In this matter the Plaintiff, Richard A. Baumgart (Trustee), and the Defendant, Huntington National Bank (HNB), have filed cross motions for summary judgment regarding the complaint allegations set forth in Count I of the above-styled adversary proceeding. In pursuance of this effort, the parties have entered into the following stipulations of fact:
It is stipulated and agreed by and between the Plaintiff, Richard A. Baumgart, Trustee, and the Defendant, Huntington National Bank ("HNB"), that if witnesses were sworn and testified in the above entitled Adversary Proceeding and any available documentary proof introduced, that the following facts would thereby be established or would be testified to, and the parties hereto agree to the same, the evidence of which, except for this agreement, need not be adduced upon trial.
1. That Plaintiff, Richard A. Baumgart, is the Trustee in the bankruptcy case of Freewerth Enterprises, Inc. ("Freewerth"), the Debtor herein, which case was commenced by the filing of a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on December 6, 1989, and in which case an Order for Relief was entered.
2. That the within Adversary Proceeding is a Core Proceeding pursuant to 28 U.S.C. § 157, and the within Bankruptcy Court has jurisdiction over the within Adversary Proceeding.
3. That the Debtor at all times relevant to the within Adversary Proceeding was a corporation which designed, constructed and installed custom cabinetry and restaurant equipment.
4. That prior to the year before the commencement of the within bankruptcy case, HNB made one or more commercial loans to the Debtor, and the Debtor, to evidence such loans, executed one or more promissory notes (the "Promissory Notes") payable to HNB. All of the foregoing loans were made in the ordinary course of business or financial affairs of the Debtor and HNB, and according to ordinary business terms.
5. On September 10, 1985, the Debtor executed a security agreement granting to HNB a security interest in the inventory and receivables of the Debtor to secure payment of the Promissory Notes.
6. On September 10, 1985, the Debtor executed financing statements relating to the aforementioned security interest.
7. That on or about September 16, 1985, HNB filed the aforementioned financing statements with the Secretary of State of Ohio and the Recorder of Cuyahoga County, Ohio, which filings did not effect a perfection of the aforementioned security interest, as the Debtor\'s sole place of business in Ohio at all pertinent times was located in Summit County, Ohio.
8. HNB failed to perfect the aforementioned security interest by failing to file a financing statement with the Recorder of Summit County, and such security interest is unperfected as against Plaintiff and the Debtor. HNB claims lack of perfection constitutes an unjustifiable impairment of collateral for the promissory notes given by the Debtor, against whom Harry Friedman had a right of recourse, pursuant to Ohio Revised Code, §§ 1303.67 and 1303.72(A)(2).
9. That Harry Freedman was the president and sole shareholder of the Debtor at all times during the year prior to the filing of the within bankruptcy case, and was at all times during the year prior to the filing of the within bankruptcy case an "insider" of the Debtor as that term is defined in 11 U.S.C. § 101(30).
10. More than one year prior to the commencement of the within bankruptcy case, Harry Freedman personally guaranteed in writing all of the Debtor\'s obligations to HNB, including the payment by the Debtor of the Promissory Notes. A photographic reproduction of the guarantees of Harry Freedman are attached hereto as Exhibits "A" and "B".
11. That during the year prior to the commencement of the within bankruptcy case, the Debtor transferred to HNB the aggregate sum of $61,434.84 in partial satisfaction of its outstanding obligation on the Promissory Notes, $18,678.96 of which was transferred during the 90 days immediately prior to the bankruptcy and $42,755.88 of which was transferred between 90 days and one year prior to the bankruptcy.
12. The parties agree that the aforementioned transfers by the Debtor to HNB of $61,434.84 during the year prior to the commencement of the within bankruptcy case satisfies all of the elements of a preferential transfer required to be proved by Plaintiff to establish a prima facie case as set forth in 11 U.S.C. § 547(b).
