A. Fassnacht & Sons, Inc., In re

• Decision Date: 14 August 1987
• Docket Number: No. 86-5724,86-5724
• Citation: 826 F.2d 458
• Parties: 17 Collier Bankr.Cas.2d 821, 16 Bankr.Ct.Dec. 622 In re A. FASSNACHT & SONS, INC., Debtor. Richard P. JAHN, Jr., Trustee, Plaintiff-Appellant, v. Suzanne FASSNACHT, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 458

826 F.2d 458

17 Collier Bankr.Cas.2d 821, 16 Bankr.Ct.Dec. 622

In re A. FASSNACHT & SONS, INC., Debtor.

Richard P. JAHN, Jr., Trustee, Plaintiff-Appellant, v. Suzanne FASSNACHT, Defendant-Appellee.

No. 86-5724.

United States Court of Appeals, Sixth Circuit.

Argued March 31, 1987.

Decided Aug. 14, 1987.

Richard P. Jahn, Jr. (argued), Jahn and Jahn, Chattanooga, Tenn., for plaintiff-appellant.

Thomas E. Ray (argued), Chattanooga, Tenn., for defendant-appellee.

Before JONES and NORRIS, Circuit Judges, and COOK, District Judge. ^*

JULIAN ABELE COOK, Jr., District Judge.

This is an appeal from a decision by a district judge who concluded that a bankruptcy trustee could not recover the repayment of a $100,000 loan by a debtor to a creditor. Appellant generally alleges that the repayment constituted an impermissible granting of a preference to one creditor over other creditors, thereby violating the 1980 provisions of 11 U.S.C. Sec. 547(b). ¹ For the reasons that are set forth below, we affirm the decision of District Judge L. Clure Morton.

I

A. Fassnacht & Sons, Inc. filed a petition in bankruptcy in November 1980. Prior to that time, it had been in business in Chattanooga, Tennessee for more than one hundred years. Appellee, Suzanne Fassnacht, is the wife of John Fassnacht, who became president of this family business in 1965. She was elected to the board of directors in 1971. Five years later, Appellee assumed the positions of treasurer and assistant to the president. She remained as an officer of the company until June 1980 and continued to serve on the board of directors through the filing of the bankruptcy petition. Her son, Rick Fassnacht, served as vice president of the company from 1971 until his resignation shortly before the bankruptcy petition was filed. Her daughter-in-law, Vicki Fassnacht, processed the company's accounts until the early months of 1980.

In the early part of 1979, the company began to experience some financial difficulties. ² In March 1979, American National Bank extended a $100,000 loan to the company whose (1) gross sales at that time were less than 1.5 million dollars, and (2) staff consisted of less than twelve persons. Subsequent efforts to obtain another loan from commercial banks were unsuccessful. Eventually, the company debts were paid by checks which were not issued until the supplier demanded payment.

In the summer of 1979, Appellee sought and received a $100,000 loan from her aunt, Bess Cason, who had rejected an earlier request to extend the loan directly to the company. In order to provide her aunt with some form of guaranty for the loan, Appellee executed a promissory note which made the monies due and payable within six months after her aunt's death. The note was structured in such a way that Appellee's debt could be offset against her inheritance if not fully paid prior to Cason's death.

Thereafter, Appellee loaned the monies to the company from which she took a promissory note as evidence of the debt. Her husband had intended to secure the company's debt to his wife, as well as the debts to other family members, with a parcel of property on 13th Street in Chattanooga. However, the deeds erroneously described the property which was adjacent to the 13th Street property and owned by another company, C & E Enterprises. ³

In late 1979, John Fassnacht discovered the error within the deeds and brought them to the attention of his attorneys who supposedly corrected and recorded the instruments in an effort to secure the company's obligations to the Appellee. During the early summer of 1980, John Fassnacht, while preparing the 13th Street property for sale to the Tennessee Valley Authority, discovered that the deed, which had ostensibly secured his wife's $100,000 loan, had not been corrected. The deed was immediately corrected and recorded on June 19, 1980. The property was sold in September 1980, and the $100,000 obligation to the Appellee, as well as a $5000 secured debt to C & E Enterprises, was fully satisfied.

II

A trustee may void any transfer of property by the debtor to a creditor between ninety days and one year prior to the filing of the bankruptcy petition if the creditor was (1) an insider at the time of such transfer, and (2) had reasonable cause to believe that the debtor was insolvent at the time of the transfer. 11 U.S.C. Sec. 547(b)(4)(B) (1980). There is no dispute that the Appellee, who was a director and an officer of the company, as well as the wife of the president, was an insider. However, the key legal question is whether she had reasonable cause to believe that A. Fassnacht and Sons, Inc. was insolvent at the time when her loan was fully satisfied. According to the preference statute, the time of transfer is when the corrected deed of trust was recorded. 11 U.S.C. Sec. 547(e). Thus, on the basis of the record, June 19, 1980 is the crucial date. Moreover, the trustee must prove by a "preponderance of the evidence" that the creditor had reasonable cause to believe the debtor was insolvent. Green v. A.G. Edwards & Sons, Inc., 582 F.2d 439, 442 (8th Cir.1978).

