Ryan v. Andrews

1 Debtor filed her chapter 7 petition on January 30, 2007.
Main Case, doc 1. 	Therefore the Trustee is subject to the
defense of §547(c)(9) in the amount of $5,000. 	For cases
commenced on or after 1 April 07 the amount was increased to
$5475. 	See 11 U.S.C. § 104(b).
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
BEAUMONT H. CHRISMER,
Debtor. 	No. 7-07-10201 SL
KIERAN F. RYAN,
Plaintiff,
v. 	Adv. No. 07-1160 S
JOHN ANDREWS,
d/b/a Native Jackets, Etc.
Defendant.
MEMORANDUM OPINION ON SECTION 547(c)(9) DEFENSE
This matter came before the Court for trial on the merits of
Trustee’s preference complaint against John Andrews d/b/a Native
Jackets, Etc. 	The Trustee/Plaintiff is self-represented.
Defendant appeared through his attorney Gary B. Ottinger. 	This
is a core proceeding. 	28 U.S.C. § 157(b)(2)(F).
Because the Court finds below that Defendant has a complete
defense under 11 U.S.C. § 547(c)(9), it does not need to address
the elements of preferential transfer or any other defenses.
Section 547(c)(9) states:
(c) The trustee may not avoid under this section a
transfer-...
(9) if, in a case filed by a debtor whose debts are not
primarily consumer debts, the aggregate value of all
property that constitutes or is affected by such
transfer is less than $5,000. 1
FINDINGS OF FACT
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The facts are not generally disputed. 	Defendant sold
merchandise to the Debtor and was not paid. 	Defendant does not
claim that he has a security interest and introduced no evidence
of perfection of any interest at trial, so the Court assumes that
this was an unsecured transaction. 	During the preference period
Viola Montoya, a co-owner of Native Jackets, Etc., arrived at
Debtor’s store claiming she had legal papers that allowed her the
right to retrieve the merchandise Defendant sold to Debtor and,
if there was not enough left to pay the balance in full, to take
other merchandise such that Native Jackets, Etc. would be paid in
full. 	Debtor’s employee acquiesced in Ms. Montoya’s demands and
took an inventory while the two of them loaded the goods into Ms.
Montoya’s car. 	All parties agree that Exhibit 1 is an accurate
list of the goods taken. 	All parties agree that the retail value
of the goods taken was $8,404.95. 	Debtor testified that her cost
was one-half retail, suggesting that she paid approximately
$4,202 for the goods taken.
Plaintiff did not put on evidence of the liquidation value.
Defendant testified that, in his experience in this industry, the
liquidation value of merchandise is one-third to one-half the
wholesale value. 	The Court finds that the liquidation value is
less than or equal to the cost or wholesale value.
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2 Since wholesale value of the goods is $4,202, and
therefore triggers the defense of §549(c)(9), it is not necessary
for the Court to decide whether the lower liquidation value would
be appropriate.
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Debtor’s petition indicated that her debts were primarily
business debts. 	She testified that this was true, and the
Trustee conceded this was true.
DISCUSSION
Plaintiff urges the Court to value the transfer at retail.
He claims that this is the fair market value of the goods, and
that Defendant will be able to resell the merchandise in its own
store in Santa Fe for the retail value. 	Defendant, naturally,
urges the Court to use the wholesale or cost value, or even the
liquidation value.
The Court finds that, at a maximum, the goods should be
valued at wholesale value rather than retail value, and that
value is $4,202. 2 	This was the price that the parties negotiated
with each other at arms length when Debtor first ordered the
goods from Defendant. 	There is no evidence that the value of the
goods changed significantly in the time between when they were
ordered and when they were repossessed by Ms. Martinez for
Defendant. 	While it might be the case that, in Defendant’s store
in Santa Fe, the goods might sell at retail for as much as
$8,405, as the Trustee argues, that possibility is only that, a
possibility. 	Indeed, the same possibility existed for Debtor’s
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3 One of the issues in Classic Drywall was whether, pursuant
to §550, return of the goods (drywall) or a monetary award should
have been ordered by the trial court. 	In this case, no one
suggests the return of the goods to the Trustee.
