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In re Mississippi Valley Livestock, Inc.

United States Court of Appeals, Seventh Circuit

March 12, 2014

IN RE: MISSISSIPPI VALLEY LIVESTOCK, INC., Debtor

Argued September 30, 2013.

Page 300

Appeal from the United States District Court for the Northern District of Illinois, Western Division. No. 12-C-50341 -- Frederick J. Kapala, Judge.

For In the Matter of: MISSISSIPPI VALLEY LIVESTOCK, INCORPORATED, Debtor - Party-in-Interest: Stephen G. Balsley, Attorney, BARRICK, SWITZER, LONG, BALSLEY & VAN EVERA, Rockford, IL.

For STEPHEN G. BALSLEY, in his capacity as Chapter 7 Trustee for Mississippi Valley Livestock, Incorporated, Trustee - Appellant: Bradley T. Koch, Attorney, HOLMSTROM & KENNEDY, Rockford, IL.

For J& R FARMS, Defendant - Appellee: Joseph A. Peiffer, Attorney, DAY RETTIG PEIFFER, P.C., Cedar Rapids, IA.

Before WOOD, Chief Judge, and BAUER and KANNE, Circuit Judges.

OPINION

Page 301

Wood, Chief Judge.

This case calls on us to enter the world of commercial livestock operations. In happier times, Mississippi Valley Livestock was in the business of buying and selling fatted livestock for slaughter and processing. Mississippi Valley had an arrangement with J& R Farms (J& R) under which the former agreed to sell some of J& R's cattle to a particular buyer. Shortly before declaring bankruptcy, Mississippi Valley paid J& R nearly $900,000 representing completed sales. The bankruptcy trustee now seeks to recover those funds under the preferential-transfer provision of the Bankruptcy Code, 11 U.S.C. § 547(b). The trustee's efforts were unsuccessful in both the bankruptcy court and the district court. Although we have no quarrel with much of what those courts did, we conclude that further proceedings are necessary, because it is unclear how much of the money could properly be traced to a constructive trust in favor of J& R.

I

Beginning in early January 2007, Mississippi Valley agreed to sell cattle to Swift Con-Agra (Swift). It planned to fulfill that agreement in part with cattle it had received from J& R and in part with cattle from other suppliers. Importantly, Mississippi Valley was merely the holder of J& R's cattle, rather than the purchaser or owner. Because the relationship between Swift and J& R had soured, Mississippi Valley chose not to inform Swift that some of the cattle it was delivering to Swift were actually J& R's. The unwitting Swift paid for these purchases with checks made out to Mississippi Valley. Mississippi Valley deposited the checks in its own general operating account, and then from time to time, it sent J& R checks representing the proceeds of the sales of the latter's cattle.

This arrangement worked well until Mississippi Valley stopped making timely remittances to J& R. As the debts accumulated, J& R sent Mississippi Valley increasingly frantic demands for payment. In one handwritten letter dated March 6, 2007, J& R proprietor Ron Lahr listed 14 head of cattle for which J& R had not yet been paid. " I still have not received my money," complained Lahr. " I think it has been long enough. I don't want to hear excuses.... I know you have all this money, I want it[.] Fed Ex or wire to me tomorrow. This is getting old, the lies and waiting for it. You are just using it." Lahr's pleas did not fall on deaf ears.

Page 302

Over the next month, Mississippi Valley sent seven checks to J& R totaling $862,747.31.

Less than 90 days later, on May 25, 2007, several creditors filed an involuntary petition for relief against Mississippi Valley under Chapter 7 of the Bankruptcy Code. Acting as Mississippi Valley's bankruptcy trustee, Stephen Balsley (the Trustee) sought to avoid the seven payments to J& R as preferential transfers. The parties agreed that the transfers met all the requirements of a preference, if the transferred funds constituted " an interest of the debtor in property." See 11 U.S.C. § 547(b). But J& R insisted that Mississippi Valley never had the requisite property interest in the funds.

J& R argued that Mississippi Valley held the cattle-sale proceeds for J& R's benefit--in effect, in trust. Because the proceeds were held in trust, J& R said, they were never part of Mississippi Valley's estate and therefore the payments did not satisfy the definition of an avoidable preference. The Trustee took the position that Mississippi Valley's estate did have an interest because the funds were commingled with Mississippi Valley's general operating account, rather than segregated into a separate account. This meant, the Trustee argued, that payments drawn from that account were indeed avoidable as preferences.

The bankruptcy court granted summary judgment in J& R's favor, and the district court affirmed. " Because the uncontested facts in this case show that Mississippi Valley only held the property as bailee for J& R," the district court concluded, " Mississippi Valley had no equitable or legal interest in the property." Therefore, the court determined, the payments were not a transfer of an interest of the debtor in property. The court did not analyze the propriety of imposing a constructive trust on the funds in J& R's favor, nor did it trace the payments to the proceeds derived from sales of J& R's cattle. The Trustee timely appealed the judgment to this court.

II

Like the district court, we review a bankruptcy court's factual findings for clear error and its legal conclusions de novo. In re Davis, 638 F.3d 549, 553 (7th Cir. 2011). The decision whether to grant summary judgment is a legal conclusion. I ...


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