Opinion
No. 01-80431, Adv. No. 03-8015.
June 25, 2004
Andrew W. Covey, Peoria, Illinois, Attorney for Plaintiff.
B. Kip Shelby, Peoria, Illinois, Attorney for Defendant.
Charles E. Covey, Peoria, Illinois, Attorney for Defendant.
OPINION
This matter is before the Court for decision after trial on the Complaint filed by Charles E. Covey, the Trustee of Classic Coach Interiors, Inc. (TRUSTEE), against the Defendant, Taylor Son (TAYLOR), to recover a preferential transfer of $26,968.
FACTS
It is quite common today that many individuals who are wheelchair-bound own and operate a motor vehicle, usually a van or minivan that has been specially modified for accessibility and operation. These vans are not manufactured with the requisite modifications. Instead, a niche industry has arisen consisting of companies whose business it is to modify "stock" vans and to market and sell those modified vans to customers with special needs.
There are two general kinds of companies in this niche industry: those that modify the van chassis by lowering the floor and installing a ramp or a lift, and those that sell and install customized operational equipment and make other alterations and adaptations to the interior of the van to meet a customer`s particular needs. Operating in the latter category, Classic Coach Interiors, Inc., the Debtor (DEBTOR), was engaged in the business of adapting vans with customized equipment and interior alterations.
The DEBTOR was an authorized dealer for Independent Mobility Systems, Inc. (IMS), a company that modifies van chassis by lowering the floors and installing mechanized ramps for wheelchair and scooter access. As an IMS dealer, the DEBTOR was responsible for marketing and sales to special needs customers. The DEBTOR sold both new and used vans from its showroom floor at its place of business in Kewanee, Illinois. In addition, the DEBTOR participated in various trade shows in order to solicit customers. The DEBTOR would assist the customer in selecting the make and model of the van and the appropriate adaptations to meet the customer`s needs.
The DEBTOR`S dealer agreement with IMS was not exclusive. The DEBTOR also did business with Vantage Mobility International.
Neither IMS nor the DEBTOR had an exclusive agreement to sell vans only of a particular manufacturer. Since the DEBTOR was not a licensed new vehicle dealer, whenever a new van was to be modified and sold to a customer, it was necessary that the Certificate of Origin be transferred from a licensed new vehicle dealer who could provide the manufacturer`s warranties. Accordingly, the DEBTOR established relationships with several new vehicle dealers for this purpose.
One such relationship was with TAYLOR, a licensed new vehicle dealer for Daimler-Chrysler. TAYLOR`S place of business was located in Kewanee, Illinois, about one and onehalf miles from the DEBTOR`S place of business. The DEBTOR and TAYLOR had a standing arrangement that TAYLOR would serve as the selling new vehicle dealer for individuals who wished to purchase a new Chrysler or Dodge van. TAYLOR had participated in approximately twenty-five such transactions with the DEBTOR.
Once an individual had identified to the DEBTOR a new Chrysler or Dodge van to be purchased, the DEBTOR would prepare and forward to TAYLOR a purchase agreement between the DEBTOR and the individual purchaser, that identified the vehicle by year, make and model, as well as exterior and interior color. Based upon the purchase order, TAYLOR would order the van from Daimler-Chrysler and pay its cost through TAYLOR`S floor-plan credit facility. The purchaser was usually required by the DEBTOR to make a substantial down payment at the time the purchase order was placed. Such down payments were retained by the DEBTOR and not given to or shared with TAYLOR, although the DEBTOR was required to pay IMS in advance, in full, for the cost of its services.
It was understood between TAYLOR and the DEBTOR that whenever TAYLOR purchased a van from the manufacturer for ultimate delivery to a customer of the DEBTOR, that the DEBTOR would reimburse TAYLOR for any interest charges attributable to the van that TAYLOR incurred under its floor-plan credit facility. It was also understood that TAYLOR would sell such vans at cost, with no mark-up. Dave Taylor, the son of TAYLOR`S owner, testified that the vans were sold on a no-profit basis, partly out of a sense of charity, but also because such sales helped meet their dealer sales quotas and because TAYLOR received a three percent reimbursement from the manufacturer.
After being ordered and paid for by TAYLOR, the van would be shipped to IMS to have the floor lowered and the ramp installed. Once that occurred and IMS had finished its work, the vehicle would be shipped to the DEBTOR. In most instances, the DEBTOR would perform additional modifications, and upon completion, the vehicle would be prepared for delivery. At the time of delivery, the customer would pay to the DEBTOR the balance due, less any amount paid by a governmental agency. Monies the DEBTOR received from customers were deposited into one of two bank accounts, both maintained for general operating purposes. The disposition of those funds in the DEBTOR'S "working" accounts was not restricted in any manner. If a customer died or backed out of a purchase, the DEBTOR would find another buyer for the vehicle rather than return it to the dealer. It was understood as part of their arrangement, that the DEBTOR would pay TAYLOR for the cost of the van only after the modifications were completed and the van was delivered to the purchaser.
