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#2357 signed 9-15-97



In Re:




CASE NO. 92-41715-11




v. ADV. NO. 95-7098





This proceeding is before the Court on the defendant's amended motion for summary judgment. The defendant, the Federal Deposit Insurance Corporation (FDIC), appears by counsel Steven M. Leigh and Robert D. Kroeker of Martin, Leigh & Laws, P.C., of Kansas City, Missouri. The plaintiff, the trustee of the Osman liquidating trust, appears by counsel F. Stannard Lentz and John J. Cruciani of Lentz & Clark, P.A., of Overland Park, Kansas. The Court has reviewed the relevant pleadings and materials and is now ready to rule.


The FDIC is the receiver for College Boulevard National Bank, also known as Midland Bank of Overland Park, N.A. (the Bank). Debtor Steven Osman owned a company called Professional Property Management, Inc. (PPM), and both he and the company obtained financing from the Bank at various times. As is commonly done, his wife usually signed the loan documents that obligated him personally. However, since he apparently ran the businesses without her significant participation, the Court will use "Osman" to refer only to him.

The plaintiff contends that PPM was an alter ego of Osman rather than a truly separate entity and that the Bank, through its president at the relevant time, was an "insider" of Osman as that term is used in the Bankruptcy Code. In this proceeding, relying on 11 U.S.C.A. §547(b), the plaintiff seeks to recover from the FDIC an alleged preferential transfer that occurred more than 90 days but less than one year before Osman filed for bankruptcy when PPM pledged a debenture as security for its debt to the Bank. In its amended motion for summary judgment, the FDIC contends: (1) the Bank was not an insider of Osman; (2) the transfer did not enable it to receive more than it would have received in a chapter 7 liquidation because the Bank was already a perfected secured creditor when the transfer was made; and (3) the transfer was an ordinary course payment protected from the plaintiff by §547(c)(2). For present purposes, the FDIC is not questioning whether PPM was Osman's alter ego, so the Court will assume in this decision that the plaintiff will be able to prove that preliminary fact.

The following historical facts of Osman and PPM's dealings with the Bank are disclosed by the documents and depositions the parties have submitted. In 1988, Osman and his wife gave the Bank a $350,000 promissory note secured by Dominion Banqueshares Limited Convertible Subordinated Debenture No. 1 (Debenture No. 1) in the principal amount of $350,000 and issued to the Osmans on the day they signed the note. The Bank received the debenture that same day. In 1989, PPM assumed the Osmans' obligations on the note, and the Bank remained secured by Debenture No. 1. On January 15, 1990, PPM executed a new note for $340,000, due July 16, 1990, which stated it was secured by the Osmans' guaranties and a $350,000 Dominion Banqueshares Limited Convertible Subordinated Debenture. Apparently at some unspecified later time, this note was amended by typing in the words, "Substituted Dominion Banqueshares Limited Convertible Debenture in the amount of $300,000.00," and then, by hand, by crossing out the number and writing in "$290,000.00." The Osmans and PPM appear to have initialed this change. Since only initials and not signatures appear on the one-page document submitted to the Court, it seems likely there is at least one more page to the document.

On June 15, 1990, a number of important things happened. According to notations on it, Debenture No. 1 was canceled. A new $300,000 Dominion Banqueshares Limited Convertible Subordinated Debenture, No. 11 (Debenture No. 11), was issued to the Osmans. The Osmans signed an "Individual Pledge Agreement" giving the Bank a security interest in a Dominion debenture specifically identified only as "in the amount of $290,000.00." They also assigned to the Bank a Dominion debenture specifically identified only as "in the amount of $290,000.00." On September 24, 1990, an assistant vice president of the Bank signed a receipt for a Dominion debenture which might have been No. 11, but the first space used for listing the identification number for the debenture has had more than one character typed into it so the Court cannot tell what number or letter was intended. The receipt does indicate the debenture would be held as collateral for the loan to PPM. Debenture No. 11 has been stamped "Cancelled," but no date for the cancellation is indicated on it. Dominion Banqueshares Limited Convertible Subordinated Debenture No. 14 (Debenture No. 14), for $300,000, was issued on January 2, 1991, to PPM.

PPM's note was extended on July 16, 1990, and reduced to $290,000. The note was later extended six more times. Neither the first nor the next five extensions specifically referred to any security for the note; all merely included boilerplate language that "any security documents for the payment of said note shall remain in full force and effect." The last extension, dated February 3, 1992, contained that language but also included the following: "Substitution of collateral taken on 2-3-92: Individual guaranty of Steven H. Osman and Susan J. Osman. Dominion Banqueshares Limited Convertible Subordinated Debenture No. 14 in the amount of $300,000.00 in the name of Professional Property Management due 10-2-95." PPM signed a corporate pledge agreement that same day, pledging Debenture No. 14 to the Bank. A Bank employee signed a receipt for Debenture No. 14 on February 14, 1992. This pledge is the transfer the plaintiff is trying to avoid.

