Biase v. Congress Fin Corp , 372 F.3d 510 ( 2004 )

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
6-21-2004
Biase v. Congress Fin Corp
Precedential or Non-Precedential: Precedential
Docket No. 02-4177
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PRECEDENTIAL (Opinion filed June 21, 2004)
UNITED STATES COURT OF Before: ALITO, ROTH, and HALL* ,
APPEALS Circuit Judges
FOR THE THIRD CIRCUIT
____________ Richard B. Honig, Esquire (Argued)
John A. Adler, Esquire
No.: 02-4177 Hellring, Lindeman, Goldstein & Siegal,
____________ LLP
One Gateway Center
IN THE MATTER OF: Newark, NJ 07102-5386
TOPS APPLIANCE CITY, INC., Counsel for Appellant
Debtor Stanley L. Lane, Jr., Esquire (Argued)
Otterbourg, Steindler, Houston & Rosen
DONALD V. BIASE, TRUSTEE IN 230 Park Avenue
BANKRUPTCY FOR TOPS New York, NY 10169
APPLIANCE
CITY, INC. William S. Katchen, Esquire
Joseph H. Lemkin, Esquire
v. Duane Morris, LLP
744 Broad Street
CONGRESS FINANCIAL Newark, NJ 07102
CORPORATION,
Counsel for Appellees
Donald V. Biase,
Appellant
OPINION
Appeal from the United States District
Court ROTH, Circuit Judge:
for the District of New Jersey Donald Biase, trustee in bankruptcy
(D.C. Civil Action No.02-cv-02890) of Tops Appliance City, Inc., brought suit
Chief District Judge: Honorable John W.
Bissell
___________________ *The Hon. Cynthia H. Hall, Circuit
Argued on June 16, 2003 Judge for the United States Court of
Appeals for the Ninth Circuit, sitting by
designation.
1
against Congress Financial Corporation to limited to . . . existing and future leasehold
recover $10.5 million dollars in payments interests in equipment, real estate, and
from Tops to Congress. The Bankruptcy fixtures).” Additionally, § 9.7 of the LSA
Court granted summary judgment in favor required Congress’s assent before Tops
of Congress, dismissing the action. The made any substantial modification to its
District Court affirmed. On this appeal to business plan. More specifically, §
us, we are asked to decide two issues: (1) 9.7(b)(iii) of the LSA provided that, if
whether the transfer between Tops and Tops sold any of its assets, “any and all net
Congress was a transfer of Tops’ interest proceeds payable or delivered to [Tops] . .
in leases, and thus of an interest in real . shall be paid or delivered [to Congress].”
property, subject to the New Jersey Congress filled a UCC-1 Financing
Recording Statute, or a transfer of the Statement in New York and New Jersey to
proceeds of the sales of the leases, and perfect this security interest.
thus secured by the filing of a UCC-1 In the fall of 1999, Tops decided to
Financing Statement; and (2) whether the stop selling so-called “brown goods,” i.e.,
transfer from Tops to Congress occurred home electronics, and to focus entirely on
within 90 days of the filing of the “white goods,” i.e., appliances such as dish
bankruptcy petition, making it avoidable washers and refrigerators. Pursuant to this
by the trustee. For the reasons stated by plan, Tops sought to sell to Best Buy
the Bankruptcy Court, we conclude that Stores, L.P., Tops’ leases for three of its
the transfer was of proceeds and not of an home electronics retail stores. Tops
interest in real property. Furthermore, entered into a Sale-Purchase Agreement
because the transfer of Tops’ interest in (SPA) with Best Buy. The purchase price
these proceeds occurred more than ninety for the leases was $10 million, plus
days before the bankruptcy petition was $500,000 which was added later when the
filed, the transfer is not a voidable landlord of one of the stores agreed to
preference under § 547(b) of the extend its lease for Best Buy. According
Bankruptcy Code. to § 2 of the SPA, Best Buy would pay $1
I. Factual Background and Procedural million immediately to the Chicago Title
History Insurance Company, acting as escrow
Congress is engaged in the business agent; Best Buy would pay the remainder
of commercial finance and asset-based into escrow at closing. At the October 29
lending. On October 31, 1996, Congress closing, Tops was to convey the three
and Tops, entered into a Loan Security leases to Best Buy and hand over keys for
Agreement (LSA) whereby Congress each of the locations. Tops and Best Buy
agreed to provide Tops with financing for also agreed to enter into a license
its business. Section 5.1 of the LSA agreement, which would allow Tops to
granted Congress a security interest in “all remain in the leased premises until Tops
present and future contract rights [and] had liquidated its inventory, but not later
general intangibles (including but not than December 31, 1999. The SPA
2
provided for 20 percent of the purchase was converted to Chapter 7 on April 16.
