In re Weilert RV, Inc.

245 B.R. 377 (2000)

In re WEILERT R.V., INC., Debtor.

Karl T. Anderson, Trustee, Plaintiff, v. Ganis Credit Corp., Defendant.

Karl T. Anderson, Trustee, Plaintiff, v. Bank of the West, Defendant.

Bankruptcy No. RS97-16032 MG. Adversary Nos. RS98-1824 MG, RS98-1826 MG.

United States Bankruptcy Court, C.D. California, Riverside Division.

February 25, 2000.

COPYRIGHT MATERIAL OMITTED

Steven E. Smith, Michael C. Abel, Danning, Gill, Diamond & Kollitz, Los Angeles, CA, for plaintiff-trustee in both adversary action.

Karl T. Anderson, Trustee, Palm Springs, CA, for trustee.

Dave M. McGraw, Gregg A. Eichler, Patrick K. McClellan, Law Offices of Dave M. McGraw, Walnut Creek, CA, for defendant — Bank of the West in adversary action RS98-1826 MG.

John A. Hendry, Hendry & Serian, South Pasadena, CA, for defendant — Ganis Credit Corporation in adversary action RS98-1824 MG.

AMENDED OPINION, FINDINGS, CONCLUSIONS & ORDER RE GANIS CREDIT CORPORATION and BANK OF THE WEST

MITCHEL R. GOLDBERG, Bankruptcy Judge.

INTRODUCTION

Procedural Background

On April 4, 1997, Weilert R.V., Inc. ("Debtor") filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101-1330. The Court appointed Karl T. Anderson ("Plaintiff") as Chapter 11 Trustee on April 24, 1997. On September 10, 1997 the case was converted to Chapter 7. Plaintiff commenced two separate adversary actions on December 23, 1998. The first, case number RS98-1824 MG, was brought against Ganis Credit Corporation; the second, case number RS98-1826 MG, was brought against Bank of the West (Ganis and Bank of the West, hereinafter collectively referred to as "Defendants").¹ These adversary actions were instituted against Defendants to determine whether the payments made by Debtor to Defendants during the ninety days prior to filing bankruptcy could be avoided as a preferential payment under Section 547(b).

On March 23, 1999, the Court jointly heard Plaintiffs motions for summary judgment against both Defendants. Plaintiffs were granted partial summary adjudication in each case as to all elements under Section 547(b). The remaining issue to be decided at trial was whether Defendants could prevail under the ordinary course defense provided by 11 U.S.C. § 547(c)(2). On July 9, 1999, the trial commenced, evidence was taken, and arguments were heard.

Factual Background

Debtor sold new and used recreational vehicles ("R.V.s"). The used vehicles were often obtained when the purchaser of a new R.V. had an older one to be used as a trade-in or a used vehicle was brought in to be sold on consignment ("trade-ins"). The trade-ins were sold by the Debtor as used vehicles. Often, money was still owed to the original financiers who held security interests in the used R.V.s. These liens were to be paid out of the money received by Debtor when the vehicle was traded in or when the used R.V.s were purchased by third parties.

Defendants were one of these "original financiers" and held security interests in used R.V.s sold by Debtor. In the ninety days prior to bankruptcy filing, Debtor made two payments to Ganis totaling $48,304.59, and three payments to Bank of the West totaling $100,261.50.²

Re: Ganis Trade-Ins

The first Ganis-secured R.V. was originally registered to Wilson and transferred to Debtor on November 21, 1996. Debtor resold the Wilson vehicle on January 30, 1997 to Pamplin, who took possession of the vehicle on or about that same date. Debtor received $37,005.33 as proceeds from its sale of the Wilson vehicle on January 30, 1997, and deposited those proceeds into its general account. Debtor then issued a check to Ganis. On February 20, 1997, the check issued to Ganis cleared Debtor's account. The time lapse from Debtor's receipt of the sale proceeds and transfer of the vehicle to Pamplin to the time the check cleared Debtor's account was 21 days. The time from trade-in to payoff was 91 days.

Another Ganis-secured R.V. was originally registered to Springer and transferred to Debtor on January 27, 1997. Debtor resold the Springer vehicle on February 6, 1997 to Taber, who took possession of the vehicle on or about that same date. Debtor received $11,299.26 as proceeds from its sale of the Springer vehicle on February 6, 1997, and deposited those proceeds into its general account. Debtor then issued a check to Ganis. On March 19, 1997 the check issued to Ganis cleared Debtor's account. The time lapse from Debtor's receipt of the sale proceeds and transfer of the vehicle to Taber to the time the check cleared Debtor's account was 41 days. The time from the trade-in to payoff was 51 days.

