Askenaizer v. Seacoast 06-CV-123-SM 03/29/07 P UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

In re: Michael S. Askenaizer, Appellant

v.

Seacoast Redimix Concrete, LLC, Appellee Civil No. 06-CV-123-SM Opinion No.

Seacoast Redimix Concrete. LLC. Cross-Appellant

v.

Michael S. Askenaizer. Cross-Appellee

O R D E R

Michael S. Askenaizer, the chapter 7 trustee ("the Trustee")

for Charwill Construction, Inc. ("Charwill"), seeks to avoid two

allegedly preferential payments made to Seacoast Redimix

Concrete, LLC ("Seacoast").

Seacoast filed a motion for summary judgment on the issue,

and a request for sanctions against the Trustee, before the

bankruptcy court. The bankruptcy court denied judgment avoiding

the two payments, but also declined to impose sanctions against

the Trustee. This appeal and a subsequent cross-appeal followed. Having carefully considered the matter, the decision of the

bankruptcy court is vacated and remanded to the extent it relates

to the contested payments. As it relates to the denial of

sanctions, the decision of the bankruptcy court is affirmed.

Standard of Review

District Courts have jurisdiction to hear appeals from final

judgments, orders, and decrees of the bankruptcy court.

(a)(1). In reviewing bankruptcy decisions, "the

district court and the court of appeals apply the same standards

of review that govern appellate review in other cases." In re

Hodes,

(10th Cir. 2005).

When appealed to a district court, a bankruptcy court's

legal determinations are reviewed de novo. In re Gonic Realty

Trust. 909 F .2d 624, 626-27 (1st Cir. 1990); In re G.S.F. Corp..

(1st Cir. 1991). The bankruptcy court's

findings of fact, however, are accorded deference. Factual

findings made in the bankruptcy court remain undisturbed unless

clearly erroneous. See Briden v. Folev.

(1st

Cir. 1985). A factual finding is clearly erroneous when,

although there may be evidence to support it, the reviewing

court, after consideration of all evidence before it, is left

2 with the definite and firm conviction that a mistake has been

made. See In re McIntyre.

(D.N.H. 1986). The

bankruptcy court's imposition of sanctions, however, is reviewed

only for abuse of discretion. See In re CK Liquidation Corp..

(B.A.P. 1st Cir. 2005); In re Svlver.

(B.A.P. 1st Cir. 1997).

Background

The facts relevant to this appeal are not in dispute.

Seacoast provided Charwill, a contractor, with concrete for use

in the construction of a wastewater treatment facility in the

Town of Durham, New Hampshire. Pursuant to N.H. Rev. Stat. Ann.

("RSA") § 447:16, the project was secured by a bond, guaranteed

by St. Paul Travelers, to ensure that all laborers and suppliers

would be paid.

Charwill made two regular payments to Seacoast for concrete

materials provided - the first on August 26, 2003, in the amount

of $6,652.00, and the second on October 22, 2003, in the amount

of $10,026.00. Charwill filed for protection under chapter 7 of

the Untied States Bankruptcy Code on October 24, 2003. The

Trustee brought an adversary proceeding against Seacoast seeking

3 to avoid the two payments, as preferential, because they occurred

within 90 days of Charwill's filing a bankruptcy petition.

Seacoast countered with a motion for summary judgment,

arguing that it was a fully secured creditor pursuant to state

law and that neither the lien nor the transfers were avoidable

under

(c)(6). Seacoast also sought sanctions

against the Trustee and his legal counsel under F e d . R. B a n k r . P.

9011(b). The Trustee objected, asserting Seacoast had not

established that it was a secured creditor and, even if that had

been established,

(c)(6) refers only to the lien

and not the transfers.

The bankruptcy court granted summary judgment in Seacoast's

favor, but on an alternative theory - reasoning that, because of

the bond, Seacoast would have obtained the full value of

Charwill's payments in the bankruptcy proceeding, had Charwill

not made the payments before filing. Accordingly, the court

found the preference transfer test set forth in

(b)(5) not met, and declined the Trustee's request to avoid

4 them. The bankruptcy court also declined to impose sanctions on

the Trustee or his attorneys. These appeals followed.1

Discussion

I. Avoidance under

(b).