Various governmental agencies provide financial assistance to qualifying individuals who need specially adapted vehicles for transportation.
In April of 2000, Carl Winger (WINGER), approached the DEBTOR to acquire an adaptive van. WINGER gave the DEBTOR a check payable to its order, in the amount of $5,000 for a down payment on April 13, 2000. An additional sum of $8,000 was being paid by the Department of Veterans Affairs, as an auto allowance for WINGER. On April 26, 2000, the DEBTOR prepared a purchase agreement for a 2000 Dodge Caravan, directed to TAYLOR`S attention, which identifies WINGER as the "customer" and shows the chassis invoice in the amount of $28,031, plus license and title of $143 and tax of $1,751.94, less the chassis rebate of $1,750 and a down payment of $13,000, for a total remaining due of $15,175.94. WINGER gave the DEBTOR a check for that amount on the same day. The DEBTOR prepared a second purchase agreement, also identifying WINGER as the customer, listing the adaptive equipment options selected by WINGER, including an IMS ramp, for a total of $16,685, including a shipping charge of $750. While the DEBTOR would ordinarily prepare only one purchase order, two separate purchase orders were prepared in this case because the Veterans Administration was paying for the adaptive equipment. On August 29, 2000, TAYLOR issued a check to Daimler-Chrysler in the amount of $28,051 in payment of the invoice received from the manufacturer. Pursuant to their agreement, the DEBTOR paid TAYLOR the "floor plan" interest charges assessed on the van until the DEBTOR paid the purchase price to TAYLOR.
That amount was not received by the DEBTOR until November 13, 2000.
The figures stated by the Court have been taken from the exhibits admitted at trial. Neither party made any attempt to reconcile any apparent inconsistencies.
With information furnished by the DEBTOR, TAYLOR prepared a vehicle order, showing WINGER as the owner of the 2000 Dodge Caravan, the purchase price due of $26,968, and a delivery date of November 30, 2000. TAYLOR admitted that contrary to the information shown on the order, the vehicle was shipped to IMS and not to TAYLOR. After delivering the van to WINGER, the DEBTOR issued a check on December 4, 2000, in the amount of $26,968 to TAYLOR.
On February 2, 2001, the DEBTOR filed a voluntary petition under Chapter 11 of the Bankruptcy Code. At that time, the DEBTOR had approximately eighteen vans in its inventory which it was in the process of converting for customers. According to the DEBTOR'S schedules, the DEBTOR had received deposits from customers totaling $464,018 on contracts totaling $811,970. The DEBTOR'S attempts to reorganize were futile and three months later, on May 4, 2001, the case was converted to Chapter 7. Many of those customers that had given deposits to the DEBTOR, but had not received their vans, filed unsecured claims for the amount of the deposits they had made. Relief from the stay was granted by the Court in order that the rights, as between the customers and the secured lender, to the proceeds received from the auction sale of the remaining vans could be adjudicated in state court.
Of these eighteen vans, the DEBTOR'S Statement of Affairs indicates that seven vans were actually owned by the customers. The DEBTOR'S role was limited to converting or modifying those vans to meet the customer's specifications.
The TRUSTEE brought this adversary proceeding to recover the transfer of $26,968 to TAYLOR under Section 547 as a preferential transfer. The matter proceeded to trial on March 16, 2004. Both David White, the former President of the DEBTOR, and Paula Fitzsimmons, a former secretary, testified on the DEBTOR'S behalf. Dave Taylor, the son of Albert Taylor, the owner of TAYLOR, also testified at the trial. At the conclusion of the evidence, the Court took the matter under advisement.
ANALYSIS
A trustee's right to avoid certain transfers made by the debtor during the ninety-day period preceding the bankruptcy filing is governed by Section 547(b) of the Bankruptcy Code. 11 U.S.C. § 547(b). Pursuant to that provision, the elements of a preferential transfer are:
1. a transfer
2. of an interest of the debtor in property,
3. to or for the benefit of a creditor,
4. for or on account of an antecedent debt,
5. made while the debtor is insolvent
6. and within ninety (90) days before the debtor's bankruptcy filing,
7. that enables the creditor to receive more than the creditor would have in a Chapter 7 case, had the transfer not been made.
The trustee bears the burden of proof on all elements under this provision. 11 U.S.C. § 547 (g); Warsco v. Preferred Technical Group, 258 F.3d 557 (7th Cir. 2001).
