USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 92-2463
IN RE RALAR DISTRIBUTORS, INC., ET AL.,
Debtors,
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RALAR DISTRIBUTORS, INC.,
HALMAR DISTRIBUTORS, INC.,
Plaintiffs, Appellants,
v.
RUBBERMAID, INCORPORATED,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Frank H. Freedman, U.S. District Judge]
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Before
Cyr and Boudin, Circuit Judges,
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and Burns,* Senior District Judge.
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Paul R. Salvage with whom Michael J. Coyne, Susan L. Burns and
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Bacon & Wilson, P.C. were on brief for appellants.
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Dustin F. Hecker with whom Cornelius J. Chapman, V. Denise
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Saunders and McDermott, Will & Emery were on brief for appellee.
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September 14, 1993
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*Of the district of Oregon, sitting by designation.
CYR, Circuit Judge. Chapter 11 debtors Ralar Distri-
CYR, Circuit Judge.
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butors, Inc. and Halmar Distributors, Inc. (hereinafter: "debtor"
or "R-H") appeal a district court order affirming a bankruptcy
court's award of summary judgment to Rubbermaid, Inc. ("Rubber-
maid") in R-H's adversary proceeding to recover a $453,000
preferential transfer. We affirm.
I
I
BACKGROUND
BACKGROUND
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R-H, a wholesale distributor of household products,
sold Rubbermaid and non-Rubbermaid merchandise to several retail
store chains, including Caldor. Between 1987 and 1989,
Rubbermaid and Caldor entered into a series of annual contracts,
the latest executed in March 1989, which the parties refer to as
an "advertising support program" ("ASP"). Rubbermaid authorized
Caldor to incur expense for promotional ads of Rubbermaid
products subject to reimbursement by Rubbermaid. Rather than
reimburse Caldor directly for incurring these ASP expenses,
however, Rubbermaid arranged with R-H, which was never a
signatory to the ASP agreement, to serve as a go-between. Caldor
would incur the ASP expenses, then deduct them from the next
invoice it received from R-H. R-H routinely treated Caldor's ASP
expenses as credits against Caldor's account with R-H ("ASP
credit"). To offset these ASP credits, R-H in turn would reduce
its next payment for Rubbermaid merchandise by the amount of its
most recent ASP credit to Caldor. The net effect of the ASP
2
transaction on R-H's books was a "wash."
On October 16, 1989, R-H commenced its chapter 11
reorganization proceeding. In its adversary proceeding complaint
against Rubbermaid, R-H alleged that Rubbermaid received a
voidable preferential transfer "on or about" July 24, 1989, when
it authorized Caldor to offset ASP expenses totalling $453,000 as
ASP credits on Caldor's account with R-H. The bankruptcy court
entered summary judgment for Rubbermaid on the ground that the
ASP credits merely constituted a "recoupment of mutual rights
under one transaction." See infra notes 1 and 10. The district
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court affirmed.
II
II
DISCUSSION
DISCUSSION
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Bankruptcy Code 547(b) sets out the essential
elements of a voidable preference:
(b) Except as provided in subsection (c) of
this section [setting out defenses to avoid-
ance], the trustee may avoid any transfer of
an interest of the debtor in property
________ __ ___ ______ __ ________
(1) to or for the benefit of a creditor
[viz., Rubbermaid];
____
(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) on or within 90 days before the
date of the filing of the petition
. . . ; and
(5) 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 [11 U.S.C. 701-
3
766];
(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.C.S. 101-1330].
11 U.S.C. 547(b) (emphasis added). A "transfer" of the
debtor's "property," within the preference period, that enables a
creditor to realize more than it would have received on its claim
in a chapter 7 liquidation of the property of the debtor estate,
see Bankruptcy Code 726, 11 U.S.C. 726, violates the theme of
___
equality of distribution among all creditors of like class. H.R.
Rep. No. 595, 95th Cong., 2d Sess. 177-78, reprinted in 1978
_________ __
U.S.C.C.A.N. 5787, 5963, 6138 [hereinafter: H.R. Rep. No. 595].
