In the Matter of Fuel Oil Supply & Terminaling, Inc., Debtors. Gulf Oil Corp., Appellee-Cross-Appellant v. Fuel Oil Supply & Terminaling, Inc., Appellant-Cross-Appellee, and Banque De Paris Et Des Pays-Bas and Lockwood National Bank of Houston, N.A., Cross-Appellees
Docket: 87-2365
Court: Court of Appeals for the Fifth Circuit; March 15, 1988; Federal Appellate Court
In a preference action involving Fuel Oil Supply, Terminaling Company (FOSTI) and Gulf Oil Corporation, the United States Court of Appeals for the Fifth Circuit addressed whether certain gasoline and monetary transfers made by FOSTI to Gulf within the ninety days prior to filing for bankruptcy were voidable preferences under 11 U.S.C. § 547. The district court had ruled that while most transfers were not preferences, a portion of one payment was. However, the appellate court reversed this decision, determining that none of the transfers constituted voidable preferences, and therefore dismissed the judgment against Gulf for $84,889.98.
The case stemmed from an Exchange Agreement entered on May 6, 1981, where Gulf agreed to supply FOSTI with 200,000 barrels of gasoline, which FOSTI was to return in kind. FOSTI was required to pay Gulf a handling differential and secured its obligations with standby letters of credit from Lockwood National Bank and Banque de Paris et des Pays-Bas, which fully covered its debts to Gulf.
Gulf delivered the gasoline to FOSTI between May and June 1981, but changes were made to the delivery logistics. FOSTI paid Gulf various amounts, including a $40,198.77 differential and $244,169.52 for handling. Both letters of credit were eventually canceled or expired, and an involuntary bankruptcy petition against FOSTI was filed on September 4, 1981. Subsequently, FOSTI, now under Chapter 11, sought to recover the value of the gasoline transfers, claiming they were voidable preferences, leading to this appeal.
FOSTI asserted that payments made to Gulf—specifically, a $40,198.77 place and term differential and $169,779.96 of a $244,169.52 handling differential—constituted voidable preferences. Gulf countered with a third-party complaint against the Banks for reinstating letters of credit and indemnification. The parties entered into a Limited Stipulation to resolve legal issues through cross-motions for summary judgment. Gulf argued that elements under Section 547(b) were unmet and invoked defenses under Section 547(c), while FOSTI contested this in its own motion. The Banks sought summary judgment, claiming the expiration of letters of credit barred Gulf's recovery.
The bankruptcy court favored the Banks and FOSTI, denying Gulf's motion. The district court upheld the decision regarding the Banks but vacated that concerning FOSTI, determining that the Exchange Agreement constituted a bailment rather than a sale. This interpretation led to the conclusion that no antecedent debt existed under Section 547(b)(2), thus ruling the gasoline transfer was not a preferential transfer, nullifying FOSTI's recovery claim.
The court analyzed the payments, ruling that the place and term differential was integral to the bailment and not recoverable, while FOSTI's payment for the first thirty-day handling period was deemed a voidable preference, leading to a judgment against Gulf for $84,889.98. Gulf's defense under Section 547(c)(1) was rejected since releasing the letters of credit did not offer FOSTI 'new value.'
On appeal, FOSTI challenged the district court's bailment determination and its ruling on payment preferences. However, the appellate court found the elements of Section 547(c)(1) satisfied by the relationship among FOSTI, Gulf, and the Banks, indicating that even if FOSTI met all Section 547(b) criteria, the transfers were not voidable preferences. Section 547 allows a trustee or debtor to invalidate specific pre-bankruptcy transfers to ensure equitable treatment among unsecured creditors, particularly benefiting those with unsecured claims over fully secured creditors. Section 547(c)(1) provides exemptions for certain transfers that do not meet these objectives.
A transfer may be defended under Section 547(c)(1) if it is intended by both the debtor and creditor as a contemporaneous exchange for new value, and if it is indeed a substantially contemporaneous exchange. This defense is based on the principle that new value offsets payments, preventing depletion of the debtor's estate to the detriment of other creditors. The term "new value" encompasses the release of property previously transferred to a creditor. If a creditor perfects a security interest in a debtor's collateral and subsequently releases that interest after the debtor fulfills its obligation, such a transfer is protected from being voided by the trustee.
In the case of Gulf and FOSTI, Gulf was named the beneficiary of letters of credit secured by FOSTI's assets, which were always equal to or greater than FOSTI's obligations to Gulf. FOSTI made payments totaling $284,367.99 and transferred 200,000 barrels of gasoline to Gulf. In return, Gulf canceled and allowed letters of credit to expire, leading to the release of FOSTI's collateral by the Banks. Gulf asserted that the criteria for Section 547(c)(1) were met through this arrangement, claiming that the release of collateral constituted new value to FOSTI.
FOSTI did not contest the contemporaneity or intent of the transactions but argued that the new value requirement was not fulfilled since it was the Banks, not Gulf, that provided new value. The district court ruled that the relationships in the context of letters of credit were legally irrelevant to the debtor-creditor analysis, asserting that new value must originate from the creditor who received the pre-bankruptcy transfer. The court acknowledged the complexity of the transactions but maintained its position based on prior case law, particularly citing In re Originala Petroleum Corp., where the debtor's obligations were not met before bankruptcy.
Letters of credit shift the risk of nonperformance to banks, and the court declined to issue an injunction that would disturb this risk allocation. The independence principle mandates that issuing banks honor draw requests regardless of disputes between customers and beneficiaries over alleged breaches of underlying contracts. The court emphasized that maintaining this principle is essential for the viability of letter of credit financing globally. In the present case, FOSTI was not attempting to prevent Gulf from drawing on the letters of credit; rather, it sought to recover transfers made to Gulf for which it received new value through released collateral. Granting FOSTI recovery would not undermine the independence principle, as its pre-bankruptcy performance relieved the Banks of liability.