Disputing both the second and the fourth elements, TAYLOR contends that the payment it received was not a transfer "of an interest of the DEBTOR in property" and that it was not "for or on account of an antecedent debt." TAYLOR maintains that the DEBTOR served as an intermediary or deal maker in WINGER'S acquisition of the vehicle and that it only brought WINGER and TAYLOR together so they could make their own contract. This had to be so, according to TAYLOR, because the only way that WINGER could acquire warranties from the manufacturer was to acquire the vehicle directly from a licensed new vehicle dealer. Dubbing the DEBTOR a "conduit," TAYLOR suggests that the DEBTOR'S role was merely that of collecting the funds from WINGER and holding them for payment to the DEFENDANT. Accordingly, TAYLOR concludes that the monies received from WINGER never became the DEBTOR'S property and the DEBTOR was not obligated to TAYLOR for the cost of the van. In contrast, the TRUSTEE characterizes TAYLOR as the DEBTOR'S lender, financing its acquisition of the van for its sale to WINGER, characterizing the DEBTOR'S relationship as a buyer with respect to TAYLOR and then as a seller to WINGER.
TAYLOR does not claim that either an agency or trust relationship was created. Property which a debtor holds in trust for another is, of course, excluded from the bankruptcy estate. 11 U.S.C. § 541(d). Generally speaking, a debtor's deposit of funds into a commingled account defeats a claim that the funds were held in trust. In re Hedged-Investments Associates, Inc., 48 F.3d 470 (10th Cir. 1995).
WINGER'S only contact in the transaction was the DEBTOR. The DEBTOR discussed WINGER'S options and quoted WINGER the price for the van. TAYLOR was not present at any time during the negotiations between the DEBTOR and WINGER. After TAYLOR paid the manufacturer for the chassis, it billed the DEBTOR for interest it paid to its lender under its floor plan. The DEBTOR paid the interest to TAYLOR and did not back-charge it to WINGER.
The TRUSTEE introduced an invoice sent to the DEBTOR by TAYLOR relating to a separate transaction involving a sale to a different customer, which reflects on the face of the invoice that the van was "sold to Classic Coach for [that customer]" and charges the DEBTOR with "51 days floor plan at 9.75% (6.94 per day)."
The documentary evidence leads to some ambiguity as to the status held by each party to the transaction. For purposes of determining whether the TRUSTEE can recover the payment received by TAYLOR from the DEBTOR, however, the Court need not define with exactitude the economic substance of the entire transaction. For even if the DEBTOR'S only obligation was to pass on the funds it received from WINGER to TAYLOR once the van was completed for delivery, TAYLOR admits that after the DEBTOR depleted those monies, it remained obligated to pay TAYLOR from its general funds.
Under the Bankruptcy Code, the criterion of whether a challenged transfer was of an interest of the debtor in property is whether that property would have been part of the bankruptcy estate had it not been transferred before the commencement of the proceedings, and is thus determined by reference to Section 541, which defines "property of the estate." Begier v. I.R.S., 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). Broadly defined and broadly construed, the bankruptcy estate includes "all legal or equitable interests of the debtor in property," "wherever located and by whomever held." 11 U.S.C. § 541(a). Focal to the determination under Section 547 is whether the challenged transfer resulted in a diminution of the debtor's estate. Warsco, 258 F.3d at 564-65.
Under that broad standard, TAYLOR'S focus upon the lack of a written contract between it and the DEBTOR is much too narrow and, in fact, misdirected. The analysis begins with the payments received by the DEBTOR. The following payments were made to the DEBTOR by WINGER or on his behalf: $5,000 on April 13, 2000; $15,175.94 on April 26, 2000; and $8,000 on November 13, 2000. Those funds, not held or required to be held in trust, were deposited in the DEBTOR'S operating accounts and commingled with other funds. The payment of $26,968 to TAYLOR, made by the DEBTOR with a check drawn on one of its general operating accounts, did not occur until December 4, 2000, more than seven months after WINGER`S second payment. By the time that the DEBTOR paid TAYLOR, all of the monies it received from WINGER had long been spent. The payment to TAYLOR was admittedly made from the DEBTOR'S unrestricted, general operating funds. The DEBTOR'S unfettered ability to use those funds to pay any one of its creditors, or for any other purpose, establishes its interest in the funds sufficient to render such funds property of its bankruptcy estate. See, In re Flooring America, Inc., 302 B.R. 394 (Bankr.N.D.Ga. 2003). Thus, the evidence establishes that the DEBTOR was neither just a "conduit" or "middleman" who took no ownership interest in the proceeds. See, In re UDI Corp., 301 B.R. 104, 111 (Bankr.D.Mass. 2003) (collecting "true conduit" cases). Had the DEBTOR filed its bankruptcy petition on December 3, 2000, the day before it issued the check to TAYLOR, the funds in its "working" checking account would undisputedly have been property of its bankruptcy estate.
Applying the "lowest intermediate balance" rule, the TRUSTEE introduced the DEBTOR'S bank records and laboriously traced the deposits made by WINGER and the Veteran's Administration and the depletion of those funds from the accounts, taking into consideration any interaccount transfers. Near the end of the TRUSTEE'S presentation, TAYLOR stipulated to this fact.
