Opinion
Case No. 91-14535-T, APNo. 94-1321-T
August 13, 2002
MEMORANDUM OPINION
In this adversary proceeding the plaintiff trustee seeks to recover alleged preference and fraudulent transfer payments. Hearing was held March 7, 2002, on defendant Chrysler Credit Corporation's motion for summary judgment as to the transfers involving Brandnewco and Koons Chrysler Plymouth and plaintiff trustee's cross motion for partial summary judgment as to the transfers involving JKJ Chrysler Plymouth.
At hearing the court granted plaintiffs cross motion for summary judgment. Order on plaintiffs cross motion for summary judgment will be entered with this opinion. The court's ruling held that counsel for trustee had proved the elements of an 11 U.S.C. § 547 preference as to JKJ Chrysler Plymouth. The court denied Chrysler Credit's affirmative defenses of spoliation and floating liens.
"Spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." Silvestri v. General Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001).
Chrysler asserted a floating lien defense as to the value that was shuttled pre-petition from one debtor dealership to another. "A floating lien is a financing device where the creditor claims an interest in property acquired after the original extension of the loan and extends its security interest to cover further advances. The floating lien is a lien against a constantly changing mass of collateral for a loan value that will change as payments are received and further advances are made."Batlan v. Transamerica Commercial Fin. Corp. (In re Smith's Home Furnishings. Inc.), 265 F.3d 959, 964 (9th Cir. 2001).
The court deferred ruling on defendant's summary judgment motion and requested the parties to submit proposed findings of fact and conclusions of law. The court finds that there are genuine issues of fact in dispute regarding the pre-petition transfers related to the motion and will therefore deny defendant's motion.
Findings of Fact.
Background
On October 22, 1991, a number of motor vehicle dealerships owned and controlled by John W. Koons, Jr. filed petitions under chapter 11 of the bankruptcy code. Those dealerships included the following: JKJ Chevrolet, Inc., in Tyson's Corner, VA (JKJ Chevrolet); JKJ Glebe, Inc., in Arlington, VA (JKJ Glebe); Koons Chrysler Plymouth, Inc., in Tyson's Corner, VA (Koons); JKJ Chrysler Plymouth in Alexandria, VA (JKJ-CP) and Brandnewco, Inc., in Woodbridge, VA.
Chapter 7 trustee Richard Hall filed a complaint against Chrysler Credit Corporation to recover payments made to Chrysler by three of the consolidated debtors — JKJ-CP, Koons, and Brandnewco — within 90 days prior to the filing of debtors' respective petitions. Count I of the complaint seeks to recover payments alleged to be preferential transfers under 11 U.S.C. § 547 (b)(5). Count n seeks to recover fraudulent payments under 11 U.S.C. § 548. These claims were assigned to Ford Motor Credit, which is prosecuting the claims in the name of the trustee. Plaintiff has since amended count n to allege constructive fraud under § 548(a)(1)(B).
Chrysler Credit filed for summary judgment on January 15, 2002, claiming that there was no issue of material fact as to transfers being avoidable. On February 25, 2002, trustee filed a cross motion for summary judgment on count I of complaint to recover preferential transfers and/or fraudulent conveyances. The cross motion concerned only the transfers involving JKJ-CP.
Floor Plan Financing
Chrysler Credit provided "floor plan" inventory financing to Koons, Brandnewco, and JKJ-CP. The remaining consolidated debtors, JKJ Glebe and JKJ Chevrolet, received financing from Ford Credit. In addition to receiving floor plan financing from Chrysler, Brandnewco also received financing from General Motors Acceptance Corporation. GMAC financed the acquisition of Buick motor vehicles for Brandnewco while Chrysler financed its acquisition of Isuzu and Mitsubishi motor vehicles.
The floor plan agreement with Chrysler Credit operates in the following way: 1) As vehicles were shipped to the dealerships, Chrysler paid the manufacturer for them and added the cost of those vehicles to the dealership's line of credit; 2) Those vehicles became additional collateral. Interest would accrue on each vehicle until Chrysler was repaid the principal; 3) Repayment was due five days after the vehicle was sold and the dealership received the funds. Interest on the amount outstanding was due and payable monthly in arrears; 4) The dealership could continue to add vehicles to its inventory as long as it did not reach the maximum amount of its loan and was not in default; 5) As Chrysler Credit received payment for each vehicle the loan amount was reduced which made room for additional inventory. Under this arrangement, the collateral and the loan balance were constantly moving up and down as vehicles were added to inventory and sold. See Aff. of Bruce Chittick. Def.'s Ex. D.
