In Re Lco Enterprises, Debtor. Lincoln Alvarado Patrician Associates, Inc. Lpc Alvarado Phase II v. Edward M. Walsh, Trustee

12 F.3d 938 62 USLW 2449 , 25 Bankr.Ct.Dec. 136 , Bankr. L. Rep. P 75,648 In re LCO ENTERPRISES, Debtor. Lincoln ALVARADO; Patrician Associates, Inc.; LPC Alvarado Phase II, Appellees, v. Edward M. WALSH, Trustee, Appellant. No. 92-15825. United States Court of Appeals, Ninth Circuit. Argued and Submitted Oct. 7, 1993. Decided Dec. 30, 1993. Melanie M. Darling, Goldberg, Stinnett & MacDonald, San Francisco, CA, for appellant. Barry Milgrom, Michael St. James, Rosenblum, Parish & Bacigalupi, San Francisco, CA, for appellees. Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Russell, Perris and Ashland, Bankruptcy Judges, Presiding. Before: TANG, TROTT and FERNANDEZ, Circuit Judges. FERNANDEZ, Circuit Judge: 1 This appeal concerns the mechanics of applying the "greater amount" test of 11 U.S.C. Sec. 547 (b)(5) to determine whether a prepetition payment to a landlord constitutes a preference. The question before us is whether the bankruptcy court must hypothesize whether a hypothetical chapter 7 trustee would assume a lease, or whether the court must base its analysis on the fact that the lease was actually assumed in the chapter 11 proceedings. We conclude that the…

. This appeal concerns the mechanics of applying the “greater amount” test of 11 U.S.C. § 547 (b)(5) to determine whether a prepetition payment to a landlord constitutes a preference. The question before us is whether the bankruptcy court must hypothesize whether a hypothetical chapter 7 trustee would assume a lease, or whether the court must base its analysis on the fact that the lease was actually assumed in the chapter 11 proceedings. We conclude that the hypothetical chapter 7 analysis required by § 547(b)(5) 1 must be based on the actual facts of the case and affirm the decision of the Bankruptcy Appellate Panel.

BACKGROUND FACTS

LCO Enterprises was formed in 1981 to provide merchandise warehousing and distribution services. LCO’s business flourished. Over the next seven years it expanded from a 25,000 square foot warehouse to a 500,000 square foot custom-designed facility. When LCO lost its largest customer, it was forced to scale back operations. LCO vacated its warehouse and leased space from Lincoln Alvarado and Patrician Associates, Inc. (collectively “Lincoln”) in late 1988 and early 1989. LCO executed a five-year lease with a monthly rent of approximately $25,000,…

concurring in part and dissenting in part:

It does seem unfair that the Trustee seeks to “have his leased property and his rent payments, too.” The majority is confident that LCO and Lincoln never intended this result, and I agree. If Lincoln insisted that the Plan of Reorganization contain a provision protecting the $92,007.46 in rent payments from preference attack, LCO and its creditors probably would have agreed to that protection. Unfortunately, the parties did not provide for the rent payments, and this •litigation ensued. The majority is willing to construe the Bankruptcy Code to ameliorate the oversight, I am not.

Let me begin by noting my agreement with the majority’s rejection of the implied preference immunity agreement. What enormous mischief can result from permitting such agreements not to be brought to the table in a chapter 11 setting. Chapter 11 requires full disclosure so that all parties can make an informed decision on the reorganization plan. I think this unsupportable conclusion led the Bankruptcy Appellate Panel astray, influencing their entire analysis.

I disagree, however, with the majority’s reliance on § 365 of the Bankruptcy Code to resolve this…