Bankruptcy - the Honorable W.h. Drake, Jr. and Christopher S. Strickland

• Publication year: 1999

Bankruptcy by The Honorable W.H. Drake, Jr.*and

Christopher S. Strickland**

I. Introduction

Undeniably, 1998 proved to be an important year for bankruptcy in the Eleventh Circuit Court of Appeals, with the circuit ultimately producing a total of fourteen opinions having material bearing upon the debt relief process. In keeping with the cosmopolitan nature of bankruptcy practice, these decisions involved the court's performance of diversified tasks, ranging from the interpretation of intricate Bankruptcy Code provisions, to the construction of governing requirements from the Uniform Commercial Code, and the resolution of potential conflicts between the bankruptcy process and various constitutional or state law provisions. Provided below is an overview of each decision rendered during the 1998 calender year.

II. Levine v. Weissing

The Eleventh Circuit began its bankruptcy jurisprudence for the year in Levine v. Weissing (In re Levine)¹ by clarifying the extent to which a debtor's prepetition conversion of nonexempt assets into assets exempt from his or her bankruptcy estate subsequently may be avoided as a fraudulent transfer. The debtors in Levine filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code in 1991. Shortly thereafter, the trustee for their estate filed a complaint pursuant to 11 U.S.C. Sec. 544² and Florida Statute section 726.105,³ seeking to set aside as fraudulent the transfer of approximately $440,000 in purchased annuities exempted from the claims of creditors under Florida law, to the extent that such purchases were made in an effort to hinder, delay, or defraud creditors.⁴

Finding that there were not two distinct, identifiable parties acting as transferor and transferee in the subject transaction, and therefore, that there had been no transfer of funds which could be set aside as fraudulent, the bankruptcy court initially dismissed the trustee's complaint.⁵ In doing so, the bankruptcy court opined that "because the Debtors still retain control and ownership of the assets acquired with funds they obtained from disposition of their nonexempt assets . . . the fact that this conversion effectively removed the former assets from the reach of the creditors is of no consequence."⁶ The district court thereafter reversed the bankruptcy court's order of dismissal, however, concluding that there had been such a transfer, and furthermore opining that the trustee had stated a cause of action under 11 U.S.C. Sec. 544 and Florida Statute section 726.105.⁷

On remand, the bankruptcy court held an evidentiary hearing to ascertain whether the challenged annuities had been purchased with fraudulent intent.⁸ Noting that the debtors had discussed the exempt status of annuities with an estate-planning lawyer while anticipating the entry of a substantial court judgment against them, and that they purchased the subject annuity contracts within a short period of time thereafter, the court found such fraudulent intent indeed to have existed and set aside the annuities purchase on that basis.⁹ This decision was affirmed summarily by the United States District Court for the Middle District of Florida.¹⁰

Applying Florida law, the Eleventh Circuit explained that an individual who purchases an annuity remains the technical owner of the asset, but he does not retain total control over that asset and does not have unfettered access to such property.¹¹ As such, when they purchased the subject annuities, the debtors did in fact "transfer" assets from nonexempt to exempt status.¹² Furthermore, as the court clarified, the avoidance of such transfers does not fall under the thirty-day limitations period governing objections to claimed exemptions, but instead shall be timely filed under the two-year statute of limitations governing exercises of the trustee's avoidance powers.¹³ Otherwise finding no clear error in the bankruptcy court's factual determination that the debtors had purchased exempt annuities with an intent to hinder or defraud known creditors, the Eleventh Circuit affirmed.¹⁴

III. Miller v. Florida Mining & Materials

In its second bankruptcy opinion of the year, Miller v. Florida Mining & Materials (In re A.W. & Associates, Inc.),¹⁵ the Eleventh Circuit resolved questions regarding the need to consider industry standards in determining whether disputed payments fall within the "ordinary course of business" exception to the trustee's preference avoidance powers. Pursuant to its operation as a construction company, the debtors in A. W. & Associates had regularly purchased concrete and concrete-related products from Florida Mining & Materials. Historical dealings between the parties also had often involved the debtor's failure to make timely payments on the Florida Mining account, and numerous checks issued to that company by the debtor had subsequently been dishonored for insufficient funds. Indeed, delinquent and dishonored payments appeared to have become a matter of custom between the debtor and Florida Mining.¹⁶