price to be paid to Tops at closing and the The appellant, Donald Biase, was
remainder to be paid from escrow when appointed Chapter 7 Trustee. He filed a
Tops delivered possession of all leased complaint on June 26, 2000, seeking to
premises to Best Buy. avoid the $10.5 million that had been paid
Because the sale of the leases to Congress. Cross motions for summary
would involve a material change in its judgment were filed. On May 1, 2002, the
strategic business plan, Tops notified Bankruptcy Court granted summary
Congress of its intent and asked for judgment in favor of Congress, finding
Congress’s consent in accordance with the that the payment of the $10.5 million
LSA. On October 29, 1999, Tops and proceeds to Congress was pursuant to a
Congress executed both Amendment 6 to perfected assignment of proceeds of the
the LSA and a contract, entitled the sale of leaseholds and that transfer of the
Collateral Assignment of Acquisition proceeds dated from October 29, 1999,
Agreement (CAAA), by which Congress when Congress obtained the right to
gave its approval for the sale of the leases receive them. Biase appealed this decision
provided that the proceeds, received from to the District Court which affirmed the
Best Buy, w ould immediately be judgment of the Bankruptcy Court on
transferred to Congress. $2.1 million of October 30, 2002. Biase appealed to this
the escrowed amount would be paid to Court.
Congress at closing to reduce Tops’ II. Jurisdiction and Standards of
outstanding loan balance, subject to Review
relending. The remaining $8.4 million The District Court had jurisdiction
would be paid from escrow by December over this matter pursuant to 28 U.S.C.
31, 1999, when Tops had vacated the three §1334(b) and 28 U.S.C. §157(a). We have
stores. Amendment 6 also contained a jurisdiction to consider Biase’s appeal of
reduction by up to $2 million of the total the District Court’s final order under 28
amount of transaction proceeds available U.S.C. §1291.
for relending to Tops. In addition, “Summary judgment is appropriate
Amendment 6 continued all Congress’s ‘if the pleadings, depositions, answers to
security interests under the LSA. These interrogatories, and admissions on file,
terms were carried out as agreed, with the together with the affidavits, if any, show
exception that the initial $2.1 million that there is no genuine issue as to any
payment, due at closing, was actually paid material fact and that the moving party is
three days later on November 3. The entitled to judgment as a matter of law.’”
remainder of the escrowed proceeds were Chisolm v. McManimon, 275 F.3d 315,
paid to Congress on December 7, 1999, 321 (3d Cir. 2001) (quoting Fed. R. Civ. P.
when Tops vacated the stores. 56(c)). In reviewing a summary judgment
On February 2, 2000, Tops filed a decision of the Bankruptcy Court, we
Chapter 11 petition in bankruptcy. This apply, as did the District Court, a plenary
3
standard to legal issues. See In re easements, fixtures, and all land rights.
Siciliano, 13 F.3d 748, 750 (3d Cir. 1994); This was an absolute assignment of Tops’
Saldana v. Kmart Corp., 260 F.3d 228, 231 property rights. The transfer was not
(3d Cir. 2001). incomplete just because Tops had another
III. Discussion duty to perform under the SPA, i.e.,
A. Perfection of the Proceeds from vacating the premises at each leased
Tops’ Leases location by December 31. See First Fid.