Section 547(b) is designed to deter creditors from
"dismember[ing] the debtor during [its] slide into bankruptcy."
Id. at 177.
___
R-H contended that the net effect of the challenged ASP
credits was to permit Rubbermaid to receive the entire "benefit"
of the $453,000 ASP credit (i.e., the account receivable Caldor
____
owed R-H) which otherwise would have been apportioned among all
of R-H's unsecured creditors, not merely Rubbermaid, in the event
of a chapter 7 liquidation. The bankruptcy court disagreed, on
the ground that the ASP credits effected no "transfer of an
interest of the debtor in property."1
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1The bankruptcy court explained its rationale as follows:
There are two difficulties with [the Debtors']
argument. First, there never was a $453,000 receivable
due to the Debtors from Caldor. The entire Caldor
receivable was, with the Debtors' consent, at all times
4
Appellant R-H characterizes the ASP transactions quite
differently: "On or about" July 24, 1989, Caldor owed R-H more
than $453,000 for merchandise previously purchased from R-H.
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Thus, R-H held an account receivable an enforceable contract
claim in the amount of $453,000 against Caldor which assumedly
became property of the hypothetical R-H chapter 7 estate, see
___
Bankruptcy Code 541, 11 U.S.C. 541, hence available for pro
___
rata distribution among all R-H unsecured creditors, not merely
____
Rubbermaid. Instead, however, R-H in effect "released" Caldor
from its obligation to pay R-H the full $453,000 account receiv-
able, in order to effect reimbursement of the ASP expenses Caldor
was entitled to receive from Rubbermaid under their separate ASP
contract, thereby conferring an indirect "benefit" upon Rubber-
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subject to advertising credits which turned out to be
$453,000. Second, there never was a $453,000 debt owed
by the Debtors to Rubbermaid. The entire indebtedness
owed Rubbermaid was at all times subject to the same
credit arrangement. To put it another way, the
agreement made among the Debtors, Caldor and Rubbermaid
prevented any calculation of indebtedness owed by
Caldor to the Debtors, or owed by the Debtors to
Rubbermaid, without taking into account the advertising
costs incurred by Caldor with respect to Rubbermaid
products. Because the parties expressly agreed to the
assertion of the advertising credits in their
respective sales transactions, application of the
credits constitutes recoupment of mutual rights under
one transaction. Without that agreement, the
advertising and sales would consist of separate
transactions and there would not even be the right of
setoff vis-a-vis Caldor and the Debtors or vis-a-vis
the Debtors and Rubbermaid. See, generally, on
recoupment and setoff, In re B & L Oil, 782 F.2d 155
________________
(10th Cir. 1986) . . . .
Ralar Distribs. v. Rubbermaid, Inc. (In re Ralar Distribs.), No.
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90-4222, slip op. at 3-4 (Bankr. D. Mass. Sept. 4, 1991).
5
maid. See Bankruptcy Code 101(54), 11 U.S.C. 101(54)
___
(broadly defining "transfer" as including both "direct" and
"indirect" modes of disposing of property); see also Kellogg v.
___ ____ _______
Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586, 591
________________________ ___________________
(5th Cir. 1987) (mere "circuity of arrangement" cannot redeem a
transaction which has the effect of a preference) (citing
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National Bank of Newport v. National Herkimer Cty. Bank, 225 U.S.
________________________ ___________________________
178, 184 (1912)).
Rubbermaid counters that such ASP arrangements are too
customary in wholesale-retail trade to be considered preferen-
tial, and that this voluntary ASP arrangement constituted a long-
established "course of dealing" among the parties. If a "trans-
fer" occurred at all, says Rubbermaid, R-H received the benefit
of the transfer because Rubbermaid accepted $453,000 less from
R-H for household merchandise previously purchased from
Rubbermaid, and if anyone received a voidable "transfer" from R-
H, it was Caldor. Furthermore, these ASP credits ultimately
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produced a "wash" on R-H's books, documenting the fact that there
was no net diminution in either R-H's property or the property of
its hypothetical chapter 7 estate. Finally, recovery of these
transfers from Rubbermaid would result in an unjust enrichment to
R-H, which realized the benefits from the use of these ASP
credits in reducing its outstanding debt to Rubbermaid, but would
now recoverthe same$453,000 forthe benefitof itschapter 11estate.
