Opinion
Bk. Case No. 97-40643, Adv. No. 98-6244.
February 25, 1999.
Daniel C. Green and James P. Price, RACINE, OLSON, NYE, BUDGE BAILEY, CHTD., Pocatello, Idaho, Attorneys for Plaintiff.
Stephen A. Meikle, MEIKLE LAW OFFICE, P.A., Idaho Falls, Idaho, Attorney for Defendants.
MEMORANDUM OF DECISION
Plaintiff L. D. Fitzgerald, the Chapter 7 Trustee, sues Defendants Robert and Juanita Cochran ("Cochrans") and their daughter, Sharon Sharp, the Chapter 7 Debtor, to avoid Cochrans' security interest in a pickup, and to recover that pickup from Sharp for sale. The action is before the Court on the cross motions for summary judgment filed by Plaintiff and Defendants Cochran.
Undisputed Facts
From the pleadings and affidavits filed in this action, the following undisputed facts appear.
The Cochrans loaned Sharp $17,300 between March 15, 1996 and June 5, 1997. On June 5, in contemplation of additional loans, Sharp signed a Loan Agreement, Promissory Note, and Security Agreement in favor of the Cochrans. The gist of the documents is that Cochrans would continue to loan Sharp money; that Sharp would repay the loans in monthly installments; and that Sharp would grant Cochrans a security interest in her pickup, a 1989 Chevrolet, worth about $7,000 according to Plaintiff's estimate. Cochrans loaned Sharp $1,500 on June 5, the date the documents were signed, and another $27,355 from June 5, 1997 through January 28, 1998. Cochrans' security interest in the pickup truck was perfected by notation on the vehicle title on June 10, 1997.
On June 24, 1997, Sharp filed a petition for Chapter 7 bankruptcy relief. Plaintiff is the Chapter 7 trustee in the bankruptcy case.
Discussion and Disposition of the Issues
Plaintiff argues that Cochrans' security interest in the truck is avoidable as a preference under 11 U.S.C. § 547(b). Plaintiff explains that since Sharp owed money to Cochrans when the security interest was granted them on June 5, 1997, the lien constitutes an avoidable preference to the extent of the pre-existing indebtedness.
Plaintiff is no doubt correct, as far as the argument goes. As to the pre-June 5 loans, all the elements of 11 U.S.C. § 547(b) are satisfied, and the record supports Plaintiff's claim that the granting of the security interest was preferential to the extent the parties intended to secure any antecedent debt. However, Plaintiff's theory fails to address Defendants' position.
Defendants do not contest Plaintiff's argument; if fact, they don't seem to care. This is because Defendants are not arguing that the security interest secures Sharps loans to Cochrans made prior to June 5. In spite of the "dragnet clause" found in the security agreement securing all obligations of Sharp to Cochrans then existing (on June 5, 1997) or thereafter arising, Cochrans and Sharp acknowledge the lien granted by the agreement was not intended by the parties to secure any pre-existing indebtedness. Instead, Defendants focus on the loans made from Cochrans to Sharp after June 5. These loans, Defendants contend, would be secured by the "future advances" language of the security agreement, and to that extent the security interest protected from preference avoidance by the "new value" exception found in Section 547(c)(4).
Section 547(c)(4) provides that a trustee may not a avoid a 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. § 547(c)(4).
The record shows, without dispute, that Sharp received $1,500 from Cochrans on June 5, the date the documents were signed, and over $27,000 thereafter, commencing with another $1,500 advance on July 6, 1997. Defendants argue that since this amount greatly exceeds the value of the truck, Plaintiff's demand that it be surrendered should be rejected. This argument is fatally flawed, however.
Sharp filed for bankruptcy relief on June 25, 1997. At that time, she was indebted to Cochrans for the initial $1,500 advanced under the new loan agreement, note and security agreement. For that amount, as a subsequent advance of new value, Cochrans' security interest is unavoidable.
However, on that date, any interest of Sharp in the vehicle became property of her bankruptcy estate. 11 U.S.C. § 541(a). In other words, when she filed for bankruptcy, she no longer owned the truck, and subsequent advances of credit to her by Cochrans could not be secured by the truck.
Moreover, post-bankruptcy advances do not qualify for protection from avoidance under the new value rule of Section 547(c)(4). Fitzpatrick v. Central Communications and Electronics, Inc. (In re Tennessee Valley Steel Corp.), 203 B.R. 949, 957(Bankr.E.D.Tenn. 1996); Clark v. Frank Hall Company of Colorado (In re Sharoff Food Service, Inc.), 179 B.R. 669, 678 (Bankr.D.Colo. 1995); Morse Operations, Inc. v. Goodway Graphics of Virginia, Inc. (In re Lease-A-Fleet), 155 B.R. 666, 684 (Bankr.E.D.Pa. 1993). As this Court explained in In re Laser Magic Research and Development Corp., 89 I.B.C.R. 81, "[t]he time period [applicable to] Section 547 is the 90 days prior to the filing of the bankruptcy petition . . . [and] the case law and legislative comments make it clear that the exceptions to the trustee's preference avoidance powers also pertain to this time period." 89 I.B.C.R. at 83. Quoting from an Eighth Circuit decision, the Court held that advances of new value to a debtor after the filing of a bankruptcy petition cannot be used to offset a pre-petition preference. 89 I.B.C.R. at 84, citing In re Bellanca Aircraft Corp., 850 F.2d 1275, 1284 (8th Cir. 1988).
Conclusion
Except to the extent of the one protected $1,500 advance made on June 5, any security interest claimed by Cochrans in the pickup is avoidable and unenforceable against the Plaintiff as trustee. Plaintiff's motion for summary judgment should be granted to that extent, and the truck should be turned over to Plaintiff for liquidation according to law. Defendants' motion for summary judgment should be denied. Counsel for Plaintiff shall submit an appropriate form of order and judgment for entry by the Court.