In re Bohlen Enterprises, Ltd.
| Decision Date | 20 February 1987 |
| Docket Number | Adv. No. 86-0342W.,Bankruptcy No. 86-01665W |
| Parties | In re BOHLEN ENTERPRISES, LTD., dba Central Office Equipment, Debtor. Wesley B. HUISINGA, Trustee, Plaintiff, v. NATIONAL BANK OF WATERLOO, Waterloo, Iowa, Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Northern District of Iowa |
George D. Keith, Waterloo, Iowa, for National Bank of Waterloo.
Wesley B. Huisinga, Cedar Rapids, Iowa, trustee.
Michael C. Dunbar, Waterloo, Iowa, for debtor.
Trustee's Claim of Preference
The Trustee has filed a complaint claiming that a payment by the debtor to the Defendant in the amount of $191,777.27 constituted a preference which is avoidable under the provisions of Bankruptcy Code § 547(b). On the basis of the evidence and the arguments of counsel the Court makes the following Findings of Fact, Conclusions of Law and Order pursuant to Bankruptcy Rule 7052.
1. At the time of the transactions concerned, the debtor owed the National Bank of Waterloo (NB) two debts in the principal amounts of $125,000 and $189,000, plus accrued interest. These obligations were secured under an agreement dated October 3, 1983, for which a financing statement was filed October 5, 1983.
2. On or about April 28, 1986, in response to insistence by NB that payments be made by the end of the month, the debtor applied for a $200,000 loan from the John Deere Community Credit Union of Waterloo (Credit Union).
3. At the time of the loan application, William Bohlen (Bohlen), president of the debtor corporation, and the Credit Union loan officer agreed that a part of the loan proceeds would be used for payment of the debtor's $125,000 loan obligation to the bank. The remainder was to be used for miscellaneous purposes. This agreement was confirmed by the issuance of a check by the Credit Union on Thursday, May 1, 1986 in the amount of $125,068.50 made payable to NB and the debtor. The existence of the debtor's $189,000 debt to NB was not then known to the Credit Union.
4. On Wednesday, April 30, 1986, a share draft account was established by the Credit Union for the debtor, and Bohlen received share drafts for use by the debtor. The share account balance was zero.
5. On the same date, and prior to the Credit Union's final approval of the $200,000 loan, Bohlen wrote a share draft in the amount of $192,000 for deposit in the debtor's business account at NB, and made the deposit on that date.
6. On the same date, Bohlen wrote three checks on the NB account, all payable to NB, covering the principal and interest due on the $189,000 obligation and the interest due on the $125,000 obligation. These checks were in the respective amounts of $189,000, $1,708.77 and $1,068.50.
7. On Thursday, May 1, 1986, the share draft which Bohlen had written the previous day for deposit in NB was presented to the Credit Union for payment. The draft was cleared by the Credit Union.
8. The $192,000 deposit by the debtor was not in the ordinary course of its business.
9. The debtor was insolvent at the time of the payment of the stated sums to the bank.
10. The debtor filed a Chapter 7 bankruptcy petition on July 21, 1986, and that proceeding is now pending.
MEMORANDUMThe issue before the Court is whether the transfer of $191,777.27 to NB by the debtor within the 90-day period prior to the filing of a bankruptcy petition by the debtor constituted a preferential transfer under 11 U.S.C. § 547. The pertinent provision of the code states:
It is undisputed that the debtor was insolvent when the transfer to NB was made, that the transfer occurred within 90 days prior to the filing of the debtor's bankruptcy petition and that the transfer was for and on account of an antecedent debt owed by the debtor to NB. The issues, therefore, are (1) whether the funds transferred constituted "property of the debtor" within the meaning of § 547(b), and (2) whether the transfer enabled NB to receive more that it would have received if the transfer had not been made and NB had received payment of the debt to the extent provided by the provisions of the bankruptcy code.
NB contends that the funds used to make the payments were "earmarked" and were never intended to become the unrestricted property of the debtor. If so, the payment to NB in no way diminished the debtor's estate, for they were never intended to be available to satisfy claims of creditors other than NB.
Where a third party makes a loan to a debtor specifically to enable him to satisfy the claim of a designated creditor, the proceeds do not become assets of the debtor, and therefore no preference is created. It makes no difference whether the proceeds of the loan are transferred directly by the lender to the creditor or are paid directly to the debtor with the understanding that they will be paid to the designated creditor, if the funds are clearly "earmarked". 4 Collier on Bankruptcy, 547.25, 547-100 (15th Ed.1986).
A payment by a debtor with borrowed funds may create a preference where the loan so used was not made upon condition that it be paid to the particular creditor to whom it was turned over. Id. In re Jaggers, 48 B.R. 33, 36 (Bkrtcy.W.D.Tex.1985).
In the instant case, it is agreed that the check for $125,068.50 issued by the Credit Union and made payable to the debtor and NB was earmarked specifically for the purpose of satisfying the debtor's $125,000 obligation to NB. This transaction was not completed as intended, but NB did receive $191,777.27 from funds supplied by the Credit Union. It was the intent of the Credit Union that NB receive $125,068.50 and the loan arrangements were such that the debtor did not have control of that sum. The debtor was to act merely as a conduit in the transfer of funds from the Credit Union to NB. We conclude on this basis that $125,068.50 of the total $191,777.27 payment was not property of the debtor, and that the remaining $66,708.77 was property of the debtor.
The next issue involves a determination of NB's right to the remaining $66,708.771 in light of the provision of Code Section 547(b)(5). A creditor may retain any payments received during the 90-day period prior to a debtor's filing a bankruptcy petition if those payments do not give the creditor a bigger payoff than he would have received if he had waited until bankruptcy to obtain payment. In re Auto-Train Corp., 49 B.R. 605, 609 (Bkrtcy.D.C. 1985). A comparison must be made between what NB would have received by reason of the payment and what it would have received in a Chapter 7 liquidation had the payment not been made.
The amount owed NB after the $125,000 payment was $192,000. The additional payment to NB in the amount of $67,000 (the difference between the total payment of $192,000 and the earmarked amount of $125,000), would have further reduced the debtor's debt to $125,000. After liquidating the collateral which secured the debtor's remaining obligation, NB obtained $84,000 for application to the remaining $125,000 debt, thus leaving an unsecured claim in the amount of $41,000. Had the $67,000 payment not been made to NB, its claim would have been secured to the extent of the fair market value of the collateral, $84,000, leaving an unsecured claim of $108,000. This comparison demonstrates that NB received $67,000 more by the debtor's payment than it would have received in a contemporary Chapter 7 liquidation.
NB also claims entitlement on the basis of an alleged right of setoff. A setoff is classified as a secured claim under Bankruptcy Code § 506(a). Generally, a creditor who receives payment on a secured claim has not been preferred because he has merely realized the value of his collateral earlier than he would have had he waited until liquidation. In re Hawkins Mfg. Inc., 11 B.R. 512, 513-14 (Bkrtcy.D. Colo.1981). NB's argument must fail for three reasons.
Firstly, § 553 is not self-executing; affirmative acts must be taken by the creditor which indicate a clear intent to setoff. In re Balducci Oil Co., Inc., 33 B.R. 847, 850 (Bkrtcy.D.Colo.1983). The share draft for $192,000 was deposited in the debtor's account at NB on April 30, 1986, and checks totalling the approximate amount of $192,000 were paid from the account without any evidence that NB intended to exercise its right of setoff in the brief time during which the funds were actually in the debtor's bank account. Had the three checks that were made payable to NB actually been made payable to other creditors, there is no evidence that NB...
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