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store in Cloudcroft; presumably the goods could have sold for
their retail value there as well. 	To realize that higher value
at either location would have required having in place the entire
marketing or selling apparatus that a retail operation entails,
including a pleasant location, sales staff, perhaps advertising,
adequate time for enough customers to consider the merchandise,
etc. 	On the other hand, the wholesale cost is what the goods
could be and were transferred for “as is”.
This is consistent with the notion that at least one purpose
of the preference section of the Code is to restore to the estate
the value it had prior to the transfer at issue. 	See In re
Classic Drywall, Inc., 127 B.R. 874, 876 (D. Kans. 1991)
(applying §550(a)). 3 	What Debtor had on the date of the transfer
was the clothing for sale, for which she had promised to pay
$4,202; she had not realized the higher sale price.
Further, the mere fact that Defendant may be able to obtain
a higher price for the goods by means of his location, his
marketing expertise, his additional inventory needed to realize
the maximum sale prices for the goods, etc., does not mean that
that potential extra value should accrue to the estate. 	The case
of Active Wear, Inc. v. Parkdale Mills, Inc. (In re Active Wear,
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Inc.), 331 B.R. 669 (W.D. Va. 2005) involved a similar fact
pattern. 	Active Wear’s primary business was turning yarn into
cloth. 	Id. at 670. 	Shortly before an involuntary bankruptcy was
filed against Active Wear it returned a substantial amount of
yarn to Parkdale Mills. 	Id. 	Active Wear consented to Title 11
relief and converted the case to chapter 11 and attempted to
avoid the transfer to Parkdale Mills as preferential. 	Id. 	The
Bankruptcy Court found that Parkdale Mills had to pay the
liquidation value of the returned yarn to the estate. 	Id.
Active Wear appealed to the District Court, claiming that the
yarn’s fair market price was that which Parkdale Mills could
obtain reselling the yarn. 	Id. at 670-71. 	Relying on Virginia
National Bank v. Woodson (In re Decker), 329 F.2d 836, 840 (4 th
Cir. 1964), a Bankruptcy Act case, the District Court affirmed on
appeal. 	Id. at 671.
In Decker, the Fourth Circuit held that a transfer made
before the debtor files for bankruptcy may be avoided
if it depletes the estate of the bankrupt.
Furthermore, the Decker opinion held that the value
which must be returned to the debtor is the amount that
was depleted from the bankrupt's estate. 	On this
point, the Decker opinion stated:
The fact that there was a preference which
involved a depletion of the bankrupt's estate to
some undisclosed extent does not necessarily
require that the preferred creditor shall return
all that he has received unless the amount of
depletion is at least equal to the amount so
received. 	The test is not what the creditor
receives but what the bankrupt's estate has lost.
It is the diminution of the bankrupt's estate, not
the unequal payment to creditors, which is the
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4 The Court questions this last statement about the unequal
payment of creditors not being an evil sought to be remedied by
the statute. 	In this context, however, it does not make a
difference.
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evil sought to be remedied by the avoidance of a
preferential transfer, 329 F.2d at 840. 4
Active Wear, 331 B.R. at 671.
Active Wear and Decker both seem to be good law because they
make economic sense. 	In neither case had the Debtor realized the
full value of the returned merchandise. 	It would have been
unfair to reward the estates at the expense of the debtors, who
in each case had to retake the merchandise and exert efforts to
resell at the higher price in order to realize that higher value.
CONCLUSIONS OF LAW
1) 	Debtor is a debtor whose debts are not primarily consumer
debts.
2) 	The value of the property returned was, at most, $4,202.
3) 	Plaintiff cannot recover a preference in this case unless it
exceeds $5,000. 	11 U.S.C. § 547(c)(9).
4) 	The Court will enter judgment for Defendant.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	September 23, 2008
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copies to:
Kieran F Ryan
Ryan Law Office
PO Box 26
Las Cruces, NM 88004-0026
Gary B Ottinger
PO Box 1782
Albuquerque, NM 87103-1782
George E. Adelo
430 Alta Vista
Santa Fe, NM 87501
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