The plaintiff concedes that he must show the Bank qualifies as an "insider" of the debtors because the transfer occurred more than 90 days before they filed for bankruptcy, and also concedes that the Bank does not fall within any of the specified categories in 11 U.S.C.A. §101(31)(A) which would make it an "insider" of these individual debtors. Noting, however, that the specified categories are introduced by the word "includes," which §102(3) declares is not limiting, the plaintiff contends the depositions of Osman and of Leopold H. Greif, the Bank's president at the time of the transfer, show that these men's relationship was sufficiently close that Greif, as the Bank's agent, should be determined to be an insider of the debtors. Osman said that Greif brought him the opportunity to buy a bank and helped him obtain financing to do so. Both he and Greif indicated they had something of a social or personal relationship beyond their banking relationship. Osman also said that he talked to Greif about his financial problems and what he was trying to do about them, and that he thought Greif would also have learned something about those problems from bank examiners and from some of Osman's partners, who had personal relationships with Greif. Osman indicated the banking environment at the time made it "virtually impossible" to find a replacement for his financing through the Bank (and perhaps other banks in which Greif had an interest).

In the course of his brief, the plaintiff asserts that around May 12, 1992, the Bank bought Debenture No. 14 from PPM for $300,000, and required Osman to write a check for $291,691.67 on PPM's account using most of the sale proceeds to pay off PPM's note to the Bank. He adds that a new debenture, No. 15, was then issued in the Bank's name to replace Debenture No. 14. The FDIC has not complained that these assertions are not true or have been improperly made, and they help make the balance of the plaintiff's assertions more understandable. Osman and Greif referred to this debenture purchase in their depositions. Osman indicated Greif became concerned about PPM's ability to make the required payments on the note and wanted the loan paid off, telling Osman, "I can buy a debenture but I can't have a bad loan." Greif indicated that he viewed Osman and PPM as being virtually the same entity and that he knew they had a number of other creditors who could try to collect from them, so it was in the Bank's interest to be as aggressive as possible to try to get a better source of repayment. Consequently, he arranged to have the Bank buy Debenture No. 14 and made sure Osman used the money paid for it to pay off PPM's note with the Bank.


In pertinent part, 11 U.S.C.A. §547 provides:

(b) Except as provided in subsection (c) of this section, the trustee 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 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.

(c) The trustee may not avoid under this section a transfer--

. . .

(2) to the extent that such transfer was--

(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee; and

(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and

(C) made according to ordinary business terms;

Section 547(g) provides that the plaintiff has the burden of proving the avoidability of the transfer under subsection (b), but the FDIC has the burden of proving its nonavoidability under subsection (c).

Federal Rule of Civil Procedure 56, governing grants of summary judgment, is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056. Rule 56 provides that this Court must grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In considering a motion for summary judgment, the Court must examine all the evidence in the light most favorable to the party against whom summary judgment is sought. Summary judgment is inappropriate if an inference can be deduced from the facts which would allow the nonmovant to prevail. The court must consider factual inferences tending to show triable issues in the light most favorable to the existence of those issues. Where different ultimate inferences may properly be drawn, summary judgment should be denied. United States v. O'Block, 788 F.2d 1433, 1435 (10th Cir. 1986).

The party that will not have the burden of proof at trial may ordinarily simply assert in a summary judgment motion that the opposing party will not be able to produce sufficient evidence at trial to permit the factfinder to find in the latter's favor, and thus require the nonmovant to demonstrate in response that it will be able to present such evidence. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). However, while the plaintiff may ultimately have to prove the Bank was unsecured before the February 3, 1992, pledge of Debenture 14, the Court believes the FDIC must at least produce some evidence that the Bank already had a perfected security interest on that date before the plaintiff will be required to overcome that evidence. This requirement is sensible because it is easier to prove a positive (the Bank was perfected) than a negative (it was not perfected), and because the FDIC should have better access to the necessary proof than the plaintiff.

The Court also notes that the FDIC submitted no affidavits attesting to the authenticity of the documents attached to its motion or otherwise showing them to be admissible at trial. Consequently, the plaintiff was free to negate them simply by denying they were what the FDIC contended they were. However, after reviewing the materials the parties submitted, the Court finds it can resolve the motion even it assumes all the documents will be admissible at trial.

The FDIC contends that the plaintiff will not be able to prove that the Bank was an insider of the Osmans or that the FDIC as the successor to the Bank received more as a result of the pledge of Debenture No. 14 than it would have received in a chapter 7 liquidation without the pledge. It also contends that the pledge satisfied the requirements of §547(c)(2) so that the plaintiff may not avoid it. The Court concludes it must reject each facet of the FDIC's summary judgment motion.

