Stevenson v. Leisure Guide of America, Inc. (In Re Shelton Harrison Chevrolet, Inc.)

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0038P (6th Cir.) File Name: 00a0038p.06

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _________________

;  In Re: SHELTON HARRISON

Debtor.  CHEVROLET, INC.,  ________________________  No. 98-6537

 > GEORGE W. STEVENSON,    Trustee for Shelton Harrison

Plaintiff-Appellant,  Chevrolet, Inc.,   v.     LEISURE GUIDE OF AMERICA,

Defendant-Appellee.  INC., d/b/a LEISURE VANS,   1

Appeal from the United States District Court for the Western District of Tennessee at Memphis. No. 96-02875—Jon Phipps McCalla, District Judge. Argued: September 16, 1999 Decided and Filed: January 31, 2000

2 In re Shelton Harrison Chevrolet, Inc. No. 98-6537

Before: RYAN, MOORE, and GIBSON,* Circuit Judges. _________________ COUNSEL ARGUED: Michael P. Coury, WARING COX, PLC, Memphis, Tennessee, for Appellant. Steven N. Douglass, APPERSON, CRUMP & MAXWELL, Memphis, Tennessee, for Appellee. ON BRIEF: Michael P. Coury, WARING COX, PLC, Memphis, Tennessee, for Appellant. Steven N. Douglass, Toni Campbell Parker, APPERSON, CRUMP & MAXWELL, Memphis, Tennessee, for Appellee. RYAN, J., delivered the opinion of the court, in which MOORE, J., joined. GIBSON, J. (p. 9), delivered a separate dissenting opinion. _________________ OPINION _________________ RYAN, Circuit Judge. The issue in this case is whether, under the “contemporaneous exchange” exception to a bankruptcy trustee’s avoidance powers pursuant to 11 U.S.C. § 547 (1993), a document called a Manufacturer’s Statement of Origin (MSO) has “new value” when it is delivered to the purchaser of a new vehicle more than a week after the purchaser pays for the vehicle. We hold that, in this case at least, the MSO did not itself have “new value” and reverse the judgment of the district court.

* The Honorable John R. Gibson, Circuit Judge of the United States Court of Appeals for the Eighth Circuit, sitting by designation.

No. 98-6537 In re Shelton Harrison Chevrolet, Inc. 3

I. Shelton Harrison Chevrolet, Inc., was an automobile dealer operating in Tennessee. Leisure Guide of America, Inc., d/b/a Leisure Vans, is a Georgia corporation that customizes vans for resale to retail automobile dealers. Between June and August 1991, Shelton placed orders to purchase six customized vans from Leisure Vans and received delivery of the vans between August 22 and 24. Upon delivery, Shelton tendered six checks to Leisure Vans for these vehicles in the amounts of $7,995, $7,995, $4,145, $5295, $5295, and $5295. When all six checks bounced, the President of Leisure Vans called Shelton and was assured that the checks would clear if presented again. Leisure Vans proceeded to present the same checks for payment, and the checks were honored on September 4, 1991. After the checks cleared, Leisure Vans delivered the MSOs on the six vehicles to Shelton. There was no security agreement between Leisure Vans and Shelton to secure payment of the van conversion packages. Shelton did not sell any of the converted vans before it received the MSOs. II. Shelton filed a petition for relief under Chapter 11 of the Bankruptcy Code on November 26, 1991, less than 90 days after Shelton’s checks cleared and Leisure Vans transferred the MSOs. The Chapter 11 proceeding was subsequently converted to a Chapter 7 proceeding. In 1994, the bankruptcy trustee filed a complaint against Leisure Vans to recover preferential transfers totaling $36,020, the sum of Shelton’s checks for the six customized vans, pursuant to 11 U.S.C. § 547(b). The trustee and defendant Leisure Vans filed cross- motions for summary judgment. The bankruptcy court held that the bankruptcy trustee could not avoid the transfers because the delivery of the MSOs in exchange for the honored checks constituted a contemporaneous exchange for new value, establishing an exception to the trustee’s avoidance authority under section 547(c)(1). Thus, the bankruptcy court granted summary judgment in favor of Leisure Vans.

