Bankruptcy for Tops Applicance City, Inc. v. Congressional Financial Corporation

Donald Biase, trustee in bankruptcy
of Tops Appliance City, Inc., brought suit
*The Hon. Cynthia H. Hall, Circuit
Judge for the United States Court of
Appeals for the Ninth Circuit, sitting by
designation.

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against Congress Financial Corporation to
recover $10.5 million dollars in payments
from Tops to Congress. The Bankruptcy
Court granted summary judgment in favor
of Congress, dismissing the action. The
District Court affirmed. On this appeal to
us, we are asked to decide two issues: (1)
whether the transfer between Tops and
Congress was a transfer of Tops' interest
in leases, and thus of an interest in real
property, subject to the New Jersey
Recording Statute, or a transfer of the
proceeds of the sales of the leases, and
thus secured by the filing of a UCC-1
Financing Statement; and (2) whether the
transfer from Tops to Congress occurred
within 90 days of the filing of the
bankruptcy petition, making it avoidable
by the trustee. For the reasons stated by
the Bankruptcy Court, we conclude that
the transfer was of proceeds and not of an
interest in real property. Furthermore,
because the transfer of Tops' interest in
these proceeds occurred more than ninety
days before the bankruptcy petition was
filed, the transfer is not a voidable
preference under § 547(b) of the
Bankruptcy Code.

I. Factual Background and Procedural
History

Congress is engaged in the business
of commercial finance and asset-based
lending. On October 31, 1996, Congress
and Tops, entered into a Loan Security
Agreement (LSA) whereby Congress
agreed to provide Tops with financing for
its business. Section 5.1 of the LSA
granted Congress a security interest in "all
present and future contract rights [and]
general intangibles (including but not
limited to . . . existing and future leasehold
interests in equipment, real estate, and
fixtures)." Additionally, § 9.7 of the LSA
required Congress's assent before Tops
made any substantial modification to its
business plan. More specifically, §
9.7(b)(iii) of the LSA provided that, if
Tops sold any of its assets, "any and all net
proceeds payable or delivered to [Tops] . .
. shall be paid or delivered [to Congress]."
Congress filled a UCC-1 Financing
Statement in New York and New Jersey to
perfect this security interest.

In the fall of 1999, Tops decided to
stop selling so-called "brown goods," i.e.,
home electronics, and to focus entirely on
"white goods," i.e., appliances such as dish
washers and refrigerators. Pursuant to this
plan, Tops sought to sell to Best Buy
Stores, L.P., Tops' leases for three of its
home electronics retail stores. Tops
entered into a Sale-Purchase Agreement
(SPA) with Best Buy. The purchase price
for the leases was $10 million, plus
$500,000 which was added later when the
landlord of one of the stores agreed to
extend its lease for Best Buy. According
to § 2 of the SPA, Best Buy would pay $1
million immediately to the Chicago Title
Insurance Company, acting as escrow
agent; Best Buy would pay the remainder
into escrow at closing. At the October 29
closing, Tops was to convey the three
leases to Best Buy and hand over keys for
each of the locations. Tops and Best Buy
also agreed to enter into a license
agreement, which would allow Tops to
remain in the leased premises until Tops
had liquidated its inventory, but not later
than December 31, 1999. The SPA

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provided for 20 percent of the purchase
price to be paid to Tops at closing and the
remainder to be paid from escrow when
Tops delivered possession of all leased
premises to Best Buy.

Because the sale of the leases
would involve a material change in its
strategic business plan, Tops notified
Congress of its intent and asked for
Congress's consent in accordance with the
LSA. On October 29, 1999, Tops and
Congress executed both Amendment 6 to
the LSA and a contract, entitled the
Collateral Assignment of Acquisition
Agreement (CAAA), by which Congress
gave its approval for the sale of the leases
provided that the proceeds, received from
Best Buy, would immediately be
transferred to Congress. $2.1 million of
the escrowed amount would be paid to
Congress at closing to reduce Tops'
outstanding loan balance, subject to
relending. The remaining $8.4 million
would be paid from escrow by December
31, 1999, when Tops had vacated the three
stores. Amendment 6 also contained a
reduction by up to $2 million of the total
amount of transaction proceeds available
for relending to Tops. In addition,
Amendment 6 continued all Congress's
security interests under the LSA. These
terms were carried out as agreed, with the
exception that the initial $2.1 million
payment, due at closing, was actually paid
three days later on November 3. The
remainder of the escrowed proceeds were
paid to Congress on December 7, 1999,
when Tops vacated the stores.