The remaining question, answered in large part by the foregoing analysis, is whether the transfer to TAYLOR was "for or on account of an antecedent debt owed by the debtor before such transfer was made." 11 U.S.C. § 547(b)(2). The terms "debt" and "claim" are defined in the Bankruptcy Code in coextensive terms. Matter of Knight, 55 F.3d 231, 234 (7th Cir. 1995). "Debt" is defined as a "liability on a claim." "Claim" is defined very broadly 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" or "a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment." A creditor is defined as an entity that has a claim against the debtor. An "antecedent debt," not itself defined, is essentially a debt incurred prior to the transfer.
According to TAYLOR, it sold the van to WINGER, not to the DEBTOR, and there never was any debt between it and the DEBTOR. Ironically, TAYLOR takes the position that its sole obligee was the purchaser, WINGER, and that the DEBTOR had no legally enforceable obligation to pay it for the van, despite having received full payment from WINGER. Clearly it was part of the understanding between TAYLOR and the DEBTOR, enforceable as an oral or implied contract, that the DEBTOR having received the funds from the purchaser, would subsequently pay TAYLOR. Even if the Court would accept TAYLOR'S position that the DEBTOR'S role as a conduit was merely to pass on the funds received by WINGER upon their receipt, the DEBTOR'S failure to pay over those funds upon receipt but instead using those funds for other purposes, gave rise to a claim by TAYLOR against the DEBTOR. Moreover, TAYLOR admitted at trial that the DEBTOR incurred an obligation to pay TAYLOR at the time it expended the monies it had received from WINGER. That debt was incurred prior to the DEBTOR'S payment which was unquestionably made "on account of that antecedent debt." See, In re Cybermech, Inc., 13 F.3d 818 (4th Cir. 1994).
Even in the absence of a contract claim, TAYLOR would certainly have a claim against the DEBTOR for the purchase price based upon the equitable theory of unjust enrichment.
As an alternative contention, the TRUSTEE relies on In re Pearson Industries, Inc., 142 B.R. 831 (Bankr.C.D.Ill. 1992). The TRUSTEE contends that, by application of Section 2-236 of the Illinois Commercial Code, TAYLOR'S delivery of the van to the DEBTOR at its place of business for sale to WINGER rendered the vehicle subject to the claims of the DEBTOR'S creditors. According to the TRUSTEE, that result translates into an ownership interest by the DEBTOR not only in the van but in the monies paid by WINGER for the purchase of the van as well. TAYLOR claims that Pearson is distinguishable because the chassis in that case were actually sold to the debtor by the dealership.
Although this argument need not be addressed given the ruling in the TRUSTEE'S favor, this Court notes that despite the similarities between the parties involved, Pearson is readily distinguishable. In Pearson, the trustee sought to recover both the chassis repossessed by the dealer and payments made by the debtor to the dealer. First determining that the parties intended the creation of a secured relationship, the court held that the vans were the debtor's property and that the repossessions constituted a transfer of the debtor's interest in property. Notwithstanding its determination, however, the court went on to address the dealer's contention that it retained title to the chassis until it was paid by the debtor. In so doing, the court agreed with the trustee's contention that the delivery of the chassis to the debtor to be modified and resold by the debtor to its customers came within Section 2-326 of the UCC, giving the debtor an interest in the chassis for purposes of Section 547(b)(2). The dealer did not dispute that the amounts it received from the debtor for the payment of six chassis during the preference period were transfers of the debtor's interest in property, contending only that the payments were made in the ordinary course of business. Accordingly, the court's comments in Pearson, addressing the trustee's attempts to set aside the transfers of the chassis, have no application to the resolution of this proceeding.
The TRUSTEE has carried his burden of proof and is entitled to judgment in his favor. The Court recognizes that this result may seem unfair to TAYLOR, who was selling vans at cost for the benefit of disabled individuals. It is worth noting that TAYLOR could have protected itself against this result by taking and perfecting a security interest in the van sold to WINGER or by requiring that WINGER pay for the cost of the van directly to it rather than through the DEBTOR. By allowing WINGER to pay the DEBTOR with the understanding that the DEBTOR would subsequently pay it out of the DEBTOR`S general funds, TAYLOR assumed the risk of the DEBTOR`S insolvency.
For the reasons stated herein, judgment should enter in favor of the TRUSTEE and against TAYLOR. This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that Judgment is entered in favor of the Plaintiff and against the Defendant in the amount of $26,968, with prejudgment interest at the rate of 1.41% from January 14, 2003, plus costs. Pursuant to Fed.R.Bankr.Pro. 8002(c)(1), the time for filing a notice of appeal from this Order is hereby extended to the date 30 days from the date of the entry of this Order.