(b) provides, in pertinent part,that a

trustee in bankruptcy

may 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 debtowed 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 [the Bankruptcy Code]; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of [the Bankruptcy Code].

To avoid a transfer, the Trustee must establish, by a

preponderance of the evidence, each essential element of a

1 Because the parties' briefs address only whether the bankruptcy court erred in considering payment sources other than the bankruptcy estate, this court does not review the merits of other arguments advanced by the parties in the bankruptcy court.

5 voidable preference. In re Ralar Distribs.,

(1st

Cir. 1993). In this case, the bankruptcy court held that the two

payments did not constitute preferential transfers because, even

in a chapter 7 liquidation, Seacoast would have received 100

percent of the amount it was owed, because payment was guaranteed

by the St. Paul Travelers bond. Accordingly, the court reasoned,

the Trustee could not show that Seacoast obtained more from the

allegedly preferential transfers than it would have obtained from

a distribution under chapter 7, thus necessarily failing to

satisfy the test set forth in

(b)(5).

The Trustee argues that the bankruptcy court erred by

considering a payment source outside the bankruptcy estate in

constructing its hypothetical chapter 7 liquidation result - that

is, calculating what Seacoast would have obtained in the chapter

7 proceeding. Specifically, the Trustee asserts that the

bankruptcy court's inquiry should have focused on the net effect

upon the estate due to the preferential payments, or whether

similarly situated creditors would obtain less from the estate

because of the allegedly preferential transfers. The Trustee

points to Palmer Clay Prods. Co. v. Brown.

(1936), which explains that

6 [w]hether a creditor has received a preference is to be determined, not by what the situation would have been if the debtor's assets had been liquidated and distributed among his creditors at the time the alleged preferential payment was made, but by the actual effect of the payment as determined when bankruptcy results.

The Supreme Court went on to more succinctly define a preference

transfer as "[a] payment which enables the creditor 'to obtain a

greater percentage of his debt than any other of such creditors

of the same class.'"

Seacoast argues that the bankruptcy court's ruling was

correct, citing a factually analogous case in which a bankruptcy

court focused on a payment bond when it compared a creditor's

preferential receipt with its potential chapter 7 recovery. In

re ML & Associates. Inc..

(Bkrtcy. N.D. Tex. 2003).

The court in ML & Associates. Inc. reasoned that the creditor's

claim would have been paid in full either by the debtor or the

bonding company, and noted that a commercially reasonable

insurance company would proceed against the bankruptcy estate to

recover any amount it paid to the creditor under the bond.

. The creditor's claim against the bankruptcy estate in

such a case would simply be replaced by the insurance company's

subrogation claim for the same amount.

. The

creditor, the court concluded, received no more from the debtor

7 than it would have received from the bonding company.

,

and, on that basis, held that the requirements of

(b)(5) were not satisfied.

Seacoast reads ML & Associates. Inc. as holding that if a

creditor, who has been fully paid by a debtor within the

preferential period, would have obtained full payment of the

bankrupt's debt from any other source (i.e., not necessarily from

the bankruptcy estate), then the preferential payment by the

debtor is not avoidable under section 547(b). That seems a

strained reading, and, in any event, a doubtful legal

proposition.

Under the correct approach, as explained in a different

opinion, "the court must focus, not on whether a creditor may

have recovered all of the monies owed by the debtor from any

source whatsoever, but instead upon whether the creditor would

have obtained less than a 100% payout in a Chapter 7

liquidation." In re Virqinia-Carolina Financial Corp..

(4th Cir. 1992) (emphasis in original; citation

omitted). The important inquiry is whether "the creditor

received a greater percentage recovery on its debt [from the

preferential payment] than it would otherwise have received had it looked solely to distribution from the Chapter 7 estate for

its payment." In re El Paso Refinery L.P.,

, 253

(5th Cir. 1999). Put differently, "the [c]ourt must focus on

whether the transfer of funds would have affected other creditors

in a chapter 7 liquidation." In re Philip Servs. Corp..

