297 F.2d 392 (5th Cir. 1961), 18817, Mayo v. Pioneer Bank & Trust Co.

Docket Nº:18817.
Citation:297 F.2d 392
Party Name:Robert K. MAYO et al., as Trustees in Bankruptcy of Twin City Construction Company, Inc., Bankrupt, Appellants. v. PIONEER BANK & TRUST COMPANY, Appellee.
Case Date:December 07, 1961
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 392

297 F.2d 392 (5th Cir. 1961)

Robert K. MAYO et al., as Trustees in Bankruptcy of Twin City Construction Company, Inc., Bankrupt, Appellants.



No. 18817.

United States Court of Appeals, Fifth Circuit.

December 7, 1961

Rehearing Denied Jan. 18, 1962.

Page 393

Cleve Burton, Richard H. Switzer, Shreveport, La., for appellants.

Paul M. Hebert, Baton Rouge, La., for appellee.

Before CAMERON, BROWN and WISDOM, Circuit Judges.

WISDOM, Circuit Judge.

The dispute between the parties in this case is the tag-end of the legal controversies caused by the bankruptcy of William A. Gray and the companies through which he conducted his construction business in Shreveport, Louisiana. In an earlier appeal the Trustees in Bankruptcy for Twin City Construction Company, Inc., sought to recover as voidable transfers payments by Twin City to the Pioneer Bank and Trust Company of $50,125, $9,000, and $10,020. The district court entered judgment against the Trustees on all three claims. We affirmed as to the first two but reversed and remanded the case for a redetermination of the third. 5 Cir., 1959, 270 F.2d 823. The district court, after taking additional testimony, again ruled against the Trustees. The sole question on appeal is whether the district judge erred in finding that Pioneer Bank did not have reasonable cause to believe that Twin City was insolvent when it received the $10,020 payment from Twin City January 10, 1956. We hold that this finding was erroneous and that the Trustees are entitled to recover this sum from Pioneer Bank.

William A. Gray engaged in the construction business in Shreveport with apparent success for many years. Since 1945, when the Pioneer Bank was formed, that bank provided all of the financing Gray required in his operations. When he started a new job, Gray generally discussed it with the bank president, E. R. Campbell, who handled his account, and borrowed a sum equal to about ten per cent of the contract price to cover his first payroll. As work progressed, the loan would be renewed; when the contract was completed it would be paid off. These loans were secured by a pledge of the contract proceeds; in addition, the bank held floating mortgages on Gray's home, all his business assets, and his stock in a wholly owned corporation that owned and operated apartment buildings-- every asset Gray possessed except his life insurance. The bank repeatedly sought to obtain financial statements from Gray but he fended off these requests and gave it no statements after 1948. In the course of sixty to seventy loans ranging up to $35,000, however, the bank never sustained a loss on its dealings with Gray, and bank officials testified that they held the utmost confidence in Gray's integrity and financial reliability.

In May 1955 Gray discussed with Campbell plans to activate a wholly owned corporation, Twin City Construction Company, Inc., and to channel his business operations into the corporation to

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avoid personal liability and to provide continuity in case his ill health should force an end to his activities. Gray had organized the corporation in 1951, but it had no paid-in capital stock and had lain dormant until 1955. Pioneer Bank made a personal loan to Gray of $50,000 and at Gray's direction credited the funds to the account of Twin City. By depositing the $50,000 to Twin City's account Gray was able to show the sum as a cash asset on the Twin City balance sheet. This maneuver enabled him to obtain a performance bond for his bid on a $190,000 Government construction contract at Blytheville, Arkansas. Almost immediately after obtaining his performance bond, Gray transferred the $50,000 from the Twin City account back to the bank in redemption of his personal note. Gray had supplied the bank with Twin City corporate resolutions authorizing the bank to honor, certify, or pay all instruments signed by a Twin City officer although the instruments might be presented in payment of the personal obligation of the officer or for deposit to his personal account. Gray informed Campbell that he had obtained the Blytheville contract, and the bank issued a.$19,000 loan to Twin City July 1, 1955, which Twin City repaid August 5. This was the only contract handled by Twin City, although Gray continued several other construction contracts through the W. A. Gray Construction Company. The bank made no further loans to Twin City until December 29.

November 9, 1955, Twin City drew a $20,000 check payable to W. A. Gray Construction Company, the unincorporated vehicle of Gray's earlier operations. December 15 Twin City drew a second check on its account with the Pioneer Bank payable to W. A. Gray Construction Company, in the amount of $4,000. December 29 Gray drew a check for $9,000 on the Twin City account and deposited it in his personal account, the funds being thereafter used to pay creditors of W. A. Gray Construction Company. The same day he applied for and obtained a thirty-day $10,000 loan to Twin City. In a letter accompanying his application he stated that the work on the Blytheville job was 99 per cent finished, and that Twin City had a balance of $42,331 due to it on the contract price. Five days later, January 3, 1956, Gray walked into Campbell's office and announced that he was in financial ruin, that he was 'throwing up his hands.' When Campbell inquired about Twin City a day or two later, however, Gray told him that it was solvent and would continue operations. January 10 Twin City deposited a check for $11,693, received as part payment on its contract, and authorized Pioneer Bank to apply the funds in payment of its $10,020 note. In March Gray was adjudicated a bankrupt, owing $794,278 in unsecured claims and $5,436 in taxes. He had assets of $8,771. Twin City was adjudicated a bankrupt April 21, 1956. It had assets of $91.14 to apply to unsecured debts of $71,045 and $4,531 in taxes owed.

The Trustees contend that the payment of the loan constituted a viodable preference under the Bankruptcy Act, 11 U.S.C.A. § 96(a) and (b). Section 96(a) provides that six statutory elements must be shown to exist before a preference is established. Section 96(b) imposes the further requirement that the transferee who received the alleged preference must have had 'reasonable cause to believe that the debtor is insolvent' at the time of the transfer....

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