When the Debtor's payoff checks to Ganis cleared, Ganis released its liens against the Wilson and Springer vehicles. Ganis was deemed to have held perfected security interests in both vehicles at the time of their payoffs.

Re: Bank of the West Trade-ins

The first Bank of the West-secured R.V. was originally registered to Deeds and transferred to Debtor pursuant to a consignment contract on October 4, 1996. Debtor resold the Deeds vehicle on November 19, 1996 to Krum, who took possession of the vehicle on or about that date. Debtor received $44,272.71 as proceeds from its sale of the Deeds vehicle and deposited those proceeds into its general account. On January 8, 1997, Debtor issued a check to Bank of the West and that check cleared on January 14, 1997. The time lapse from Debtor's receipt of the sale proceeds and transfer of the vehicle to Krum to the time the check cleared Debtor's account was 56 days. The time lapse from consignment of the vehicle to payoff was 102 days.

Bank of the West was deemed to have held a perfected security interest in the Deeds-Krum vehicle at the time of its payoff. As with Ganis, when Debtor's payoff check to Bank of the West cleared, Bank of the West released its lien against the vehicle.

The second Bank of the West transaction was a new vehicle sold on December 31, 1996 to Jones, who took possession on or about that date. From the testimony received it appeared that Bank of the West issued a check to Debtor, and that check cleared on January 6, 1997. Subsequently, Bank of the West issued a funding credit to Debtor's Bank of the West account in the amount of $42,280.79. On or about January 7, 1997, Bank of the West became aware of the error and instructed Debtor to refund the double payment. On January 10, 1997 Debtor issued a $42,280.79 check to Bank of the West and that check cleared on January 15, 1997. It is undisputed that these monies represented a refund to Bank of the West for an error that occurred. The time lapse from Debtor's receipt of the sale proceeds to the time the check cleared Debtor's account was not greater than 12 days, and only 9 days from the date funds cleared to Weilert to the date the funds cleared to Bank of the West.

The only issue before this Court is to determine whether Defendants' actions fall under the ordinary course of business defense of 11 U.S.C. § 547(c)(2).³

DISCUSSION

Because the above proceedings "arise in or are related to" a case under Title 11 of the United States Code, this Court maintains original jurisdiction over these adversary proceedings pursuant to 28 U.S.C. § 1334 (the district courts shall have original and exclusive jurisdiction of all cases under Title 11), 28 U.S.C. § 157 (authorizing the district courts to refer all Title 11 cases and proceedings to the bankruptcy judges in the district), and General Order No. 266 dated October 9, 1984 (referring all Title 11 cases and proceedings to the bankruptcy judges for the Central District of California). These matters are core proceedings pursuant to 28 U.S.C. §§ 157(b)(2)(F) and (H), and this Court has authority to enter final orders in respect thereto. See 28 U.S.C. § 157(b)(1).

Legal and Statutory Background

"Law can be stranger than fiction in the Preference Zone." Committee of Creditors Holding Unsecured Claims v. Koch Oil Co. (In re Powerine Oil Co.), 59 F.3d 969, 971 (9th Cir.1995), cert. denied 516 U.S. 1140, 116 S.Ct. 973, 133 L.Ed.2d 893 (1996) (observing that an unsecured creditor can be better off when the debtor defaults rather than paying off its debt). Judge Kozinski's keen observation certainly rings true in the aftermath of Weilert R.V., Inc.'s financial deterioration. Had the payoffs not occurred, both Defendants would have retained their secured rights in their vehicles and their in personam rights to their borrowers. With acceptance of these funds and release of liens during the preference period, these lenders, who no longer had a legal interest in the units at that time, find themselves in this precarious position. This Court must consider whether the ordinary course of business exception is elastic enough to encompass the payments/vehicle title transactions between Debtor and Ganis, and Debtor and Bank of the West. This Court finds that the exception has some elasticity, but that the evidentiary burden upon the Defendants has not been properly met.

1. The Subjective and Objective Tests Under § 547(c)(2) Defined

The ordinary course of business exception is governed by 11 U.S.C. § 547(c)(2). The elements of a defense under 11 U.S.C. § 547(c)(2) are threefold. That is, the Trustee is prevented from avoiding a transfer where the transfer was:

(A) in payment of a debt incurred by debtor in the ordinary course of business or financial affairs of the debtor and the transferee;⁴

(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.

The Section 547(c) exception to preference avoidance was meant to protect ordinary trade transactions, as well as transactions that arise in the context of a debtor's financial distress. See Air One, Inc. v. Flight Support International, Inc. (In re Air One, Inc.) 80 B.R. 145-147 (Bankr.E.D.Mo.1987); Tidwell v. Atlanta Gas Light Co. (In Matter of Georgia Steel, Inc.), 38 B.R. 829 (Bankr.M.D.Ga.19...