Gentry v. Bodan

• Decision Date: 24 August 1972
• Docket Number: Civ. A. No. 14539.
• Parties: Herschel A. GENTRY, Trustee in Bankruptcy of Estate of Shane Quality Jewelers, Inc. v. Alvin L. BODAN v. Thomas O. PARKER, Jr., and C. David Parish, Third-Party Defendants.
• Court: U.S. District Court — Western District of Louisiana

347 F. Supp. 367

Herschel A. GENTRY, Trustee in Bankruptcy of Estate of Shane Quality Jewelers, Inc. v. Alvin L. BODAN v. Thomas O. PARKER, Jr., and C. David Parish, Third-Party Defendants.

Civ. A. No. 14539.

United States District Court, W. D. Louisiana, Monroe Division.

August 24, 1972.

COPYRIGHT MATERIAL OMITTED

James A. Hobbs, Jones, Blackwell, Chambliss, Hobbs & Henry, West Monroe, La., for plaintiff.

Robert Lee Curry III, Theus, Grisham, Davis & Leigh, Monroe, La., for defendant.

John C. Massey, West Monroe, La., for third-party defendants.

OPINION ON THE MERITS

DAWKINS, Chief Judge.

This action is brought by the Trustee in Bankruptcy of Shane Quality Jewelers, Inc., to avoid an alleged preferential transfer made to Alvin Bodan. Plaintiff brought the action under Sections 60, 67 and 70 of the Bankruptcy Act (11 U.S.C. §§ 96, 107 and 110) to recover certain specified property transferred to defendant, Alvin Bodan, by the bankrupt, Shane Quality Jewelers, Inc., within four months prior to its filing a voluntary petition in Bankruptcy.

The story begins when the defendant landlord leased premises in Monroe, Louisiana, to Shane Quality Jewelers, Inc., for a term of ten years for a monthly rental of two hundred seventy-five dollars ($275.00) or six and one-half percent (6½%) of annual sales, whichever was greater. The lease was executed May 22, 1967, and rental payments began the month of September, 1967, when the structure was suitable for occupancy. To secure the rental payments, the lessor required the copartners, Thomas O. Parker, Jr., and C. David Parish, to bind themselves as sureties in solido. The lease restricted the use of the premises to the business of a jewelry store, including watch repair. The lease also contained an acceleration clause, to be triggered by any installment of rent which became delinquent. This provision provided that the lessor was obliged to give the lessee written notice by mail of the delinquent rent and unless payment was made within five (5) days of receipt of such notice the lessor could declare the balance of rent installments immediately due.

It is undisputed that the lessor, Bodan, knew that the corporation was in the process of filing a voluntary petition in bankruptcy at the time he accepted the specified property for cancellation of the lease.¹ Plaintiff's Exhibit No. 1 is the contractual agreement for cancellation of the lease. This agreement was executed May 17, 1968, just four days before Shane Quality Jewelers, Inc., was adjudicated as a bankrupt. Before this date, Bodan testified that he had trouble getting his rent almost every month. Also, at the time of the execution of the agreement for the cancellation of the lease there was a discussion with regard to Shane Quality Jewelers, Inc., entering bankruptcy, and prior to May 17, 1968, Bodan conversed with Parker, president of the bankrupt corporation, about the corporation entering bankruptcy.

The evidence also reflects that rent for the month of May, 1968, had not been paid to the lessor before the execution of the lease cancellation and this was the only past due rent. All previous payments had been made through April, 1968.

On May 17, 1968, Bodan and Parker, acting on behalf of Shane Quality Jewelers, Inc., entered into an agreement whereby the bankrupt transferred to the defendant all the merchandise and fixtures in the leased premises, plus $1500.00, in consideration of a release of liability for any past due or future rent due arising out of the contract of lease between the parties. This compromise also expressly released the two sureties under the lease, namely, Thomas O. Parker, Jr., and C. David Parish, from any further liability. The doors of the premises were closed for business on that date.

The voluntary bankruptcy was filed May 21, 1968, and Herschel A. Gentry was appointed Trustee. August 2, 1968, the Trustee in Bankruptcy mailed a letter to defendant demanding a return of the money and equipment transferred by the document dated May 17, 1968. The Trustee claimed the transfer was void as preferential under the terms of the Bankruptcy Act. The complaint was filed April 4, 1969. Defendant was granted leave to implead the bankrupt's president, Thomas A. Parker, and part-owner, David Parish.

In the event that Parker and Parish are liable to the third party plaintiff, they counterclaim against the Trustee for an amount of almost $10,000 which represents salaries allegedly due from the corporation.

