In re Entertainment Incorporated

• Decision Date: 15 April 1974
• Docket Number: No. BK-1030-72-R.,BK-1030-72-R.
• Citation: 375 F. Supp. 390
• Court: U.S. District Court — Eastern District of Virginia
• Parties: In the Matter of ENTERTAINMENT INCORPORATED t/a Pat's One Stop and Bandbox.

375 F. Supp. 390

In the Matter of ENTERTAINMENT INCORPORATED t/a Pat's One Stop and Bandbox.

No. BK-1030-72-R.

United States District Court, E. D. Virginia, Richmond Division.

April 15, 1974.

Watson M. Marshall, Trustee in Bankruptcy, Eddie Cantor, for Watson Marshall, Trustee in Bankruptcy, Richmond, Va.

Robert N. Johnson, Richmond, Va., for Entertainment, Inc.; C. Cotesworth Pinckney, Richmond, Va., for Warner Elektra Atlantic Distributing Corp.

MEMORANDUM

MERHIGE, District Judge.

Warner Elektra Atlantic Distributing Corporation(WEA) petitions the Court for a review of an order in this cause by the Bankruptcy Judge, dated October 29, 1973.Jurisdiction is attained by virtue of 11 U.S.C. § 67(c).

Basically, the facts are as follows:

In July, 1971, WEA entered into a business relationship with the Bankrupt whereby the Bankrupt would order, and WEA would supply, on an open account, sixty-day credit basis, phonograph records and recorded tapes.A security agreement, dated October 2, 1971, was entered into granting WEA a security interest in all WEA merchandise sold to the Bankrupt, and the proceeds thereof, which security agreement was filed with the Chancery Court in Richmond on October 12, 1971.A financing statement purporting to cover such collateral was not filed with the Virginia State Corporation Commission until August 10, 1972.

Some time during the month of August, 1972, the total outstanding indebtedness of the Bankrupt, then approximately $94,000.00, was converted from an accounts receivable indebtedness to a notes receivable indebtedness by the execution of five notes with maturities of October 1, 1972, November 1, 1972, December 1, 1972, January 1, 1973, and on a demand basis for the remainder.Simultaneously with the execution of the notes, and to secure their repayment, the Bankrupt executed another security agreement, dated August 14, 1972, granting to WEA a security interest in all of the Bankrupt's present and future accounts, contract rights, chattel paper and other receivables.A financing statement purporting to cover such collateral was filed with the Virginia State Corporation Commission on September 8, 1972, and with the Clerk of the Chancery Court in Richmond on that same date.

On or about August 18, 1972, WEA altered its policy from that of selling on open account to the Bankrupt to a policy of C.O.D. sales only.

On November 28, 1972, the Bankrupt filed an original petition with this Court, instituting Chapter XI proceedings.Subsequently, on December 7, 1972, Entertainment, Incorporated, was adjudicated a bankrupt.The previously appointed receiver, Watson M. Marshall, was thereafter appointed Trustee in Bankruptcy ("Trustee").

On March 6, 1973, WEA filed a petition alleging that it had a security interest in various merchandise inventory which had been previously sold by WEA to the Bankrupt, the proceeds of that inventory, and also claiming a security interest in the accounts receivable and contract rights of the Bankrupt.WEA prayed that its security interests be found valid and enforceable, and that it receive all funds paid to the Trustee on account of his sale of inventory previously sold to the Bankrupt by WEA, and that WEA receive the proceeds of the accounts receivable of the Bankrupt, to the extent of $82,007.18, that being the amount of debt claimed by WEA.

In April, 1973, the Trustee filed an Answer and Counterclaim, alleging that the claimed inventory security interest was unperfected under the Virginia Uniform Commercial Code, and, as such, was subordinate to the rights of the Trustee under Section 70 of the Bankruptcy Act.Additionally, the Trustee alleged that if the claimed inventory security interest was perfected at all, it, together with the claimed accounts receivable security interest, was perfected within four months of bankruptcy and, as such, those security interests constituted preferences voidable by the Trustee under Section 60 of the Bankruptcy Act.Finally, the Trustee alleged in his Counterclaim that approximately $25,050.55 of payments were made by the Bankrupt to WEA during the four months preceding bankruptcy, for or on account of an antecedent debt or debts, while the Bankrupt was insolvent and while WEA had reasonable cause to believe the Bankrupt was insolvent, thus enabling WEA to obtain a greater percentage of its debt than other creditors of the same class, and that each such payment constituted a voidable preference under Section 60 of the Bankruptcy Act.

