In re F & S Cent. Mfg. Corp.

• Decision Date: 16 October 1985
• Docket Number: Adv. P. No. 884-0322-18.,Bankruptcy No. 882-82533-18
• Citation: 53 BR 842
• Parties: In re F & S CENTRAL MANUFACTURING CORP., Debtor. Marianne DeROSA, Trustee of the Estate of F & S Manufacturing Corp., Plaintiff, v. BUILDEX INCORPORATED and Instrument Systems Corp., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

53 B.R. 842 (1985)

In re F & S CENTRAL MANUFACTURING CORP., DebtorMarianne DeROSA, Trustee of the Estate of F & S Manufacturing Corp., Plaintiff, v.BUILDEX INCORPORATED and Instrument Systems Corp., Defendants.

Bankruptcy No. 882-82533-18, Adv. P. No. 884-0322-18.

United States Bankruptcy Court, E.D. New York.

October 16, 1985.

COPYRIGHT MATERIAL OMITTED

Shaw, Goldman, Licitra, Levine & Weinberg, P.C., Garden City, N.Y., for trustee.

Anderson Russell Kill & Olick, P.C., New York City, for Buildex Inc.

Marianne DeRosa, Mineola, N.Y., trustee.

DECISION & ORDER

C.ALBERT PARENTE, Bankruptcy Judge.

On December 10, 1984, the trustee commenced an action to avoid an alleged preferential transfer made by F & S Central Manufacturing Corp.(the "debtor") to Buildex Incorporated(the defendant).The defendant and the trustee each subsequently moved for summary judgment.A hearing on their motions was held on May 9, 1985.From the parties' papers and the hearing, the following facts have been adduced.

FACTS

The debtor, a corporation, was a wholly owned subsidiary of the defendant until June, 1982 when the defendant sold the debtor to the Brunswick Group, Inc.("Brunswick" or "Buyer").At the time of sale, the debtor's books reflected that the debtor owed the defendant $3.249 million.¹

The terms of sale were contained in several documents, including a Stock Purchase Agreement ("SPA"), a Subordinated Note (the "Subordination Agreement"), and a Loan and Security Agreement.The Stock Purchase Agreement provided that Brunswick would pay the defendant $1,000 to purchase the defendant's stock.(SPA Paragraph (1)(B).)In addition, Brunswick, in some unspecified way, would "cause to be made available" to the debtor $1.499 million, which sum the debtor would use to reduce the debt it owed the defendant.The debtor was to pay the balance of the debt ($1.75 million), in 22 periodic installments, with the defendant's right to receive these payments subordinated, under limited circumstances, to the rights of certain of the debtor's creditors.(SPA Paragraph (1)(C).)

The defendant and Brunswick executed the Stock Purchase Agreement on June 4, 1982, at which time the defendant delivered its stock in the debtor to Brunswick.On this same date, the debtor entered into an Agreement (the "Loan and Security Agreement") with Marine Midland Bank ("Marine Midland" or "Bank") in which the debtor borrowed $1.499 million.To obtain the loan, the debtor granted Marine Midland a security interest in all the debtor's physical and intangible assets, and agreed to use the loan proceeds to reduce its debt to the defendant.Brunswick guaranteed the loan.

Although the Stock Purchase Agreement expressly provided that the debtor was to transfer the $1.499 million to the defendant at or before the time the defendant delivered its stock to Brunswick (SPA Paragraph (13)(E)), the defendant avers that the debtor's transfer of the funds did not actually take place until three days later, on June 7, 1982.As proof of the date of transfer, the defendant has submitted a copy of a statement issued by the defendant's bank showing that the funds were received on June 7, 1982.The defendant has submitted no evidence indicating when the funds were actually transferred.The trustee disputes that there was a delay between the date the defendant divested itself of legal title to the stock and the date the debtor transferred the funds.

Four months after the sale, on October 6, 1982, the debtor filed for relief under Chapter 11 of the Bankruptcy Reform Act(the "Code").On March 11, 1983, the debtor was removed as debtor-in-possession and Marianne DeRosa appointed trustee.On December 10, 1984, Ms. DeRosa commenced the within adversary proceeding to avoid as a preference the debtor's transfer of the $1.499 million.

DISCUSSION

A motion for summary judgment is governed by Bankruptcy Rule 7056 which incorporates the summary judgment rule of the Federal Rules of Civil Procedure("Rule 56").The purpose of the motion is to dispose of issues which can be decided upon admitted or established facts without a trial.C. Wright, A. Miller, M. Kane, 10A Federal Practice & ProcedureCiv.2d § 2712(1983).Issues which cannot be so decided must be reserved for trial.Id.

Regardless of which party bears the burden of proof on an issue at trial, the burden in a motion for summary judgment is on the movant.In re T.I. Swartz Clothiers, Inc.,15 B.R. 590, 592;8 B.C.D. 681(Bankr. E.D.Va.1981).This burden is a stringent one:

Before summary judgment will be granted it must be clear what the truth is and any doubt as to the existence of a genuine issue of material fact will be resolved against the movant.

