In re Frigitemp Corp.
| Decision Date | 29 November 1983 |
| Docket Number | No. 81 Civ. 3172 (ADS),81 Civ. 3251,81 Civ. 3252 and 81 Civ. 3254.,81 Civ. 3172 (ADS) |
| Citation | 34 BR 1000 |
| Parties | In re FRIGITEMP CORPORATION, Preference Actions. Lawson F. BERNSTEIN, Trustee in Bankruptcy of Frigitemp Corp., Plaintiff, v. ALPHA ASSOCIATES, INC.; Comet Travel Service; Greitzer, Inc.; Hancock Bank; Laboratory Furniture, Inc.; Joseph Lefrak, et al; Mississippi Power Company; and Traulsen & Co., Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Bernstein, Obstfield & Schwed, New York City, Scruggs & Williams, Pascagoula, Miss., for plaintiff-trustee; Lawson F. Bernstein, Jr., Harold Obstfeld, and T. Gregory Schwed, New York City, Richard F. Scruggs and David Frazier, Pascagoula, Miss., of counsel.
Brashich & Finley, Weisenfreund & Golenbock, Wolf, Popper, Ross, Wolf & Jones, Golenbock & Barell, New York City, White & Morse, Gulfport, Miss., Bond & Camhi, New York City, for Hancock Bank; Deyan Brashich, Susan Golenbock, Robert Kornreich, and Patricia Avery, Michael Silberberg, New York City, Stanford Morse, Jr., and John Harral, Gulfport, Miss., Stephen B. Camhi, New York City, of counsel.
Winthrop, Stimson, Putnam & Roberts, New York City, for Mississippi Power Co.; Julie D. Fay, New York City, of counsel.
D'Amato & Lynch, New York City, for Joseph Lefrak and Lefrak, Fischer & Myersont, Andrew R. Simmonds, New York City, of counsel.
Ballon, Stoll & Itzler, New York City, for Comet Travel Service, Julie Anne Jackson, New York City, of counsel.
Angel & Frankel, New York City, for Laboratory Furniture, Inc., John H. Drucker and Bruce Frankel, New York City, of counsel.
Kissam, Halpin & Genovese, New York City, for Traulsen & Co., Inc.; Laurence May, of counsel.
Siegel, Sommers & Schwartz, New York City, for Alpha Associates, Inc.; Harris Schwartz, New York City, of counsel.
Zimmer, Fishbach & Hertan, New York City, for Greitzer, Inc.; Robert M. Trien, New York City, of counsel.
This is the second stage of an action brought by the trustee in bankruptcy for the Frigitemp Corporation to void as preferential certain transfers made to various of Frigitemp's creditors during the period between November 20, 1977 and March 20, 1978. Frigitemp manufactured and installed interiors, furnishings, and equipment for marine and institutional construction, including refrigeration and insulation systems. Its corporate headquarters were in New York but many of the transactions in this case involved sales to Frigitemp's Gulfport, Mississippi plant. The corporation was forced to file for protection under Chapter 11 after a period of rapid growth that generated severe cash flow and credit problems and culminated in its inability to complete many millions of dollars worth of construction contracts. In addition, Frigitemp officers are alleged in other actions to have engaged in fraud, misrepresentation, and bid-rigging.
The trustee in this action challenges payments made to various vendors who sold materials to Frigitemp on credit, as well as payments to a law firm, power company, and local Mississippi bank. The trustee claims that Frigitemp's trade creditors had reasonable cause to believe the company insolvent at the time the transfers were accepted. In its action against Hancock Bank, the trustee seeks recovery not only of transfers to satisfy conventional debts but also of deposits in the bankrupt's checking account applied by the bank to cover overdrafts and provisional credits. These claims raise novel issues concerning the law relating to bank payment and collection procedures as well as the law of voidable preferences.
After an earlier trial, Frigitemp was found to have been insolvent during the entire preference period. Bernstein v. Pulvermacher, No. 81-3172, slip op. (S.D.N.Y. Jan. 25, 1983). To prevail at this stage, the trustee must prove in each case that the four remaining elements of a preference were present under section 60 of the Bankruptcy Act, repealed Title 11 U.S.C.A. § 96 (West 1979), which is the governing law, rather than the new Bankruptcy Code which took effect on October 1, 1979. The Bankruptcy Act established the following five elements as necessary to void a preferential transfer: (1) the transfer must be from a debtor to a creditor for an antecedent debt; (2) it must take place while the debtor is insolvent, which has already been determined; (3) it must take place in the four month period preceding filing for bankruptcy, which is not controverted in any case at issue; (4) it must give the creditor a greater percentage of his debt than other creditors of his class; and (5) the creditor must have had reasonable cause to believe that the bankrupt was insolvent at the time the transfer was made. 4 Remington on Bankruptcy § 1657 (6th ed. 1967).
