The Unsecured Creditors Committee v. Community Bank, Ellisville Mississippi

Filing 16

Memorandum Opinion and Order re 1 Bankruptcy Appeal. The Court affirms the September 14, 2011, Memorandum Opinion and Final Judgment entered by the Bankruptcy Court in this matter. Accordingly, this case is dismissed. Signed by District Judge Keith Starrett on March 20, 2012 (dsl)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
HATTIESBURG DIVISION
DEREK A. HENDERSON, TRUSTEE
V.

APPELLANT

CIVIL ACTION NO. 2:11-CV-243-KS-MTP

COMMUNITY BANK, ELLISVILLE,
MISSISSIPPI, A.K.A. COMMUNITY BANK

APPELLEE

MEMORANDUM OPINION AND ORDER
For the reasons stated below, the Court affirms the September 14, 2011,
Memorandum Opinion entered by the Bankruptcy Court in this matter.
I. BACKGROUND1
Stinson Petrolum Company, Inc. (the “Debtor”) engaged in a substantial checkkiting scheme before filing a voluntary petition under Chapter 11 of the United States
Bankruptcy Code on August 4, 2009. In July 2009, the Debtor maintained a checking
account with Community Bank (the “CB account”) and a checking account with the
Bank of Evergreen (the “BOE Account”). These were the accounts associated with the
kite.
Bank of Evergreen was closed on Friday, July 3, 3009, because of the
Independence Day holiday on Saturday, July 4, 2009. However, Community Bank
1

As the facts in this matter are largely undisputed, the Court’s account of its
factual and procedural background borrows heavily – both substantively and
stylistically – from the Bankruptcy Court’s opinion, which provided the facts as
stipulated by the parties in the pretrial order. See In re Stinson Petroleum Co., No.
09-05094-NPO, 55 Bankr. Ct. Dec. 129, 2011 Bankr. LEXIS 3511, at *3 (Bankr. S.D.
Miss. Sept. 14, 2011).

remained open on July 3, 2009, because the Federal Reserve was open on that day.
Before the holiday weekend, Bank of Evergreen vice-president Tim Dantz had become
suspicious of kiting activity in the Debtor’s BOE account. After Bank of Evergreen
reopened on Monday, July 6, 2009, Dantz confirmed that the Debtor had been kiting
checks between the BOE Account and the CB Account. Therefore, he placed a five-day
hold on $3,940,161.00 deposited in the BOE Account that day and $3,296,600.00
deposited in the BOE Account on Thursday, July 2, 2009. Accordingly, the kite
collapsed.
The deposits into the BOE Account on July 2 and July 6, 2009, included the
following checks drawn on the CB Account:
Check Number

Amount

July 2, 2009
1636

$500,000.00

1640

$696,404.00

1646

$618,080.00

1651

$689,740.00

1657

$592,376.00

July 6, 2009
1643

$505,025.00

1650

$806,346.00

1655

$818,400.00

1661

$673,132.00

1668

$887,258.00

The deposit made on July 2, 2009, also included a check in the amount of $200,000.00
2

drawn on an account at a different bank, and the deposit made on July 6, 2009,
included a check in the amount of $250,000.00 drawn on an account at a different
bank.
On Tuesday, July 7, 2009, Bank of Evergreen placed a five-day hold on
$2,115,001.00 deposited in the BOE Account, including the following checks drawn on
the CB Account:
Community Bank
Check Number

Amount

1644

$450,000.00

1652

$535,219.00

1658

$506,780.00

1665

$478,002.00

The deposit also included a check in the amount of $150,000.00 drawn on an account
at a different bank.
Bank of Evergreen placed holds on the funds so that the deposited checks could
be processed for forward collection and payment through the Federal Reserve. While
the holds were in place, the Debtor did not have access to the funds through the use
of provisional credits, and checks that were presented for payment on the BOE Account
were rejected for insufficient funds and returned unpaid.
Therefore, over several days beginning on July 6, 2009, Bank of Evergreen
refused to honor eighteen (18) checks totaling $10,178,452.00 drawn on the Debtor’s
BOE Account that the Debtor had deposited into its CB Account. After these checks
were deposited in the CB Account, Community Bank processed them for collection and
3

payment, making a digital image of the checks and electronically transmitting them
through the Federal Reserve for presentment to Bank of Evergreen. Those checks,
their numbers, amounts, and dates were as follows:
Bank of Evergreen
Check Number

