Appeal from the United States District Court for the Central District of California. D.C. No. CV-90-3005-AWT. A. Wallace Tashima, District Judge, Presiding.
Before: Melvin Brunetti, David R. Thompson, and Ferdinand F. Fernandez, Circuit Judges. Opinion by Judge Brunetti.
In Bankruptcy Court, the trustee for Comark, a limited partnership, sought to recover the value of an alleged preferential transfer to GreatAmerican Federal Savings & Loan Association. The transfer occurred when Comark returned $9.25 million worth of securities to GreatAmerican that were "additional margin" in a securities transaction that the parties cancelled. On cross motions for summary judgment, the Bankruptcy Court ruled that while the transfer was a preferential transfer it was not avoidable because the return of the securities was either a "margin payment" or a "settlement payment." The district court affirmed.
This appeal arises from an adversary proceeding between the trustee ("Comark") for the debtor Comark and the receiver ("GreatAmerican") for the GreatAmerican Federal Savings & Loan Corporation. Although the transactions involved in this appeal are complex, the facts can be sorted out relatively easily.
Comark was involved in a sophisticated business of trading in government securities, known as "Ginnie Maes" ("GNMAs"). Each GNMA represents an interest in a pool of home mortgages. Comark entered into repurchase agreements ("Repos") and reverse repurchase agreements ("Reverse Repos"). In a Repo arrangement, the dealer sells specified securities to a purchaser, but also agrees to repurchase the securities later at the original price, plus an agreed upon additional amount usually representing interest on the original purchase price. A Reverse Repo basically is the reverse: the dealer buys securities and agrees to resell the securities to the seller in the future.*fn1 Reverse Repos can function as a loan. The seller receives cash for the securities, but must repurchase the securities in the future at the same price. Thus, the securities "sold" to the dealer can be viewed as being collateral for a loan.
Comark engaged in "matched book" transactions. Comark would sell Repos and then buy the equivalent in Reverse Repos, and profit by getting a greater rate of return on the securities it bought than it paid for the securities it sold.
Early in 1982 the parties engaged in the first of the transactions at issue in this appeal. Comark entered into six Reverse Repo agreements with GreatAmerican. Comark agreed to buy GNMAs, while GreatAmerican agreed to repurchase these GNMAs in December of 1982, at the same price, plus an additional interest payment. For each of the six Reverse Repos, GreatAmerican also delivered additional GNMAs to Comark ("Additional GNMAs"), beyond the GNMAs Comark actually purchased. As Comark itself notes, the Additional GNMAs "were intended to provide Comark additional margin for the purchase price." Shortly after the Comark-GreatAmerican Reverse Repo agreements, Comark entered into six "matching" Repo agreements with other firms.
The Additional GNMAs represented excess margin beyond what GreatAmerican was obligated to provide. Apparently, GreatAmerican's operational plans called for it to provide greater than required margin, to protect against additional margin calls in the event that the market value of the GNMAs declined significantly. Comark's book entries denoted the transferred securities as "Additional Securities Required to Meet 65% Loan Ratio." The Additional GNMAs had a market value of $9,259,208 when they were returned to GreatAmerican.
In the spring of 1982, Comark began to experience financial difficulties. It decided to withdraw from the securities market. On June 23, 1982, Comark, GreatAmerican, and the firms that "matched" the Comark-GreatAmerican Reverse Repos entered into an agreement. Comark withdrew as an intermediary. GreatAmerican and the firms on the Repo side contracted to complete the repurchase agreements directly with each other. GreatAmerican released Comark's obligation to resell the securities according to the Reverse Repo agreements and the other firms released Comark's obligation to repurchase securities pursuant to the Repo agreements. Comark gave up its potential for profit.
That left the Additional GNMAs, which were in Comark's possession. These were returned to GreatAmerican June 18 and 22, and July 7 and 8.*fn2 Only the Additional GNMAs are involved in this action.
On September 1, 1982, Comark was forced into Chapter 7 bankruptcy. The trustee sought to recover the value of the Additional GNMAs as an avoidable preferential transfer. In response to cross motions for summary judgment, the Bankruptcy Court found that Comark had an interest in the Additional GNMAs; that GreatAmerican was a creditor; Comark was insolvent when it transferred the Additional GNMAs back to GreatAmerican; and that the transfer was within ninety days of the bankruptcy filing. Thus, the court held that the return of the Additional GNMAs was a preferential transfer. However, the Bankruptcy Court determined that GreatAmerican was protected from having the transfer avoided, because the transfer ...