Cushman Bakery, In re, No. 75--1104
| Decision Date | 25 November 1975 |
| Docket Number | No. 75--1104 |
| Citation | 526 F.2d 23 |
| Parties | 18 UCC Rep.Serv. 1 In re CUSHMAN BAKERY and Cushman Baking Company. Appeal of Jacob AGGER, Trustee. |
| Court | U.S. Court of Appeals — First Circuit |
Vern Countryman, Cambridge, Mass., with whom Arthur T. Wasserman, Boston, Mass., and Charles W. Smith, Saco, Me., were on brief, for appellant.
William W. Willard, Portland, Me., with whom Alan R. Atkins, Bernstein, Shur, Sawyer & Nelson, Portland, Me., Julius L. Shack, and Slater, Goldman, Gillerman, Shack & Tutun, Boston, Mass., were on brief, for appellees.
Before COFFIN, Chief Judge, McENTEE, Circuit Judge, and THOMSEN *, Senior District Judge.
The trustee in bankruptcy for Cushman Baking Company and Cushman Bakery (hereinafter sometimes collectively referred to as 'Cushman'), appeals from a final judgment of the District Court for the District of Maine, reversing the order of a bankruptcy judge. The district court held that the bankruptcy judge had erred in (1) declaring invalid a secured claim in the amount of $65,561.51 filed by Bakers Management Corporation (hereinafter referred to as 'Bakers') on the ground that the 'real and personal property transfers were not properly perfected and in any event were fraudulent' and (2) further disallowing, pursuant to § 57g of the Bankruptcy Act, 11 U.S.C. § 93(g), that claim and an unsecured claim of $42,756.99 filed by Seaboard Allied Milling Corporation (hereinafter referred to as 'Seaboard'), unless voidable preferences totalling $108,940.02 were surrendered. 1
Cushman Baking Company and Cushman Bakery were interrelated corporations which operated bakeries in Portland, Maine and Lynn, Massachusetts for many years. Cushman Baking Company operated the Portland plant, and Cushman Bakery operated the Lynn plant until it closed in 1967. For some 30 to 40 years, Seaboard had supplied flour to Cushman on an open account basis, payable 30 days after delivery. In the latter part of 1967, Cushman's account with Seaboard was running substantially in arrears, and it owed Seaboard $31,624.65 on its last five flour shipments.
Following several meetings between officers of Cushman and Seaboard and after Seaboard's officer had examined Cushman's finances, Seaboard, in January, 1968, agreed to lend Cushman $75,000 for working capital, to be secured by second mortgages on real and personal property located in Portland and by an assignment of a second mortgage on the Lynn plant, which Cushman Baking Company held to secure an inter-company indebtedness of $100,000. Seaboard also agreed to extend $25,000 in credit for flour shipments payable 30 days after delivery.
Although Seaboard was to supply the money for the loan, it was to be granted in the name of Bakers as Seaboard's nominee. Bakers is an affiliated corporation which had customarily acted as Seaboard's nominee in loan transactions. Bakers is controlled by the individuals who control Seaboard and is a 'paper corporation' with no assets, income, or profits. As part of the loan transaction, it was also agreed that Cushman would purchase from Seaboard a minimum of 50,000 cwt of flour annually (nearly double the average quantity purchased by Cushman from Seaboard over the last three years), so long as any part of the $75,000 loan remained unpaid. This part of the agreement was incorporated into a Flour Purchase Agreement signed on February 16, 1968. It was contemplated that Seaboard would be secured for future flour shipments by an assignment from Bakers of the mortgages given as security for the $75,000 loan.
On March 4, 1968, before the loan transaction was closed, Seaboard stopped shipments to Cushman because Cushman was too far behind in its payments on account. The loan was closed on March 6, 1968. The documents reflect that on February 12, 1968 Union Mutual Life Company (hereinafter referred to as 'Union Mutual'), the holder of the first mortgage on Cushman's Portland realty, consented to Cushman's giving a second mortgage on its Portland real estate. At the closing, Bakers' check for $75,000 was delivered to Cushman, and Cushman delivered its promissory note dated February 16, 1968 for $75,000 to Bakers. This note was secured by three documents: (1) a second mortgage on Cushman's real property in Portland dated February 16, 1968; (2) a second mortgage on Cushman's personal property in Portland dated February 12, 1968; and (3) an assignment of the second mortgage on Cushman's Lynn property. The second mortgage on the Portland real estate was recorded in the Cumberland County, Maine, Registry of Deeds on March 6, 1968. Two financing statements to perfect the second security interest in the Portland personal property were filed, one in the Cumberland County Registry of Deeds and the other in the office of the Secretary of State of Maine, both on March 8, 1968. The real estate mortgage identifies Cushman Baking Company as the mortgagor and Bakers as the mortgagee. The financing statements identify Cushman Baking Company as the debtor and Bakers as the secured party. The assignment of the security instruments from Bakers to Seaboard to secure future flour shipments was never executed, and, because of this failure, Seaboard conceded that its claim for the flour shipped to Cushman after March 6, 1968 is unsecured. Upon receiving Bakers' check for $75,000 at the March 6 closing, Cushman gave Seaboard a check for $73,961.67, representing Cushman's then current indebtedness for flour shipments plus the price of the two February shipments which had been stopped in transit and which were then released by Seaboard.
