Kapela v. Newman

• Decision Date: 22 May 1981
• Docket Number: No. 80-1737,80-1737
• Citation: 649 F.2d 887
• Parties: , Bankr. L. Rep. P 68,072 Paul F. KAPELA et al., Defendants, Appellants, v. Samuel NEWMAN, Plaintiff, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 887

649 F.2d 887

7 Bankr.Ct.Dec. 1261, Bankr. L. Rep. P 68,072

Paul F. KAPELA et al., Defendants, Appellants, v. Samuel NEWMAN, Plaintiff, Appellee.

No. 80-1737.

United States Court of Appeals First Circuit.

Argued April 10, 1981.

Decided May 22, 1981.

Kenneth A. Sweder, Boston, Mass., with whom Siri F. Boreske, and Kaye, Fialkow, Richmond & Rothstein, Boston, Mass., were on brief, for defendants, appellants.

Marshall F. Newman, Boston, Mass., with whom Philip Slotnick and Newman & Newman, P. C., Boston, Mass., were on brief, for plaintiff, appellee.

Before ALDRICH, CAMPBELL and BREYER, Circuit Judges.

BREYER, Circuit Judge.

A Bank makes a large loan to a corporation. A corporate shareholder guarantees repayment of this Basic Loan. At the same time the guarantor himself owes money to the corporation a debt in which the Bank has a secured interest as partial collateral for its Basic Loan. The corporation goes bankrupt. The guarantor just before bankruptcy pays a sum of money to the Bank money which he claims at one and the same time reduces his debt to the corporation and also reduces his obligation as guarantor of the Basic Loan. If so, has he received a voidable "preference" under section 60(a) of the Bankruptcy Act of 1898, 11 U.S.C. § 96(a)? Has property belonging to the corporation been transferred in a manner that benefitted the guarantor at the expense of other creditors of the same class? The district court believed that such a preference was created. We disagree and reverse its decision.

I.

The facts on this appeal are not in dispute. The defendants, Kapela and Brovenick, were sole shareholders of Amesbury Woodcraft, Inc. In early 1976 Amesbury borrowed $100,000 (the Basic Loan) from Century Bank and Trust Company, Somerville, Massachusetts. The Bank obtained a chattel mortgage in virtually all of Amesbury's assets as security. The mortgage included, among other things, all "notes, bills general intangibles and all other debts, obligations and liabilities in whatever form whether now existing or hereafter arising " Amesbury also executed a loan and security agreement giving the Bank a secured interest in, among other things, all Amesbury's "rights to the payment of money, now existing or hereafter arising " And, the Bank filed an appropriate financing statement on March 9, 1976, noting its secured interest in this property. Kapela and Brovenick also personally guaranteed the Bank's Basic Loan to Amesbury.

Between March 22, 1976 and December 27, 1976, Brovenick borrowed money from the corporation. On January 13, 1977, Brovenick provided the corporation with a promissory note for $24,640 as evidence of this debt. The corporation then assigned the note to the Bank as collateral under its security agreements.

On March 2, 1977, Brovenick sent the Bank a check for $21,540 upon the back of which he wrote, "Pay to the order of Century Bank & Trust Co., assignee of my note of 1/13/77". ¹ At the same time, Brovenick (who also supervised the corporate bookkeeping) made accounting entries in the corporation's books reducing his debt to it by $21,540.

On March 9, 1977, the corporation went bankrupt. The corporation had been insolvent for the preceding four months, and both Kapela and Brovenick knew, or should have known, it.

On August 14, 1977, Samuel Newman, the corporation's trustee in bankruptcy, brought this suit in order to recover, for the corporation, the money that Brovenick paid to the Bank. He argued that the payment of $21,540 to the Bank (at least when taken together with the transfer of Brovenick's note from Amesbury to the Bank) constituted a "voidable preference", for it satisfied each of the Bankruptcy Act's seven conditions. ² There was:

(1) A transfer of the debtor's property (the note or money, which "belonged" to Amesbury, was transferred to the Bank);

(2) to or for the benefit of a creditor (Brovenick and Kapela, as guarantors of the Basic Loan were "contingent creditors" of Amesbury ³ and benefitted as guarantors by a reduction in the amount due on the Basic Loan);

(3) for or on account of an antecedent debt (the Basic Loan);

(4) while insolvent;

(5) and within four months of bankruptcy;

(6) which enabled Brovenick and Kapela to obtain a greater percentage of their debt (the "contingent debt" for repayment of their payment of the guaranty) than other creditors of the same class;

(7) and Kapela and Brovenick had reasonable cause to believe that Amesbury was insolvent.

