In re Cosmopolitan Aviation Corp.

• Decision Date: 14 November 1983
• Docket Number: Adv. No. 883-0580-18.,Bankruptcy No. 881-82644-18
• Citation: 34 BR 592
• Parties: In re COSMOPOLITAN AVIATION CORP., Debtor. James BARR, Chapter 11 Trustee of Cosmopolitan Aviation Corp., Plaintiff, v. NATIONAL AIRCRAFT SERVICES, INC., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

34 B.R. 592 (1983)

In re COSMOPOLITAN AVIATION CORP., Debtor.

James BARR, Chapter 11 Trustee of Cosmopolitan Aviation Corp., Plaintiff, v. NATIONAL AIRCRAFT SERVICES, INC., Defendant.

Bankruptcy No. 881-82644-18, Adv. No. 883-0580-18.

United States Bankruptcy Court, E.D. New York.

November 14, 1983.

Hahn & Hessen, New York City, for trustee.

Milgrim, Thomajan, Jacobs & Lee, P.C., New York City, for National Aircraft Services, Inc.

DECISION

C. ALBERT PARENTE, Bankruptcy Judge.

This is an adversary proceeding brought by trustee against creditor, National Aircraft Services, Inc. ("National"), to recover funds obtained from debtor posited on the contention that the transfer of the funds constituted a voidable preference.

FACTUAL BACKGROUND

On August 11, 1981, Cosmopolitan Aviation Corp. ("Cosmopolitan") filed a voluntary petition under Chapter 11 of the Bankruptcy Reform Act of 1978 ("Code"). Prior to the filing, National obtained a judgment in the United States District Court for the Northern District of Texas against Cosmopolitan in the amount of $81,893.91. On or about April 16, 1981, an authenticated copy of the foreign judgment was docketed in the office of the clerk of Suffolk County, New York. On April 22, 1981, National served an execution upon the sheriff of Suffolk County, which was received by the sheriff on April 25, 1981. On June 25, 1981, the sheriff seized the Cosmopolitan bank account, partially satisfying the judgment by levying upon $10,154.90. The bank account had been previously restrained in April or May of 1981 by the service of a restraining notice pursuant to N.Y.C.P.L.R. § 5222.

On June 24, 1982, a trustee was appointed to administer the property of the bankruptcy estate. On June 28, 1983, the trustee commenced this adversary proceeding by filing a complaint with this court seeking to avoid the transfer of June 25 on the grounds that such transfer was a preference voidable under § 547 of the Code. The summons and complaint were served upon National on June 30, 1983. National interposed its answer on July 29, 1983. A trial was conducted before this court on September 22, 1983. Decision was reserved.

DISCUSSION

A trustee may avoid as a preference the transfer of property of the debtor to a creditor upon proving the five elements of a preference as enumerated in 11 U.S.C. § 547(b). This section provides that:

Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made

(A) on or within 90 days before the date of the filing of the petition; or

(B) between 90 days and one year before the date of the filing of the petition, if such creditor, at the time of such transfer—

(i) was an insider; and

(ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer; and

(5) that enabled such creditor to receive more than such creditor would receive if—

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debtor to the extent provided by the provisions of this title.

No allegation has been made that National is an "insider" and thus the appropriate focus is the ninety day period prior to the date of the filing of the petition. (11 U.S.C. § 547(b)(4)(A).) Such period is properly measured by excluding the date of filing and counting ninety days from that date. In re Grimaldi, 3 B.R. 533, 1 C.B.C.2d 901 (Bkrtcy.D.Conn.1980); see In re Fabmet Corporation, 31 B.R. 414, 8 C.B.C.2d 1220 (Bkrtcy.W.D.N.Y.1983). Therefore, any transfer to National from May 18, 1981 to the date of filing may be avoided if otherwise meeting the criteria set forth in § 547(b).

The trustee urges upon this court that the levy by the sheriff on June 25, 1981 satisfied the elements of § 547(b) and should thus be set aside. There is no dispute between the parties that the sheriff's levy was a "transfer" under this section. The broad language of 11 U.S.C. § 101(40) leaves no doubt as to the correctness of this view. Section 101(40) states that a "transfer means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest." See In re Riddervold, 647 F.2d 342, 4 C.B.C.2d 517, 7 B.C.D. 921 (2d Cir. 1981).

In addition, there is no dispute that the first and second elements of a preference have been met. § 547(b)(1), § 547(b)(2). With respect to the third requirement (§ 547(b)(3)) that the transfer occurred while debtor was insolvent, this court finds that National has not rebutted the presumption of insolvency set forth in § 547(f). See In re Briarbrook Development Corp., 11 B.R. 515, 4 C.B.C.2d 871 (Bkrtcy.W.D.Mo.1981); In re National BuyRite, Inc., 7 B.R. 407, 3 C.B.C.2d 431 (Bkrtcy.N.D.Ga.1980). The parties are in further agreement that the transfer at issue herein occurred within the preference period and thus the fourth element has been met.

