In re Grain Merchants of Indiana, Inc., 7259.

• Citation: 286 F. Supp. 597
• Decision Date: 08 July 1968
• Docket Number: No. 7259.,7259.
• Parties: In the Matter of GRAIN MERCHANTS OF INDIANA, INC., et al., Bankrupts. Mark L. FRANCE, Trustee, v. UNION BANK AND SAVINGS COMPANY, BELLEVUE, OHIO, Respondent.
• Court: U.S. District Court — Northern District of Indiana

286 F. Supp. 597

In the Matter of GRAIN MERCHANTS OF INDIANA, INC., et al., Bankrupts. Mark L. FRANCE, Trustee, v. UNION BANK AND SAVINGS COMPANY, BELLEVUE, OHIO, Respondent.

No. 7259.

United States District Court N. D. Indiana, Fort Wayne Division.

July 8, 1968.

Hoffman, Moppert & Solomon, Fort Wayne, Ind., for Grain Merchants.

George E. Fruechtenicht of Rothberg, Gallmeyer, Fruechtenicht & Logan, Fort Wayne, Ind., for the Trustee.

Paul W. Philips of Helmke, Philips & Beams, Fort Wayne, Ind., for respondent.

MEMORANDUM OF DECISION AND ORDER

ESCHBACH, District Judge.

This matter is before the court on a petition by the respondent, Union Bank and Savings Company, Bellevue, Ohio, for review of an order entered February 9, 1968 by the referee in bankruptcy requiring the bank to turn over to the trustee in bankruptcy, Mark L. France, the sum of $52,441.49. The referee in bankruptcy held that this amount represented preferences which were voidable by the trustee under the provisions of Section 60 of the Bankruptcy Act, 11 U. S.C. § 96. This court has jurisdiction under 28 U.S.C. § 1334. This petition for review of an order of a referee in bankruptcy is authorized by Section 39 of the Bankruptcy Act, 11 U.S.C. § 67. This court concludes that the order of the referee in bankruptcy entered February 9, 1968 must be set aside, and the matter must be remanded to the referee for further determinations.

The funds which the referee in bankruptcy has ordered the Union Bank and Savings Company, Bellevue, Ohio, (hereinafter referred to as "Union Bank") to turn over to the trustee of the bankrupt, Grain Merchants of Indiana, Inc., (hereinafter "Grain Merchants") represent collections upon accounts receivable of Grain Merchants which were created after September 20, 1966. These accounts receivable were transferred to Union Bank as security for a loan made by Union Bank to Grain Merchants on September 20, 1966 pursuant to a security agreement made between Union Bank and Grain Merchants in September of 1965. The bank's security interest in these accounts receivable was valid and perfected under Indiana law. However, the referee in bankruptcy held that the accounts receivable created after September 20, 1966 were transferred to the Union Bank when the individual accounts were created, and were therefore transferred "for or on account of an antecedent debt" within the meaning of Section 60 of the Bankruptcy Act, 11 U. S.C. § 96. Having found that the trustee had established the other elements of a voidable preference, the referee voided the transfer of these accounts and ordered the collections on account of these transfers turned over to the trustee. The question for determination in this petition for review of the referee's order is the correctness of the referee's holding that these accounts were transferred to the Union Bank, for purposes of Section 60 of the Bankruptcy Act, at the time when individual accounts receivable were created.

On September 17, 1965, Grain Merchants executed a security agreement with the Union Bank. By the terms of this security agreement, Union Bank was to have a security interest in all accounts receivable then belonging to Grain Merchants or thereafter received by or belonging to Grain Merchants. This security interest was to secure loans to be made by the Union Bank to Grain Merchants in amounts which were limited by the terms of the security agreement. At the same time, Grain Merchants also executed in favor of Union Bank a second security agreement which granted the bank a security interest in inventory. However, only the security agreement concerning accounts receivable is involved in this action. Financing statements relating to these security agreements were timely and appropriately filed.

On December 10, 1965, Grain Merchants executed a promissory note in the amount of $30,000.00, payable on demand, to the Union Bank. This note was specifically secured by warehouse receipts representing 35,000 bushels of corn. On December 27, 1965, Grain Merchants executed a second promissory note to the Union Bank, this one in the amount of $20,000.00. This note was secured by warehouse receipts representing 25,000 bushels of corn.