On February 2, 2000, Tops filed a
Chapter 11 petition in bankruptcy. This
was converted to Chapter 7 on April 16.

The appellant, Donald Biase, was
appointed Chapter 7 Trustee. He filed a
complaint on June 26, 2000, seeking to
avoid the $10.5 million that had been paid
to Congress. Cross motions for summary
judgment were filed. On May 1, 2002, the
Bankruptcy Court granted summary
judgment in favor of Congress, finding
that the payment of the $10.5 million
proceeds to Congress was pursuant to a
perfected assignment of proceeds of the
sale of leaseholds and that transfer of the
proceeds dated from October 29, 1999,
when Congress obtained the right to
receive them. Biase appealed this decision
to the District Court which affirmed the
judgment of the Bankruptcy Court on
October 30, 2002. Biase appealed to this
Court.

II. Jurisdiction and Standards of
Review

The District Court had jurisdiction
over this matter pursuant to 28 U.S.C.
§1334(b) and 28 U.S.C. §157(a). We have
jurisdiction to consider Biase's appeal of
the District Court's final order under 28
U.S.C. §1291.

"Summary judgment is appropriate
‘if the pleadings, depositions, answers to
interrogatories, and admissions on file,
together with the affidavits, if any, show
that there is no genuine issue as to any
material fact and that the moving party is
entitled to judgment as a matter of law.'"
Chisolm v. McManimon, 275 F.3d 315,
321 (3d Cir. 2001) (quoting Fed. R. Civ. P.
56(c)). In reviewing a summary judgment
decision of the Bankruptcy Court, we
apply, as did the District Court, a plenary

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standard to legal issues. See In re
Siciliano, 13 F.3d 748, 750 (3d Cir. 1994);
Saldana v. Kmart Corp., 260 F.3d 228, 231
(3d Cir. 2001).

III. Discussion

A. Perfection of the Proceeds from
Tops' Leases

This case turns upon the nature of
the transactions both between Congress
and Tops and between Tops and Best Buy.
Biase argues that what was transferred to
Congress was an interest in the leases and
their rents, and not the proceeds of the sale
of the leases by Tops to Best Buy. An
interest in a lease is an interest in real
property and would have to be perfected
through the New Jersey Recording Statute.
N.J. Stat. Ann. § 46:16-1 (West 2003). To
make his point that this transaction was the
transfer of an interest in real property,
Biase highlights the fact that Tops did not
vacate the stores until December 1999,
remaining in the stores under a license
agreement with Best Buy. However,
despite Biase's attempts to characterize the
transaction between Congress and Tops as
a real estate transaction, the evidence of
record demonstrates that the leases were
completely transferred by Tops to Best
Buy as of the date of the closing on
October 29, 1999, and that Congress was
granted an interest only in the proceeds
from that transfer.

Congress never had any property
right in the leases themselves because, as
of October 29, 1999, they were wholly
owned by Best Buy. The SPA between
Tops and Best Buy clearly stated that Tops
was to convey "all of Seller's right, title
and interest in . . . the Leases," including
easements, fixtures, and all land rights.
This was an absolute assignment of Tops'
property rights. The transfer was not
incomplete just because Tops had another
duty to perform under the SPA, i.e.,
vacating the premises at each leased
location by December 31. See First Fid.
Bank, N.A. v. Jason Realty, L.P. (In re
Jason Realty, L.P.), 59 F.3d 423, 428 (3d
Cir. 1995) ("The fact that a right is
conditional on the performance of a return
promise or is otherwise conditional does
not prevent its assignment before the
condition occurs."). On the October 29
closing date, all keys, blue prints, and
financial documents were turned over to
Best Buy. Tops remained in the stores to
liquidate its inventory, but it did so as a
licensee with limited rights under §12(l) of
the SPA: "This Agreement is an
exclusive, revocable license . . . and shall
not be deemed as . . . conveying any
interest in the Licensed Area (other than as
set forth herein)." Tops did not hold any
remaining property interest in the leases,
and thus could not have granted Congress
what it did not have itself.