(Bkrtcy. S.D. Tex. Dec. 21, 2006).

Essentially, then, a court must consider not only whether the

creditor obtained more from the preference payment(s) than it

would have recovered in a chapter 7 liquidation, but also

whether, as a result of the preference payment, the bankruptcy

estate will be left with fewer assets to distribute among the

other creditors than if the preferential payment(s) had not been

made.

In a case like this one, where a creditor will be paid under

a third-party bond should the debtor fail to pay, there generally

will be no adverse impact on the estate's assets, because the

bonding company, as subrogee, will likely be a secured creditor

of the debtor with respect to amounts paid under the bond. See

In re Philip Servs. Corp..

("[ajlthough the court [in ML & Associates. Inc.) seems to

overlook . . . Krafsur, the outcome is consistent with Krafsur

if: (I) the party from whom the subcontractor actually or

9 potentially recovered had a security interest in the

debtor's/estate's assets or if the third party had a right of

offset against sums payable to the debtor, and (ii) if the

payment of the subcontractor released that security interest or

right of offset"). That is, if the debtor paid the creditor in

full within the preferential period, that payment could be

avoided, but not if avoiding it means only that the creditor will

obtain full payment from the bankruptcy estate through a

different means - e.g., as an effectively secured creditor. In

such circumstances the end result is the same - the preferential

payments can have no adverse effect on the equal distribution of

assets available to creditors of the estate - the full debt will

be paid, either because the debtor paid it within the

preferential period, or because the creditor would be entitled to

full payment from a third-party payee (e.g., a bonding company)

and the bonding company, in turn, would be entitled to full

payment, as subrogee, from the bankruptcy estate's assets (e.g.,

as a secured creditor).

Of course, if, in this case, St. Paul Travelers was

required, under its bond, to pay Seacoast in full, but had no

secured position vis a vis the bankruptcy estate's assets, then

upon payment under the bond it would become merely an unsecured

10 creditor. As an unsecured general creditor St. Paul Travelers

would receive (as subrogee of Seacoast) less than full payment on

Charwill's debt. In that circumstance, the preferential

payment(s) would provide Seacoast a greater recovery than it

would receive in a chapter 7 proceeding. The debtor would have

paid out 100% preferentially while the bankruptcy estate would

have paid out less than 100% to St. Paul Travelers, as subrogee,

for the same antecedent debt.

The outcome of this particular case, then, turns on whether

the bond issued to Charwill by St. Paul Travelers was

sufficiently secured by Charwill's assets (or, for some other

reason it, or Seacoast, would have recovered full value from the

bankruptcy estate in a chapter 7 proceeding). The record

developed in this appeal provides no reliable answer to that

critical question. The bankruptcy court's decision may well be

sustainable, if, for example, St. Paul Travelers would have had a

security interest in assets of the estate sufficient to guarantee

recovery of 100 percent of what it would have paid Seacoast under

its bond, had Charwill not paid Seacoast in the preferential

period. Otherwise, the order is not sustainable.

11 Conclusion

The bankruptcy court's order relating to the alleged

preference payment is necessarily vacated and the case is

remanded for further consideration. The controlling comparison

is between what the creditor, Seacoast, got paid, and what it (or

its subrogee) would have been paid in a chapter 7 proceeding.

For the reasons given during the bankruptcy court's hearing

on February 15, 2006, and in that court's written order dated

February 15, 2006, the decision of the bankruptcy court related

to imposition of sanctions is affirmed.

SO ORDERED.

S^ceven J/McAuliffe Chief Judge

March 29, 2 0 07

cc: David P. Azarian, Esq. John M. Sullivan, Esq. Joshua E. Menard, Esq. US Bankruptcy Court - NH, Clerk Geraldine L. Karonis, Esq.

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