In re Dick Henley, Inc., Bankruptcy No. 81-00430

• Decision Date: 14 January 1985
• Docket Number: Adv. No. 83-0180.,Bankruptcy No. 81-00430
• Citation: 45 BR 693
• Parties: In re DICK HENLEY, INC. (E.I. #XX-XXXXXXX), Debtor. Erwin A. LAROSE, Trustee, Plaintiff, v. BOURG INSURANCE AGENCY, Defendant.
• Court: U.S. Bankruptcy Court — Middle District of Louisiana

45 B.R. 693 (1985)

In re DICK HENLEY, INC. (E.I. #XX-XXXXXXX), Debtor Erwin A. LAROSE, Trustee, Plaintiff, v. BOURG INSURANCE AGENCY, Defendant.

Bankruptcy No. 81-00430, Adv. No. 83-0180.

United States Bankruptcy Court, M.D. Louisiana.

January 14, 1985.

Erwin A. LaRose, Baton Rouge, La., Trustee.

R. Patrick Vance and Carl D. Rosenblum, New Orleans, La., for defendant.

REASONS FOR JUDGMENT

WESLEY W. STEEN, Bankruptcy, Judge.

I. Jurisdiction of the Court

This is a proceeding arising under Title 11 U.S.C. The United States District Court for the Middle District of Louisiana has jurisdiction pursuant to 28 U.S.C. § 1334(b). By order dated August 2, 1984, under the authority of 28 U.S.C. § 157(a), the United States District Court for the Middle District of Louisiana referred all such cases to the Bankruptcy Judge for the district and ordered the Bankruptcy Judge to exercise all authority permitted by 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(F); pursuant to 28 U.S.C. § 157(b)(1), the Bankruptcy Judge for this district may hear and determine all core proceedings arising in a case under Title 11 referred under 28 U.S.C. § 157(a), and the Bankruptcy Judge may enter appropriate orders and judgments.

No party has objected to the exercise of jurisdiction by the Bankruptcy Judge. No party has filed a motion for discretionary abstention, nor has any party filed a timely motion for mandatory abstention under 28 U.S.C. § 1334(c)(2). No party has filed a motion under 28 U.S.C. § 157(d) to withdraw all or part of the case or any proceeding thereunder, and the District Court has not done so on its own motion.

II. Findings of Fact

A. This bankruptcy proceeding was filed on September 22, 1981. The case was originally filed as a Chapter 11 reorganization and was subsequently converted to a Chapter 7 liquidation. The Debtor is Dick Henley, Inc.

B. The bankruptcy schedules, in answer to question number 21, indicate that Richard E. Henley is the only officer, director, and more than 20% shareholder of the corporation. Exhibits introduced in connection with the motions for summary judgment indicate that only fifty shares of stock were ever issued in the corporation. So far as the Court can tell, Dick Henley is the only shareholder of the corporation.

C. On November 1, 1980, Bourg Insurance agency ("Defendant"), as agent for Travelers Insurance Company and some of its affiliates, issued binder number 07506 in favor of Dick Henley, Inc., ("Debtor") providing workmen's compensation, automobile, general liability, inland marine, and property insurance. The insurance binder was for a one year period beginning September 4, 1980, and continuing through September 3, 1981. The total premium was $219,168.

D. On July 15, 1981, the Travelers Insurance Companies issued a notice of cancellation of these policies; the cancellation was effective as of August 1, 1981. The evidence is not clear on this point, but it appears that the Debtor was paying premiums under these policies monthly. It is clear that the Debtor was in arrears in the amount of $91,320 in the payment of premiums as of July 15, 1981. This sum was for insurance coverage for the months of March through July, 1981.

E. On July 31, 1981, Bossier Bank lent to Dick Henley, individually, the sum of $500,000. The money was deposited (through various wire transfers) in Henley's individual bank account at the Bank of Gonzales.

F. On July 31, 1981, the Debtor issued check $20,000 for $91,320 in payment of the premiums due the Travelers Insurance Companies. This check was apparently delivered to Bourg Insurance Agency, payable to Bourg. At the time that the check was issued by the Debtor, there were insufficient funds in the account for payment; in fact, on July 31, the date that the check was issued, the Debtor's account was overdrawn by more than $13,000.

G. On August 3, 1981, $400,189.92 was transferred from Dick Henley's individual account to the Debtor's account at the Bank of Gonzales. The stipulated facts include this statement: "No note, contract, agreement, or other formal instrument evidences any consideration or value given by the debtor . . ." for these funds.