A hearing on the matter was held on June 21, 1973, before the Honorable Henry D. Evans, Bankruptcy Judge, who made the following formal findings of fact:

FINDINGS OF FACT

1.On October 2, 1971, a security agreement was executed between Bankrupt and WEA granting Petitioner a security interest in all of Bankrupt's inventory sold by WEA to it.The purpose of the agreement was to secure the payment of purchase money credit.The agreement described in detail various merchandise covered by the agreement by means of attached invoices, and covered any after-acquired WEA inventory, and the proceeds of all of the foregoing.This security agreement was filed with the Chancery Court in Richmond, Virginia on October 12, 1971.

2.Subsequently, WEA and Bankrupt executed a financing statement as required by the Virginia Uniform Commercial Code(hereinafter referred to as the "Code"), covering such collateral, which was filed with the Virginia State Corporation Commission on August 10, 1972.

3.Some time within the first two weeks of August, 1972, the Bankrupt's then total outstanding indebtedness to WEA of $94,105.30 was converted from an account receivable to a note receivable by the execution of five notes, maturing respectively on October 1, November 1, December 1, of 1972, January 1, 1973, and on a demand basis for the remainder.At the time of conversion of accounts to notes, the indebtedness was antecedent debt.

4.On August 14, 1972, WEA and Bankrupt executed another security agreement covering all of the Bankrupt's present and future accounts, contract rights, chattel paper and other receivables.The purpose of this agreement was to secure the payment of the above described notes, and any other indebtedness of the Bankrupt to WEA.

5.Financing statements covering the transaction described in No. 4, supra, were thereafter executed by WEA and Bankrupt and filed with the Virginia State Corporation Commission and with the Chancery Court of the City of Richmond on September 8, 1972.

6.On November 28, 1972, an original petition instituting proceedings under Chapter XI of the Act was filed in this Court by the Debtor, Entertainment Incorporated, and a receiver was appointed; on December 7, 1972, Debtor was adjudicated a bankrupt and thereafter the receiver was appointed trustee to administer the estate.

7.From at least August 1, 1972, until its final adjudication as a bankrupt, Entertainment Incorporated was insolvent in that its liabilities exceeded the fair market value of its assets, and, throughout this period, WEA knew of this insolvency, or certainly knew enough to put it on notice to make inquiry which would have revealed insolvency.

8.At all times relevant to the discussion herein, the Bankrupt had creditors, other than WEA, of the same class as WEA.

In addition, the Bankruptcy Judge's opinion clearly reflects that the following findings were made with respect to the trustee's counterclaim regarding the cash payments and return of goods by the Bankrupt to WEA within four months of bankruptcy:

1.Payments totalling $16,342.16 were actually paid by the bankrupt on C.O.D. transactions.

2.The payment of $2,708.39 on August 1, 1972, was on account for goods actually delivered in March, 1972.

3.The payment of $6,000.00 on or about October 4, 1972, was credited to a note which had matured on October 1, 1972 and covered a prior indebtedness.

4.The payment of $1,400.00 during September, 1972, was on account, for goods delivered prior to that time.

5.During September, 1972, the Bankrupt returned to WEA goods valued at $2,000.00.

Based on his findings, the Bankruptcy Judge reached the following conclusions:

1.Because no financing statement had been filed with the Virginia State Corporation Commission covering the collateral secured by the October 2, 1971 security agreement, as required by § 8.9-401(1)(c), Va.Code(1950), as amended, until August 10, 1972, WEA's secured interest in that collateral was not perfected, if at all, until that later date.

2.At all times prior to the perfection of the aforementioned security interest, said interest would have been subordinate to the position of the trustee for the Bankrupt by virtue of § 8.9-301(3), Va.Code(1950), as amended, and § 70(c) of the Bankruptcy Act, 11 U.S.C. § 110(c).

3.WEA's perfection of the aforementioned security interest on August 10, 1972, if at all, constituted a preferential transfer under § 60(a)(1) of the Bankruptcy Act, 11 U.S.C. § 96(a), and therefore voidable by the trustee in bankruptcy under § 60(b) of the Bankruptcy Act, 11 U.S.C. § 96(b).

4.WEA's secured interest in collateral under the August 14, 1972 security agreement, perfected on September 18, 1972, was also a preferential transfer under § 60(a)(1) of the Bankruptcy Act, which was voidable by the trustee in bankruptcy under § 60(b).

5.Except for the $16,342.16 paid by the Bankrupt on C.O.D. transactions, all of the payments made to WEA within four months of bankruptcy—totalling $12,108.39, including the goods returned —were also preferential transfers under § 60(a)(1) of the Bankruptcy Act, and therefore voidable by the trustee in bankruptcy under § 60(b).

Accordingly, an order was entered by the Bankruptcy Judge denying WEA's request that its claim of $82,807.18 be allowed as a secured claim.The order also granted to the trustee in bankruptcy a judgment against WEA in the amount of $12,108.39, plus interest, on its counterclaim.

In its ...