This case turns upon the nature of Bank, N.A. v. Jason Realty, L.P. (In re
the transactions both between Congress Jason Realty, L.P.), 59 F.3d 423, 428 (3d
and Tops and between Tops and Best Buy. Cir. 1995) (“The fact that a right is
Biase argues that what was transferred to conditional on the performance of a return
Congress was an interest in the leases and promise or is otherwise conditional does
their rents, and not the proceeds of the sale not prevent its assignment before the
of the leases by Tops to Best Buy. An condition occurs.”). On the October 29
interest in a lease is an interest in real closing date, all keys, blue prints, and
property and would have to be perfected financial documents were turned over to
through the New Jersey Recording Statute. Best Buy. Tops remained in the stores to
N.J. Stat. Ann. § 46:16-1 (West 2003). To liquidate its inventory, but it did so as a
make his point that this transaction was the licensee with limited rights under §12(l) of
transfer of an interest in real property, the SPA: “This Agreement is an
Biase highlights the fact that Tops did not exclusive, revocable license . . . and shall
vacate the stores until December 1999, not be deemed as . . . conveying any
remaining in the stores under a license interest in the Licensed Area (other than as
agreement with Best Buy. However, set forth herein).” Tops did not hold any
despite Biase’s attempts to characterize the remaining property interest in the leases,
transaction between Congress and Tops as and thus could not have granted Congress
a real estate transaction, the evidence of what it did not have itself.
record demonstrates that the leases were While Biase is correct in pointing
completely transferred by Tops to Best out that courts will not be restricted by the
Buy as of the date of the closing on exact words used by the parties in
October 29, 1999, and that Congress was characterizing a transaction, see, e.g.,
granted an interest only in the proceeds Major’s Furniture Mart, Inc. v. Castle
from that transfer. Credit Corp., 602 F.2d 538, 545 (3d Cir.
Congress never had any property 1979), a court should start with the words
right in the leases themselves because, as themselves and begin with the plain
of October 29, 1999, they were wholly meaning of the document. See Watt v.
owned by Best Buy. The SPA between Alaska, 451 U.S. 259, 266 n.9 (1981)
Tops and Best Buy clearly stated that Tops (noting that while the plain-meaning rule
was to convey “all of Seller’s right, title is not absolute, “the words used, even in
and interest in . . . the Leases,” including their literal sense, are the primary, and
4
ordinarily most reliable, source of assertion of prior claims to the land based
interpreting the measure of any writing: upon any recordable but unrecorded
be it a statute, a contract, or anything instrument.” Cox v. RKA Corp, 164 N.J.
else”) (quoting Cabell v. Markham, 148 487 (2000); see also Cooper River Plaza E,
F.2d 737, 739 (2d Cir.) (L. Hand, J.), aff'd, LLC v. Briad Group, 359 N.J. Super. 518,
326 U.S. 404 (1945)). The plain words 527-28 (N.J. Super. Ct. App. Div. 2003)
both in the SPA and in the CAAA are (noting that the central public policy under
unambiguous. There is nothing in the the New Jersey Recording Act is so that a
record to indicate that Tops conveyed to potential buyer of real property “should be
Congress anything more than the proceeds able to discover and evaluate all of the . .
of the transfer of the leases to Best Buy. . restrictions on the property from a review
There is no doubt that, as of the date of the of the public record”) (citations omitted).
closing, Best Buy had sole control of the The fact that Congress had a right to
three leases in question. Thus, Tops could proceeds from the leases did nothing to tie
grant Congress only what remained: a up the leased real property in any manner.
simple contract right to the proceeds from Congress had no interest in the underlying
the sale of those leases. real property itself and could not have
As both parties acknowledge, the made any claims on the real property
acquisition of such a right to proceeds falls against a subsequent purchaser – whether
under Article 9 of the Uniform or not Tops made the required payments to
Commercial Code. See N.J. Stat. Ann. Congress under the CAAA.
