefit of the third party and was not new value extended to the bankruptcy estate