There is surface appeal to the arguments of both
6
parties, though both are wide of their mark.2 If borne out by
the evidence, the contentions advanced by R-H arguably would
comport with the policy of equality of distribution, and R-H
correctly asserts that it is the effect of the alleged transfer,
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not the subjective intent of the parties, which primarily governs
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the section 547(b) analysis. See 4 Lawrence P. King, Collier on
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Bankruptcy 547.01, at 547-13 (and cases cited therein)
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[hereinafter: Collier]; but cf. infra note 5. We are persuaded,
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nevertheless, by Rubbermaid's contention that R-H failed to carry
its burden of proof in opposition to Rubbermaid's motion for
summary judgment.
In order to prevail, R-H ultimately must establish, by
a preponderance of the evidence, each essential element of a
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2Several of Rubbermaid's arguments are beside the point.
First, although Rubbermaid did not receive a direct "transfer"
from R-H, a "transfer" to Caldor "for the benefit of" Rubbermaid
would be recoverable from either Rubbermaid or Caldor. See Bank-
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ruptcy Code 550, 11 U.S.C. 550(a) (trustee may recover from
"the initial transferee" or from "the entity for whose benefit
the transfer was made"); Travelers Ins. Co. v. Cambridge Meridian
__________________ __________________
Group, Inc. (In re Erin Food Servs., Inc.), 980 F.2d 792, 797,
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797 n.8 (1st Cir. 1992).
Second, Rubbermaid places great stock in the fact that these
ASP transactions produced a "wash" on R-H's books, suggesting
that the ASP credits resulted in no diminution of the hypotheti-
cal chapter 7 estate. Were this the standard, however, few
transfers would ever contravene 547(b). Instead, the 547(b)
focus is on the ultimate effect of the transfer. By their very
nature, most preferential transfers result in a "wash" on the
debtor's books, since the preferred transferee receives payment
on account of an antecedent debt and its allowable "claim"
against the chapter 7 estate is reduced accordingly.
Finally, arguably no "unjust" enrichment would result were
R-H to recover from Rubbermaid. If Rubbermaid were required to
disgorge, it could file a proof of claim for the amount of the
avoided transfer, id. 502(h), 502(d), which would be entitled
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to a pro rata distribution from the R-H debtor estate.
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7
voidable preference under section 547(b). See Bankruptcy Code
___
547(g), 1107(a), 11 U.S.C. 547(g), 1107(a); Travelers Ins.
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Co. v. Cambridge Meridian Group, Inc. (In re Erin Food Servs.,
___ _______________________________ ________________________
Inc.), 980 F.2d 792, 799 (1st Cir. 1992). Once the movant
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presents sufficient competent evidence to entitle it to summary
judgment as a matter of law, the nonmovant cannot rest merely on
the averments and denials in its pleadings, but must set forth
specific facts demonstrating a genuine issue for trial. See Fed.
___
R. Bankr. P. 7056; Fed. R. Civ. P. 56(c), (e); Germain v. RFE
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Inv. Partners IV (In re Wescorp, Inc.), 148 B.R. 161, 162-63
_________________ ____________________
(Bankr. D. Conn. 1992); see also Marshack v. Sauer (In re
___ ____ ________ _____ ______
Palmer), 140 B.R. 765, 768 (Bankr. C.D. Cal. 1992). As to any
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essential factual element of its claim on which the nonmovant
would bear the burden of proof at trial, its failure to come
forward with sufficient evidence to generate a trialworthy issue
warrants summary judgment for the moving party. See Christians
___ __________
v. Crystal Evang. Free Church (In re Young), 148 B.R. 886, 889
___________________________ ____________
(Bankr. D. Minn. 1992) (citing Celotex Corp. v. Catrett, 477 U.S.
