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Summarizing by Shane Ramsey


Summarizing by Bradley Pearce

In re Mississippi Valley Livestock, Inc.

No. 13‐1377 (7th Cir., Mar. 12, 2014)
In case involving $900,000 in allegedly preferential payments relating to cattle sales, the Seventh Circuit found that a bailment existed with regard to the Debtor's possession of the transferee's cattle, and accordingly concurred that a constructive trust could exist in favor the transferee. To the extent that a constructive trust was imposed, this was a defense to the alleged preferential transfer because there was no "transfer of an interest of the debtor in property" with regard to money received from the sale of the cattle. However, the Court also found that tracing was required, and that the lowest intermediate balance rule was to be applied. It therefore remanded the action to the bankruptcy court for further proceedings, since a tracing analysis had not been done in the litigation below.
Procedural context:
Appeal from the United States District Court for the Northern District of Illinois, Western Division, which affirmed bankruptcy court's entry of summary judgment in favor of the alleged transferee of the allegedly preferential transfer.
Pre-petition, debtor Mississippi Valley Livestock agreed to sell cattle to Swift Con-Agra. To fulfill that agreement, it obtained cattle from various suppliers, including J&R Farms. Importantly, Mississippi Valley did not purchase and re-sell the cattle to Swift. Instead, it merely accepted delivery of the cattle from J&R and then delivered the cattle to Swift. J&R and Mississippi Valley agreed that Mississippi Valley would remit the proceeds applicable to J&R's cattle to J&R following payment by Swift. During 2007, Mississippi Valley stopped making timely remittances of the proceeds received from Swift. J&R complained, and Mississippi Valley responded by making $862,747.31 in payments to J&R. Less than 90 days later, however, creditors of Mississippi Valley filed an involuntary petition against it, and an order for relief was entered. The chapter 7 trustee thereafter brought a 547 action against J&R. J&R argued that the relationship between Mississippi Valley and J&R was a bailment. Under Illinois law, “bailment is the delivery of goods for some purpose, upon a contract, express or implied, that after the purpose has been fulfilled [the goods] shall be redelivered to the bailor, or otherwise dealt with according to his directions, or kept till he reclaims them.” The Seventh Circuit noted that historically, Illinois courts have found bailment in cases in which the alleged bailee took possession of goods to be sold for the bailor’s benefit. The Court, citing several precedents, found that a bailment existed between J&R and Mississippi Valley because, among other things, Mississippi Valley had no ownership interest in the cattle; it merely possessed them for the purpose of selling them to Swift. The Court also found that the remedy of constructive trust, which it noted is a subset of unjust enrichment, applied because ownership of the cattle never changed prior to sale to Swift. Notwithstanding the Court's determination that a constructive trust could be properly applied, however, the case had to be remanded for a determination on tracing. The imposition of a constructive trust requires tracing the claimant's interest to specific property, since without tracing, the requirement that the claimant identify "specific property in another's possession" cannot be satisfied. Since commingled funds were at issue, the Court instructed that the lowest intermediate balance rule was to be applied to determine the extent of J&R's interest in the accounts of the Debtor. That rule presumes that when funds are commingled, the debtor withdraws its own funds first and leaves the trust funds intact. If the account balance drops below the debtor's funds (into the funds to the claimant), the claimant's interest abates accordingly.
Wood, Chief Judge, and Bauer and Kanne

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