Amount

Date of Deposit

2226

$466,770.00

6/30/09

2229

$745,360.00

6/30/09

2231

$780,733.00

6/30/09

2237

$289,600.00

7/2/09

2242

$414,930.00

7/2/09

2240

$703,892.00

7/2/09

2243

$722,683.00

7/2/09

2238

$310,580.00

7/3/09

2241

$603,244.00

7/3/09

2234

$425,000.00

7/3/09

2244

$706,200.00

7/3/09

2248

$706,096.00

7/3/09

2235

$306,988.00

7/6/09

2245

$347,300.00

7/6/09

2239

$704,610.00

7/6/09

2247

$767,014.00

7/6/09

2246

$340,000.00

7/7/09

2250

$783,452.00

7/7/09

Community Bank provided the Debtor with provisional credit for each of these
uncollected deposits, and the Debtor availed itself of those provisional credits.

4

According to the electronic endorsements, the three Bank of Evergreen checks
deposited into the CB Account on Tuesday, June 30, 2009, (check nos. 2226, 2229, and
2231) were originally presented for payment through the Federal Reserve on Thursday,
July 2, 2009. Additionally, the four Bank of Evergreen checks deposited in the CB
Account on July 2, 2009, (check nos. 2237, 2240, 2242, and 2243) were originally
presented for payment through the Federal Reserve on Monday, July 6, 2009.
Bank of Evergreen dishonored the three June 30, 2009, checks on Monday, July
6, 2009, after it reopened following the Independence Day holiday. Community Bank
received advance notification of the returned checks on the same day, and the Federal
Reserve returned the check images to Community Bank on July 7, 2009. Bank of
Evergreen dishonored the four July 2, 2009, checks on Tuesday, July 7, 2009. The
Federal Reserve returned those check images to Community Bank on July 8, 2009.
Community Bank first realized that the Debtor was kiting checks on July 6,
2009, when it received notification that Bank of Evergreen was returning large items.
As stated above, Community Bank had already granted the Debtor provisional credits
for the uncollected deposits, which the Debtor withdrew by writing checks drawn on
the CB Account. Therefore, Community Bank charged back each of the eighteen (18)
checks to the Debtor’s CB Account, and by July 9, 2009, the account was overdrawn by
$6,155,070.68. Community Bank also returned nine (9) checks drawn on the CB
Account and deposited into the BOE Account on July 6 and 7, 2009. The checks totaled
$5,600,162.00. Bank of Evergreen had already placed five-day holds on the deposits,
though, and the returned checks did not negatively impact Bank of Evergreen.
5

Community Bank filed late return claims with the Federal Reserve on the basis
that Bank of Evergreen did not return the seven checks from June 30 and July 2 in a
timely manner. If the returns were untimely, both Bank of Evergreen and the Debtor
would be liable for paying the checks. Of course, Bank of Evergreen disputed the late
return claims.
On Thursday, July 9, 2009, Sam Stinson, a principal of the Debtor; Darron
Dodd, then president of Community Bank; Tim Dantz, a vice-president at Bank of
Evergreen; and the president of the Bank of Evergreen met at the Bank of Evergreen
in Evergreen, Alabama. The purpose of the meeting was to determine the cash position
of the BOE Account, and they concluded that approximately $5.6 million would be
available in the BOE Account. Sam Stinson and Leon Stinson, another principal of the
Debtor, authorized Bank of Evergreen to wire transfer available funds to the CB
Account.
The first hold on the BOE Account – regarding deposits totaling $3,296,600.00
– was scheduled to release on July 10, 2009, the day after the meeting.
At some point after the July 9 meeting, Bank of Evergreen determined that only
$3,524,761.92 remained in the BOE Account. Bank of Evergreen agreed to process the
proposed wire transfer on the condition that Community Bank execute an agreement
releasing Bank of Evergreen from any liability arising out of Community Bank’s late
return claims. The effective date of the Settlement Agreement and Release of Claims
was July 10, 2009. The agreement provided, in pertinent part:
1.

Community agrees as follows:
6

(a) Agreement Not to Return Checks. Community agrees that it
shall not return any checks drawn prior to July 10, 2009 on Community
in respect of Stinson Petroleum and deposited to Accounts maintained at
Evergreen except checks already returned . . . . The Account at
Community is now restricted in anticipation of being closed, however the
restriction herein shall not apply to checks drawn after July 1, 2009.
(b) Release of Disputed Claim. Community agrees to drop any
claim in respect of timeliness of return of checks in respect of the
Accounts.
...
2.

