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#2043

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

DANIEL JOSEPH CATES, JUHREE ROCKHILL CATES,

DEBTOR(S)

NO. 91-42201-7

CHAPTER 7

ROBERT L. BAER, Trustee,

PLAINTIFF(S),

v.

AMERICAN MUTUAL LIFE INSURANCE COMPANY,

DEFENDANT(S)

ADV. NO. 93-7133

ORDER DENYING MOTION FOR PARTIAL SUMMARY JUDGMENT

This proceeding is before the Court on the summary judgment motion of defendant American Mutual Life Insurance Company (American Mutual). American Mutual appears by counsel Dale L. Somers and Anne Lamborn Baker. The trustee appears by counsel Robert L. Baer and Susan L. Mauch. The Court has reviewed the relevant pleadings and is now ready to rule.

FACTS

Except as indicated, the following facts are uncontroverted. Luxembourg Partners borrowed $720,000 from American Mutual in 1987, giving a mortgage on certain real property. All the partners of the partnership guaranteed the debt to American Mutual. Both debtors were general partners of the partnership, along with nine other individuals and one corporation. The partnership defaulted on the loan and American Mutual obtained a judgment for $196,103.29 against all the partners except the corporation, jointly and severally.

Between one year and ninety days before the debtors filed for bankruptcy, American Mutual collected some of Mr. Cates' money through various garnishment orders. The trustee seeks to recover the garnished amounts as preferences under 11 U.S.C.A. §547 and §550, relying on Mr. Cates' general partners' status as "insiders" under §101(31) to extend the preference period under §547(b)(4)(B). In response to an interrogatory asking him to identify those insiders' claims against Mr. Cates, the trustee(1) referred to a judgment against them entered in favor of the Wyandotte Bank on the same day as American Mutual's judgment was entered. The Court assumes the trustee intended to refer to American Mutual's judgment that was entered in the same case on the same day. The Wyandotte Bank's judgment is involved in a related proceeding pending before the Court, Adversary No. 93-7134. In response to other interrogatories asking him to "state the basis and nature of any control or influence" the debtors had over the insiders or the insiders had over the debtors, the trustee responded, "General partner."

Although the Wyandotte Bank alleged in a motion it filed in Adversary No. 93-7134 that all the other general partners have been discharged in their own individual bankruptcy cases, the Bank did not present any support for the assertion and the trustee opposes it. Like the Bank, American Mutual has presented no evidentiary support for the assertion. The trustee concedes that five of the partners of the Luxembourg Partnership have filed for bankruptcy and their cases have been closed; this does not establish that any of them received a discharge. The trustee also responds that three partners have not filed for bankruptcy or been discharged. Consequently, the question of the bankruptcy discharges cannot be resolved in American Mutual's favor on its summary judgment motion.

DISCUSSSION AND CONCLUSIONS

In this proceeding, the trustee relies on the Tenth Circuit's decision in In re Robinson Brothers Drilling, Inc., 897 F.2d 850 (10th Cir. 1989) (adopting district court's decision, 97 B.R. 77 (W.D.Okla. 1988), which ruled that the extended preference period for insiders could be applied to a transfer to a non-insider if the transfer benefitted an insider-creditor. American Mutual first tries to distinguish Robinson Brothers on the ground it involved a payment a corporate debtor had made that reduced the contingent liability of the debtor's insider shareholder who had guaranteed the debt, while this case involves payments made by an individual who had been a partner in the primary obligor and had guaranteed the primary obligor's debt. The Court believes the theory that the extended insider-preference period may apply to payments made to non-insiders can be applicable--so long as the other prerequisites to recovery are met--when the trustee represents the estate of a general partner of the primary obligor on a debt as well as when he represents the primary obligor itself. However, while a guarantor normally has a claim against the primary obligor for every dollar the guarantor pays on the debt, secondary obligors like partners and guarantors probably have claims against one another for some portion of the amounts they pay but not for every dollar. This distinction may make some difference in this case, but right now, the Court is not convinced the trustee's recovery is totally precluded.

American Mutual argues, without explanation or citation to authority, that the fact the partnership debt and the guarantees had been reduced to judgment somehow prevented the partnership and its partners from having any contingent claims against Mr. Cates by virtue of his guarantee. If this argument is to be pursued, the Court will need further explanation and citation to supporting authority before considering it seriously. At this point, the Court is not convinced the judgment barred such claims.

