DWIGHT R.J. LINDQUIST, TRUSTEE, APPELLANT,
v.
MARJORIE DORHOLT, APPELLEE.
| [1] | UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT |
| [2] | No. 99-3829 |
| [3] | Keywords: substantially contemporaneous, preference, 10-day, 547(e),
547(c)(1) |
| [4] | August 29, 2000 |
| [5] | IN RE: DORHOLT, INC., DEBTOR. DWIGHT R.J. LINDQUIST, TRUSTEE, APPELLANT, v. MARJORIE DORHOLT, APPELLEE. |
| [6] | Before Loken and Bright, Circuit Judges, and Hand, * District Judge.
*The Honorable William Brevard Hand, United States District Judge for
the Southern District of Alabama, sitting by designation. |
| [7] | The opinion of the court was delivered by: Loken, Circuit Judge. |
| [8] | Appeal from the Eighth Circuit Bankruptcy Appellate Panel. |
| [9] | Submitted: June 13, 2000 |
| [10] | In March 1998, Marjorie Dorholt loaned $100,950 to Dorholt, Inc., a
family printing business founded by her late husband. In exchange, the
company granted her a lien on its inventory, accounts receivable,
fixtures, and equipment. Due to a service bureau's mistake, Marjorie's
security interest was not perfected by filing until sixteen days later.
In April 1998, the company went into bankruptcy. Trustee Dwight
Lindquist commenced this adversary proceeding to avoid the security
interest as a preferential transfer. The bankruptcy court agreed,
but a divided Bankruptcy Appellate Panel reversed, concluding
that Marjorie's security interest may not be avoided because it falls
within the contemporaneous new value exception in § 547(c)(1) of the Bankruptcy
Code, 11 U.S.C. § 547(c)(1). The trustee appeals, arguing the loan and
the security interest were not "substantially contemporaneous"
as a matter of law because the security interest was not perfected
within ten days. We agree with the majority of circuits that have
rejected this construction of the statute and therefore affirm. |
| [11] | The Bankruptcy Code allows the trustee to avoid (set aside)
pre-bankruptcy transfers of the debtor's property that would
result in preferential treatment of favored creditors. In general, an
avoidable preference is a transfer of the debtor's property to or for
the benefit of a creditor, on account of the debtor's antecedent debt,
made less than ninety days before bankruptcy while the debtor was
insolvent, that enables the creditor to receive more than she would in a
Chapter 7 liquidation. See 11 U.S.C. § 547(b). This rule "is
intended to discourage creditors from racing to dismember a debtor
sliding into bankruptcy and to promote equality of distribution
to creditors in bankruptcy." In re Jones Truck Lines, Inc.,
130 F.3d 323, 326 (8th Cir.1997). Consistent with this purpose, §
547(c)(1) provides that a transaction is not a preferential transfer,
even if made on the eve of bankruptcy, if the creditor provides
new value in exchange for the debtor's contemporaneous transfer of, for
example, a security interest. Other creditors are not adversely affected
by such an exchange because the debtor's estate has received new value.
Moreover, this exception encourages creditors to continue dealing with a
troubled company, which may allow the company to escape bankruptcy
altogether. See In re Jones, 130 F.3d at 326. |
| [12] | In this case, Marjorie concedes that her security interest meets the
criteria for avoidance under § 547(b). This concession is correct even
though it is not self-evident that Dorholt, Inc., granted the security
interest "on account of an antecedent debt." Although Marjorie
loaned the company $100,950 on the same day it executed the security
agreement, in order to discourage debtors from granting secret liens the
Code expressly provides that the transfer of a security interest is
deemed to be "at the time such transfer is perfected" unless
the security interest is perfected within ten days. See 11 U.S.C. §
547(e)(2)(B). Marjorie's security interest was not perfected until
sixteen days after it was granted. Thus, her loan was
"antecedent" to the company's transfer of the security
interest. See 5 LAWRENCE P. KING, ET AL., COLLIER ON BANKRUPTCY
¶ 547.05[5][a] (15th ed. rev. 2000). |
| [13] | As Marjorie's security interest is admittedly avoidable under §
547(b), the issue on appeal is whether it falls within the § 547(c)(1)
exception for contemporaneous new value exchanges. That section provides
that the trustee may not avoid a transfer: |
| [14] | (1) to the extent that such transfer was- |
| [15] | (A) intended by the debtor and the creditor to or for whose benefit
such transfer was made to be a contemporaneous exchange for new value
given to the debtor; and |
| [16] | (B) in fact a substantially contemporaneous exchange. |
| [17] | The trustee concedes that Marjorie and the debtor intended a
contemporaneous exchange of a loan for a security interest, satisfying
§ 547(c)(1)(A). The issue is whether the exchange was in fact
"substantially contemporaneous." The statute does not define
that term. |
| [18] | The trustee argues that the transfer of a security interest is not
substantially contemporaneous as a matter of law unless the security
interest is perfected within the ten-day period set forth in §§
547(e)(2)(A) and (B). Relying on In re Arnett, 731 F.2d 358 (6th Cir.