Evergreen agrees as follows:

(a) Payment in Consideration of the Foregoing. In consideration of
the foregoing undertakings by Community, Evergreen agrees to
immediately wire to Community the sum of Three Million Five Hundred
Thousand and 00/100 Dollars ($3,500,000.00), deposited to the account of
Stinson Petroleum to partially cover overdrafts, together with any other
collected funds in excess of funds necessary to cover payroll, that may
come into the Account through Tuesday, July 14, 2009, in excess all as
previously authorized by Stinson Petroleum on July 9, 2009.
The Debtor did not sign the Settlement Agreement.
Sam Stinson and Leon Stinson retained $24,000.00 in the BOE Account to cover
payroll expenses and executed written instructions to transfer $3.5 million from the
BOE Account to the CB Account. The transfer was accomplished through two separate
wire transfers. The first wire transfer, in the amount of $1,992,863.00, included the
following notation in the written instructions: “payment for checks #2226, 2231 and
2229,” which refers to the three checks from June 30, 2009, which Community Bank
contested as having been returned untimely. The second wire transfer, in the amount
of $1,507,137.00 included the following notation in the written instructions: “payment
for returned checks.”
7

After the wire transfers, the CB Account was left with a remaining overdraft of
$3,993,053.00. Bank of Evergreen disputed Community Bank’s late return claims, and
the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code on August 4, 2009.
The Trustee filed a Complaint seeking to avoid and recover the wire transfers
as preferential transfers. The Bankruptcy Court held a trial on August 22, 2011, and
it entered a Memorandum Opinion on September 14, 2011, holding that the wire
transfers at issue were not avoidable preference transfers under 11 U.S.C. § 547. On
the same day, the Bankruptcy Court entered a Final Judgment in accordance with the
opinion. The Trustee filed a timely notice of appeal, and the matter is now ripe for
review.
II. STANDARD OF REVIEW
This Court reviews the Bankruptcy Court’s conclusions of law de novo, while it
reviews findings of fact for clear error. In re Lothian Oil Inc., 650 F.3d 539, 542 (5th
Cir. 2011). The Court reviews mixed questions of law and fact de novo. In re San
Patricio Cnty. Cmty. Action Agency, 575 F.3d 553, 557 (5th Cir. 2010). While the
determination of whether a transfer constitutes a preference is ultimately a question
of law, the determination of a fact question underlying an element of the preference
claim is subject to the clearly erroneous standard of review. See In re Ramba, Inc., 416
F.3d 394, 402 (5th Cir. 2005) (the determination of whether a debtor retained
possession of property – in which case the creditor would have had a statutory lien and,
therefore, received the same amount in a Chapter 7 liquidation as in the alleged
8

preferential transfer – was a question of fact).
“A finding of fact is clearly erroneous only if on the entire evidence, the court is
left with the definite and firm conviction that a mistake has been committed.” In re
Duncan, 562 F.3d 688, 694 (5th Cir. 2009) (punctuation omitted). If the Bankruptcy
Court’s view of the evidence “is plausible in light of the record viewed in its entirety,”
the Court “may not reverse it even though convinced that had it been sitting as a trier
of fact, it would have weighed the evidence differently. Where there are two
permissible views of the evidence, the factfinder’s choice between them cannot be
clearly erroneous.” In re Leonard, 963 F.2d 809, 814 (5th Cir. 1992) (quoting Anderson
v. City of Bessemer City, N.C., 470 U.S. 564, 573-74, 105 S. Ct. 1504, 1511, 84 L. Ed.
2d 518 (1985)). Therefore, the Court defers to the Bankruptcy Court’s “determinations
of witness credibility.” Duncan, 562 F.3d at 695. Even if the Bankruptcy Court’s
“findings of fact do not rest on credibility determinations, but are based instead on
physical or documentary evidence or inferences from other facts,” the Court must
employ the clearly erroneous standard. Richmond Leasing Co. v. Capital Bank, N.A.,
762 F.2d 1303, 1308 (5th Cir. 1985).
III. DISCUSSION
“Section 547(b) of the bankruptcy code allows a trustee to recover as a
preferential payment certain transfers made by a debtor to a creditor within the
ninety-day period prior to bankruptcy.” Braniff Airways, Inc. v. Exxon Co., U.S.A., 814
F.2d 1030, 1033 (5th Cir. 1987). Section 547(b) provides the elements of a preference:
(b)