In addition to the two notes described above, Grain Merchants executed a series of promissory notes in favor of Union Bank which were secured in part by accounts receivable under the security agreement which had been executed September 17, 1965. Beginning no later than January of 1966, Grain Merchants executed a new promissory note in favor of Union Bank on the 20th day of each month. The note which had been executed the previous month was then canceled. Grain Merchants executed such a note on September 20, 1966 in the amount of $100,000.00 in favor of Union Bank. (The face amount of the note executed by Grain Merchants on September 20 was actually $111,100.00, but the bank unilaterally treated it as a note for $100,000.00, and it may be considered as a note in the latter amount for purposes of this action.) Upon receipt of the note executed September 20, 1966, the Union Bank canceled a note executed August 20, 1966 in the same amount. The referee held that cancellation of the August 20 note constituted consideration for the September 20 note, and the trustee has not questioned this holding. Thus the Union Bank may be considered as having extended credit to Grain Merchants in the amount of $100,000.00 on September 20, 1966.

On September 30, 1966, Grain Merchants ceased doing business. On October 3, 1966, the Union Bank took certain steps to apply assets then in the hands of Grain Merchants toward payment of the existing indebtedness of Grain Merchants to Union Bank. As of October 3, the balance on the two notes executed in December of 1965, together with interest then owing, totaled $51,659.52. In addition, the balance on the note executed September 20, 1966, including accrued interest, totaled $100,596.03.

Grain Merchants had on deposit in the Union Bank on October 3 the sum of $18,979.21. That day the bank paid four checks drawn against the account of Grain Merchants totaling $181.72. In addition, one check in the amount of $869.00 which Grain Merchants had deposited to its account was returned to the bank unpaid, and Union Bank accordingly reduced Grain Merchants' balance by $869.00. The net amount of Grain Merchants balance at Union Bank on October 3 was $17,928.49. Union Bank set this amount off against the indebtedness of Grain Merchants. This offset is permitted under Section 68 of the Bankruptcy Act, 11 U.S.C. § 108, and the trustee has not challenged it.

The Union Bank also seized corn which was covered by warehouse receipts issued to Union Bank to secure the two notes executed in December of 1965. The Union Bank sold this corn for $13,802.15. The trustee does not question Union Bank's right to proceeds from the sale of this corn.

In addition, on October 3 Grain Merchants deposited with the Union Bank the sum of $28,197.73, which represented collections on accounts receivable. The referee did not recognize this as a completed deposit, and did not permit the Union Bank to treat this amount as an offset under Section 68 of the Bankruptcy Act, 11 U.S.C. § 108. The Union Bank has not questioned this holding of the referee. The referee permitted the Union Bank to retain $14,622.20 out of the amount which Grain Merchants attempted to deposit on October 3. This amount represented collections on accounts receivable which arose on or before September 20, 1966, the last date on which Union Bank extended credit to Grain Merchants. The referee held that because these accounts receivable arose on or before September 20, the bank's lien on these accounts receivable did not attach on account of an antecedent debt, and the bank's lien was therefore not a preference as that term is defined in Section 60 of the Bankruptcy Act, 11 U. S.C. § 96.

However, out of the funds which Grain Merchants turned over to the Union Bank on October 3, the other $13,575.53 represented collections on accounts receivable which came into existence after September 20, 1966. The referee has ordered that these funds be returned to the trustee.

In addition to the collections from accounts receivable which Grain Merchants turned over to the Union Bank on October 3, Grain Merchants also turned over to Union Bank all its then outstanding, uncollected accounts receivable. The Union Bank then proceeded to collect these accounts and apply the proceeds against the remaining indebtedness of Grain Merchants. These collections totaled $99,443.70. Of this amount, $60.577.74 represented collections on accounts receivable which came into existence on or before September 20, 1966. The referee permitted Union Bank to retain these funds. The remaining $38,865.96 represented collections on accounts receivable which arose after September 20, 1966. The referee has ordered that these funds be turned over to the trustee.

For clarity, these financial transactions should be summarized. Grain Merchants' total indebtedness to Union Bank was $152,255.55, of which $100,596.03 was created on September 20, 1966, and the remainder was created in December of 1965. Against this amount, Union Bank has collected from all sources the sum of $159,372.07. Of these collections, $7,116.52 represents an excess over the total indebtedness of Grain Merchants to Union Bank, and this amount is now in escrow. From sources other than accounts receivable, Union Bank collected $31,730.64. From accounts receivable coming into existence on or before September 20, 1966, Union Bank collected $75,199.94. From accounts receivable which came into existence after September 20, 1966, Union Bank collected $52,441.49. This last sum is the amount which the referee has ordered Union Bank to turn over to the trustee.

Grain Merchants filed its petition in bankruptcy on October 27, 1966. It was insolvent, as that term is defined in the Bankruptcy Act, at...