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Official Committee of Unsecured Creditors of ABC-NACO, Inc., ex rel ABC-NACO, Inc. v. Bank of America N.A.

February 27, 2009

THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF ABC-NACO, INC., EX REL. ABC-NACO, INC., PLAINTIFF-APPELLANT,
v.
BANK OF AMERICA N.A., DEFENDANT-APPELLEE.



The opinion of the court was delivered by: David H. Coar United States District Judge

HON. JUDGE DAVID H. COAR

MEMORANDUM OPINION AND ORDER

This matter comes before the Court on Plaintiff-Appellant the Official Committee of Unsecured Creditors of ABC-NACO, Inc. (the "Committee" or "Appellant"), on behalf of ABCNACO, Inc. ("ABC-NACO" or "Debtor"), on appeal from the United States Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). Appellant now challenges the ruling of the Bankruptcy Court that retroactive application of Section 1213 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") does not violate either the Due Process Clause or the Takings Clause of the Fifth Amendment. Appellant Br. at 1. This pure legal issue is the only issue on appeal to this Court.

I. BACKGROUND

The relevant facts in this case are simple and not in dispute. They are set forth in the Bankruptcy Court's opinion, Official Comm. of Unsecured Creditors of ABC-NACO, Inc. v. Bank of America N.A. (In re ABC-NACO, Inc.), 331 B.R. 773, 776 (Bankr. N.D. Ill. 2005). ABC-NACO was a supplier of products to the rail industry. Before October 30, 2000, ABCNACO entered into a revolving loan agreement with Defendant-Appellee Bank of America N.A. and several other lenders (collectively, the "Bank" or "Appellee"). The Bank received corporate guarantees from ABC-NACO's subsidiaries. The subsidiary guarantors were "insiders" of ABCNACO within the meaning of 11 U.S.C. § 101(31). The Bank was not an insider of ABCNACO. In late 2000 and early 2001, the Debtor and Bank amended the Credit Agreement to give to the Bank liens on several pieces of real property (the "Contested Liens"). These Contested Liens were all granted between ninety days and one year prior to the Debtor filing for bankruptcy. The Debtor filed a Chapter 11 petition in the Bankruptcy Court on October 18, 2001.

On February 28, 2002, the Committee initiated this adversary proceeding in the Bankruptcy Court, seeking to avoid the Contested Liens as preferences under 11 U.S.C. § 547(b). Section 547 of the Bankruptcy Code authorizes a trustee to avoid a preferential payment made to a creditor by a debtor within 90 days of filing, whether the creditor is an insider or an outsider. 11 U.S.C. § 547. Section 547(b) provides an extended preference period of one year for a transfer made "to or for the benefit of a creditor" if "such creditor at the time of such transfer was an insider." 11 U.S.C. § 547(b)(4)(B). Congress created this extended preference provision "[t]o address the concern that a corporate insider (such as an officer or director who is a creditor of his or her own corporation) has an unfair advantage over outside creditors."

H.R.Rep. No. 109-31, at 143 (2005). Presumably, the insider creditor has access to more information about the debtor's solvency than the non-insider creditor, so § 547(b)(4)(B) incentivizes non-insider loans and reduces their risk during the debtor's bankruptcy by permitting payments to insider creditors to be avoided as preferences for a longer period of time than payments to non-insiders.

In Levit v. Ingersoll Rand Fin. Corp. (In re DePrizio), 874 F.2d 1186 (7th Cir. 1989) (hereinafter "DePrizio"), the Seventh Circuit construed § 547(b) to allow avoidance of a loan payment made within the extended preference period even though the payment was made to a non-insider lender, because an insider had guaranteed the loan. In essence, DePrizio applied the extended preference period to payments to non-insiders where an insider had merely benefitted from the payment. Relying on DePrizio, the Committee argued in Bankruptcy Court that the Contested Liens were transfers of a debtor's property to a non-insider between 90 days and one year prior to bankruptcy that could be avoided under § 547(b)(4)(B) because the transfers benefitted an insider of the debtor (ABC-NACO's subsidiaries).

However, after trial concluded and while judgment was pending, Congress passed and the President signed BAPCPA on April 20, 2005. Section 1213 of BAPCPA added a new subsection to 11 U.S.C. § 547 that specifically limited preference claims against non-insiders (like the Bank) to transfers that occurred within 90 days of the bankruptcy filing:

If the trustee avoids under subsection (b) a transfer made between 90 days and 1 year before the date of the filing of the petition, by the debtor to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be considered to be avoided under this section only with respect to the creditor that is an insider.

11 U.S.C.A. § 547 (i). It is undisputed that § 1213 changes the bankruptcy code to prohibit the lien avoidance with respect to non-insiders that § 547 previously permitted, voiding the Committee's only basis for its adversary proceeding. Section 1213 also expressly provided that its amendments "shall apply to any case that is pending or commenced on or after the date of enactment of this Act," Pub. L. No. 109-8, 119 Stat. 23, 194, which made it applicable to the Committee's pending proceeding.

The day after BAPCPA was signed, the Bank moved for judgment as a matter of law under § 1213, arguing for retroactive application of the statute. The Committee contended that retroactive application would violate the Due Process and Takings Clauses of the Fifth Amendment. The United States also filed an intervenor's brief at the request of the Bankruptcy Court. On October 13, 2005, the Bankruptcy Court granted the Bank's motion for judgment as a matter of law.

II. STANDARD

On appeal to a district court, a bankruptcy court's conclusions of law are reviewed de novo. Monarch Air Serv. v. Solow (In re Midway Airlines, Inc.), 383 F.3d 663, 668 (7th Cir. 2004). The only questions on appeal are pure questions of law regarding whether ยง 1213 ...


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