Brown v. First Nat. Bank of Little Rock, Ark., 84-1582

• Decision Date: 21 November 1984
• Docket Number: No. 84-1582,84-1582
• Citation: 748 F.2d 490
• Parties: Bankr. L. Rep. P 70,136 Robert J. BROWN, Trustee, Appellant, v. FIRST NATIONAL BANK OF LITTLE ROCK, ARKANSAS, Appellee. Ark-La Materials, Inc., Debtor.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 490

748 F.2d 490

Bankr. L. Rep. P 70,136

Robert J. BROWN, Trustee, Appellant, v. FIRST NATIONAL BANK OF LITTLE ROCK, ARKANSAS, Appellee Ark-La Materials, Inc., Debtor.

No. 84-1582.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 13, 1984.

Decided Nov. 21, 1984.

Robert J. Brown, Little Rock, Ark., for appellant.

James C. Clark, Jr., Little Rock, Ark., for appellee.

Before ARNOLD, Circuit Judge, HENLEY, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.

PER CURIAM.

Robert J. Brown, the trustee of the bankruptcy estate of Ark-La Materials, Inc., brought suit to avoid an alleged preferential transfer to the First National Bank of Little Rock. The bankruptcy court ¹ denied the claim and the district court ² affirmed. The question on appeal is whether certain payments by makers or guarantors of a promissory note upon which the insolvent debtor is also liable can be avoided by the trustee as illegally preferential. See 11 U.S.C. Sec. 547(b). We hold that the payments were not avoidable as preferential transfers and affirm.

On November 19, 1979 Ark-La Materials, Inc., a corporation, executed a promissory note in the amount of $45,000.00 payable to appellee, First National Bank of Little Rock, Arkansas. The note was signed by George Locke as chairman of the board of Ark-La. Locke, along with Fred Weaver and H. Allen Gibson, also signed the note in their individual capacities making each personally liable on the note as makers.

When Ark-La failed to pay the debt when it became due, the Bank demanded payment from the co-makers. On January 24, 1980 Locke and Weaver, two of the co-makers, presented the Bank with three checks as full payment of the note. Each check was in the amount of $15,427.19, was made payable to Ark-La, and was presented personally to Phil Bronkhorst, an officer of the Bank. Two of the checks were signed by Weaver and were payable from accounts of other companies with which he was connected. ³ The third check was signed by Locke and was payable from his own personal account. ⁴ Thus, all the money used to pay the note represented the personal funds of individual co-makers.

Weaver and Locke instructed Bronkhorst that the checks were to be used to pay off the $45,000.00 note, plus all accrued interest. Pursuant to these instructions, Ark-La's debt to the Bank on the note was reduced to zero. ⁵

Ark-La filed a Chapter 11 petition in bankruptcy on March 14, 1980. The trustee sought to avoid the January 24, 1980 payments arguing that they represented a preferential transfer of the debtor's property within ninety days of the filing of Ark-La's petition. See 11 U.S.C. Sec. 547(b). The bankruptcy court denied the claim holding that the funds which were transferred were not property of the estate and that the note payment was therefore not a preferential transfer of debtor's funds. The district court agreed and affirmed.

The trustee has the burden of proving each of the elements of a preferential transfer. First National Bank of Clinton v. Julian, 383 F.2d 329, 333 (8th Cir.1967). One of these elements is that the property transferred must be property of the bankrupt's estate. DeAngio v. DeAngio, 554 F.2d 863, 864 (8th Cir.1977). It must be shown that the transfer depleted the debtor's estate. Id.

No such diminution has been shown here. All the funds used to pay the note came solely from the individual co-makers. Therefore the amount of Ark-La's property or funds available for distribution to the other creditors was not reduced. Since the funds used to pay the note were not property of the debtor, there was no preferential transfer.

The result might be different were there any evidence that the individual co-makers received money or property from Ark-La in exchange for paying off the note. Such indirect transfers from the debtor's estate may be avoided since they result in a diminution of the bankrupt's estate. See Virginia National Bank v. Woodson, 329 F.2d 836, 839 (4th Cir.1964); Miller v. Fisk Tire Co., 11 F.2d 301, 303 (D.Minn.1926); 4 Collier on Bankruptcy p 547.25 (15th ed.1984). However, there is no such evidence here. The transfers by the co-makers were made in order to extinguish their personal liability on the note and there is nothing to show that they received anything from Ark-La in return. "[P]ayments made by an indorser, surety or guarantor do not effect a preference because there is no transfer of the debtor's property ...." 4 Collier on Bankruptcy p 547.25, at p. 547-93. See also DeAngio, 554 F.2d at 864 (payment by third party not a preference where there is no diminution of bankrupt's estate); Virginia National Bank, 329 F.2d at 839 (same); Inter-State National Bank v. Luther, 221 F.2d 382, 393 (10th Cir.1955) (same); Olmstead v. Massachusetts Trust Co., 11 F.2d 410, 411 (D.Mass.1926) (same). ⁶

Therefore the judgment of the district court is affirmed.

1 The Honorable Charles W. Baker, United States Bankruptcy Judge for the Eastern District of Arkansas.

2 The ...