UNITED STATES BANKRUPTCY COURT
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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.
NORTHERN DISTRICT OF CALIFORNIA
MTC TELEMANAGEMENT CORP., et al., No. 97-12893
JOHN H. BROWNELL, Trustee,
v. A.P. No. 98-1110
GARY R. ANDERSON,
Memorandum of Decision
The debtors in these cases were affiliated entities in the telecommunications business. They
purchased transmission line capacity from telephone service providers and resold that capacity to
business and consumer customers.
The debtors experienced financial difficulties during 1997 and unsuccessfully attempted a
workout with major creditors. When this failed, the debtors' principals bailed out. They transferred
the business assets to the major secured creditor and abandoned the debtors after paying themselves
large amounts in severance benefits.
The remaining creditors filed involuntary petitions against the debtors. Since the principals had
bailed and there was no one left to look after the debtors' estates, the court consolidated the cases and
appointed John H. Brownell as trustee. In this adversary proceeding, Brownell mainly seeks to recover
as a preference $149,000.00 paid to defendant Gary Anderson, who was the debtor's Chief Financial
Anderson has moved the court for summary judgment, relying on Matter of Southmark Corp.
62 F.3d 104 (5th
Cir.1995). The court has reviewed this case carefully, and finds itself in the position
of having to follow a case it believes is wrong. The court in Southmark
found that if severance pay is
tendered when employment is terminated, it is "simultaneous" and therefore not on account of an
antecedent debt. Therefore, the element of a preference specified in § 547(b)(2) of the Bankruptcy
Code is not present.
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
, 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
; 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.
The trustee has raised an issue of fact as to whether there was a binding obligation to pay
severance pay, which precludes summary judgment at this time. However, the remainder of the case
shall be conducted in conformity with this memorandum and it shall be deemed without controversy
that the payment to Anderson is not recoverable as a preference. Counsel for Anderson may submit an
appropriate form of order.
Dated: December 30, 1998 ____________________________
United States Bankruptcy