Constructora Maza, Inc. v. Banco de Ponce

• Decision Date: 22 February 1980
• Docket Number: No. 79-1309,79-1309
• Citation: 616 F.2d 573
• Parties: , Bankr. L. Rep. P 67,358 CONSTRUCTORA MAZA, INC., Plaintiff, Appellee, v. BANCO DE PONCE, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 573

616 F.2d 573

6 Bankr.Ct.Dec. 53, Bankr. L. Rep. P 67,358

CONSTRUCTORA MAZA, INC., Plaintiff, Appellee, v. BANCO DE PONCE, Defendant, Appellant.

No. 79-1309.

United States Court of Appeals,

First Circuit.

Argued Dec. 3, 1979.

Decided Feb. 22, 1980.

Alex Gonzalez, San Juan, P. R., with whom Angel Alvarez Perez and Dubon, Gonzalez & Vazquez, Hato Rey, P. R., were on brief, for defendant, appellant.

Benjamin Rodriguez-Ramon, Hato Rey, P. R., with whom Teodoro Pena-Garcia and Jose Raul Cancio-Bigas, Hato Rey, P. R., were on brief, for plaintiff, appellee.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

COFFIN, Chief Judge.

This appeal arises out of an action brought in the United States District Court for the District of Puerto Rico by the appellee, Constructora Maza, Inc. ("Maza"), a "debtor-in-possession", to invalidate as "voidable preferences" certain transfers of assets made by Maza to the appellant, Banco de Ponce (the "Bank"), within four months preceding Maza's filing a petition under Chapter XI of the Bankruptcy Act. The action was tried to the court, which found (1) that the contested transfers were made while Maza was insolvent and (2) that the Bank had reasonable cause to believe that Maza was insolvent at the time of the transfers. The court therefore concluded that the transfers were voidable preferences under section 60 of the Bankruptcy Act, 11 U.S.C. § 96 (1976), and held further that none of the transfers fell within the "set-off" exception of section 68 of the Act, 11 U.S.C. § 108.

The Transfers

The uncontested facts may be summarized as follows.

Constructora Maza, Inc., was engaged in the construction of single and multiple-unit residential structures in the San Juan area. Maza's commercial relationship with the Bank began at the end of 1973 and continued actively until Maza filed its petition for bankruptcy on March 2, 1976. In order to meet the cash flow needs of its expanding business, by mid-1974 Maza had obtained lines of credit for demand loans of $2,000,000 from the Bank. Although Maza delivered a $1,000,000 certificate of deposit to the Bank as collateral for one of these loans, the Bank failed to perfect a security interest in the certificate, and this line of credit remained unsecured until December, 1975. As Maza's cash needs increased, so did the amount of its indebtedness to the Bank. In addition to obtaining further credit through conventional loans, beginning in January of 1975 Maza began to make substantial overdrafts against its checking account with the Bank. These overdrafts were periodically covered by unsecured notes issued by Maza to the Bank. As of November 28, 1975, Maza owed the Bank $2,000,000 in notes issued during the year to cover overdrafts plus a current overdraft of $1,245,780.14.

In December, 1975, the Bank apparently realized that Maza's indebtedness was not properly secured and sought to obtain adequate collateral. On December 9, 1975, at the request of Mr. Roberto Feria, the Bank's branch manager who handled Maza's account, Maza assigned to the Bank all of the retainages and progress billings due Maza on its outstanding construction projects. In consideration for this assignment, the Bank advanced an additional $1,000,000 to Maza, which was credited to Maza's account to reduce its existing overdraft. On January 14, 1976, the Bank requested Maza to reaffirm its assignment of these retainages and progress payments. On February 3, 1976, the Bank debited $1,000 to Maza's checking account for legal services rendered in preparing these assignments.

On December 24, 1975, Mr. Miguel Fernandez, who took over Maza's account from Feria, met with Maza and insisted on additional collateral for Maza's indebtedness, which then totalled $2,222,939. The parties agreed that if Maza assigned certificates of deposit in this amount to the Bank, the Bank would extend an additional $800,000 credit to Maza upon receiving a current statement of Maza's financial condition. On December 26, Maza executed a promissory note for $2,222,000 and pledged as security a certificate of deposit in the amount of $2,222,939.49. The Bank applied this note and an additional loan of $778,000 to offset four outstanding loans to Maza.

On February 5, 1976, the Bank requested, and received from Maza, a pledge of three notes issued to Maza by San Pablo Doctor Center, Inc., totalling $325,000. The Bank credited the amount of this pledge to Maza's account to reduce its overdraft.

Finally, on February 27, 1976, the Bank informed Maza that it had set off its indebtedness of $2,222,939.49 to Maza, evidenced by the certificate of deposit in that amount Maza had pledged to the Bank on December 26, with the promissory note for $2,222,000 executed that same day.