Initially, we must identify the appropriate standard of review for the issues in this cause. The Eighth and Ninth Circuit Courts of Appeal have used the "clearly erroneous" standard in reviewing the decision of the lower courts regarding whether a creditor had reasonable cause to believe that the debtor was insolvent. See e.g. Green, 582 F.2d at 442 (8th Cir.1978); Los Angeles v. Quittner, 176 F.2d 997 (9th Cir.1949). Indeed, most cases have employed this standard. See 3 Collier's on Bankruptcy, p 60.54 at 1072 n. 4 (1976). These cases appear to treat a ruling on this issue as a finding of fact on which the Court of Appeals must defer to the trial court. The only Sixth Circuit Court of Appeals cases in this area are more than fifty years old and involve a slightly different version of the statute. Nevertheless, this Circuit has held that the findings of a bankruptcy court shall not be disturbed unless there is "plain error." Manufacturer's Acceptance Corp. v. Hale, 65 F.2d 76, 77 (6th Cir.1933); Buchanan State Bank v. DeGroot, 39 F.2d 397, 398 (6th Cir.1930).

However, some significant decisions in the Second and Fifth Circuit Courts of Appeal suggest that the simple application of the clearly erroneous standard may not be appropriate in certain limited situations. These Circuits have held that when the facts are largely undisputed, the inferences from the facts or an application of law to the facts is an area where appellate courts can engage in broad review. See e.g. Bernstein v. South Central Bell Telephone Co., 730 F.2d 987, 990 (5th Cir.1984), citing, Mayo v. Pioneer Bank & Trust Co., 297 F.2d 392, 395 (5th Cir.1961) (Wisdom J.); In re Hygrade Envelope Corp., 366 F.2d 584 (2d Cir.1966) (Friendly, J.).

Nevertheless, we need not attempt to reconcile any conflict that may exist between the circuits or decide whether to modify the "plain error" rule which this Circuit has employed in the past. Instead, we note that our decision to affirm the lower court would be the same without regard to which standard is employed. Here, the trustee has not demonstrated any substantive errors in the decision of the district judge who adopted the findings of fact, as well as the conclusions of law, of the Bankruptcy Judge.

In Cissell v. First National Bank of Cincinnati, 476 F.Supp. 474, 484 (S.D. Ohio 1979), the district court gave an excellent explanation of what the trustee must prove in order to show that the creditor had reasonable cause to believe that the debtor was insolvent:

Knowledge of insolvency is not necessary, nor even actual belief thereof; all that is required is a reasonable cause to believe that the debtor was insolvent at the time of the preferential transfer. A creditor has reasonable cause to believe that a debtor is insolvent when such a state of facts is brought to the creditor's notice, respecting the affairs and pecuniary condition of the debtor, as would lend a prudent business person to the conclusion that the debtor is insolvent. Of course, a creditor may not willfully close his eyes that he might remain in ignorance of his debtor's condition. On the contrary, where circumstances are such as would incite a man of ordinary prudence to make inquiry, the creditor is chargeable with notice of all facts which a reasonably diligent inquiry would have disclosed. In such a case, an inquiry of the debtor alone is generally insufficient, where his answer, under the circumstances, could readily have been found to be untrue. As a matter of fact, it is the creditor's cause for belief and not the debtor's knowledge, or lack of it, that is important. And if a creditor fails to make an inquiry when he has a duty to do so, he will be charged with all the knowledge that he would have acquired had he conducted such an investigation (3 Collier on Bankruptcy (Part 2) p 60.53 (1977) (footnotes omitted). (See also In re Hygrade Envelope Corp., 366 F.2d 584, 586-90 (2d Cir.1966) (Friendly, J.)).

Cissell is helpful, in that it establishes the necessity of a three step analysis which should be adopted by the trial courts. First, the court must determine whether circumstances exist that would lead an ordinarily prudent business person to make an inquiry. Second, where such circumstances exist and the creditor has failed to make any inquiry, the court must impute to the creditor that knowledge which he would have acquired had a "reasonably diligent" inquiry been made. Mack v. Bank of Lansing, 396 F.Supp. 935, 942 (W.D.Mich.1975). Third, if the imputed knowledge would have given the creditor reasonable cause to believe that the debtor was insolvent, the court should allow the trustee to void the preferential treatment which had been received by the creditor.

In the instant cause, the bankruptcy judge followed this analysis perfectly. With regard to the first step, he explicitly...