Except as provided in subsections (c) and (i) of this section, the
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trustee may avoid any transfer of an interest of the debtor in
property –
(1)

to or for the benefit of a creditor;

(2)

for or on account of an antecedent debt owed by the debtor
before such transfer was made;

(3)

made while the debtor was insolvent;

(4)

made –
(A)
(B)

(5)

on or within 90 days before the date of the filing of
the petition; or
between ninety days and one year before the date of
the filing of the petition, if such creditor at the time
of such transfer was an insider; and

that enables such creditor to receive more than such
creditor would receive if –
(A)

the case were a case under chapter 7 of this title;

(B)

the transfer had not been made; and

(C)

such creditor received payment of such debt to the
extent provided by the provisions of this title.

11 U.S.C. § 547(b).
The central dispute in this case involves the fifth element of a preference claim:
“the requirement that before a trustee in bankruptcy can avoid a preferential payment,
the trustee must establish that the payment enabled the creditor to receive more than
the creditor would have received upon liquidation under Chapter 7 of the bankruptcy
code.” Braniff, 814 F.2d at 1034. To be clear, the Trustee had the burden to establish
this element at trial. Id. at 1034 n. 3; In re El Paso Refinery, L P, 171 F.3d 249, 253
10

(5th Cir. 1999); 11 U.S.C. § 547(g). The Bankruptcy Court’s task was “to construct a
hypothetical Chapter 7 liquidation and determine what the creditor would have
received had the transfers not taken place” – based on the evidence presented by the
parties at trial. In re N A Flash Foundation Inc., 298 F. App’x 355, 359 (5th Cir. 2008).
When constructing a hypothetical Chapter 7 case, courts “assume that all persons
would act in a commercially reasonable and businesslike manner.” Id.
Of course, in determining whether a creditor received a greater percentage
recovery on its debt than it would have in a Chapter 7 liquidation, courts must consider
“how the debt would have been treated in a Chapter 7 liquidation.” Braniff, 814 F.2d
at 1034. The status of the creditor is pertinent to this determination, as “a fully secured
creditor who receives a prepetition payment does not receive a greater percentage than
he would have in a bankruptcy proceeding because as a fully secured creditor he would
have recovered 100% payment in a bankruptcy proceeding.” El Paso Refinery, 171 F.3d
at 254. Therefore, “payments to a fully secured creditor are not preferential because
the creditor does not receive more than he would in a Chapter 7 liquidation.” Braniff,
814 F.2d at 1034.
Mississippi Code Section 75-4-210 provides:
(a)

A collecting bank has a security interest in an item and any
accompanying documents or the proceeds of either:
(1)

In case of an item deposited in an account, to the extent to
which credit given for the item has been withdrawn or
applied;

(2)

In case of an item for which it has given credit available for
withdrawal as of right, to the extent of the credit given,
11

whether or not the credit is drawn upon or there is a right
of charge-back; or
(3)

If it makes an advance on or against the item.
...

(c)

Receipt by a collecting bank of a final settlement for an item is a
realization on its security interest in the item, accompanying
documents and proceeds. So long as the bank does not receive final
settlement for the item or give up possession of the item or
possession or control of the accompanying documents for purposes
other than collection, the security interest continues to that extent
and is subject to Title 75, Chapter 9, but:
(1)

No security agreement is necessary to make the security
interest enforceable (Section 75-9-203(b)(3)(A));

(2)

No filing is required to perfect the security interest; and

(3)

The security interest has priority over conflicting perfected
security interests in the item, accompanying documents, or
proceeds.

MISS. CODE ANN. § 75-4-210. Therefore, once Community Bank provided provisional
credit for the uncollected checks drawn on the Bank of Evergreen account, it received
a perfected security interest in the kited checks. For this reason, the Bankruptcy Court
held that the wire transfers “did not alter the position Community Bank would assume
in a hypothetical chapter 7 case, and, accordingly, the fifth element of 11 U.S.C. §
547(b) cannot be met.” Stinson Petroleum Co., 2011 Bankr. LEXIS 3511 at *27 (citing
Braniff, 814 F.2d at 1034).
This appeal reduces to a single factual dispute: whether Community Bank would
have received less in a hypothetical Chapter 7 liquidation than it did pursuant to the
Settlement Agreement. As noted above, the Bankruptcy Court held that Community
12

