8th U.S. Circuit Court erases bright line on debts

St. Louis Daily Record & St. Louis Countian, Sep 29, 2008 by Donna Walter

A federal appeals court erased a bright-line rule against preferential transfers when it permitted certain creditors in a bankruptcy case to recoup the full amounts owed to them.

Bankruptcy law allows trustees to go after payments made by debtors in the 90 days before filing for bankruptcy. In this way, the trustee can ensure that each unsecured creditor gets a pro rata share of the estate proceeds.

David G. Velde, a Chapter 7 trustee in Minnesota, sought to get the money Daniel Miller, the owner of a Grand Forks, Minn., crop storage elevator, paid four of his creditors from whom he bought soy beans, wheat, canola and grain. After the checks bounced, Miller sent replacement checks, which all cleared. In all, the checks totaled a little more than $405,000.

Because these replacement checks were made 90 days before the involuntary Chapter 7 bankruptcy petition was filed against Miller, the payments were prohibited preferential transfers under the Bankruptcy Code, the trustee argued.

The creditors, on the other hand, argued that the checks applied against debt the creditors owed their banks. When the checks cleared, the banks released their security interest in the goods, which constituted new value, they argued.

"We know this is a bounced check, but we've got to look at when the security interest was released," said Fargo, N.D., lawyer David L. Johnson, who represented creditor David Kirsch.

The Bankruptcy Court in Minnesota found in favor of the trustee, but the U.S. District Court reversed that decision. Last week, the 8th U.S. Circuit Court of Appeals affirmed the District Court's decision.

"If new value is given, a contemporaneous exchange does not diminish the estate," wrote U.S. District Judge Ralph R. Erickson, of North Dakota, who was sitting by designation. "Thus, in a cash transaction with the debtor, goods may be purchased or sold, reducing the estate, but if cash is paid over for the value of the goods, the estate is restored to the same position it had before the transaction occurred.

"A contemporaneous exchange for new value occurs when a debtor incurs debt and pays it by check at the same time, if the payor bank honors the check," he wrote.

Miller's creditors recouped their debts because they didn't release the crops to him until his checks cleared. Had they turned over the goods when they received his first checks, they would be among the unsecured creditors sharing in the bankruptcy estate, according to the 8th Circuit's decisions.

Velde's lawyer, Justin P. Weinberg, of New Ulm, Minn., said he needed Velde's permission to talk to the press. Velde was in court Friday, and Weinberg declined to comment.

A call made to Paul Randolph, assistant U.S. trustee in the Eastern District of Missouri, was not returned by press time. Daniel J. Casamatta, assistant U. S. trustee in the Western District of Missouri, referred questions to office of the U.S. trustee in Washington, D.C. Spokeswoman Jane Limprecht said the office had no comment.

The cases are David G. Velde v. David Kirsch, 07-2017, and David G. Velde v. Hans Reinhardt, Flywheel Grain and Bill Hess, 07-2070 and 07-2073. Both opinions were handed down Sept. 24 and may be accessed at the 8th Circuit's Web site, www.ca8.uscourts.gov.