13. During the period between 90 days and the year prior to the commencement of the within bankruptcy case, $10,066.68 of the $42,755.88 in payments made by the Debtor to HNB in payment of indebtedness incurred by the Debtor in the ordinary course of business or financial affairs of the Debtor and HNB, and pursuant to the terms of the Promissory Notes.
14. Plaintiff disputes that 11 U.S.C. § 547(c)(2) applies to the within transaction.
15. On December 6, 1989, the outstanding principal balance on the Promissory Notes was $206,666.60.
16. On December 6, 1989, the value of HNB\'s collateral was $10,685.95.
17. At all times during the year preceding the filing of the within bankruptcy case, the outstanding principal balance on the Promissory Notes was not less than $206,666.60.
18. At all times during the year preceding the filing of the within bankruptcy case, if HNB liquidated its collateral, HNB\'s deficiency balance would not be less than $61,434.84.
The Trustee's Complaint seeks to have the Court avoid a lien, to recover an avoidable preference, to sell personal property, and to determine rights, priorities and claims to the proceeds thereof. In view of the above stipulations, the Trustee alleged that this failure to properly perfect the security interest is deemed to have been a transfer made immediately before the filing of the bankruptcy petition, pursuant to § 547(e)(2)(C) of the Code 11 U.S.C. § 547(e)(2)(C).
In support of its motion for summary judgment, the Trustee asserts that HNB has stipulated to all of the prima facie elements under § 547(b) of the Bankruptcy Code 11 U.S.C. § 547(b) to allow it to avoid a prepetition transfer of $18,678.96 as having been preferentially made by the Freewerth Enterprises, Inc. (Debtor) to HNB during the 90-day period prior to the commencement of this case. (Stips. 11 and 12). As the HNB has offered no § 547(c) exception to that transfer, the Trustee seeks its avoidance under § 547(b). While contending that HNB failed to perfect its security interest respecting the $18,678.96, the Trustee asserts that the requirements of § 547(e)(2)(C) provide a further basis for its avoidance. Section 547(e)(2)(C) provides that any transfer of a security interest not perfected prior to petition filing will be treated as if it was made contemporaneously with the bankruptcy filing. 11 U.S.C. § 547(e)(2)(C). Thusly, the Trustee claims that an avoidable preferential transfer under § 547(b) has been established.
The Trustee also contends that an avoidable transfer occurred with respect to all transfers made by the Debtor to HNB within the one year period prepetition as the Debtor's president and sole shareholder, Harry Freedman, personally guaranteed the debt owed to HNB causing him to be an "insider" as that term is defined at § 101(30) of the Bankruptcy Code. See, Stip. No. 9. With regard to an amount of $61,434.84 transferred by the Debtor to HNB during the one year period prior to petition filing, the parties have stipulated that each required element of § 547(b) has been satisfied to establish an avoidable transfer. See, Stip. No. 12.
In response to the subject complaint allegation and the Trustee's motion for partial summary judgment, HNB filed its motion for summary judgment. In support of its motion, HNB asserts that an insider recovery against HNB is inappropriate as the payments received within the preferential period were made in the ordinary course of business. Secondly, HNB argues that its failure to perfect its security interest operates as an unjustified impairment of the collateral securing the Debtor's obligation to HNB, thereby discharging the insider-guarantor and preventing recovery against HNB for payments received during the preference period.
Section 550 of the Bankruptcy Code provides that:
— The trustee may recover, for the benefit of the estate, the property transferred or — the value of such property, from —
1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
2) any immediate or mediate transferee of such initial transferee. 11 U.S.C. § 550(a)(1) and (2).
Section 547(e)(2)(C) of the Code provides:
— A transfer is made —
(C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of —
(i) the commencement of the case; or
(ii) 10 days after such transfer takes effect between the transferor and the transferee.
Section 547(b)(4)(B) allows the trustee to avoid any transfer of an interest of the debtor in property which was made between ninety days and one year prior to petition filing where the creditor, at the time the transfer was made, was an insider. Under § 101(30) of the Code, the definition of an "insider" includes a director, officer, or person in control of the debtor where the debtor is a...