12A:9-109 (West 2003) (explaining that B. Avoidability of the Transfer of the
the scope of Article 9 extends to all Proceeds
accounts); N.J. Stat. Ann. 12A:9-102(2) Having established that Congress’s
(West 2003) (defining “account” in part as interest was in proceeds, which fall under
“a right to payment of a monetary Article 9 and are thus perfected with the
obligation, whether or not earned by filing of the UCC-1 Financing Statement,
performance [] for property that has been we turn to Biase’s second argument that
or is to be sold, leased, licensed, assigned, the transfer of money from Tops to
or otherwise disposed of”). This secured Congress did not occur on October 29,
interest in proceeds was properly perfected 1999, the date of the closing, but actually
when Congress filed their UCC-1 occurred on December 7, 1999, when Tops
Financing Statement. had vacated all three stores pursuant to the
Contrary to Biase’s contention, this contract with Best Buy. The bankruptcy
result does nothing to detract from the petition was filed on February 2, 2000. If
effectiveness of the New Jersey Recording the transfer had occurred on December 7,
Statute. The purpose of the New Jersey 1999, the transfer would fall within the 90
Recording Statute is to “protect subsequent day preference period of 11 U.S.C. §
judgment creditors, bona fide purchasers,
and bona fide mortgagees against the
5
547(b),1 and thus would be avoidable by the trustee.
Biase urges us to adopt the
reasoning used in wage assignment cases.
1 Under the line of cases which Biase cites,
Section 547(b) provides:
courts have held that employees do not
Except as provided
“receive” their money when a garnishment
in subsection (c) of this
order takes effect. The employees only
section, the trustee may
receive their money when they have
avoid any transfer of an
earned it by working the corresponding
interest of the debtor in
hours. See, e.g., Morehead v. State Farm
property –
Mut. Auto. Ins. Co. (In re Morehead), 249
(1) to or for the benefit of a
F.3d 445, 449 (6th Cir. 2001); Freedom
creditor;
Group, Inc. v. Lapham-Hickey Steel Corp.
(2) for or on account of an
(In re Freedom Group), 50 F.3d 408, 412
antecedent debt owed by
(7th Cir. 1995); Melon Produce, Inc. v.
the debtor before such
Karger (In re M elon Produce, Inc.), 976
transfer was made;
F.2d 71, 76 (1st Cir. 1992); In re White,
(3) made while the debtor
258 B.R. 129 (Bankr. D.N.J. 2001); In re
was insolvent;
(4) made –
(A) on or
within 90 than such creditor would
days before receive if –
the date of (A) the case
the filing of were a case
the petition; under chapter
or 7 of this title;
(B) between (B) the
ninety days transfer had
and one year not been
before the made; and
date of the (C) such
filing of the creditor
petition, if received
such creditor payment of
at the time of such debt to
such transfer the extent
was an provided by
insider; and the
(5) that enables such provisions of
creditor to receive more this title.
6
Mays, 256 B.R. 555 (Bankr. D.N.J. 2000). Buy, Tops had, for all intents and
Thus, Biase analogizes that Congress, like purposes, “earned its money” regardless of
a wage garnisher, did not “receive” its the fact that, under the SPA, it still had the
money on the closing date when its duty to vacate.
security interest attached, but only when This conclusion regarding the
Tops had vacated its stores and “earned it” effective date of the transfer of proceeds is
under the SPA with Best Buy. supported by New Jersey law. As the U.S.
In wage garnishment cases, Supreme Court noted in Barnhill v.
however, a transfer of future wages could Johnson, 503 U.S. 393 (1992), when a
not take place at the time the garnishment transfer is complete and what constitutes a
is ordered because the employee can transfer is a matter of federal law,2 but
transfer only that in which he has some defining the specific interest in property is
right. Until the employee has performed a “creature[] of state law.” Id. at 398.
the work to earn the wages and has a right Congress ‘s UCC-1 Financing Statement
to the money, there is no transfer within applied to “all present and future contract
the meaning of § 547(e). See Morehead, rights.” Thus, pursuant to N.J. Stat. Ann.