The FDIC cites five cases which it claims show that a bank does not become an "insider" of its debtor by exercising financial control over the debtor or through its officer's close personal relationship with the debtor. Lynn v. Continental Bank (In re Murchison), 154 B.R. 909 (Bankr. N.D. Tex. 1993); Torcise v. Cunigan (In re Torcise), 146 B.R. 303 (Bankr.S.D.Fla. 1992); Burner v. Security State Bank (In re Burner), 109 B.R. 216 (Bankr.W.D.Tex. 1989); Tidwell v. AmSouth Bank (In re Cavalier Homes of Georgia, Inc.), 102 B.R. 878 (Bankr.M.D.Ga. 1989); Huizar v. Bank of Robstown (In re Huizar), 71 B.R. 826 (Bankr.W.D.Tex. 1987). However, four of those cases, Torcise, Burner, Cavalier Homes, and Huizar, were decided by bankruptcy courts acting as factfinders, and thus provide little support for deciding the "insider" question in this case as a matter of law. Indeed, in Cavalier Homes, the court said, "The determination of insider status is a question of fact which must be decided on a case-by-case basis." 102 B.R. at 883; see also Wilson v. Huffman (In re Missionary Baptist Foundation of America, Inc.), 712 F.2d 206, 210 (5th Cir. 1983) (insider determination is question of fact). These cases indicate it may be difficult to convince a court as a factfinder that a bank should be determined to be an insider of a debtor, but they do not strongly indicate the question should be decided by summary judgment. The fifth case, Murchison, was decided on summary judgment, but involved a debtor who apparently controlled a much more substantial business empire than Osman did and had borrowing relationships with other banks besides his primary lender. 154 B.R. at 914. That primary lender, which was being sued under §547(b), presented the court with the uncontroverted testimony of the debtor's principal liaison with the bank, who said that the debtor and his companies did not do what the bank asked unless it made sense or they agreed with the bank, and that the debtor personally made all consequential decisions. Id. The FDIC has presented no such evidence here.

The Court is willing to agree with the FDIC that the plaintiff has not produced very strong evidence that the Bank should be considered an insider of the debtors, but must conclude he has produced enough to defeat the summary judgment motion. Greif brought Osman the chance to buy a bank and helped him arrange financing for it. Osman and Greif socialized some, and Osman discussed his financial condition with Greif and sought his advice. Probably the strongest piece of evidence in the plaintiff's favor is Greif's apparent orchestration of the Bank's purchase of Debenture No. 14 and PPM's use of nearly all of the proceeds to pay off its note to the Bank. This transaction would appear to have provided little, if any, benefit to PPM or the debtors that they would not have obtained if the Bank had merely taken ownership of the debenture directly, cancelled PPM's note, and paid PPM the $8,300 difference. Of course, the evidentiary force of this transaction is reduced since it took place about two months after the transfer the plaintiff is attacking. Nevertheless, the Court is convinced the plaintiff has raised a genuine issue about the Bank's possible insider status that must be resolved through a trial.

The FDIC asserts that the debentures are instruments under the Uniform Commercial Code and that security interests in them can be perfected only by possession, citing K.S.A. 84-9-305. Then it claims its evidence shows the Bank had a security interest that was continually perfected by its possession of a debenture, first No. 1, then No. 11, and finally No. 14. However, while the FDIC's evidence does indicate the Bank had a security interest in a debenture at all relevant times, it does not show the Bank always had possession of one as required to perfect its security interest. First, the pledge agreement and the assignment the Osmans signed on the day Debenture No. 11 was issued for $300,000 both refer to a $290,000 rather than a $300,000 debenture, and do not identify the debenture by number. The FDIC tries to brush this dollar discrepancy off as an insignificant detail, but has presented nothing to explain why no one changed these documents to be consistent even though they were all signed on the same day. The receipt which the FDIC claims shows the Bank received Debenture No. 11 on September 24, 1990, is marred (at least on the copy submitted to the Court) so the character that might have been intended to be the first "1" in "11" is not recognizable. Furthermore, even if this receipt was for Debenture No. 11, Debenture No. 1 was marked "Canceled" three months before the Bank received the new debenture, indicating the Bank may not have had a perfected security interest during those months. Debenture No. 14 was issued in January 1991 but the Bank apparently did not receive it until February 1992. If the switch from Debenture No. 11 to No. 14 was done like the switch from No. 1 to No. 11 (assuming that was the second one the Bank received), then No. 11 would have been canceled when No. 14 was issued, and the Bank again would not have had a perfected security interest in No. 14 until over a year later when it received the debenture. In sum, the evidence the FDIC has presented is too contradictory and ambiguous to establish that the Bank already had a perfected security interest when PPM pledged Debenture No. 14 to it.

The FDIC's reliance on the ordinary course of business defense under §547(c)(2) overlooks the fact that defense is available to protect the "payment of a debt," not the giving of a security interest. "Payment of a debt" is not defined in the Bankruptcy Code, but certainly would not ordinarily be thought to include merely giving security for a debt because the latter does not extinguish the debt. See Black's Law Dictionary 1016 (5th ed. 1979) (most definitions of "payment" include extinguishing or discharging the debt). Indeed, two other defenses under §547(c) concern the giving of a security interest: the creation and perfection of a purchase money security interest is protected under §547(c)(3); and the creation of some perfected security interests in inventory or receivables is protected under §547(c)(5). These provisions specifically dealing with security interests indicate the defense provided by §547(c)(2) should not be stretched to cover the giving of a security interest. It does not appear the FDIC can succeed with this defense at all, but it certainly is not entitled to summary judgment on it.

For these reasons, the Court concludes the FDIC's motion for summary judgment must be and it is hereby denied.


Dated at Topeka, Kansas, this _____ day of September, 1997.





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