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U.S. v. In Long Lee

argued: May 24, 1990.

IN RE KUMAR BAVISHI & ASSOCIATES, FREDERICK L. REIGLE, ESQ. TRUSTEE FOR KUMAR BAVISHI & ASSOCIATES, APPELLANT,
v.
S. S. MAHAJAN, APPELLEE. IN RE KUMAR BAVISHI & ASSOCIATES FREDERICK L. REIGLE, ESQ., TRUSTEE FOR KUMAR BAVISHI & ASSOCIATES, APPELLANT, V. R. K. MAHAJAN, PATEL MANJULA, S. S. MAHAJAN, APPELLEES



Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil Nos. 89-1976 and 89-1972.

Cowen, Nygaard, and Aldisert, Circuit Judges.

Author: Aldisert

Opinion OF THE COURT

ALDISERT, Circuit Judge.

In these consolidated appeals from the district court's judgment that affirmed appeals from the bankruptcy court, we must decide if the appellant, who is the trustee of Kumar Bavishi & Associates, debtor, could properly set aside alleged preferential transfers to R. K. Mahajan and S. S. Mahajan, appellees. The bankruptcy judge determined that the trustee did not establish the right to avoid the transfers because the debtor had received new value in a contemporaneous exchange in the form of a loan guarantee. The trustee appealed and the district court affirmed. The trustee has now appealed to us and we affirm.

Jurisdiction in the trial court was proper based on 28 U.S.C. § 158(a). We have jurisdiction pursuant to 28 U.S.C. §§ 158(d), 1291. This appeal was timely filed.

This appeal turns on whether the guarantee by appellees constitutes "new value." The determination of "new value" is a mixed question of law and fact. In re Spada, 903 F.2d 971, slip. op. at 7 (3d Cir. 1990). "[We] exercise plenary review of the legal standard applied by the district and bankruptcy courts, but review the latter court's guidelines of fact on a clearly erroneous standard." Id. (quoting In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 147 (3d Cir. 1986) (quoting Universal Minerals Inc. v. C.A. Hughes & Co., 669 F.2d 98, 103 n. 6 (3d Cir. 1981))).

I.

R. K. Mahajan and his brother, S. S. Mahajan, were limited partners in the debtor partnership, Kumar Bavishi & Associates. The parties stipulated that both brothers were creditors of the debtor. App. at 502, 509. For convenience we will refer to both brothers as the "appellee" in this opinion. In April 1984, the debtor partnership was in desperate need of additional operating funds, and applied to a lending institution for a $200,000 loan. The lending institution, Salween Financial, declined to grant the loan solely on the credit of the debtor and its general partner, and insisted upon receiving the personal guarantees of other parties for the full amount of the loan.

Appellee and the other limited partners were under no legal obligation to provide their personal guarantees. However, to induce appellee to guarantee payment of the proposed loan from Salween Financial to the partnership, the general partner, on behalf of the partnership, agreed to pay off a portion of the partnership's pre-existing debt to appellee, in an amount equal to appellee's estimated share of the exposure on the personal guarantee of the $200,000 loan. Because six of the limited partners, including the appellee, were to become guarantors of the $200,000 loan, it was agreed that appellee's exposure would probably not exceed $33,333. Accordingly, immediately upon consummation of the loan transaction, $33,333 of appellee's pre-existing debt was repaid in exchange for appellee's personal guarantee. The other limited partners received nothing for their guarantees. It is the payment by the partnership of the $33,000 debt owed appellee that is challenged by the trustee as a preferential transfer and defended by the appellee as a "new value" exception to the preferential transfer concept.

Debtor petitioned for reorganization under Chapter 11 on June 14, 1984, about two months after the payment to the Mahajans. The guarantors were then sued by Salween Financial and forced to satisfy the $200,000 loan. Appellees paid approximately $41,000 each.

Thereafter the Chapter 11 proceeding was converted into a Chapter 7 liquidation. The debtor's trustee instituted adversary proceedings against R. K. Mahajan and S. S. Mahajan, to set aside the alleged $33,000 preferential transfers under 11 U.S.C. § 547. Alternatively, the trustee challenged the transfers as fraudulent under 11 U.S.C. § 548 and as a violation of the Pennsylvania Limited Partnership Act, 59 Pa.C.S.A. § 527 (repealed 1988).

The bankruptcy judge dismissed the section 548 claim on the grounds that the trustee failed to prove that the challenged transaction had been accomplished with intent to hinder, delay or defraud creditors. The trustee has not challenged that ruling. The bankruptcy judge further ruled that, although the challenged transfer had occurred within the preference period, the appellee had met his burden of proving that the transaction fell within the exception stated in section 547(c), in that the defendant had given new value in contemporaneous exchange for the challenged transfer. Although the bankruptcy judge did not address the state law claim under the Limited Partnership Act, the district court did. The District court stated that the "new value" that constituted a defense to the preferential transfer action also constituted a defense to the fraudulent transfer action of the Pennsylvania Uniform Limited Partnership Act.

II.

The general rule regarding transfers made prior to bankruptcy is contained in 11 U.S.C. § 547(b)(4)(A):

"the trustee may avoid any transfer of an interest of the debtor in property -- (4) made -- (A) on or within 90 days before the date of filing of the petition. . . ."

The trustee is plainly entitled to avoid the transfer by debtor to appellees as a preferential transfer because it was made within 90 days of the bankruptcy petition filing, unless the transfer falls within one of the exceptions provided in section 547(c). Section 547(c)(1) provides that the trustee may not avoid a transfer:

(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact, a substantial contemporaneous exchange. . . .

Section 547(c)(4) provides that the trustee may not avoid the payment of funds when "after such transfer, such creditor gave new value to or for the benefit of the debtor. . . ."

For purposes of both of these exceptions, section 547(a)(2) defines "new value" as "money or money's worth in goods, services or new credit. . . ." In our view, the district court did not err in concluding that the facts here came within the "new value" exception discussed hereinafter in detail.

III.

As a preliminary matter, we are convinced that the $33,000 payments were preferential transfers under 11 U.S.C. § 547(b). Even if the issue of whether this transfer was preferential had been preserved for appeal, appellee would not have succeeded. We reject appellee's argument that the transfer was not a transfer of an interest of the debtor in property. Similarly, we are not persuaded that the funds borrowed by Salween were earmarked for payment to appellee. The record does not reflect the existence of an agreement between Salween and the ...


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