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317, 322 (1986)).
At trial, R-H would bear the burden of proving, inter
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alia, that the challenged ASP credits effected a "transfer of an
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interest of the debtor in property." Bankruptcy Code 547(b),
11 U.S.C. 547(b). See also Bankruptcy Code 547(e), 11 U.S.C.
___ ____
547(e) ("[A] [preferential] transfer is not made until the
debtor has acquired rights in the property [transferred]."). A
prepetition debtor acquires "rights" in property for section
8
547(b) purposes if, but for the challenged transfer, its interest
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would have been "property of the estate" under section 541 at the
filing of a chapter 7 petition. See Begier v. Internal Revenue
___ ______ ________________
Serv., 496 U.S. 53, 58, 58 n.3 (1990).
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Accordingly, at the summary judgment stage, R-H was
required to come forward with competent evidence that,
immediately prior to its "transfer" of these ASP credits, its
hypothetical chapter 7 estate owned an account receivable from
Caldor equal to the total unpaid price of the merchandise
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previously sold to Caldor, and not merely in the net amount due
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R-H after deducting Caldor's ASP credit from the total price of
the merchandise. Unless the hypothetical R-H chapter 7 estate
would have acquired the contract right to compel Caldor to pay
the full $453,000, with no offsetting ASP credit, the property of
the hypothetical R-H estate could not have been diminished. Id.
___
("[I]f the debtor transfers property that would not have been
available for distribution to his creditors in a bankruptcy
proceeding, the policy behind the avoidance power is not
implicated.").
What constitutes "property," within the meaning of
Bankruptcy Code 541, is a question of federal law, see Koch
___ ____
Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1343 (7th
____ _______________________________
Cir. 1987) (citing H.R. Rep. No. 595, at 367-68), cert. denied,
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485 U.S. 906 (1988), and it is well established that a debtor's
contractual right to recover an account receivable is property of
the chapter 7 estate, see Crysen/Montenay Energy Co. v. Esselen
___ ___________________________ _______
9
Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098,
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1101 (2d Cir. 1990) (citing In re Chauteguay Corp., 78 B.R. 713,
_______________________
725 (Bankr. S.D.N.Y. 1987)); Glenshaw Glass Co. v. Ontario Grape
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Growers Mktg. Bd. (In re Keystone Foods, Inc.), 145 B.R. 502, 508
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(Bankr. W.D. Pa. 1992). On the other hand, the nature and extent
of the debtor's enforceable "interest" or "rights" in an account
receivable are defined by state law in this case, by state
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contract law. See, e.g., Griffel v. Murphy (In re Wegner), 839
________ ___ ____ _______ ______ ____________
F.2d 533, 538-39 (9th Cir. 1988) (under Montana law, prior mutual
rescission of executory contract divested debtor of "rights" in
cattle); see also Glinka v. Bank of Vermont (In re Kelton Motors,
___ ____ ______ _______________ ____________________
Inc.), 153 B.R. 417, 419 (D. Vt. 1993) (because 547(b) is
____
silent, courts must "look to state law" for definition of
"interest" in property); see generally Collier 547.03, at 547-
___ _________ _______
22.1.
Here, R-H alleged a "transfer." Rubbermaid, the movant
at summary judgment, presented competent extracontractual
evidence that the contract between R-H and Caldor gave rise to an
account receivable only in the net amount of the unpaid price of
____ ___ ______
the merchandise less Caldor's ASP credits. Indeed, even on
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appeal R-H readily concedes that it invariably honored Caldor's
ASP credits from the inception of the ASP arrangement in 1987.3
The deposition testimony revealed that Caldor, like many other
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3As further confirmation of the parties' understanding,
their prepetition settlement agreement of Caldor's debt to R-H in
September 1989 reflects a deduction for all ASP credits then due
Caldor.