The court noted that letters of credit ensured Gulf would receive full payment, and the collateral secured the Banks adequately. Prior to bankruptcy, neither Gulf nor the Banks had any significant motive to coerce FOSTI into performance. If FOSTI had failed to perform during bankruptcy, Gulf could have drawn on the letters, allowing the Banks to claim the collateral or its value. Thus, allowing FOSTI to recover the value of its transfers would not support the goals of the preference section. The principles underlying Section 547(c)(1) are further advanced by denying FOSTI recovery, as the Banks' release of collateral counterbalanced FOSTI's transfers, leaving no depletion of FOSTI's estate or impairment of its unsecured creditors.
The court rejected reliance on *In re Dick Henley, Inc.*, which had supported Gulf’s position and was properly criticized by the district court. In *Henley*, a subcontractor was deemed to have not made a preferential transfer when it relinquished a statutory lien in exchange for payment from the debtor, which provided new value. The court concluded that in *Henley*, the owner could only assert an indemnity right against the debtor, making it an unsecured creditor, and thus the congressional aims of Section 547 were applicable, as the owner was inequitably preferred over other unsecured creditors.
The court found that the principle of Section 547(c)(1) was violated because the debtor's payment did not provide any tangible value to the debtor's estate, ultimately harming unsecured creditors who lacked notice of the owner's indemnity claim. This claim did not involve a filed financing statement, leaving creditors unaware of the debtor's financial condition. In contrast, the case at hand involved fully secured banks that offered FOSTI tangible value by releasing collateral tied to letters of credit, and the unsecured creditors were aware of these secured claims. The ruling established that new value for a debtor could come from a fully secured third party, not solely from the creditor receiving the transfer. Consequently, the court ruled that FOSTI could not recover the value of gasoline or payments made to Gulf, reversing the judgment and dismissing the claim. Additionally, the document outlines the mechanics of oil exchanges aimed at enhancing efficiency and reducing transportation costs, and describes the operation of letters of credit, emphasizing the bank's role in assuming liability upon the customer's default. The relevant letters of credit had expiration dates that were extended by agreement, and the bankruptcy case transitioned from Chapter 7 to Chapter 11 after an involuntary petition was filed. FOSTI's transfers occurred within a critical ninety-day window, but the related agreements and security interests predated this period.
The handling differential in this context is likened to interest on a loan, with gasoline as the principal. FOSTI repaid this "loan" by transferring gasoline to Gulf over three thirty-day periods, incurring charges of $84,889.98 for the first two periods and $74,389.56 for the third. FOSTI seeks to recover only the payments made for the first two periods. Under section 547(c)(2), a transfer of assets to a creditor within 90 days of bankruptcy, if occurring within 45 days of incurring the debt, is not considered a voidable preference, a rule acknowledged by the parties despite its later abolition. FOSTI confirms that it paid the third period charge within the 45-day timeframe, thus only pursuing recovery for the first two periods.
Section 547(b) allows a trustee to avoid certain transfers made while the debtor is insolvent, which occur within specified timeframes and enable creditors to receive more than they would in a chapter 7 bankruptcy. The policy behind this section aims to prevent creditors from hastily seizing debtor assets before bankruptcy and to promote equitable distribution among creditors.
The Bankruptcy Code distinguishes between secured and unsecured claims. A creditor has a secured claim to the extent of its interest in property and an unsecured claim for any deficiency. The term "fully secured creditor" refers to those whose claims are backed by collateral valued at or above the claim amount. Even fully secured creditors may prefer early payment before bankruptcy due to potential devaluation of collateral, depreciation, and loss of interest earnings during bankruptcy. The document notes that it is unclear if the Banks perfected their security interests under state law, highlighting typical arrangements where banks secure financing with promissory notes and security agreements.
A future advances clause allows banks to secure any future loans against specified collateral, in addition to current loans. The security interest is perfected through the filing of a financing statement, as established in *Matter of Compton*. It is assumed that the banks had perfected security interests in their arrangement with FOSTI, and there is no evidence to suggest otherwise. FOSTI did not dispute this on appeal but argued in response to Gulf's Motion for Summary Judgment that a contemporaneous exchange did not occur. FOSTI claimed that the Letters of Credit and the banks' security interests remained active until canceled or expired, but this assertion is factually incorrect. The record shows Gulf canceled a $7,240,000 letter of credit on August 4, 1981, during the period FOSTI was delivering gasoline. Furthermore, FOSTI's checks for differential payments were dated July 30 and August 4.
The court in *Originala* outlined that letters of credit involve three independent contracts: the customer-beneficiary contract, the customer-issuing bank contract, and the issuing bank's obligation to pay the beneficiary. It is noted that while the banks could not immediately foreclose on collateral due to the automatic stay provision in 11 U.S.C. § 362, they would ultimately receive the value of their claims as secured creditors. The risk of delayed payment is inherent in issuing letters of credit.
The *Henley* court's ruling indicated that a release of a right of indemnity constitutes 'new value,' despite not falling under the literal interpretation of 11 U.S.C. § 547(a)(2). This section defines 'new value' as money or equivalent goods/services, or the release of previously transferred property, but excludes obligations substituted for existing ones. Although the interpretation in *Henley* may be questionable, it is not central to the current issue since the banks did provide new value by releasing FOSTI's collateral. The *Henley* ruling further implies that a pre-bankruptcy transfer to a creditor with a third-party guarantee does not create a preference, potentially undermining the purpose of the preference provision in bankruptcy law.
