Memorandum of Decision Re: Severance Pay as Preference

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
Judge's Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re MTC TELEMANAGEMENT CORP., et al.,                                       No. 97-12893      Debtor(s). ______________________________________/ JOHN H. BROWNELL, Trustee,      Plaintiff(s),    v.                                                                                                      A.P. No. 98-1108 EVAN A. KRAUS,      Defendant(s). _______________________________________/
Memorandum of Decision
     When the insiders of the debtor realized that the debtor was financially doomed, they abandoned its assets to the principal secured creditor after first paying themselves large amounts in severance pay. The unpaid creditors commenced involuntary bankruptcy proceedings, and a trustee was appointed to represent the estate. In this adversary proceeding, the trustee seeks to recover over $200,000.00 paid to defendant Evan Kraus, the debtor's former Vice President and General Counsel, just before the insiders abandoned ship.      Kraus' defense is based on a Catch-22. He argues that the severance payment is not, under law, a payment on an antecedent debt and therefore cannot be a preference. Matter of Southmark Corp., 62 F.3d 104 (5th Cir. 1995). At the same time, he argues that the payment was on account of an antecedent debt (or at least a "present" debt) and therefore not a fraudulent transfer.      Whether one says that the debtor's obligation to pay severance pay arose when the employment contract was signed or when the employee was actually terminated, the payment was clearly made on account of an antecedent debt. Congress intended § 547(c)(1) to cover payments which are substantially contemporaneous; such payments are not avoidable if the creditor gave "new value." This term requires a dollar-for-dollar exchange, so that the estate is not diminished. In re Jet Florida Systems, Inc., 861 F.2d 1555, 1559 (11th Cir. 1988). By calling the severance pay "simultaneous" and therefore not on account of an antecedent debt, the court in Southmark allowed a creditor to have the benefit of the substantially contemporaneous defense without requiring the creditor to show new value.      Application of Southmark achieves a highly inequitable result in cases like this one, where the transferees are insiders. When insiders decide that the debtor's financial ship is sinking, they should be taking steps to insure that whatever assets are available are distributed fairly and equitably among all creditors. Equity should not permit them to appropriate whatever assets are available and abandon ship, leaving the other creditors to their fate like the hapless pilgrims in Joseph Conrad's Lord Jim.      Nonetheless, the court understands that as an inferior court it is not free to disregard Southmark; if a split among the circuits is to be created, it should be at a higher level. Accordingly, the court will in further proceedings follow that case, but will grant appropriate stays so that its rulings can be reviewed by courts with the power to dissent from the Fifth Circuit's ruling.      However, the court is not willing to complete the Catch-22 by holding that a payment can be both on account of an antecedent debt for fraudulent conveyance purposes and not on account of an antecedent debt for preference purposes. The case will proceed to trial on fraudulent conveyance grounds. Kraus will have to explain why he should not be estopped from arguing that the payment was on account of an antecedent debt, given his reliance on Southmark.      In reviewing the file, the court notes that both sides have misfiled in it pleadings belonging in other cases. The court suggests that the parties make an effort to correct their mistakes, as they will make creation of a proper record on appeal very difficult if not put right.      Counsel for Kraus shall submit an appropriate form of order to the effect that he did not receive a preference. All other issues shall be decided at time of trial.
Dated: January 18, 1999                                                                              ____________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      United States Bankruptcy