10
trade retailers, routinely asserted this sort of "charge back"
for manufacturers other than Rubbermaid.
Under state law,4 R-H's contract rights against
Caldor, if indefinitely expressed in their contract, would be
informed by their prior course of dealing, course of performance,
or usage of trade. See Mass. Gen. L. ch. 106, 2-202 (1990)
___
(providing that parol evidence of prior course of dealing or
usage of trade is admissible to explain or supplement contract
terms); id. 1-205(1) (defining "course of dealing" as "a
___
sequence of previous conduct between the parties to a particular
transaction which is fairly to be regarded as establishing a
common basis of understanding for interpreting their expressions
and other conduct"); id. 1-205(3); id. 2-208(1) ("Where the
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contract for sale involves repeated occasions for performance by
either party with knowledge of the nature of the performance and
opportunity for objection to it by the other, any course of
performance accepted and acquiesced in without objection shall be
relevant to determine the meaning of the agreement."); id.
___
1-205(2) (defining "usage of trade" as any practice or method
of dealing having such regularity of observance in a place,
vocation or trade as to justify an expectation that it will be
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4We assume for present purposes that Massachusetts law would
apply to the contract for the sale of goods between R-H, a Mas-
sachusetts corporation, and Caldor. The Massachusetts Uniform
Commercial Code, on "course of performance and dealing" and
"usage of trade" evidence, substantially conforms with that in
other states.
11
observed with respect to the transaction in question").5
Bypassing these procedural concerns, R-H urges on
appeal that "[w]hether an account receivable from Caldor ever
existed on the Debtors [sic] books is a [question] of fact which
should be determined by the Bankruptcy Court on remand."
However, once Rubbermaid came forward with its undisputed
evidence of prior course of dealing, performance, and usage of
trade, R-H was left with the laboring oar. As the nonmovant at
summary judgment, R-H had the burden to establish that its agree-
ment with Caldor contained an express contract term which (i)
____ ______ _______
would have precluded resort to such extracontractual evidence in
interpreting the contractual rights of the parties, or (ii) would
at least have given rise to a trialworthy factual issue bearing
on the proper interpretation of their contract. See Mass. Gen.
___
L. ch. 106, 1-205(4) (1990) (express contract terms "trump"
inconsistent "course of dealing" evidence); see also Lancaster
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5In many respects, this is precisely the type of evidence
which would be needed to establish Rubbermaid's 547(c)(2)
defense to preference avoidance for payments made in the
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"ordinary course of [the debtor's] business." See Collier
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547.01, at 547-13 n.20 (noting that, though state of mind
generally is immaterial to overall 547 analysis, intent "may be
_________
a dispositive factor in determining certain elements of a
preference . . . ."). But because this "transfer" involves R-H's
alleged "release" of a preexisting obligation by Caldor, and R-H
has the threshold burden to establish all essential 547(b)
___
elements before the burden shifts to Rubbermaid to establish a
547(c) defense to avoidance, the burden remained with R-H to
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establish a contract right to recover the full price of the
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merchandise with no offsets for Caldor's ASP credits.
12
GlassCorp. v. PhilipsECG, Inc., 835F.2d 652, 659(6th Cir. 1987).6
__________ ________________
The record does not disclose the relevant terms of the
Caldor - R-H agreement nor is there documentation from which its
terms might reasonably be inferred.7 Moreover, there is no evi-
dence that Rubbermaid accelerated its recourse to the ASP credit
arrangement in anticipation of R-H's chapter 11 petition, as by
inducing Caldor to increase the amount or frequency of its ASP
credits over previous levels.8 Consequently, given its failure
to confront Rubbermaid's evidence of prior course of dealing,
performance, and usage of trade, R-H demonstrated no trialworthy
dispute that it had any cognizable "interest" in the $453,000 ASP
credit which would have become property of the estate in the
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6Similarly, R-H did not generate a trialworthy issue as to
whether the ASP credits could have replaced the "released" Caldor
accounts receivable as R-H "assets," since the hypothetical R-H
chapter 7 estate could never have required Rubbermaid to honor
the ASP credits by paying the R-H estate $453,000 in cash. Under
the contract between Rubbermaid and R-H, as informed by prior
course of dealing, any ASP credits held by R-H could be used only
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to reduce R-H's accounts payable to Rubbermaid.
