Search by Case Name
Search by Case Number
Search by Keyword

1893



IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS



In Re:

LA ROCHELLE, INC.,

DEBTOR(S)

NO. 91-42352-11

CHAPTER 11

LA ROCHELLE, INC.,

PLAINTIFF(S),

v.

D.G.F. ENTERPRISES, INC.,

DEFENDANT(S)

ADV. NO. 92-7094

MEMORANDUM OF DECISION

This proceeding is before the Court following a trial on the merits. The plaintiff-debtor appeared by counsel Joel Pelofsky and Janice E. Stanton of Shughart, Thomson & Kilroy, P.C. The defendant, DGF Enterprises, Inc. (DGF), appeared by counsel Lynda C. Moore of Slagle, Bernard & Gorman.

The debtor seeks to recover certain payments it made to DGF as either avoidable preferences under 11 U.S.C.A. §547(b) or fraudulent transfers under §548(a)(2)(A). DGF asserts that the transfers are not avoidable because any preferences are protected under the ordinary-course-of-business or new-value exceptions found in §547(c)(2) and (4), and the debtor received reasonably equivalent value in exchange for them so they were not fraudulent.

Based upon the evidence presented at trial and consideration of the arguments of counsel, the Court makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

The debtor, an over-the-road trucking company, filed for relief under chapter 11 on November 12, 1991. It is now operating under a confirmed plan of reorganization.

DGF, a produce broker, is a Kansas corporation with its principal place of business in Kansas City. It is a partner in a company named FGF which is engaged in the sale of produce in the Kansas City, Missouri, area. DGF's charter apparently allows it to loan money to other entities when it is in DGF's interest to do so. DGF did not engage in any produce-brokering or trucking directly with the debtor, but the FGF partnership did, from time to time, hire the debtor to haul produce.

Before and throughout the ninety-day preference period established by §547, the parties engaged in a series of transactions whereby the debtor borrowed money from DGF on an unsecured basis. The transactions took this general form. The debtor would approach DGF and ask to borrow a certain amount of money which it would repay, together with a stated additional amount, a short time later. DGF would indicate whether it had the money available. If DGF accepted the deal, it gave the debtor the loan and the debtor contemporaneously gave DGF a post-dated check which DGF was to hold until the date of the check, the loan due date. Occasionally, the debtor inadvertently dated a check with the day the loan was made, but nevertheless, DGF held the check until the due date and then deposited it. Though the parties never stated any interest rate for the loans, the effective rate ranged from 99% to over 5,000%. Kansas law does not regulate the interest rates that may be charged to corporations. The terms of the loans ranged from one to seventeen days.

The debtor borrowed in this manner only from DGF. Otherwise, it obtained loans of the more conventional type usually associated with banks and other lending institutions. DGF was not generally in the business of lending money, and in fact made no other loans, except perhaps to related entities. The debtor used the proceeds of these loans for general operating purposes at times when other financing was unavailable. No evidence pertaining to standard business practices in either party's industry was presented.

Exhibits A and 11 document the transactions at issue in this proceeding. The parties stipulated that the debtor was insolvent during the ninety days before it filed for bankruptcy. The payments the debtor made to repay the loans were on account of an antecedent debt owed to DGF, a creditor. DGF received more as a result of the transfers than it would have received in a case under chapter 7 if the payments had not been made.

DISCUSSION AND CONCLUSIONS

The facts as found by the Court establish that the transfers satisfy the requirements of §547(b), and so constitute preferences. However, DGF argues the preferences are not avoidable because they fall within the protections of §547(c)(2) and (4). These defenses will be addressed in turn.

Section 547(c)(2) provides that a debtor-in-possession may not avoid a preferential transfer to the extent that the 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;

(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.

DGF has the burden of proof with respect to this defense. §547(g). Among other things, subsection A requires proof that the antecedent debt that led to the preferential transfer was incurred by the debtor in the ordinary course of the creditor's business. Although borrowing is an ordinary-course-of-business transaction for most businesses, lending was not ordinary for DGF. Its ordinary business was brokering produce, not loaning money. While the testimony indicated its charter (not itself offered into evidence) allowed it to lend money when beneficial for its business purposes, DGF did not generally make loans in the ordinary course of its business. It engaged in no produce-brokering in the course of its relationship with the debtor, so the loans could not be viewed as any sort of trade credit. Only the related partnership, FGF, did ordinary business with the debtor, sometimes hiring it to transport produce. The Court is convinced the debtor's obligation was not incurred in the ordinary course of DGF's business. In addition, this Court has previously held that subsection C requires proof that the transactions at issue were ordinary within the parties' respective industries. In re Bill's Coal Co., (Redmond v. McCorkle Truck Line, Inc.) Case No. 85-41428-7, Adv. No. 88-0077 (Bankr.D.Kan. Jan. 8, 1991). Other courts have reached the same conclusion. E.g., In re Tax Reduction Institute, 148 B.R. 63, 75-76 (Bankr.D.Col. 1992). No evidence was presented to show these transactions were ordinary in either parties' industry. DGF's reliance on the ordinary-course-of-business defense is unavailing.