In keeping with that course of dealing, on March 5, 1993, the debtor tendered a $6,131.05 check to Florida Mining in payment of certain invoices dated January 29, February 1, February 2, February 3, and February 4, 1993. The check was initially dishonored, but was resubmitted and paid on March 10,1993. As among the various invoices which were satisfied in that transaction, payment upon the January 29 invoice came late, but all other payments upon the subject invoices were received in a timely fashion.¹⁷

Subsequent to these payments, the debtor sought relief under the Bankruptcy Code on May 3, 1993. The trustee appointed to administer the debtor's estate thereafter filed a complaint in the bankruptcy court seeking to avoid the March 10 payment as a preferential transfer under 11 U.S.C. Sec. 547(b).¹⁸ As a defense to the trustee's action, Florida

Mining responded that the payment had been made in the ordinary course of business, and therefore, it was exempt from avoidance under 11 U.S.C. Sec. 547(c)(2).¹⁹

Following a trial on the matter, the bankruptcy court concluded the transfer was made in the ordinary course of business between the parties and was not the result of extraordinary collection efforts.²⁰ In a key point of its analysis, however, the court ruled as a matter of law that the section 547(c)(2) exception depends "upon the debtor's internal operations and the circumstances of the transactions in question, not industry standards."²¹ In an unreported decision, the district court affirmed this legal conclusion, as well as the findings of fact attending the bankruptcy court's application of section 547(c)(2).²²

On appeal, the Eleventh Circuit first noted the parties' stipulation that the debtor's payment to Florida Mining qualified as a preferential transfer under section 547(b).²³ Thus, the appeal's outcome depended solely upon whether section 547(c)(2) applied, and specifically, whether courts must consider industry standards in determining that defense's application.²⁴ This question, the court observed, was one of first impression for the Eleventh Circuit.²⁵

As the panel in A.W. & Associates noted, however, other circuits had considered the issue, reaching a consensus that the language of section 547(c)(2)(C) requires bankruptcy courts to consult industry standards in classifying a disputed transfer.²⁶ Thus, the court joined in the nearly unanimous view that such an examination of industry standards forms a necessary part of the application of section 547(c)(2)(C).²⁷ To the extent they depended upon a ruling otherwise, the decisions of the bankruptcy and district courts were overturned.²⁸

IV. Key Bank of Maine v. Jost

Also in the 1998 term, in Key Bank of Maine v. Jost (In re Jost)²⁹ the circuit addressed issues regarding a creditor's objection to the debtor's allegedly fraudulent asset exemption. In July 1991 the debtor had purchased a home in Florida, using proceeds from the sale of her prior home in Missouri as a downpayment. Roughly three months later, she satisfied the $138,000 mortgage on the Florida residence, using payments she had received from her brother-in-law under a promissory note. When she subsequently filed for bankruptcy protection on April 6, 1994, the debtor claimed an exemption in the home valued at $184,000.³⁰ Pursuant to Bankruptcy Rule 4003(b),³¹ a creditor of the estate objected to her claimed exemption in the home, alleging that the debtor had purchased her Florida home, an exempt asset, with nonexempt assets with the intent to hinder, delay, or defraud her creditors.³²

In overruling the creditor's objection, the bankruptcy court concluded that the creditor had failed to establish a prima facie case for disallowing the debtor's homestead exemption because the record was

devoid of any evidence of. . . threat of levy, attachment, garnishment, or execution on a judgment just prior to the debtor's purchase of the Florida homestead [and] there was no credible evidence produced to indicate that the Debtor was being pursued by creditors at the time of the purchase of the disputed homestead property.³³

The creditor thereafter moved for rehearing, which the bankruptcy court denied.³⁴ The creditor then appealed to the United States District Court for the Southern District of Florida, which affirmed the bankruptcy court's judgment.³⁵

The creditor's further appeal to the Eleventh Circuit framed the core point of the legal dispute as to whether a claimed Florida homestead exemption may be challenged on the basis that the subject home has been purchased with nonexempt assets in an attempt to hinder, delay, or defraud creditors in violation of Florida Statute section 726.105.³⁶ Nevertheless, the panel in Jost found it unnecessary either to resolve that question of state law or to certify it for determination to the Florida Supreme Court; such legal questions would have to be decided only if the bankruptcy court had made a finding of fact...