In re Camp Rockhill, Inc., Bankruptcy No. 80-00256K

• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
• Writing for the Court: WILLIAM A. KING, Jr.
• Citation: 12 BR 829
• Parties: In re CAMP ROCKHILL, INC., Debtor. Arthur T. McWILLIAMS, Trustee, Plaintiff, v. Leon GORDON, Defendant.
• Docket Number: Bankruptcy No. 80-00256K,Adv. No. 80-0127K.
• Decision Date: 17 July 1981

12 B.R. 829 (1981)

In re CAMP ROCKHILL, INC., Debtor.
Arthur T. McWILLIAMS, Trustee, Plaintiff,
v.
Leon GORDON, Defendant.

Bankruptcy No. 80-00256K, Adv. No. 80-0127K.

United States Bankruptcy Court, E.D. Pennsylvania.

July 17, 1981.

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COPYRIGHT MATERIAL OMITTED

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Arthur T. McWilliams, James J. O'Connell, Philadelphia, Pa., for trustee/plaintiff

Frank E. Greenberg, Philadelphia, Pa., for defendant.

OPINION

WILLIAM A. KING, Jr., Bankruptcy Judge.

The issue presently before the court is whether a transfer, made during the period that begins one (1) year before the filing of the bankruptcy petition and ending ninety (90) days before filing, can be voided by the trustee pursuant to section 547 of the Bankruptcy Code (the "Code"). We conclude that the failure of the trustee to establish the existence of an insider relationship at the time of the transfer on account of the antecedent debt, precludes the voidability of the transfer as a preference under section 547(b)(4)(B) of the Code.

The facts of the instant case are uncontroverted and can be simply stated.¹ Defendant, the creditor, was a minority shareholder of the debtor corporation, Camp Rockhill, Inc., (Rockhill). On October 10, 1978, the creditor surrendered his entire interest in Rockhill to the debtor for a $10,000.00 judgment note. At no time was the creditor an officer of the debtor corporation. On November 5, 1979, the creditor recorded the judgment note, thereby acquiring a lien on the real property of the debtor. Subsequently, the debtor filed for relief under Chapter 7 of the Code on February 5, 1980.

Admittedly, the recordation of the judgment note, resulting in the creation of a lien on debtor's real property, falls outside the ninety (90) day period prior to the filing of the petition. The trustee brings this action, however, alleging that the creditor was an insider of the corporate debtor which permits him to avoid any preferential transfer which occurred within one (1) year prior to the filing of the petition.

DISCUSSION

Section 547(b) of the Code presents five (5) criteria which are to be applied to a transfer of property of the debtor, and provides that the trustee may avoid any transfer of property of the debtor which satisfies all five criteria.² The criteria are: (1) the transfer must have been to or for the benefit of a creditor, (2) for or on account of an antecedent debt, (3) made while the debtor was insolvent, (4) on or within ninety days before the date of the filing of the petition; or within one year before the date of the filing if the creditor was an insider at the time of the transfer and had reasonable cause to believe that the debtor was insolvent, and (5) which enabled the creditor to receive more than he would have received under the distribution provisions of the Code.³

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In the instant case, the trustee seeks to avoid the lien obtained by the recordation of the judgment note as a preferential transfer to an insider.⁴ Yet, before we can reach the issue of whether the creditor was an insider, we must first determine whether the trustee has established, by a preponderance of the evidence,⁵ the other essential elements required to void a transfer pursuant to section 547(b).

Section 101(9) of the Code enunciates a broad definition of the term creditor. A creditor is defined as an entity that has a claim against the debtor that arose at the time of or before the order for relief has been entered. 11 U.S.C. § 101(9) (1979). Clearly, the taking of a judgment note by the defendant prior to the filing of the bankruptcy petition constitutes a claim against the debtor under section 101(9). Furthermore, the recordation of the note and subsequent creation of a lien on the debtor's real property was to or for the benefit of the creditor.

The second essential element which the trustee must establish to void a transfer as being preferential, is whether the transfer was made on account of an antecedent debt. Section 101(40) of the Code defines the term "transfer" as broadly as possible to include any disposition of property or an interest in property. H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 314 (1977); S. Rep. No. 95-989, 95th Cong., 2d Sess. 27 (1978), U.S. Code Cong. & Admin. News 1978, 5787. Specifically, "transfer means every mode, direct or indirect, absolute or conditional, voluntarily or involuntarily, of disposing of or parting with property or with an interest in property . . ." 11 U.S.C. § 101(40) (1979). We are convinced that the taking and recording of a judgment against the debtor's real property, thereby creating a lien and security for a debt, constitutes a transfer within the purview of section 547. See In re Fell, 18 F.Supp. 989, 991 (E.D. Pa.1937); Grant v. National Bank of Auburn, 232 F. 201, 205 (N.D.N.Y.1916); In re Tupper, 163 F. 766 (N.D.N.Y.1908).

Once we have established that the judgment lien was a transfer within the Code definition, the question remains whether the transfer was on account of an antecedent debt. See 11 U.S.C. § 547(b)(2). In other words, we must determine when the transfer was made. For the purposes of section 547, a transfer is made at the time such transfer is perfected.⁶ Section 547(e)(1) states that a transfer of real property is perfected when a bona fide purchaser of such property from the debtor against

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whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee. In the instant case, the act of the creditor in recording the judgment note, thereby creating a lien on the debtor's real property, so far perfected his interest in the property, that a bona fide purchaser from the debtor could not acquire an interest superior to that of the creditor. Pa. Stat. Ann. tit. 68, § 602(3) (Purdon). See also, Tupper, 163 F. at 766; Fell, 18 F.Supp. at 991. Accordingly, the recordation of the judgment note on November 5, 1979, is when the transfer was made. The debt was created on October 10, 1978, when the defendant surrendered his interest in Rockhill and received a judgment, thereby becoming a creditor of the debtor corporation. Therefore, the transfer was made on account of an antecedent debt

For the preference to be affected under section 547, the trustee need also establish the debtor's insolvency at the time of the transfer. 11 U.S.C. § 547(b)(3). In response to the problems engendered by requiring proof of insolvency, Congress included section 547(f) in the Code, whereby insolvency is presumed for the period of ninety (90) days prior to filing. H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 178 (1977). However, the presumption of insolvency applies only during the ninety days immediately preceding the date of the filing of the petition. Hence, because the trustee is challenging the transfer to an alleged insider that occurred more than ninety days before the filing of the petition, the presumption is of no apparent assistance. Therefore, the trustee must establish the debtor's insolvency on the date the transfer was made. Constructora...