One creditor, the Hancock Bank, claims that certain transfers are legitimate setoffs authorized by Bankruptcy Act § 68, repealed Title 11 U.S.C.A. § 108(a) (West 1979), were not made in payment of an antecedent debt or did not deplete the estate available for distribution among other creditors. Otherwise, all the cases at issue in this proceeding involve only the fifth element—reasonable cause to believe— which was the subject of most of the testimony and legal argument heard by the court. Over one hundred claims had originally been at issue, but by the time testimony was concluded in this case the trustee had settled with all but eight claimants. As to the remaining claims, the trustee has failed to meet its burden of proving a preferential transfer in all but its cases against Joseph Lefrak and the law firm of Lefrak, Fischer & Myersont, and against the Hancock Bank.
A preference is voidable if a creditor has notice of facts that would lead a prudent businessman to conclude the debtor is insolvent. In Re Hygrade Envelope Corp., 366 F.2d 584 (2d Cir.1966). Moreover, a creditor is precluded from "deliberately closing his eyes so as to remain in ignorance of the debtor's condition; `Where circumstances are such as would incite a man of ordinary prudence to make inquiry, the creditor is chargeable with notice of all facts which a reasonably diligent inquiry would have disclosed. . . .'" Id. at 586. Once a creditor has actual notice of some fact or facts which ought to cause suspicion, a duty arises to make whatever inquiry a reasonably prudent person in that line of business would make. What facts should arouse suspicion, or what sort of inquiry should thereafter be made, depends on the circumstances and on the type of creditor involved. An item on an audited balance sheet which might be suspicious to a sophisticated investor will not necessarily be grounds for placing an ordinary trade creditor on notice; by the same token, an ordinary trade creditor would not be expected to conduct the same sort of inquiry into a debtor's financial situation as a sophisticated lending institution should conduct. See Transcript at 218. The trustee contends he need not prove that a diligent inquiry would have produced information demonstrating the bankrupt's insolvency. The case law is clear, however, that "inquiry must be capable of producing facts essential to a determination of insolvency." Reese v. Akai America, Ltd., 19 B.R. 83, 95 (D.C.S.D. Fla.1982). A creditor may be charged with constructive notice only of those facts which a reasonably diligent inquiry would have disclosed. See In re Hygrade Envelope Corp., 366 F.2d at 586-87.
The evidence at trial showed that the overall picture of Frigitemp's financial condition known to trade creditors from November 1977 through January 1978 was not so unfavorable as to trigger a duty to investigate. Moreover, a trade creditor's reasonably diligent inquiry would not have uncovered sufficient information prior to February 1978 to lead it to conclude that Frigitemp was insolvent. Although the trustee correctly notes that balance sheet insolvency may be inferred from other indicia, the cases require substantial evidence and a sound commercial basis for a finding of reasonable cause to believe. For example, the Second Circuit in Margolis v. Gem Factors Corp., 201 F.2d 803 (2nd Cir.1953) found sufficient evidence to go to the jury when a creditor knew of bank overdrafts, slow payments, and that one of the debtor's principals had taken the extraordinary step of deeding her home to the creditor as security. The creditor, who had been discounting the debtor's accounts receivable, was charged with knowledge of the fact, which could have been discovered by spot checking, that some of those accounts receivable were fictitious. In Miller v. Wells Fargo Bank International Corp., 540 F.2d 548 (2d Cir.1976), a company whose balance sheet showed a net worth of $105,000 had a claim filed against it of $3 million and had agreed to pay $300,000 in settlement of another claim. The creditor bank, which had actual notice of these facts, was charged with notice of the attachment of the company's accounts in other New York banks in a suit for $4.5 million. In each of these cases, the creditor was actually aware of certain, critical information and was charged with notice of facts which were within that creditor's area of expertise, and which would have been discoverable on inquiry. As Judge Learned Hand remarked, "that creditor only the statute proscribes who dips his hand in a pot which he knows will not go round." Kennard v. Behrer, 270 F. 661, 664 (S.D.N.Y.1920). To conclude that a debtor is insolvent is not the same as to speculate or to harbor suspicions that the debtor is not in optimum financial condition, as the Supreme Court long ago made clear in Grant v. National Bank, 97 U.S. 80, 24 L.Ed. 971 (1877).
A corporation may be solvent for Bankruptcy Act purposes, even though it is unable to meet current liabilities, as long as the fair valuation of its assets is sufficient to...
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