The parties are in dispute as to whether the trustee has carried his burden of proof on the fifth element of a preference, to wit: has the transfer resulted in the creditor receiving a greater percentage of the debtor's estate than it would have otherwise received under a hypothetical liquidation? See 11 U.S.C. 547(b)(5); In re Conn, 9 B.R. 431 (Bkrtcy.N.D.Ohio 1981); In re Pritchard Co., 17 B.R. 508, 6 C.B.C.2d 63 (Bkrtcy.S.D. Ala.1981). This divergence between the parties rests upon their differing perception of the legal effect of National's delivery of a writ of execution to the sheriff of Suffolk County. National asserts that it had acquired a lien on the Cosmopolitan bank account by virtue of its delivery of the execution and thus had achieved secured status under § 506 of the Code prior to the date of the transfer and outside of the period in which such security interest could be avoided by the trustee. It thus reasons that for the trustee to meet his burden he must prove that National would not have received the full value of its collateral upon a hypothetical liquidation.

Alternatively, the trustee premised his offer of proof at trial on the proposition that National did not acquire a lien on the bank account by virtue of the delivery of an execution to the sheriff. Therefore National had no security interest in the bank account and thus occupies the status of a general unsecured creditor. Consistent with this position, the trustee introduced evidence by Charles D. Raich, the accountant for the trustee, that if the assets of the estate were to be liquidated, there would exist no assets for distribution to general unsecured creditors. Tr. 9/22/83 at 38. The trustee offered no proof as to the amount to which National would have been entitled as a secured creditor upon a hypothetical liquidation.

Thus, the pivotal issue to be resolved in this case is whether National acquired a lien against Cosmopolitan's bank account by delivery of an execution to the sheriff. A determination of when a lien is created depends upon state law. 4 Collier on Bankruptcy ¶ 547.12 (15th ed. 1983); Powers v. Johnson, 71 F.2d 48 (8th Cir.1934), cert. denied 293 U.S. 596, 55 S.Ct. 111, 79 L.Ed. 689 (1934); Westmoreland v. Dodd, 2 F.2d 212 (5th Cir.1924); Yumet & Co. v. Delgado, 243 F. 519 (1st Cir.1917).

Under New York law, it is settled that a judgment becomes a lien on personalty when an execution is delivered to the sheriff. Knapp v. McFarland, 462 F.2d 935 (2d Cir.1972); Adler v. Greenfield, 83 F.2d 955 (2d Cir.1936); Corrigan v. United States Fire Insurance Company, 427 F.Supp. 940 (S.D.N.Y.1977); In re Lucasa International, Ltd., 13 B.R. 596, 4 C.B.C.2d 1190, 7 B.C.D. 1356 (Bkrtcy.S.D.N.Y.1981); Art-Camera-Pix, Inc. v. Cinecom Corporation, 64 Misc.2d 764, 315 N.Y.S.2d 991 (S.Ct.N.Y.Co.1970); Meyerhardt v. Heinzelman, 71 N.Y.S.2d 692 (S.Ct.N.Y.Co.1947); see also In re Riddervold, supra.

Notwithstanding the fact that numerous New York courts have characterized the rights of a judgment creditor obtained by delivery of an execution as a "lien," the trustee contends that such an interest is not a lien, as defined in 11 U.S.C. § 101(28), sufficient to justify secured status under 11 U.S.C. § 506. The trustee offers no support for this proposition.

Section 101(28) of the Code defines lien as a "charge against or interest in property to secure payment of a debt or performance of an obligation." It is clear that an execution creditor in New York possesses certain interests in or charges against the debtor's property as against certain transferees and other execution creditors by virtue of sections 5202 and 5234 of the N.Y.C.P.L.R. and thus obtains a lien under § 101(28). See also In re Baum, 15 B.R. 538, 5 C.B.C.2d 745 (Bkrtcy.E.D.Va. 1981) (the delivery of a writ of fieri facias constitutes a judicial lien).

Section 506(a) of the Code states in relevant part: "An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest." The use by Congress of the term "lien" without qualification indicates a legislative intent that such term be defined in accordance with § 101(28). In re Tanner, 14 B.R. 933, 5 C.B.C.2d 503, 8 B.C.D. 347 (Bkrtcy.W.D.Penn.1981).

Thus, this court finds that National acquired a lien on Cosmopolitan's bank account entitling it to secured status under § 506. Predicated upon the fact that National acquired its interest in Cosmopolitan's property on April 25, 1981, prior to the preference period, such interest acquired may not be avoided under § 547. See In re Staples, 1 F.Supp. 620 (N.D.Okla.1932); In re Riddervold, supra.

The trustee thus has the burden, in avoiding the...