See Collier on Bankruptcy § 60.12 (14th ed. 1977). The district court found that each of these classic conditions was indeed met, declared a "voidable preference", and ordered Kapela and Brovenick jointly to pay $21,500 to the corporation. ⁴

We reverse, however, because we believe (1) that the payment of $21,500 was not a transfer of the bankrupt's property, (2) that the transfer of the note, while a transfer of the bankrupt's property, was not a transfer for antecedent debt, and (3) that the transfers, whether taken separately or together, did not diminish the bankrupt's estate available to other comparable creditors.

II.

The preference section of the Bankruptcy Act imposes obligations upon a debtor to treat its creditors fairly once the threat of impending bankruptcy becomes apparent. Thus, four months before the filing of a bankruptcy petition, the debtor loses its common law right to prefer one creditor over another. At the same time, the Act recognizes the importance of preferring secured, to unsecured, creditors. The detailed provisions of the Act are written to prevent preferences as among creditors of the same class, while normally allowing secured creditors to obtain, and realize upon, their collateral. Occasionally, conflicts can develop between section 60 of the Bankruptcy Act governing preferences, and Article 9 of the Uniform Commercial Code, relating to secured transactions as, for example, when a lender takes a secured interest in "after acquired" receivables, which do not come into existence until just prior to a bankruptcy. See Benedict v. Ratner, 268 U.S. 353, 45 S.Ct. 566, 69 L.Ed. 991 (1925). ⁵ Yet, it is important to interpret the two statutes in a way that minimizes such conflicts and harmonizes the policies that underlie them.

The threat that the district court's holding poses to those seeking to give security for credit can best be seen by analyzing this case from the point of view of the Bank, the secured creditor. It seems clear that the Bank held a valid secured interest in Brovenick's debt to the corporation as partial collateral for its Basic Loan. If so, neither the transfer of the note evidencing that debt to the Bank, nor the subsequent payment of that note, would constitute a preference to the Bank. Neither the transfer of the note nor the payment diminished the bankrupt's estate available to pay other creditors, for the other creditors were never entitled to the Brovenick debt, to the note that evidenced it, or to the funds used to pay the debt. Paying off that debt did not hurt them.

How then could transfer of the note to the Bank or payment of the note have constituted a preference to the guarantors ? Granted that the payment helped them by reducing their liability on their guaranty, how did it hurt the corporation's other creditors? How did it diminish the bankrupt's estate that would otherwise have been available to pay those other creditors? To find that it did, one would have to hold that, despite the fact that Brovenick's $24,000 debt was secured collateral for the Basic Loan, it should have been available to help satisfy other creditors; one would have to hold that the guarantors could not rely upon that debt's use to reduce their guarantor liability. Rather, they must pay the Bank $100,000 to satisfy the Basic Loan, despite the existence of this other collateral. In other words, one would have to hold that (at least as to some types of collateral) realization by the creditor of the collateral's value does not relieve the guarantor of his liability under the guaranty. He must still pay it either to the Bank or to the bankrupt corporation as a voided preference.

Such a holding seems undesirable. It seems unfair to a guarantor, who might, for example, have guaranteed a loan to a corporation because he knew that the corporation held an asset, such as a note, a receivable, or for that matter land or chattels, which when given as security, would protect him from having to pay on the guaranty. Such a holding would make one think twice before guaranteeing loans to corporations that appear to have adequate collateral.

One could avoid this result, while supporting the holding below, only if one held that this is a special case that normally realization on collateral does not create a preference in favor of a Basic Loan's guarantor, but it does so here because Brovenick is guarantor, originator of the collateral and a major corporation shareholder all in one. Yet, no improper activity by Brovenick is alleged in this court. No reason has been presented as to why the fact that the collateral originates from the guarantor, from the corporation's owner, or from the owner/guarantor should make a difference. And, we can discern no such reason. Therefore, we believe that realization upon a note legitimately held as collateral by a secured creditor should not create a preference in favor of the guarantor of the creditor's Basic Loan when it would not create a preference in favor of the creditor.

This result is consistent with the language of the statute. If Brovenick's note was legitimately held as collateral by the Bank, the subsequent payment of that note is not a "transfer of the property of (the) debtor" a statutory requisite for a finding of a preference. ⁶ Indeed, there is no such "transfer" whether the payment is made directly to the creditor or given to the corporation, but earmarked for payment to the creditor. ⁷ For that matter, neither does such a transfer...