C. Wright, A. Miller, M. Kane, 10A Federal Practice & Procedure§ 2727.The adverse party has no duty to present evidence opposing the motion unless the movant's evidence would entitle the movant to a directed verdict at trial if uncontroverted.As stated by one authority:

Where the evidentiary matter in support of the motion does not establish the absence of a genuine issue, summary judgment must be denied even if no opposition evidentiary matter is presented.

Id.

Section 547(b) of the Bankruptcy Reform Act(the "Code") empowers the trustee to avoid certain "preferential" transfers of the debtor's property made before the debtor filed for bankruptcy relief.The provision was enacted to promote the Code's policy of preserving a financially distressed debtor's estate so that the debtor's assets may be fairly distributed amongst all creditors, not merely those who are favored.See, e.g., Palmer v. Radio Corp. of America,453 F.2d 1133, 1136(5th Cir.1971);In re Bennett,35 B.R. 357, 360(Bankr.Ill.1984);In re Davis,22 B.R. 644(Bankr.Ga.1982).

In order to avoid a pre-bankruptcy transfer, the trustee must prove: (1) that the transfer was a transfer of the debtor's interest in property; (2) to or for the benefit of a creditor; (3) on account of the debtor's antecedent debt; (4) made during the 90 day period preceding the debtor's filing for bankruptcy relief, or if the creditor is an "insider," made within the year preceding the filing at a time when the creditor had reasonable cause to believe that the debtor was insolvent; (5) made at a time when the debtor was insolvent; and (6) enabled the creditor to receive more than it would receive in a Chapter 7 distribution.Several exceptions to the trustee's avoiding powers are contained in § 547(c).These exceptions are affirmative defenses which must be pleaded and at trial proven by the creditor transferee.See, e.g., In re Saco Local Development Corp.,30 B.R. 867, 868(Bankr.D.Me.1983).

The trustee seeks summary judgment on the following issues: (1) the transfer was a transfer of the debtor's interest in property; (2) the transfer was a transfer on account of the debtor's antecedent debt; (3) and the creditor was an "insider" at the time of transfer.

The defendant challenges the trustee's action and seeks summary judgment on the following grounds: (1) that no property of the debtor was transferred; (2) that the payment was not on account of an antecedent debt; (3) that the transfer took place more than 90 days before the petition was filed, at a time when the defendant was not an insider; (4) that the debtor was not insolvent at the time of the transfer; and/or (5) that the transaction is exempt under § 547(c)(1) which provides that a transfer which the debtor and creditor intended to be a contemporaneous exchange for new value, and which was in fact "substantially contemporaneous," is not subject to the trustee's avoiding powers.The defendant does not dispute that it was a creditor of the debtor, or that the transfer enabled it to receive more than it would receive in a Chapter 7 case distribution.

TRANSFER OF THE DEBTOR'S INTEREST IN PROPERTY

The trustee and the defendant dispute whether the transfer of the $1.499 million was a transfer of the debtor's interest in property.The defendant argues that since the Marine Midland loan to the debtor was conditioned upon the debtor's using the loan proceeds to repay the defendant, the loan proceeds were "earmarked funds" which never became part of the debtor's estate, and hence no property of the debtor was transferred.To support its position, the defendant relies principally on the following quotation from Collier's:

In cases when a third person makes a loan to a debtor specifically to enable him to satisfy the claim of a designated creditor, the proceeds never become part of the debtor\'s assets, and therefore no preference is created.The rule is the same regardless of whether the proceeds of the loan are transferred directly by the lender to the creditor or are paid to the debtor with the understanding that they will be paid to the creditor in satisfaction of his claim, so long as such proceeds are clearly `earmarked.\'

4 Collier on Bankruptcy, 15th ed., § 547.25.In addition to Collier's, the defendant also cites numerous other cases which purportedly support the rule of law as articulated by Collier's.Grubb v. General Contract Purchase Corp.,94 F.2d 70(2d Cir.1938);In re M.J. Sales & Distributing Co., Inc.,25 B.R. 608, 612(Bankr.S.D.N.Y.1982);In re Price Chopper,40 B.R. 816(Bankr.S.D.Cal.1984);In re Villars,35 B.R. 868(Bankr.S.D.Ohio1983).

The defendant is incorrect.Collier's statement of the case law, focusing as it does on the form of a debtor's transaction, and not effect, is misleading and the defendant's reliance upon it misplaced.In re Villars,35 B.R. at 872;accord, Steel Structures, Inc. v. Star Manufacturing Co.,466 F.2d 207, 217(6th Cir.1972).

A judicially developed exception to the preference statute holds that a transfer by the debtor which does not diminish the debtor's assets is not a preference.National Bank of Newport v. National Herkimer County Bank,225 U.S. 178, 184, 32 S.Ct. 633, 635, 56 L.Ed. 1042(1912);Grubb v....