In addition to its agreement with Chrysler Credit, Brandnewco also received financing from GMAC. GMAC filed financing statements under the Uniform Commercial Code claiming a security interest in Brandnewco's motor vehicle inventory prior to Chrysler Credit's filing of finance statements. However, Chrysler intended to take over the GMAC floor plan, and GMAC is not listed as a creditor in Brandnewco's schedules. The status of GMAC's secured interest in Brandnewco is uncertain, and Chrysler has not provided proof that it has taken over the GMAC floor plan.
Chrysler Credit is undersecured as to debtors Koons and Brandnewco. The value of the collateral held by Chrysler Credit was found to be less than the amount owed on that collateral. The court is unable to determine at this time whether all of the challenged transfers originated from proceeds of assets in which Chrysler held a first priority lien.
Pre-Petition Transfers
The parties dispute whether certain pre-petition transfers in the 90 days preceding filing of the petition in bankruptcy constitute avoidable preferences. That the transfers took place is not in dispute. However, the court has been unable to determine the amounts involved in certain of the transfers. The exhibits supporting these transfers were either illegible or inconclusive. The following is a list of the disputed transfers as the court understands them based on the representations of the parties:
Between August 21, 1991, and October 9, 1991, Koons received $1,828,325.00 from certain dealerships. During the same period, Koons paid the sum of $1,856,475.00 to other related entities.
1) Between September 27, 1991, and October 9, 1991, $725,000.00 was transferred from JKJ Glebe to Koons.
2) Between August 21, 1991, and October 8, 1991, $1,103,325.00 was transferred from JKJ Chevrolet to Koons.
3) Between July 30, 1991, and October 11, 1991, Brandnewco received $675,000.00 from JKJ-CP.
4) Chrysler claims that for each of these transfers a larger amount was transferred from the debtors to other related dealerships during the stated period.
5) A substantial majority of the payments received by Chrysler Credit from Koons and Brandnewco were made for or on account of an antecedent debt within 90 days of the petition date.
Discussion and Conclusions of Law.
Avoidance of Preferential Transfers by Trustee under 11 U.S.C. § 547 (b)
Section 547(b) of the Bankruptcy Code permits a trustee to set aside defined pre-petition transfers of a debtor, generally referred to as preferences. See Lubman v. C.A. Guard Masonry Contractor. Inc. (In re Gem Constr. Corp.), 262 B.R. 638, 644 (Bankr. E.D. Va. 2000). Thus, all unsecured creditors may share in property brought back to the estate.Id. The trustee is permitted to avoid any transfer of an interest of the debtor in property —
(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 ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(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.
11 U.S.C. § 547(b) (emphasis added).
The burden of proving the elements of an avoidable transfer is on the trustee. See § 547(g).
In this case Chrysler credit claims the trustee cannot meet its burden by proving the elements of § 547(b)(5) and further claims that it should be awarded summary judgment that the transfers in question were not avoidable preferences.
Summary Judgment
Summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56. A party moving for summary judgment bears the initial burden of demonstrating that there is no genuine issue of material fact. See Celotex Corp. v. Catrett 477 U.S. 317, 322 (1986). In determining whether this showing has been made, the court must assess the evidence in the light most favorable to the party opposing the motion. See, e.g., Charbornnages de France v. Smith, 597 F.2d 406 (4th Cir. 1979). Summary judgment is appropriate only where are no "disputes over facts that might affect the outcome of the suit"; it is not concerned with peripheral or irrelevant facts. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248 (1986).
If the moving party demonstrates that there is no genuine issue of material fact, the burden shifts to the nonmoving party to demonstrate that there is indeed a genuine issue for trial. RGI. Inc. v. Unified Indus., Inc., 963 F.2d 658, 661 (4th Cir. 1992).
When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.
Fed.R.Civ.P. 56(e). Summary judgment "is favored as a mechanism to secure the just, speedy and inexpensive determination of a case" when the requirements of Rule 56 are met. Thompson Everett. Inc. v. National Cable Adver., L.P., 57 F.3d 1317, 1322-23 (4th Cir. 1995).
