What evidence will suffice to avoid avoidance? That was one of the several questions before the United States Bankruptcy Appellate Panel for the Eighth Circuit in In re Genmar Holdings, Inc. In In re Genmar Holdings, Inc., the chapter 7 trustee successfully avoided a settlement payment paid by the debtor on behalf of its subsidiary in connection with a settlement between the subsidiary and another party. On appeal, the court held that the transfer was not exempt from avoidance (1) as a contemporaneous exchange for new value because, despite the fact that the debtor was a non-party to the settlement agreement, the parties did not intend that the exchange be contemporaneous or (2) as a payment of a debt incurred by the debtor in the ordinary course.
In April 2007, Michael Calandrillo, a customer who purchased a defective boat manufactured by Genmar Tennessee, Inc. (one of the debtor’s subsidiaries) brought an arbitration proceeding against boat vendor Plantation Boat Mart & Marina and Genmar Tennessee. One month later, the parties to the arbitration proceeding settled. Under the settlement, Calandrillo agreed to convey title to the boat to Genmar Tennessee free and clear of all liens, claims, and encumbrances, and Genmar Tennessee agreed to pay Calandrillo $205,000, with $140,000 of such sum to be paid to a lienholder and $65,000 to Calandrillo’s attorneys to be held in trust for Calandrillo. Importantly, the check to Calandrillo’s attorneys was issued by the debtor, Genmar Holdings, Inc., and not Genmar Tennessee. In March 2009, after deducting their fees, Calandrillo’s attorneys disbursed the balance of $52,000 to Calandrillo.
On June 1, 2009, Genmar Holdings and 21 of its subsidiaries filed for chapter 11 protection in the United States Bankruptcy Court for the District of Minnesota. The case was subsequently converted to a chapter 7, and a trustee was appointed. Shortly thereafter, the trustee filed an adversary proceeding against Calandrillo’s attorneys to avoid as a preferential transfer and recover the $65,000 payment made by the debtor to the attorneys pursuant to sections 547 and 550 of the Bankruptcy Code. After being informed that the attorneys merely served as conduits and received the $65,000 on behalf of their client Calandrillo, the trustee amended the complaint to add Calandrillo as a defendant and to have the amended complaint “relate back” to the date of the original complaint. The bankruptcy court entered an order in favor of Calandrillo’s attorneys with respect to the transfer they received as conduits, but in favor of the trustee with respect to the transfers received by Calandrillo. Calandrillo appealed to the bankruptcy appellate panel.
Importantly, Calandrillo did not appeal the bankruptcy court’s holding that the $65,000 payment satisfied all of the elements of a preferential transfer under 11 U.S.C. § 547(b). He did, however, challenge, among other things, whether the bankruptcy court erred in concluding that the $65,000 payment was not protected from avoidance as (1) a “contemporaneous exchange” for new value within the meaning of 11 U.S.C. § 547(c)(1)(A) and (B) or (2) a payment made in the “ordinary course of business” within the meaning of 11 U.S.C. § 547(c)(2)(A).
Sections 547(c)(1)(A) and (B) provide that:
[t]he trustee may not avoid under this section a transfer—(1) to the extent that such transfer was— (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange . . . .
The court began its analysis by succinctly stating, “[t]he burden of proving, by a preponderance of the evidence, a transfer may not be avoided by reason of § 547(c)(1) is on the transferee,” namely, Calandrillo. It is insufficient to focus, the court explained, solely on whether “new value” was given to the debtor or whether the exchange was “substantially contemporaneous.” There are, however, three prongs to the critical inquiry under section 547(c)(1) and, Calandrillo, by focusing on just those two, “overlooked-or conveniently ignore[d]” the third: the transfer must be intended by the debtor and the creditor to be a contemporaneous exchange. Here, the intent of the parties could only be gleaned from the settlement agreement at issue, an agreement between Calandrillo and the debtor’s subsidiary, not the debtor itself. Thus, while such agreement could serve as evidence of Calandrillo and Genmar Tennessee’s intent, it lacked any answers to the question presented by Calandrillo on appeal. The agreement provided in pertinent part that:
[t]he remainder of the Settlement Payment shall be paid to the trust account of [Calandrillo’s attorneys], in trust for and on behalf of Claimant, no sooner [than] 15 days after [Genmar Tennessee] receives the lien waiver confirming the Bank’s discharge of the lien and all title assignment documents, e.g., executed Certificate of Title assignment for the Boat.
Importantly, the court noted, the Bankruptcy Code does not define “contemporaneous.” Accordingly, and without a clear contrary legislative intent, the court looked to the dictionary definition of “contemporaneous” to interpret such term according to its plain, ordinary, and commonly understood meaning. The court observed that the term “contemporaneous” is defined as “existing, occurring, or originating during the same time.”
Based on the settlement agreement, it was clear to the court that Genmar Tennessee and Calandrillo intended the exchange of the lien waiver, the title assignment documents, and the $65,000 payment would occur at different times. The court held that such an exchange would not be “contemporaneous” within the plain, ordinary, and commonly understood meaning of that word. Out of an abundance of caution, the bankruptcy appellate panel noted that even if the settlement agreement were between Calandrillo and the debtor, its conclusion would not change. Accordingly, the court affirmed the bankruptcy court’s holding with respect to section 547(c)(1).
Section 547(c)(2)(A) provides that:
[t]he trustee may not avoid under this section a transfer—(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—(A) made in the ordinary course of business or financial affairs of the debtor and the transferee . . . .
The court began its analysis of Calandrillo’s second argument by reiterating that, similar to the burden imposed by section 547(c)(1), it is the burden of the transferee to prove that a transfer cannot not be avoided by reason of section 547(c)(2). The court explained that section 547(c)(2) has both a subjective and an objective component. The transferor must show that the transfer was, objectively, a payment of a debt incurred in the ordinary course of business and the transfer was, subjectively, incurred in the ordinary course of business between the debtor and the transferee. The latter component required some “consistency between the transfer at issue and other transfers between these parties.” Without distinguishing between the two, Calandrillo argued that the “pre-printed form sales contract required arbitration to resolve any dispute,” thereby concluding that “[c]learly, using arbitration proceedings to effect the return of defective boats was Debtor’s customary or ordinary course of business.”
The court found this argument without merit, for a myriad of reasons. Among them, the court was puzzled as to how the contract could evidence the ordinary course of the debtor’s business or financial affairs. The contract was not between Calandrillo and the debtor. It was between Calandrillo and Genmar Tennessee. Even if the debtor were a party to the contract, Calandrillo did not provide any authority to suggest that merely including an arbitration clause in a contract necessarily means arbitration is then in the ordinary course of a party’s business or financial affairs. And, importantly, Calandrillo did not discuss whether, under the second prong of § 547(c)(2), it was in the ordinary course of Calandrillo’s business or financial affairs to receive such payment. Finding this “fatal to [Calandrillo’s] defense” against avoidance, the court also affirmed the bankruptcy court’s holding with respect to section 547(c)(2).
In In re Genmar Holdings, Inc., a successful settlement turned sour because, although the debtor was the payor of the settlement, the debtor was not a party to the settlement. As a result, several of the elements required by section 547(c) to protect such transfers and, essentially, avoid avoidance, were not satisfied. Thus, while Calandrillo may have won the settlement “battle,” he lost the avoidance war.