While Biase is correct in pointing
out that courts will not be restricted by the
exact words used by the parties in
characterizing a transaction, see, e.g.,
Major's Furniture Mart, Inc. v. Castle
Credit Corp., 602 F.2d 538, 545 (3d Cir.
1979), a court should start with the words
themselves and begin with the plain
meaning of the document. See Watt v.
Alaska, 451 U.S. 259, 266 n.9 (1981)
(noting that while the plain-meaning rule
is not absolute, "the words used, even in
their literal sense, are the primary, and

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ordinarily most reliable, source of
interpreting the measure of any writing:
be it a statute, a contract, or anything
else") (quoting Cabell v. Markham, 148
F.2d 737, 739 (2d Cir.) (L. Hand, J.), aff'd,
326 U.S. 404 (1945)). The plain words
both in the SPA and in the CAAA are
unambiguous. There is nothing in the
record to indicate that Tops conveyed to
Congress anything more than the proceeds
of the transfer of the leases to Best Buy.
There is no doubt that, as of the date of the
closing, Best Buy had sole control of the
three leases in question. Thus, Tops could
grant Congress only what remained: a
simple contract right to the proceeds from
the sale of those leases.

As both parties acknowledge, the
acquisition of such a right to proceeds falls
under Article 9 of the Uniform
Commercial Code. See N.J. Stat. Ann.
12A:9-109 (West 2003) (explaining that
the scope of Article 9 extends to all
accounts); N.J. Stat. Ann. 12A:9-102(2)
(West 2003) (defining "account" in part as
"a right to payment of a monetary
obligation, whether or not earned by
performance [] for property that has been
or is to be sold, leased, licensed, assigned,
or otherwise disposed of"). This secured
interest in proceeds was properly perfected
when Congress filed their UCC-1
Financing Statement.

Contrary to Biase's contention, this
result does nothing to detract from the
effectiveness of the New Jersey Recording
Statute. The purpose of the New Jersey
Recording Statute is to "protect subsequent
judgment creditors, bona fide purchasers,
and bona fide mortgagees against the
assertion of prior claims to the land based
upon any recordable but unrecorded
instrument." Cox v. RKA Corp, 164 N.J.
487 (2000); see also Cooper River Plaza E,
LLC v. Briad Group, 359 N.J. Super. 518,
527-28 (N.J. Super. Ct. App. Div. 2003)
(noting that the central public policy under
the New Jersey Recording Act is so that a
potential buyer of real property "should be
able to discover and evaluate all of the . .
. restrictions on the property from a review
of the public record") (citations omitted).
The fact that Congress had a right to
proceeds from the leases did nothing to tie
up the leased real property in any manner.
Congress had no interest in the underlying
real property itself and could not have
made any claims on the real property
against a subsequent purchaser – whether
or not Tops made the required payments to
Congress under the CAAA.

B. Avoidability of the Transfer of the
Proceeds

Having established that Congress's
interest was in proceeds, which fall under
Article 9 and are thus perfected with the
filing of the UCC-1 Financing Statement,
we turn to Biase's second argument that
the transfer of money from Tops to
Congress did not occur on October 29,
1999, the date of the closing, but actually
occurred on December 7, 1999, when Tops
had vacated all three stores pursuant to the
contract with Best Buy. The bankruptcy
petition was filed on February 2, 2000. If
the transfer had occurred on December 7,
1999, the transfer would fall within the 90
day preference period of 11 U.S.C. §

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547 ( b ) , 1 and thus would be avoidable by the trustee.

Biase urges us to adopt the
reasoning used in wage assignment cases.
Under the line of cases which Biase cites,
courts have held that employees do not
"receive" their money when a garnishment
order takes effect. The employees only
receive their money when they have
earned it by working the corresponding
hours. See, e.g., Morehead v. State Farm
Mut. Auto. Ins. Co. (In re Morehead), 249
F.3d 445, 449 (6th Cir. 2001); Freedom
Group, Inc. v. Lapham-Hickey Steel Corp.
(In re Freedom Group), 50 F.3d 408, 412
(7th Cir. 1995); Melon Produce, Inc. v.
Karger (In re Melon Produce, Inc.), 976
F.2d 71, 76 (1st Cir. 1992); In re White,
258 B.R. 129 (Bankr. D.N.J. 2001); In re
1 Section 547(b) provides:

Except as provided
in subsection (c) of this
section, the trustee may
avoid any transfer of an
interest of the debtor in
property –

(1) to or for the benefit of a
creditor;

(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;
or

(B) between
ninety days
and one year
before the
date of the
filing of the
petition, if
such creditor
at the time of
such transfer
was an
insider; 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;

(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.

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Mays, 256 B.R. 555 (Bankr. D.N.J. 2000).
Thus, Biase analogizes that Congress, like
a wage garnisher, did not "receive" its
money on the closing date when its
security interest attached, but only when
Tops had vacated its stores and "earned it"
under the SPA with Best Buy.