Subsequent to the loan closing, Seaboard continued to ship Cushman between $25,000 and $30,000 worth of flour monthly. During the four months preceding the filing of Chapter XI proceedings on August 13, 1968, Cushman paid Seaboard $101,941.02 for shipments totalling $144,698.01. As a result, as of the date of the Chapter XI proceedings, Cushman owed Seaboard $42,756.99. During this four month period, Cushman paid three monthly installments due on the $75,000 note, each in the amount of $2,333. Accordingly, as of the date of the Chapter XI proceedings, Cushman owed Bakers $65,561.51 for principal and interest on the note. The bankruptcy court found, and the district court accepted this finding, that Cushman Baking Company and Cushman Bakery were individually and collectively insolvent, within the meaning of § 60(a) of the Bankruptcy Act, 11 U.S.C. § 96(a), at all times during the four month period prior to the initiation of the Chapter XI proceedings on August 13, 1968.
On June 2, 1969, after it became apparent that a plan could not be proposed under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., both Cushman Baking Company and Cushman Bakery were adjudicated bankrupt pursuant to § 376(2) of the Act, 11 U.S.C. § 776(2). Thereafter, on September 29, 1969, Bakers filed a proof of claim and a petition to establish a lien in the amount of $65,561.51, based upon the $75,000 note and the real and personal property second mortgages given by Cushman Baking Company to Bakers on March 6, 1968. Also on September 29, 1969, Seaboard filed a proof of claim and a petition to establish a lien in the amount of $42,756.99, based upon the February 16, 1968 Flour Purchase Agreement and an assignment from Bakers to Seaboard of the Cushman Baking Company note and second mortgages. As previously indicated, however, Seaboard eventually conceded that its claim was unsecured since the contemplated assignment had not been made.
On November 16, 1970, the trustee in bankruptcy filed formal objections to the establishment of Bakers' and Seaboard's liens, alleging that the security transactions were not properly authorized by Cushman Baking Company's directors and, further, that, as 'secret liens', they constituted a fraud on creditors. On August 18, 1971, more than two years after the date on which Cushman was adjudicated bankrupt, the trustee amended his objections to Bakers' secured claim and, for the first time, filed an objection to Seaboard's unsecured claim on the ground that it should be disallowed pursuant to § 57g of the Bankruptcy Act, unless Seaboard surrendered voidable preferences of $101,941.02--the amount Seaboard received as payments on the flour shipments. On September 24, 1971, Seaboard moved to dismiss this objection on the ground that it was barred by the two year statute of limitations of § 11e of the Act, 11 U.S.C. § 29(e). On January 7, 1972, the trustee filed an identical objection to Bakers' claims, asserting that it should be disallowed unless voidable preferences of $6,999--the amount of the three payments Bakers received on the $75,000 note--were surrendered.
After a hearing, the bankruptcy judge held that Bakers' secured claim of $65,561.51 was invalid because the real and personal property security interests were not properly perfected and, further, were fraudulent transfers under § 67d(2)(d) of the Bankruptcy Act, 11 U.S.C. § 107(d)(2)(d). He further held that the trustee's objections to Bakers' claim and to Seaboard's unsecured claim of $42,756.99 were not barred by the statute of limitations of § 11e, and disallowed both claims pursuant to § 57g unless voidable preferences in the amount of $108,940.02 (the $101,941.02 flour payments plus the $6,999 payment on the $75,000 note) were surrendered.
Bakers and Seaboard appealed the bankruptcy judge's order to the district court and the district court reversed and remanded, holding (1) that Bakers' secured claim of $65,561.51 had been properly perfected under Maine law, (2) that the secured transaction which formed the basis for Bakers' secured claim were not fraudulent under § 67d(2)(d) of the Act, and (3) that the trustee's § 57g objection to the allowance of Seaboard's unsecured claim was barred by the two...
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