7R-H's Exhibit H is merely a redacted transcription of
certain relevant book entries, prepared solely for litigation
purposes, hence not probative of the terms of the agreement
between R-H and Caldor. Similarly, although a former R-H officer
testified that R-H could have refused to accept Caldor's ASP
credits at any time, he identified no contractual basis for the
supposed right of refusal, nor did he suggest that R-H had ever
exercised such a right.
8Nowhere does R-H suggest or show that Caldor's ASP credits
exceeded the authorized 1989 fixed percentage rate (13.75% of
total 1989 merchandise sales to Caldor), or that the 1989 level
differed significantly from the authorized fixed-percentage
rates, or ASP credits claimed, in 1987 or 1988.
13
event of a chapter 7 liquidation.9
III
III
CONCLUSION
CONCLUSION
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We hold that R-H did not establish a trialworthy issue
as to whether a section 547(b) "transfer" occurred, as was its
burden under Fed. R. Bankr. P. 7056 and Fed. R. Civ. P. 56(c),
(e). Thus, we need take no position on the voidability of duly
established ASP credit transactions as preferential transfers
under section 547(b).10
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9R-H's Rule 7056 proffer was seriously deficient on more
than one front. The 90-day preference period extended back to
July 19, 1989. But the evidence shows that Caldor claimed
$294,000 of the $453,000 in ASP credits by assessing "charge
backs" against R-H on June 25, 1989. Since R-H's acceptance of
____ __ ____
these "charge backs" constituted the alleged "transfer," R-H
arguably did not meet its burden of proving that these transfers
of $294,000 in ASP credits fell within the applicable preference
period under 547(b)(4)(A) (transfer "made . . . on or within 90
days before the date of the filing of the petition").
10The bankruptcy court premised its decision on the
equitable doctrine of recoupment, see supra note 1, citing In re
___ _____ _____
B & L Oil Co., 782 F.2d 155 (10th Cir. 1986). Where a chapter 7
_____________
estate and its creditor hold "counterclaims" arising out of a
contractual "transaction" which bridges the date of the chapter 7
petition, it is often deemed inequitable to allow the estate to
recover its postpetition claim in full from the creditor, while
__ ____
the same creditor is allowed only a pro rata dividend on its
___ ____
prepetition claim against the estate. Recoupment allows the
creditor to abate its payment to the chapter 7 estate by the
amount of its prepetition claim. Since we rely on other grounds,
we need not address the problematic application of the recoupment
theory in this case. See Electronic Metal Prods., Inc. v.
___ _______________________________
Honeywell, Inc., 95 B.R. 768, 770 (D. Colo. 1989) (recoupment
_______________
must be narrowly construed as a preference defense); compare
_______
Raleigh v. Mid American Nat'l Bank & Trust Co. (In re Stoecker),
_______ ____________________________________ ______________
131 B.R. 979, 983 (Bankr. N.D. Ill. 1991) (recoupment not a
viable defense on merits of preference avoidance action as it is
not an enumerated defense in 547(c)(1)-(7)), with Visiting
____ ________
Nurse Ass'n of Tampa Bay, Inc. v. Sullivan (In re Visiting Nurse
______________________________ ________ ____________________
14
Affirmed; cost to appellees.
Affirmed; cost to appellees.
________ _________________
____________________
Assoc. of Tampa Bay, Inc.), 121 B.R. 114, 121 n.4 (Bankr. M.D.
__________________________
Fla. 1990) (recoupment "well recognized" defense to preference
avoidance).
15