Voidable Preferences

Section 60(a)(1) of the Bankruptcy Act, 11 U.S.C. § 96(a)(1), defines a "preference" as:

". . . a transfer . . . of any of the property of a debtor to or for the benefit of a creditor for or on account of an antecedent debt, made or suffered by such debtor while insolvent and within four months before the filing by or against him of the petition initiating a proceeding under this Act, the effect of which transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class."

Section 60(b), 11 U.S.C. § 96(b), further provides:

"Any such preference may be avoided by the trustee if the creditor receiving it or to be benefited thereby or his agent acting with reference thereto has, at the time when the transfer is made, reasonable cause to believe that the debtor is insolvent."

The burden of proof in a case involving an allegedly voidable preference is on the trustee or debtor-in-possession ¹ to prove each of the elements in sections 60(a) & (b) by a preponderance of the evidence. The district court found that Maza had satisfied its burden of proving each of those elements with respect to the transactions described above. The parties agree that these transactions were transfers of assets within the meaning of the Act, to the Bank, for or on account of an antecedent debt, within four months of Maza's filing of its Chapter XI petition, the effect of which was to allow the Bank to recover a greater percentage of its debts from Maza's assets than other creditors of its class. The Bank argues, however, that Maza failed to carry its burden of proof with respect to the remaining two elements of a voidable preference: that Maza was insolvent on the dates of the transfers and that the Bank had reasonable cause to believe it was insolvent on those dates.

Both the question of Maza's insolvency and that of the Bank's reasonable cause to believe it was insolvent are issues of fact. Kaufman v. Tredway, 195 U.S. 271, 273, 25 S.Ct. 33, 34, 49 L.Ed. 190 (1904); Salter v. Guaranty Trust Co. of Waltham, 237 F.2d 446, 447 (1st Cir. 1956). ² Thus, we will not disturb the decision below unless we are satisfied that the district court's findings on these questions were "clearly erroneous". Fed.R.Civ.P. 52(a). The presumption of correctness reflected in the "clearly erroneous" rule applies not only when the district court's findings are based upon its assessment of conflicting testimony, but also when, as here, much of the evidence is documentary and the challenged findings are factual inferences drawn from undisputed facts. Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1199, 4 L.Ed.2d 1218 (1960); Engine Specialties, Inc. v. Bombardier Ltd., 454 F.2d 527, 530 (1st Cir. 1972); Leach v. Crucible Center Co., 388 F.2d 176, 179 (1st Cir. 1968).

A. Maza's Insolvency

A person is deemed insolvent, under the Bankruptcy Act, "whenever the aggregate of his property . . . shall not at a fair valuation be sufficient in amount to pay his debts." 11 U.S.C. § 1(19). This application of a "balance sheet test" focuses not on the liquid funds available at the time of a transfer, but rather on the liquidation value of the debtor's assets compared to his current liabilities. Under this approach, a negative balance sheet raises a presumption of insolvency, see In re PRS Products, Inc., 574 F.2d 414 (8th Cir. 1978), although the fact that the debtor has overdrawn his bank account or has other cash flow difficulties does not, see McDonald v. Clearwater Railway Co., 164 F. 1007 (9th Cir. 1908).

The determination of the "fair valuation" of the debtor's assets at a specific time is at best an inexact science, and may often be impossible. As a result, insolvency frequently must be determined by proof of other facts or consideration of other factors from which insolvency may be inferred. Hassan v. Middlesex County National Bank, 333 F.2d 838 (1st Cir.), cert. denied, 379 U.S. 932, 85 S.Ct. 332, 13 L.Ed.2d 344 (1964). ³ Reduction in the face value of assets may be appropriate if those assets are not susceptible to liquidation, and thus cannot be made available for payment of debts, within a reasonable period of time. See In re United Financial Corp., 104 F.2d 593, 598 (7th Cir. 1939). Thus, for example, accounts receivable need not be taken at face value if circumstances cast doubt on their collectibility. The prospects of collection of such assets are evaluated in light of the past record of payment of the obligors, the obligors' current solvency, and the presence or absence of any dispute over the validity of the accounts or debts owed. See 1 W. Collier on Bankruptcy P 1.19 at 125-26 (14th ed. 1977). Because the value of such assets may, in certain circumstances, be discounted, it is appropriate for the trier of fact to hear qualified opinion testimony on their fairly realizable value. See Irving Trust Co. v. Jacob Weckstein & Sons, 64 F.2d 333 (2d Cir. 1933); Mack v. Bank of Lansing, 396 F.Supp. 935 (W.D.Mich.1975).

The district court relied on several factors in concluding that Maza was insolvent during the period in question, including its inability to reduce its...