Denaburg v. Post Welding Supply Co., Inc.

• Decision Date: 11 September 1980
• Docket Number: Civ. A. No. 79-X-1440-S.
• Citation: 7 BR 274
• Parties: Charles L. DENABURG, as Trustee of the Bankrupt Estate of K.B. Southern, Inc., Plaintiff, v. POST WELDING SUPPLY COMPANY, INC., a corporation, Defendant.
• Court: U.S. District Court — Northern District of Alabama

7 B.R. 274 (1980)

Charles L. DENABURG, as Trustee of the Bankrupt Estate of K.B. Southern, Inc., Plaintiff, v. POST WELDING SUPPLY COMPANY, INC., a corporation, Defendant.

Civ. A. No. 79-X-1440-S.

United States District Court, N.D. Alabama, S.D.

September 11, 1980.

Charles L. Denaburg, Denaburg, Schoel, Meyerson & Ogle, Birmingham, Ala., for plaintiff.

Robert L. Austin, Birmingham, Ala., for defendant.

MEMORANDUM OPINION

FINDINGS OF FACT AND CONCLUSIONS OF LAW

GROOMS, District Judge.

This is an action to set aside an alleged voidable preference under Section 60 of the Bankruptcy Act, 11 U.S.C.A. § 96.

The burden rests upon the Trustee to allege and prove that the preference was voidable. Mizell v. Phillips, 240 F.2d 738 (5th Cir. 1957). If the recipient of the funds in payment of an antecedent debt had reasonable cause to believe that the bankrupt was insolvent at the time of payment, the transfer-if made within four months of bankruptcy, is voidable. Id. The question of probable cause to believe that the bankrupt was insolvent is one of fact, and all the evidence bearing upon the fact is to be considered collectively. Id. No general rule can be laid down which will apply to every case. Watchmaker v. Barnes, 259 F. 783, 786 (1st Cir. 1919).

The knowledge of an attorney who has been directly employed to collect a debt, respecting insolvency, will be imputed to the creditor. Rogers v. Palmer, 102 U.S. 263, 26 L.Ed. 164 (1880); Kelley v. National Surety Corporation, 187 F.Supp. 329, 332 (S.D.W.Va.1960); 11 U.S.C.A. § 96(a)(8)(b).

Under Alabama law the service of a garnishment creates a lien in favor of the creditor. Section 6-6-76 Ala.Code 1975. Under 67(a) of the Bankruptcy Act, 11 U.S.C.A. § 107, every lien obtained by legal or equitable proceedings or process within four months before filing the petition in bankruptcy is deemed to be null and void if at the time such lien was obtained the person was insolvent. See Collier on Bankruptcy, 14th Ed., Vol. III, p. 807. Matter of Gibson Products of Arizona, 543 F.2d 652 (9th Cir. 1976); In re: Mercury Heating Co., 322 F.Supp. 1161 (E.D.Wis.1971).

The issues for determination are: (1) was the bankrupt, K.B. Southern, Inc. (herein referred to as K.B.S.), insolvent at the time of the service of the garnishment and receipt of the funds?; and (2) did the defendant know or have reasonable cause to believe that the bankrupt was insolvent at the time of those events?

A consent judgment was entered in the state court against K.B.S. on april 6, 1979, for $3,435.56 with costs. A garnishment was issued out of said court on June 4, 1979, to the Birmingham Trust National Bank returnable within thirty days. The garnishment was served on June 14. At that time the garnishee debited the account of its depositor. On June 28, 1979, the garnishee answered indebted in the amount of $3,506.42. The defendant received the funds on July 24. K.B.S. was adjudicated a bankrupt on August 2nd upon its voluntary petition filed on that date.

The bankrupt's schedule reveals assets of $2,799,000.00 and liabilities of $5,607,000.00. Insolvency on the date of preference presents the critical issue and insolvency on any other date is insufficient standing alone to prove this essential element of preference, but as stated in Inter-State National Bank of Kansas City v. Luther, 221 F.2d 382, 391 (10th Cir. 1955):

"Evidence of insolvency on dates before and after preference dates is competent evidence of insolvency on those dates, especially when considered with evidence of continued decline toward bankruptcy. 4A Remington §§ 1689-1690; 1 Collier § 1.19, p. 83."

The financial facts on insolvency referred to coupled with other facts in the case leave little doubt that K.B.S. was insolvent during the month of June and on the dates of the alleged preference. The first question must therefore receive an affirmative answer.

The defendant's account was in default in January 1979, when it was placed in its attorney's hands for collection. Suit was filed against K.B.S. on January 16, 1979. The case was set for trial on April 6, after a continuance from March 16th at K.B.S.'s request. On the trial date, following negotiations and after a discussion of financial condition of K.B.S. between counsel, the defendant in the case consented to the entry of a judgment on condition that the claim for an attorney's fee be dropped, and that execution be stayed until May 5th because said defendant did not have funds with which to pay the judgment at the time of entry or within two weeks normally fixed for the issue of an execution. The judgment was not paid, and on May 31st counsel for the defendant herein wrote a letter directing the Clerk to issue an execution on a 1972 Ford car located at a stated address. Execution issued on the 5th of June and was returned by the sheriff "no property found" on June 11th, with the notation "bad address."

There is a dispute in the evidence as to the date and the scope of a conversation, between counsel for K.B.S. and defendant's counsel, that occurred sometime between the service of the...