249 F.3d at 449 (“It is illogical to find that 12A:9-201(a) (“[A] security agreement is
a debtor may acquire rights in future effective according to its terms between
wages when they have not yet been the parties, against purchasers of the
earned.”); Melon Produce, Inc., 976 F.2d collateral, and against creditors”); and N.J.
at 76 (“[A] transfer is not made until the Stat. Ann. 12A:9-204(a) (“[A] security
debtor has acquired rights in the property agreement may create or provide for a
transferred.”) (citation omitted). Biase is secu rity interest in after-acquired
correct that under the SPA, Tops had not
completed all of its duties under the
contract and was still required to vacate 2
It should be noted that there is no
the three stores by the end of December.
doubt that the term transfer includes the
However, unlike the wage garnishment
granting of a security interest. See 11
cases, vacating the three stores was only a
U.S.C. §101(54) (West 2003) (defining
condition attached to a much larger
transfer broadly as “every mode, direct or
transaction between Tops and Best Buy.
indirect, absolute or conditional,
Unlike a wage case, where an employee
voluntary or involuntary, of disposing of
will not get paid if he does not work the
or parting with property or with an
corresponding hours, Best Buy’s remedy,
interest in property”); see also, Vogel v.
if Tops had not vacated the stores by
Russell Transfer, Inc., 852 F.2d 797, 798
December 31, would have been the
(4th Cir. 1988) (“The grant of a security
eviction of Tops from the premises and a
interest is a transfer within the definition
suit for damages. Once Tops had sold its
of [the preference avoidance statute] and
leases and turned over the keys, blue
the trustee may avoid it if it is not
prints, and financial documents to Best
perfected in time.”)
7
collateral.”), Congress properly perfected period.
its rights to proceeds and had an interest Finally, the fact that Best Buy paid
superior to that of any subsequent creditor. the proceeds into an escrow account does
not affect our conclusion above. The right
The Bankruptcy Court properly to the funds paid into escrow was
relied on In re Long Chevrolet, Inc., 79 determined at the time of the closing, both
B.R. 759 (N.D. Ill. 1987), which through the LSA and the CAAA. There
concerned the refund of an excess was no further designation of a right to the
contribution to a pension plan. Even funds which was necessary to occur to
though Long Chevrolet had to wait for the trigger their payment. The trigger of
Pension Benefit Guaranty Corporation to payment was a matter of timing, not a
approve the allocation and distribution of matter of a further determination of
funds upon the termination of the plan, the interests.
court found that there was a transfer at the IV. Conclusion
time Long Chevrolet first granted the For the reasons stated, above we
security interest in the refund. As will affirm the judgment of the District
explained by the District Court in that Court, affirming the Bankruptcy Court’s
case, just because Long “had to wait for granting of Congress’s motion for
those funds to be distributed does not summary judgment.
mean it had no right to that property prior
to that time.” Long Chevrolet, 79 B.R. at
765. See also In re Computer Eng’g
Assocs., 337 F.3d 38, 45-47 (1st Cir.
2003) (holding that the transfer of all
rights, interests, and control in property
assigned was an effective assignment
occurring at the time the assignment was
perfected, not later when proceeds paid).
As § 547(e)(1)(B) of the Bankruptcy Code
provides: “A transfer of a fixture or
property other than real property is
perfected when a creditor on a simple
contract cannot acquire a judicial lien that
is superior to the interest of the
transferee.” 11 U.S.C. § 547(e)(1)(B)
(West 2003). We therefore find that the
transfer of the proceeds from the sale of
the leases occurred on the date of the
closing, on October 29, 1999, and
therefore fell outside the preference
8