4 In re Shelton Harrison Chevrolet, Inc. No. 98-6537 No. 98-6537 In re Shelton Harrison Chevrolet, Inc. 9

The district court affirmed. The district court held that the _______________ bankruptcy court’s determination that the MSOs had a value approximately equal to that of the vehicles was not clearly DISSENT erroneous. The court relied upon Tennessee’s motor vehicle _______________ registration statute, which requires a person who buys a new vehicle from a dealer to submit an MSO to the state in order JOHN R. GIBSON, Circuit Judge, dissenting. I must to obtain a certificate of title. Based upon this law, the court confess that my concerns with the conclusion the court held that Leisure Vans’s release of the MSOs upon receipt of reaches today may spring from the potential conflict between payment constituted a contemporaneous exchange for new Tennessee's vehicle registration laws and the state's value under section 547(c)(1). requirements for obtaining a certificate of title, and the court's interpretation in Couch v. Cockroft, 490 S.W.2d 713 (Tenn. III. Ct. App. 1972) of the entrustment provisions of the Uniform Commercial Code. I am persuaded by the district court's We review the grant of summary judgment de novo. In re analysis of Couch, and I agree that there was new value in the Larbar Corp., 177 F.3d 439, 443 (6th Cir. 1999). Summary transfer of the MSOs. For these reasons I would affirm on the judgment is appropriate “if the pleadings, depositions, basis of the district court's affirmance of the bankruptcy court answers to interrogatories, and admissions on file, together opinion. with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c); Fed. R. Bankr. P. 7056(c). We note at the outset that the district court, in reviewing for clear error the bankruptcy court’s holding that the MSOs constituted “new value,” applied the wrong standard of review. Section 547 of the Bankruptcy Code authorizes bankruptcy trustees to avoid preferential transfers. Specifically, the bankruptcy trustee “‘may avoid any transfer’ of the debtor’s property to a creditor ‘for or on account of an antecedent debt owed by the debtor before such transfer was made’ that diminishes the estate or creates an inequality among classes of creditors, if the debtor was insolvent, and the transfer was made within 90 days of the filing of the [bankruptcy] petition.” In re Pitman, 843 F.2d 235, 238 (6th Cir. 1988) (quoting 11 U.S.C. § 547(b)). The provision is designed “to accomplish proportionate distribution of the debtor’s assets among its creditors, and therefore to prevent a transfer to one creditor that would diminish the estate of the debtor that otherwise would be available for distribution to all.” In re Nucorp Energy, Inc., 902 F.2d 729, 733 (9th Cir. 1990).

8 In re Shelton Harrison Chevrolet, Inc. No. 98-6537 No. 98-6537 In re Shelton Harrison Chevrolet, Inc. 5

[the title documents] to resell the vehicles to consumers.” Id. Section 547(c)(1) establishes an exception to section 547(b) We do not find this reasoning persuasive. The Ninth Circuit avoidance, providing: cited no authority in support of its finding that the debtor could not resell the vehicles without title documents. In any (c) The trustee may not avoid under this section a event, Tennessee law supports the opposite conclusion. transfer— In summary, we hold that Leisure Vans failed to present a (1) to the extent that such transfer was— genuine issue of material fact as to whether the MSOs constituted “new value” under the contemporaneous exchange (A) intended by the debtor and the creditor to or exception to the bankruptcy trustee’s avoidance powers. for whose benefit such transfer was made to be a Shelton derived the full value of the customized vans upon contemporaneous exchange for new value given receipt because it had the ability to sell the vans immediately, to the debtor; and without the MSOs. The MSOs, in turn, had no independent value and, indeed, did not even augment the value of the vans (B) in fact a substantially contemporaneous to Shelton. Therefore, Leisure Vans was not entitled to exchange. summary judgment based upon the contemporaneous exchange exception. (Emphasis added.) “New value,” as used in this subsection, means: IV. money or money’s worth in goods, services, or new The district court’s affirmance of the bankruptcy court’s credit, or release by a transferee of property previously grant of summary judgment in favor of Leisure Vans is transferred to such transferee in a transaction that is REVERSED and the case is REMANDED to the bankruptcy neither void nor voidable by the debtor or the trustee court for further proceedings. under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation. 11 U.S.C. § 547(a)(2) (1993). The contemporaneous exchange exception under section 547(c)(1), thus, has three elements: (1) both the debtor and creditor must intend the transfer to be a contemporaneous exchange; (2) the exchange must, in fact, be contemporaneous; and (3) the exchange must be for new value. In re Gateway Pac. Corp., 153 F.3d 915, 918 (8th Cir. 1998). The burden is on the creditor, Leisure Vans, to demonstrate the elements of this exception. 11 U.S.C. § 547(g) (1993). The purpose of the contemporaneous exchange exception is to “encourage creditors to continue doing business with

