The Unsecured Creditors Committee v. Community Bank (In re Stinson Petroleum Co., Inc.)

No. 12-60234 (January 7, 2013)
The Chapter 7 trustee could not prove that the defendant in a preference action (§ 547(b)) received more than they would have in a Chapter 7 liquidation because, according to Mississippi state law, the defendant was a fully secured creditor. Thus, any prepetition payment received was not, as a matter of law, a preferential transfer.
Procedural context:
The 5th Circuit affirmed both lower courts.
Stinson Petroleum Co. (the "Debtor" or "Stinson") engaged in a check-kiting scheme using bank accounts at Community Bank ("Community") and Evergreen Bank ("Evergreen"). To perpetrate the fraud, Stinson deposited worthless checks at Community that were drawn on its account at Evergreen, while simultaneously depositing checks at the latter drawn on the former. Once the scheme was detected, Community agreed to receive $3.5 million from Stinson to cover accrued overdraft fees. Shortly thereafter, Stinson filed Chapter 11, and the unsecured creditors committee brought a § 547(b) preference action against Community. Upon the case being converted to Chapter 7, the Chapter 7 trustee stepped into the committee's stead to prosecute the action. At trial, Community conceded that the first 4 elements of § 547(b) were satisfied because the payment was (1) to or for the benefit of a creditor, (2) on account of an antecedent debt, (3) made while the debtor was insolvent, and (4) made within 90 days of the petition. Community only argued that the payment did not constitute more than they would have received in a Chapter 7 liquidation. If the payment was more than they would have received in a liquidation scenario, the fifth element of § 547(b) would have been satisfied and the transfer would have been avoidable. The court, looking to Mississippi law, found that Community held a perfected security interest, and that it was entirely possible that Community would have collected the full $3.5 million via Chapter 7. Because the test under § 547(b)(5) is whether the defendant would have received less under Chapter 7 than the amount they received, Community's purported ability to collect the full amount due in Chapter 7 negated the fifth element.
BARKSDALE, DENNIS, and GRAVES, Circuit Judges. (Per Curiam opinion).

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