In the pre-trial stipulation entered in this cause, the parties made the following admissions of fact:

a. Shane Quality Jewelers, Inc., was adjudicated a bankrupt by the United States District Court for the Western District of Louisiana May 21, 1968, and Herschel A. Gentry is the duly qualified and acting Trustee of said bankrupt estate;

b. Shane Quality Jewelers, Inc., the bankrupt, as aforesaid, was the Lessee of the defendant, Alvin L. Bodan;

c. Bodan and the bankrupt corporation entered into an agreement, a certified copy of which is attached to plaintiff's petition and which contains the agreement between the bankrupt corporation and defendant.

d. Bodan received the consideration recited in said release and the bankrupt corporation received the consideration recited therein.

It should be remembered that a preference granted to a creditor by the debtor is perfectly valid unless it is declared to be invalid by some statute. See 3 Collier, Bankruptcy, ¶ 60.02 (14 Ed. 1964), and authorities cited therein. Therefore, in order for a transfer to be invalid under the Bankruptcy Act, the Act itself must declare the transfer to be so or it must incorporate such law that declares the transfer void.

Section 60a of the Bankruptcy Act (11 U.S.C. § 96a) defines a preference which is unsuitable for the Act's intended purpose:

"(a) (1) A preference is a transfer, as defined in this title, 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 title, 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."

Subsection (b) determines the condition which must be met in order for the trustee to avoid the transfer:

"(b) 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. Where the preference is voidable, the trustee may recover the property or, if it has been converted, its value from any person who has received or converted such property."

These two provisions establish the requirements which must be met before a transaction is considered a preference which may be voidable: "If any one of the elements of a preference as enumerated in § 60a is wanting, there is no necessity of considering an avoidance of the transfer under § 60b, since a preference under the terms of § 60 itself has not been established." 3 Collier, supra, ¶ 60.02, at 759, citing General Electric Credit Corp. v. Davis, 224 F.2d 322 (4th Cir., 1955).

The absence of any one of the requisite elements under § 60a(1) or 60b negates the existence of a preference. Bumb v. Valley Electric Co., 419 F.2d 107 (9th Cir. 1969); Thomas v. Gulfway Shopping Center, Inc., 320 F.Supp. 756 (S.D.Tex., 1970); 3 Collier, supra, ¶ 60.36 at p. 874. The burden is upon the trustee who seeks to avoid the transfer to show that each of these elements has been fulfilled. Bumb v. Valley Electric Co., supra; Moran Bros., Inc. v. Yinger, 323 F.2d 699 (10th Cir., 1963); Aulick v. Largent, 295 F.2d 41 (4th Cir., 1961); Republic National Bank of Dallas v. Vial, 232 F.2d 785 (5th Cir., 1956); Thomas v. Gulfway Shopping Center, Inc., supra; Holahan v. Gore, 278 F.Supp. 899 (E.D.La., 1968).

The defendant suggests that satisfaction of a statutory landlord's lien within four months prior to the filing of the petition in bankruptcy is an exception to the rule of voidable preferences. This is true if the lien is valid, for the policy of the Act is to allow secured creditors—those having liens upon specific property of the bankrupt—to have their claims satisfied first except where the intent of the Act clearly is to the contrary. Section 67b and c, as amended (11 U.S.C. § 107b and c).

"* * * The essence of a preference is that it depletes or diminishes the bankrupt's estate that is available to remaining creditors. Thus when a transfer neither depletes nor diminishes the estate that would otherwise be available for distribution to other creditors in a subsequent bankruptcy proceeding, no preferential transfer is considered to have occurred. In the case of property being transferred for the cancellation of a lien which has not been invalidated or subordinated by the Act, so long as the value of the property subject to the lien at least equals the value of the property transferred See, Dinkelspiel v. Weaver, 116 F.Supp. 455 (W.D.Ark.1953); 3 Collier, Bankruptcy Par. 60.22 (14 ed. 1964) and so long as the value of the property transferred does not exceed the value of the lien being surrendered See, Collier, Bankruptcy Par. 60.22 at 870-871 (14th ed. 1964); Waring v. Buchanan, Fed.Cas. No. 17,176 (D.C.N.Y.); Douglass v. Pugh, 177 F.Supp. 274 (E.D.Ky.1959), aff'd 6 Cir., 287 F.2d 500 (6th Cir. 1961) no preferential transfer occurs for the assets available for other creditors are not being diminished. In such circumstances the bankrupt's assets were already encumbered by the creditor-transferee's enforceable lien which was of value at least as great as the amount being transferred. See, e. g., Virginia Nat'l Bank v. Woodson, 329 F.2d 836 (4th Cir. 1964); Aulick v. Largent, 295 F.2d 41 (

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