6 In re Shelton Harrison Chevrolet, Inc. No. 98-6537 No. 98-6537 In re Shelton Harrison Chevrolet, Inc. 7

troubled debtors who may then be able to avoid bankruptcy customized vans to Shelton, it could not legally withhold the altogether.” In re Jones Truck Lines, Inc., 130 F.3d 323, 326 MSOs if Shelton thereafter sold the vans to a buyer in the (8th Cir. 1997). In addition, this exception recognizes that the ordinary course of business. Thus, Leisure Vans’s argument debtor’s payment does not adversely affect other creditors that the vans were worthless to Shelton without the MSOs is because the payment is offset by the debtor’s receipt of new entirely unpersuasive. value. A contrary holding would also undermine the purposes of The district court relied on Tennessee law governing the contemporaneous exchange exception. First, a holding vehicle titling and registration in holding that a vehicle MSO that the MSOs constitute “new value” would not encourage constitutes “new value” for purposes of the contemporaneous creditors to do business with troubled debtors. To the exchange exception. Under Tennessee law, an individual contrary, such a holding would condone a creditor’s attempt who purchases a new vehicle from a dealer must submit a bill to exert leverage over a troubled debtor by retaining a title- of sale and the MSO to obtain a certificate of title from the related document until a check clears. Second, because state. Tenn. Code Ann. § 55-3-103(c) (1998). It is illegal to Shelton derived no added value from the MSOs, its payments drive in Tennessee without a certificate of title. Id. § 55-3- to Leisure Vans would adversely affect other creditors if 102(a)(2) (1998). Based upon this law, the district court held excepted from the trustee’s avoidance powers. that the customized vans in Shelton’s possession were virtually worthless without the MSOs and, thus, the MSOs Leisure Vans contends that other circuits have held that the constituted “new value” given to Shelton. transfer of title-related documents constitutes new value for purposes of the contemporaneous exchange exception, citing The trustee argues that Shelton’s receipt of the MSOs from In re Grand Chevrolet, Inc., 25 F.3d 728, 734 (9th Cir. 1994), Leisure Vans did not constitute “new value” because Shelton and In re Barefoot, 952 F.2d 795, 800 (4th Cir. 1991). had the ability to sell and transfer legal title to the converted Leisure Vans misinterprets these cases, however. The Fourth vans upon receipt of the vans. Thus, Shelton could realize the Circuit in Barefoot ruled that the contemporaneous exchange full value of the vehicles without the MSOs. We agree. exception was inapplicable because contemporaneity was Under Tennessee law, legal title to the vans passed to Shelton lacking. The court specifically declined to decide if the upon delivery, and Shelton could transfer legal title to a buyer release of MSOs for mobile homes constituted “new value.” in the ordinary course of business even without a title Id. at 800 n.*. Moreover, Barefoot is distinguishable because certificate or an MSO. Couch v. Cockroft, 490 S.W.2d 713, the parties in that case agreed that the creditor released a 715 (Tenn. Ct. App. 1972). Legal title is, thus, distinct from purchase money security interest in the mobile homes upon documentation of title. releasing the MSOs. In this case, Leisure Vans retained no security interest in the vans upon delivery to Shelton. Leisure Vans attempts to distinguish this authority, arguing that even if Shelton could transfer legal title, the vans without In Grand Chevrolet, 25 F.3d at 734, the Ninth Circuit held the MSOs were worthless as a practical matter. According to that title documents to vehicles may have constituted “new Leisure Vans, no purchaser would choose to buy a van value” under the contemporaneous exchange rule and without an MSO because the purchaser would be unable to remanded to the district court to measure the extent of the obtain documentation of title and, therefore, could not legally new value conferred by the transfer of those title documents drive the vehicle in Tennessee. This argument relies on an along with unperfected security interests. The court reached incorrect assumption. Once Leisure Vans delivered the this conclusion based on its finding that “the debtor needed