In wage garnishment cases,
however, a transfer of future wages could
not take place at the time the garnishment
is ordered because the employee can
transfer only that in which he has some
right. Until the employee has performed
the work to earn the wages and has a right
to the money, there is no transfer within
the meaning of § 547(e). See Morehead,
249 F.3d at 449 ("It is illogical to find that
a debtor may acquire rights in future
wages when they have not yet been
earned."); Melon Produce, Inc., 976 F.2d
at 76 ("[A] transfer is not made until the
debtor has acquired rights in the property
transferred.") (citation omitted). Biase is
correct that under the SPA, Tops had not
completed all of its duties under the
contract and was still required to vacate
the three stores by the end of December.
However, unlike the wage garnishment
cases, vacating the three stores was only a
condition attached to a much larger
transaction between Tops and Best Buy.
Unlike a wage case, where an employee
will not get paid if he does not work the
corresponding hours, Best Buy's remedy,
if Tops had not vacated the stores by
December 31, would have been the
eviction of Tops from the premises and a
suit for damages. Once Tops had sold its
leases and turned over the keys, blue
prints, and financial documents to Best
Buy, Tops had, for all intents and
purposes, "earned its money" regardless of
the fact that, under the SPA, it still had the
duty to vacate.

This conclusion regarding the
effective date of the transfer of proceeds is
supported by New Jersey law. As the U.S.
Supreme Court noted in Barnhill v.
Johnson, 503 U.S. 393 (1992), when a
transfer is complete and what constitutes a
transfer is a matter of federal law,2 but
defining the specific interest in property is
a "creature[] of state law." Id. at 398.
Congress ‘s UCC-1 Financing Statement
applied to "all present and future contract
rights." Thus, pursuant to N.J. Stat. Ann.
12A:9-201(a) ("[A] security agreement is
effective according to its terms between
the parties, against purchasers of the
collateral, and against creditors"); and N.J.
Stat. Ann. 12A:9-204(a) ("[A] security
agreement may create or provide for a
security interest in after-acquired
2It should be noted that there is no
doubt that the term transfer includes the
granting of a security interest. See 11
U.S.C. §101(54) (West 2003) (defining
transfer broadly as "every mode, direct or
indirect, absolute or conditional,
voluntary or involuntary, of disposing of
or parting with property or with an
interest in property"); see also, Vogel v.
Russell Transfer, Inc., 852 F.2d 797, 798
(4th Cir. 1988) ("The grant of a security
interest is a transfer within the definition
of [the preference avoidance statute] and
the trustee may avoid it if it is not
perfected in time.")

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collateral."), Congress properly perfected
its rights to proceeds and had an interest
superior to that of any subsequent creditor.

The Bankruptcy Court properly
relied on In re Long Chevrolet, Inc., 79
B.R. 759 (N.D. Ill. 1987), which
concerned the refund of an excess
contribution to a pension plan. Even
though Long Chevrolet had to wait for the
Pension Benefit Guaranty Corporation to
approve the allocation and distribution of
funds upon the termination of the plan, the
court found that there was a transfer at the
time Long Chevrolet first granted the
security interest in the refund. As
explained by the District Court in that
case, just because Long "had to wait for
those funds to be distributed does not
mean it had no right to that property prior
to that time." Long Chevrolet, 79 B.R. at
765. See also In re Computer Eng'g
Assocs., 337 F.3d 38, 45-47 (1st Cir.
2003) (holding that the transfer of all
rights, interests, and control in property
assigned was an effective assignment
occurring at the time the assignment was
perfected, not later when proceeds paid).

As § 547(e)(1)(B) of the Bankruptcy Code
provides: "A transfer of a fixture or
property other than real property is
perfected when a creditor on a simple
contract cannot acquire a judicial lien that
is superior to the interest of the
transferee." 11 U.S.C. § 547(e)(1)(B)
(West 2003). We therefore find that the
transfer of the proceeds from the sale of
the leases occurred on the date of the
closing, on October 29, 1999, and
therefore fell outside the preference
period.

Finally, the fact that Best Buy paid
the proceeds into an escrow account does
not affect our conclusion above. The right
to the funds paid into escrow was
determined at the time of the closing, both
through the LSA and the CAAA. There
was no further designation of a right to the
funds which was necessary to occur to
trigger their payment. The trigger of
payment was a matter of timing, not a
matter of a further determination of
interests.