H. The stipulated facts also recite that "The issuance of the check to Bourg was intended to coincide with the deposit of $400,189.92 into the Debtor's account."

I. The issuance of the check (July 31, 1981), the transfer to the Debtor's account of sufficient funds to pay the check (August 3, 1981), and the payment of the check (August 5, 1981) were all within 90 days of the Debtor's filing in bankruptcy.

J. The trustee filed this adversary complaint on May 5, 1983, alleging that the $91,320 paid to Bourg Insurance Agency was a preferential transfer.

K. The bankruptcy schedules list no property that the Debtor held for any other person.

L. Financial statements as of August 31, 1981, were attached by Defendant's counsel to its motion for summary judgment. Those financial statements are not audited; they appear to be statements prepared by a consultant to the Debtor in connection with an attempt to arrange financing and to confect a workable plan of reorganization. Those financial statements show the following items:

1. Based on the completed contract method of accounting (which is apparently the method used by the Debtor for financial and income tax purposes), the Debtor was apparently insolvent to the extent of $1.8 million.¹

2. The financial statements show a loss of approximately $736,000 for the year ended August 31, 1981, even after an "allocated overhead" figure of $283,000; no explanation is given for this figure; one would assume that the Debtor created a "negative expense" account by allocating some overhead to Dick Henley or to related entities also owned by him.

III. Conclusions of Law

This is an action to recover an alleged preferential transfer. Section 547 of the Bankruptcy Code provides (as applicable to this case) that:

". . . the trustee may avoid any transfer of an interest of the debtor in property . . . to a creditor . . . on account of an antecedent debt owed by the debtor before such transfer was made . . . while the debtor was insolvent . . . within 90 days before the date of the filing of the petition . . . that enables such creditor to receive more than such creditor would receive if this case were a case under Chapter 7 . . . and the transfer had not been made . . . "

The statute both establishes the elements of a preferential transfer and enumerates circumstances under which erstwhile preferential transfers are not recoverable by the trustee.

There is no dispute in this case that several of the elements of a preferential transfer are met. There was a transfer of property to a creditor during a period when the debtor was insolvent within 90 days of the filing in bankruptcy. The transfer was such as to enable the creditor to receive more than the creditor would have received if distribution were made pursuant to Chapter 7.²

The Defendant asserts that three elements of a preferential transfer were not present in this case: (i) that the funds transferred to the Defendant were not property of the Debtor; (ii) that the Debtor was not insolvent on the date of the transfer;³ and (iii) that the transfer was not on account of an antecedent debt because it was a payment made to cure a default under an executory contract rather than a payment on an antecedent debt.⁴

The Defendant's first allegation is that the payment was not a preferential transfer because the funds paid to the Defendant did not constitute property of the estate. Bossier Bank made a loan to Dick Henley; the funds were transferred to Dick Henley's bank account at the Bank of Gonzales. At the direction of Dick Henley, the funds were then transferred to the Debtor's account at the Bank of Gonzales; the Debtor is a corporation 100% owned by Henley. The Debtor used the funds in its bank account to make a payment to the Defendant. The Defendant's argument is that these funds did not constitute property of the estate because the Debtor did not issue any note, contract, security, or other instrument as consideration for receipt of the funds. The Defendant's memorandum of authorities states:

"Since no consideration was paid, the debtor cannot be said to have had any contract rights in these funds. Consequently, it possessed no legal or equitable interests in said funds."

The Defendant's argument is not well taken. It is not necessary that a borrower execute a note or other document to borrow funds. It is not necessary for a corporation to issue additional stock certificates to its 100% stockholder in order for the stockholder to make a capital contribution to the corporation. The Defendant has produced no evidence of any legal restriction on the disposition of these funds. When Dick Henley transferred approximately $400,000 into the Debtor's bank account, those funds became property of the Debtor since the Debtor had legally unrestricted rights to use the funds as it saw fit.

The Defendant alleges that there was an "understanding" between Dick Henley and his corporation that $92,000 would be used to pay the Defendant; the Defendant argues that this was a dedication of the funds and that because of this dedication of the funds, the Debtor had no legal right to dispose of the funds otherwise; consequently, argues the Defendant, the Debtor acquired no legal or equitable interest in the funds.

The Defendant has simply failed in his burden of proof since he has submitted no evidence except for Dick Henley's testimony that it was his objective in transferring funds to the Debtor's bank account that the funds be used to pay various debts. There was no written agreement to this effect nor has there been introduced any evidence of the proposed disposition of the funds in excess of the $92,000 paid to the Defendant. From the bank account records introduced by the Defendant, it appears that...