Bank would not have received less because of its perfected security interest in the
returned checks. Stinson Petroleum Co., 2011 Bankr. LEXIS 3511 at *27. Indeed, it is
undisputed that Community Bank had a perfected security interest in the checks, and
that “payments to a fully secured creditor are not preferential because the creditor does
not receive more than he would in a Chapter 7 liquidation.” Braniff, 814 F.2d at 1034.
Nonetheless, the Trustee argues that the Bankruptcy Court erred insofar as it
failed to consider the practical difficulties that Community Bank would have faced in
realizing its security interest in the kited checks without the Settlement Agreement.2
The Trustee argues that Community Bank did not possess a blanket lien against the
funds in the Debtor’s BOE Account; rather, it only had the right to re-present the
checks for payment in the ordinary course of business. In the meantime, the hold on
the BOE Account was scheduled to lift on July 10, 2009. At that point, the Debtor and
any other recipients of checks drawn on the account would have had access to the
funds. Accordingly, the Trustee contends that it is highly unlikely Community Bank
would have recovered anything in a Chapter 7 liquidation, as there was no guarantee
that the funds would still be there by the time the Debtor filed its petition. According
to the Trustee, Community Bank improved its position by executing the Settlement

2

Community Bank argues that the Trustee failed to raise this “realization”
argument before the Bankruptcy Court. The Court disagrees. The Trustee raised
this issue in his opening statement before the Bankruptcy Court, noting that the
security interested granted by Mississippi Code Section 75-4-210 was limited to the
checks and did not create a blanket security interest in the debtor’s property.
Furthermore, the Trustee raised the issue in response to Community Bank’s motion
for summary judgment. See Henderson v. Cmty. Bank, No. 09-05094-NPO, 2011
Bankr. LEXIS 1421, at *35-*37 (Bankr. S.D. Miss. Apr. 12, 2011).
13

Agreement and ensuring that it would receive payment for some of the kited checks.
The Trustee had the burden of proving at trial that Community Bank would not
have received at least $3.5 million dollars in a Chapter 7 liquidation, but the record
contains scant evidence to that effect. As the Trustee noted in briefing, Community
Bank senior vice-president Darron Dodd testified that there was no guarantee that
Community Bank would have been paid on the checks without the Settlement
Agreement. He stated, “It’s possible. Maybe; maybe not.” The Trustee further noted
that the hold on the BOE Account was scheduled to lift on July 10, 2009, at which point
the Debtor and other parties would have been able to draw on the BOE Account. In
addition to these meager facts, the Trustee adds a number of assumptions. The Trustee
assumes that Bank of Evergreen would not have honored the re-presented checks in
the absence of the Settlement Agreement, and he also assumes that the funds in the
BOE Account would have been depleted by the time the Debtor filed a petition.
However, the Trustee failed to offer any evidence to support these assumptions.
In conclusion, the evidence presented at trial does not create a “definite and firm
conviction” that the Bankruptcy Court was mistaken when it found that Community
Bank would have received the full $3.5 million in the event of a hypothetical Chapter
7 liquidation. Duncan, 562 F.3d at 694. At best, the Trustee has proven that Mr. Dodd’s
evaluation was correct: that Community Bank may have been able to collect the $3.5
million, or it may not have been able to collect it. “Where there are two permissible
views of the evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Leonard, 963 F.2d at 814. The Court affirms the decision of the Bankruptcy
14

Court.3
IV. CONCLUSION
For the reasons stated above, the Court affirms the Memorandum Opinion and
Final Judgment entered by the Bankruptcy Court on September 14, 2011, in this
adversary proceeding. Accordingly, this case is dismissed.
SO ORDERED AND ADJUDGED this 20th day of March, 2012.
s/Keith Starrett
UNITED STATES DISTRICT JUDGE

3

The parties spent an inordinate amount of briefing addressing factual issues
and case law from outside this jurisdiction that are, at best, tangential to the main
issue of whether Community Bank received more in the wire transfers than it
would have in a Chapter 7 liquidation. These issues – such as whether Community
Bank filed the late return claims in good faith, and whether the meeting and
Settlement Agreement were extraordinary collection measures – are only weakly
relevant to the central issue of whether Community Bank would have received at
least $3.5 million in a hypothetical Chapter 7 liquidation. In any case, there is
ample evidence in the record to support the Bankruptcy Court’s factual findings
with respect to those issues, and it is not necessary for the Court to specifically
address them here.
15