Section 547(c)(4) protects preferential transfers from avoidance to the extent the creditor subsequently gave the debtor new value on an unsecured basis and received no new transfer in return for the new value. The parties agree that DGF is entitled to some protection under this provision, and simply dispute the extent of the protection. The debtor argues the new value given protects only payments the debtor made between the time that new value was given and the last previous time DGF gave new value. DGF contends the new value protects all prior preferential transfers. This Court has previously joined the majority of courts in agreeing with DGF's argument. In re Bill's Coal (Redmond v. Thermex Energy Corp.), Case No. 85-41428-7, Adv. No. 88-0071, Memorandum of Decision (Bankr.D.Kan. Oct. 1, 1990). However, in applying this rule, the Court has made the necessary calculation a little differently than the parties did. The date the debtor's checks were honored controls when its transfers were made for purposes of §547(b), Barnhill v. Johnson, ___ U.S. ___, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), and the payments made by Diamond Tower, Inc., which is not the debtor here, cannot be counted as preferential transfers made by the debtor. Balancing each of the debtor's payments against all the later loans DGF made, the payments were all protected by subsequent new value except for the debtor's last pre-petition payment. Post-petition loans and payments are irrelevant. Consequently, the debtor is entitled to recover from DGF as an avoidable preference $25,010.95.

The debtor also contends the interest payments the debtor made on the loans constitute fraudulent conveyances which it may avoid under §548(a)(2). DGF argues the debtor received "reasonably equivalent value" for the payments. The debtor has the burden of proof on this issue. 4 Collier on Bankruptcy ¶548.10 (15th ed. 1993). The parties presented little evidence to inform the Court whether the debtor received reasonably equivalent value. In essence, the debtor was content to rely simply on the size of the interest percentages it had paid to DGF to prove it did not receive such value. Certainly, expressed as annual percentage rates, the interest the debtor paid was substantial. However, the Court believes it is significant that the debtor solicited the loans from DGF, and offered to repay the principal plus a fixed amount on a specified date in the near future. Thus, the debtor voluntarily declared the value it placed on the loans. In addition, the Kansas usury laws do not apply to business loans, see K.S.A. 16-207(f); K.S.A. 16a-1-101 through 16a-9-102 (Kansas Uniform Consumer Credit Code) ; Wight v. Agristor Leasing, 652 F.Supp 1000, 1014 (D.Kan. 1987); and K.S.A. 17-7105 precludes a corporation from asserting usury as a defense in a suit on any evidence of indebtedness it issues or assumes. The debtor apparently needed the loans and could not get them from its normal lender, and the loans apparently enabled it to continue to operate its business for a period of time. Without more evidence than was presented, the Court is unable to conclude that the debtor did not receive reasonably equivalent value from DGF in return for the interest payments it made to DGF.

For these reasons, the Court concludes the debtor is entitled to recover $25,010.95 from DGF as an avoidable preference, but is not entitled to any other relief. Judgment for this amount will be entered by separate document as required by FRBP 9021 and FRCP 58.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of July, 1993.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE











IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS











In Re: )

)

LA ROCHELLE, INC., ) NO. 91-42352-11

) CHAPTER 11

DEBTOR(S). )

)

LA ROCHELLE, INC., )

)

PLAINTIFF(S), )

v. ) ADV. NO. 92-7094

)

D.G.F. ENTERPRISES, INC., )

)

DEFENDANT(S). )

JUDGMENT ON DECISION

This proceeding was before the Court following a trial on the merits. The plaintiff-debtor appeared by counsel Joel Pelofsky and Janice E. Stanton of Shughart, Thomson & Kilroy, P.C. The defendant, DGF Enterprises, Inc. (DGF), appeared by counsel Lynda C. Moore of Slagle, Bernard & Gorman.

The debtor sought to recover certain payments it made to DGF as either avoidable preferences under 11 U.S.C.A. §547(b) or fraudulent transfers under §548(a)(2)(A). DGF asserted that the transfers were not avoidable because any preferences were protected under the ordinary-course-of-business or new-value exceptions found in §547(c)(2) and (4), and the debtor received reasonably equivalent value in exchange for them so they were not fraudulent.

Based upon the evidence presented at trial and consideration of the arguments of counsel, the Court has rendered its Memorandum of Decision. For the reasons stated therein, judgment is hereby entered that debtor La Rochelle, Inc., shall recover $25,010.95 from defendant DGF Enterprises, Inc. All other relief is hereby denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of July, 1993.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

Search by Case Name
Search by Case Number
Search by Keyword