Next, American Mutual argues the trustee has failed to show that the partnership still existed when Mr. Cates' property was garnished, and so has failed to show that the partners were still insiders of Mr. Cates when the garnishments occurred. The Court has two problems with this theory. First, as a procedural matter and assuming the continued existence of the partnership is relevant, American Mutual's admission that the partnership did exist when the debt involved here was incurred is sufficient to create a genuine issue of material fact regarding the partnership's existence at the time of the transfers, at least in the absence of materials documenting its prior termination. More importantly, however, the Court does not believe the continued existence of the partnership is necessary to establish the partners' status as "insiders" of Mr. Cates. Instead, remembering that the definition in §101(31) is not limiting since it begins "insider includes," see §102(3), the Court believes those who were partners with Mr. Cates when the debt to American Mutual was incurred remained his "insiders" at least with respect to that debt, even if the partnership terminated sometime before the garnishments occurred. They were all still jointly and severally liable for the debt, both as partners and as guarantors. The only case American Mutual cited did not involve a claim of insider status, so the court's mention in a footnote of that status ending when the debtors terminated their president is dictum. In re Joshua Slocum, Ltd., 103 B.R. 610, 613, 626 n. 9 (Bankr.E.D.Pa.), aff'd 121 B.R. 442 (E.D.Pa. 1989).

American Mutual presses another argument based apparently on the theory that the extended preference period for insiders is intended solely to reduce or eliminate the extra control or influence that insiders may have over the debtor. It does not clearly cite any authority indicating this is the purpose of the extended period, but one case it cited just before making this argument did articulate a similar theory. See In re Erin Food Services, Inc., 980 F.2d 792, 796 (1st Cir. 1992). However, Congress itself indicated that the purposes of the preference section are: (1) to discourage creditors from racing to the courthouse to dismember the debtor during the slide into bankruptcy and (2) to facilitate the policy of equality of distribution among creditors. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 177-78(1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6138. Nothing in §547 or the definition in §101(31) indicates that an insider must have some amount of control or influence over the debtor to make the extended preference period applicable; the extended period applies so long as the status exists. The Court does not believe the insiders' actual ability to control or influence Mr. Cates has any bearing on the trustee's claim.

American Mutual contends Mr. Cates' partners (or former partners) have no claims against him. It first points out that in responding to an interrogatory, the trustee indicated the partners' claims arose from the Wyandotte Bank's judgment against Mr. Cates and others. Of course, this is simply a misstatement; as indicated earlier, the Court is sure the trustee intended to refer to American Mutual's judgment that was entered on the same day. Next, American Mutual asserts that no claim can arise among partners unless one has paid more than his or her proportionate share. This argument effectively concedes each partner did have a claim against Mr. Cates that was contingent on paying more than a certain portion of the debt to American Mutual; such contingent claims are sufficient to make the partners "creditors" under §547(b). American Mutual adds that any such contingent claims were discharged in bankruptcy. As indicated earlier, this assertion has not been properly established at this time. Even if it is true, the Court is not certain what effect the discharges would have in this case.

American Mutual argues the partners did not benefit from the transfers. It says the garnishments satisfied only a small part of the partnership's debt and did not reduce the remaining partners' proportionate share of the debt, so those partners received no benefit, as a matter of law, because there was no quantifiable reduction in their contingent claims against Mr. Cates' chapter 7 estate. It again cites the Erin Food Services case. In that case, however, the insider had given a non-recourse personal guaranty of the debtor's obligation, secured by the insider's property, and the payments attacked as preferences did not reduce the debt below the value of the security given for the guaranty. 980 F.2d at 801-02. This case is different. Partners are liable to a partnership's creditor, and guarantors to the beneficiary of their guarantees, for the full amount of a debt. However, the Court is inclined to believe that under §547(b), the "benefit" to the partners or guarantors must be directly related to their status as contingent creditors of the debtor rather than their status as debtors of American Mutual. Among the partners or the guarantors, one who pays more of the debt than his or her pro-rata share, or perhaps simply more than the others pay, has a claim against the others for some sort of contribution. So, the Court is convinced the partners and co-guarantors would be at least contingent creditors of Mr. Cates. One who actually paid the debt, though, would not likely have a claim against Mr. Cates for the full amount paid but only for some portion of it, and would be his creditor only to that extent. The extent of the claim against him becomes even more complicated if one assumes less than the full amount of the debt is paid. The Court is not yet prepared to rule on the precise extent of such a contingent claim, and would like the parties to brief the rights of contribution that partners and guarantors have against one another before ruling on it.

Finally, American Mutual incorporates by reference the aguments presented in the Wyandotte Bank's motion to dismiss Adversary No. 93-7134. The Court recently entered an order denying that motion. For the reasons stated in that order, the Court rejects American Mutual's incorporated assertions as well. A copy of the order is attached.

For these reasons, the Court concludes that American Mutual's motion for partial summary judgment must be denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of June, 1994.











__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

1. 1Although American Mutual's motion refers to "the defendant" as the party answering, the attached interrogatories were in fact answered by the trustee, who is the plaintiff in this proceeding.

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