1984), the trustee argues there are two reasons for adopting this
bright-line rule in construing the term substantially contemporaneous.
First, the trustee notes that another preferential transfer exception,
§ 547(c)(3), provides that a purchase money security interest is
avoidable unless it is perfected within twenty days. See generally
Fidelity Fin. Servs., Inc. v. Fink, 522 U.S. 211 (1998). Purchase money
security interests are generally favored in the law, the trustee argues,
so other security interests that are governed by § 547(c)(1) should be
given less time in which to qualify for a preferential transfer
exception. Second, the trustee argues that not incorporating §
547(e)(2)'s ten-day time limit into § 547(c)(1) would render §
547(e)(2) superfluous. |
| [19] | Like the Seventh Circuit and the Ninth Circuit, we disagree. See In re
Marino, 193 B.R. 907, 912-16 (B.A.P. 9th Cir. 1996), aff'd, 117 F.3d
1425 (9th Cir. 1997); Pine Top Ins. Co. v. Bank of Am. Nat'l Trust &
Sav. Ass'n, 969 F.2d 321, 328-29 (7th Cir. 1992). Most importantly, the
plain language of the statute is at odds with the trustee's bright-line
test. The statute uses a more elastic term, substantially
contemporaneous. "The modifier 'substantial' makes clear that
contemporaneity is a flexible concept which requires a case-by-case
inquiry into all relevant circumstances." Pine Top, 969 F.2d at
328. Congress knew how to adopt a specific time limit; it did so in the
purchase money security interest exception, § 547(c)(3). It chose a
less rigid standard for § 547(c)(1), no doubt because that provision
governs a wider variety of loans and credit transactions. We must
construe the statute accordingly. |
| [20] | We also reject the trustee' contention that § 547(e)(2)'s ten-day
rule must be read into § 547(c)(1) or § 547(e)(2) becomes mere
surplusage. Section 547(e)(2) defines when a transfer is made for
purposes of § 547. If a security interest is perfected within ten days,
the transfer is deemed made on the date of the transfer. If the security
interest remains unperfected for more than ten days, the transfer is
deemed made on the date of perfection. A transfer is not preferential
under § 547 unless it is made within ninety days prior to bankruptcy
(in the case of transfers to insiders, within one year). See 11 U.S.C.
§ 547(b)(4). Thus, § 547(e)(2) serves an essential purpose in
determining whether a transfer is avoidable, whether or not its ten-day
limit is also read into the § 547(c)(1) exception. |
| [21] | For these reasons, we reject the trustee's rigid construction of
substantially contemporaneous and adopt the case-by-case approach of the
Seventh and Ninth circuits. That resolves the appeal but potentially
leaves open the question whether Marjorie Dorholt's security interest
was in fact substantially contemporaneous when it was perfected sixteen
days after her loan. We conclude the trustee has waived this issue. On
appeal, the trustee argued only that Marjorie's security interest was
not substantially contemporaneous with her loan as a matter of law. *fn1
The trustee's concession seems appropriate -- it is undisputed that
Marjorie injected $100,950 of new capital into the struggling debtor on
March 2, 1998, and that her security interest would have been perfected
more quickly but for a service bureau's filing error. Thus, her loan
appears to be precisely the type of transaction that the § 547(c)(1)
exception was intended to protect. |
| [22] | The judgment of the Bankruptcy Appellate Panel is affirmed. |
| [23] | A true copy. |
| [24] | Attest: |
| [25] | CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT. |
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| Opinion Footnotes | |
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| [26] | *fn1 The Bankruptcy Appellate
Panel reversed the bankruptcy court; it did not remand for
further fact-based inquiry. If the Bankruptcy Appellate Panel had
remanded for "further judicial activity that is likely to affect
the merits of the controversy," we would not have jurisdiction over
this appeal under 28 U.S.C. § 158(d). In re Woods Farmers Coop.
Elevator Co., 983 F.2d 125, 127 (8th Cir. 1993). |