Darby v. Shawnee Southwest, Inc.

• Decision Date: 03 February 1975
• Docket Number: Civ. No. 74-203-D.
• Citation: 399 F. Supp. 587
• Parties: David T. DARBY, as Trustee in the Bankruptcy of Gerald W. Steincross, a Bankrupt, Plaintiff, v. SHAWNEE SOUTHWEST, INC., a corporation, Defendant.
• Court: U.S. District Court — Western District of Oklahoma

399 F. Supp. 587

David T. DARBY, as Trustee in the Bankruptcy of Gerald W. Steincross, a Bankrupt, Plaintiff, v. SHAWNEE SOUTHWEST, INC., a corporation, Defendant.

Civ. No. 74-203-D.

United States District Court, W. D. Oklahoma, Civil Division.

February 3, 1975.

John W. Swinford, Oklahoma City, Okl., for plaintiff.

B. J. Brockett, Oklahoma City, Okl., for defendant.

MEMORANDUM OPINION

DAUGHERTY, Chief Judge.

Plaintiff is the trustee in bankruptcy of Gerald W. Steincross, a bankrupt. The Bankrupt was engaged in a business primarily involved in the sale of carpet. He had started in this business about September 1, 1972. The business was not financially successful and an Involuntary Petition in Bankruptcy was filed April 6, 1973. The Bankrupt prior to this time had abandoned the business and left for parts unknown. He was adjudicated a Bankrupt July 5, 1973 in Case Number BK-73-431 in this Court. Plaintiff initiated this action asserting that property of the Bankrupt which was subjected to an attachment lien by Defendant on February 19, 1973 in a prejudgment attachment in a State Court action constituted a null and void transfer pursuant to Section 67(a)(1)(a) of the Bankruptcy Act 11 U.S.C. § 107(a) (1) (a). The Defendant caused the property which had been attached to be sold on May 21, 1973 for the sum of $30,500.00 which is the amount sought in this action. Plaintiff asserts that Defendant's attachment lien was acquired within four months before the filing of the Bankruptcy Petition at which time the Bankrupt was insolvent. He further asserts that Defendant had knowledge of the Bankruptcy proceedings at the time of said sale. Defendant raises as its sole defense an assertion that the Bankrupt was not insolvent on February 19, 1973 when it acquired its attachment lien. The only other issue raised by the parties is the amount of expenses or costs purportedly incurred by Defendant in the attachment and sale in the State Court proceeding which should be deducted or credited in the event Plaintiff should prevail in the instant action. The matter was tried before the Court with the issues framed as stated above, the primary issue being whether the Bankrupt was insolvent on February 19, 1973, and the secondary issue being how much if any of the expenses or costs of the attachment sale should be deducted from the proceeds in the event Plaintiff prevails.

The Plaintiff as Trustee was not able to obtain any books and records of the Bankrupt and his business. The testimony of the Bankrupt was not available, and the Trustee has never located the Bankrupt. The Trustee testified that he took possession of the Bankrupt's business premises and inventory shortly after the Involuntary Petition in Bankruptcy was filed and after being appointed Receiver. The inventory primarily consisted of rolls of carpet and also included a few household appliances. Plaintiff introduced into evidence an income statement of the Bankrupt for the year ending December 31, 1972. This statement showed a net loss of $32,364.04 for such period which apparently covered about four months. This statement noted a closing inventory of $154,344.11. It also disclosed the Bankrupt had no beginning inventory and made purchases for inventory totalling $183,948.27.

The testimony disclosed that several meetings with creditors or their attorneys were held by the Bankrupt and his then attorney on February 28, 1973 and during the first few days of March of said year. Defendant was represented at such meetings by its attorney. Its Dallas Regional Sales Manager was present for at least one of such meetings. The Bankrupt submitted a schedule of assets and liabilities to the creditors which is not dated but from which a letter to his creditors dated March 9, 1973 was prepared. This schedule showed his liabilities to be approximately $225,497.89 and his assets to be approximately $152,783.54 valued at his cost. In the letter of March 9, 1973, the Bankrupt through his attorney proposed a liquidation of his assets within a two month period in which it was expected that $125,000.00 could be realized. One facet of the proposal included the return of the inventory which had been attached by Defendant. Defendant's attorney was noted as a creditor's representative and Defendant's Dallas Sales Manager was noted to have investigated and approved the party who was proposed to conduct the liquidation. The testimony showed that an insufficient number of the Bankrupt's creditors agreed to the proposed liquidation arrangement and such was not conducted. The Involuntary Petition in Bankruptcy was thereafter filed on April 6, 1973. The Defendant obtained a judgment against Bankrupt in the State Court action on April 13, 1973 and conducted an execution sale on May 21, 1973 selling the Bankrupt's inventory that it had attached on February 19, 1973.

The authority for Plaintiff's claim herein is found in 11 U.S.C. § 107(a)(1) which provides:

"Every lien against the property of a person obtained by attachment, judgment, levy, or other legal or equitable process or proceedings within four months before the filing of a petition initiating a proceeding under this title by or against such person shall be deemed null and void (a) if at the time when such lien was obtained such person was insolvent . . ."

Insolvency is defined in the Bankruptcy Act in 11 U.S.C. § 1(19) as follows:

"A person shall be deemed insolvent within the provisions of this title whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed, removed, or permitted to be concealed or removed with intent to defraud, hinder, or delay his creditors, shall not at a fair valuation be sufficient in amount to pay his debts."

In the instant case, the Defendant's attachment lien was obtained on February 19, 1973, which is within four months of the date the Petition in Bankruptcy was filed. It must be determined if the Bankrupt was insolvent on said date.

In the case of Inter-State National Bank of Kansas City v. Luther, 221 F.2d 382 (Tenth Cir. 1955) the appellate Court considered the proof required to show insolvency of a Bankrupt on a certain date. The Court noted the trustee had to prove same by a preponderance of the evidence. It was noted that the insolvency must be shown on a particular date, but evidence of the Bankrupt's financial condition on dates prior to and following the critical date is competent evidence especially when considered with evidence showing a continuing decline in the Bankrupt's condition.

In the instant case, the Bankrupt was only in business for about four months prior to the time the income statement was prepared indicating a substantial loss had been incurred. The attachment was made less than two months later. The schedule of assets and liabilities prepared by the Bankrupt and given to his creditors was made within approximately two weeks of the date of attachment if not sooner. A comparison of these documents shows that the Bankrupt's year-end inventory had a cost value of $154,344.11 while he estimated the cost value of his inventory to be $152,783.54 at a time after Defendant had attached a large quantity of his inventory. The Trustee testified that the inventory he conducted about April 6, 1973 disclosed that a substantial quantity of the carpet purported to be in the Bankrupt's inventory in early March was not present. The Plaintiff testified that a diligent search was made to locate any assets of the Bankrupt other than the business inventory. This search included a review of various Court records and other official records. No assets of the Bankrupt were located in said search. The evidence disclosed that he drove a leased automobile and that the office furniture used in the business was leased. The business premises were leased also. The Plaintiff checked with various banks the Bankrupt was known to do business with and determined that on February 19, 1973, he had funds on deposit in two banks totalling $12,256.21. The preponderance of the evidence is and the Court finds that on February 19, 1973, the Bankrupt's inventory of assets consisting mainly of carpet and some appliances had a cost value of $152,783.54. In addition, the Bankrupt was shown to have $12,256.21 in two bank accounts on said date.

The...