Count I: Avoidance of Preferential Transfers
Chrysler Credit seeks summary judgment on the theory that the trustee cannot establish the § 547(b)(5) element of his preference case because Chrysler was a secured creditor as to both Koons CP and Brandnewco. In order to succeed in his § 547(b)(5) claim, the trustee must prove that the transfers enabled Chrysler to receive more than it would have if the transfers had not been made. See Batlan v. Transamerica Commercial Fin. Corp. (In re Smith's Home Furnishings. Inc.), 265 F.3d 959, 964 (9th Cir. 2001) (stating that pre-petition transfers to secured creditors are generally not preferential). If Chrysler is a secured creditor, the inquiry would end because no unsecured creditors would be prejudiced by the transfers. At hearing the court found that Chrysler was undersecured, i.e., that the value of the collateral was less than the amount owed on that collateral.
In the case of an undersecured lender, a key factual question is whether the debtor's assets were subject to a security interest by the lender. In Sloan v. Zions First Nat'l Bank. N.A. (In re Castletons. Inc.), which also involved an undersecured lender, the tenth circuit reasoned:
Because debtor's assets were subject to valid security interests on the first day of the preference period, a matter trustee does not contest, and because the collateral was not sufficient to liquidate all the debts owed to Zions on the date of bankruptcy, the bank's post-petition secured claim would have had to absorb all the assets of the estate if the pre-bankruptcy transfers had not been made. Consequently, the fluctuation in value of the collateral during the preference period, which trustee sees as bettering the bank's position, is really irrelevant. This is especially true because all payments to Zions came from assets already subject to its security interest
990 F.2d 551, 555 (10th Cir. 1993) (emphasis added). This analysis, relied upon by Chrysler, is dependent on the court's conclusion that all assets of the bankruptcy estate were subject to the lien of the secured creditor. Id. at 556.
Chrysler asserts that it had a secured inventory financing relationship with debtor. "During the preference period, the lender received payments on the indebtedness, and its lien attached to new inventory as it was delivered to the debtor." Def.'s Proposed Findings of Fact and Conclusions of Law. at 8. Further, Chrysler claims that trustee has the burden of proving that "the payments received exceeded the value of [Chrysler's] collateral" in order to show that the estate assets were not uncovered during the preference period. Id. at 9 (quoting Lease-A-Fleet. Inc. v. Wolk (In re Lease-A-Fleet), 151 B.R. 341, 349 (Bankr. E.D. Pa. 1993)). Chrysler states that it "received payments precisely equal to the wholesale value of the vehicles" and denies that trustee has met his burden. Def.'s Proposed Findings of Fact and Conclusions of Law, at 9.
For the court to grant summary judgment there must be a showing that all of the challenged transfers represented proceeds of assets in which Chrysler Credit held a first priority lien. Trustee asserts that "during the period Chrysler was receiving the challenged transfers, both Koons C-P and Brandnewco had assets and/or funds in which Chrysler either held no lien or in which Chrysler may have held a lien inferior to GMAC." PL's Proposed Findings of Fact and Conclusions of Law, at 5. Chrysler claims that it was a secured, perfected creditor in first lien position as to Koons and Brandnewco. As to the issue of Chrysler Credit's lien position, the court finds that there is a factual dispute. The trustee has the ultimate burden of proving each element of his § 547(b)(5) claim and should not be denied the opportunity to present evidence in his favor where there is an issue of fact in dispute. Defendant's motion for summary judgment on count I of plaintiff s complaint will be denied.
To support its contention that it is a secured creditor of Brandnewco, Chrysler states that GMAC is not listed as a creditor on Brandnewco's schedules. In addition, Chrysler points to 1991 loan documents stating that Buicks floor planned by GMAC would soon be floor planned by Chrysler. PL's App. Tab 2. The court finds that this evidence is inconclusive.
Count II: Constructive Fraudulent Conveyance
Trustee has alleged that one or more of the disputed transfers constitute constructive fraudulent conveyances under § 548(a)(1) (B). As with the § 547(b)(5) claim, there remains an issue of fact between the parties as to whether Chrysler was the beneficiary of the movement of value from one dealership to another during the period preceding bankruptcy. For the reasons stated above, the court will also deny defendant's motion for summary judgment as to count n of plaintiff s complaint.
Fraudulent Transfers and Conveyances:
(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.
A separate order will be entered.