In re Fulghum Const. Co., Bankruptcy No. 380-00235

CourtUnited States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Middle District of Tennessee
Writing for the CourtRUSSELL H. HIPPE, Jr.
Citation7 BR 629
PartiesIn re FULGHUM CONSTRUCTION COMPANY, Debtor. Robert H. WALDSCHMIDT, Trustee, Plaintiff, v. Harry H. RANIER, Algin H. Nolan, Ranier & Associates, Egan Iron Works, First Security National Bank of Lexington, and Liberty National Leasing Company, Defendants.
Decision Date28 November 1980
Docket NumberBankruptcy No. 380-00235,Adv. No. 380-0081.

7 B.R. 629 (1980)

In re FULGHUM CONSTRUCTION COMPANY, Debtor.
Robert H. WALDSCHMIDT, Trustee, Plaintiff,
v.
Harry H. RANIER, Algin H. Nolan, Ranier & Associates, Egan Iron Works, First Security National Bank of Lexington, and Liberty National Leasing Company, Defendants.

Bankruptcy No. 380-00235, Adv. No. 380-0081.

United States Bankruptcy Court, M.D. Tennessee.

November 28, 1980.


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Robert H. Waldschmidt, C. Kinian Cosner, Jr., Nashville, Tenn., for plaintiff.

John H. Bailey, III, L. Wearen Hughes, Nashville, Tenn., for defendants Harry H. Ranier, Algin H. Nolan, and Ranier & Associates.

William L. Montague, Charles E. Shivel, Jr., Lexington, Ky., for defendant First Security Nat'l Bank of Lexington.

David Stosberg, Louisville, Ky., for defendant Liberty National Leasing Co.

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MEMORANDUM

RUSSELL H. HIPPE, Jr., Bankruptcy Judge.

In this adversary proceeding involving numerous substantial transactions between the debtor corporation and its sole shareholder, Ranier & Associates, a partnership composed of Harry H. Ranier and Algin H. Nolan, general partners, the court has previously entered a partial judgment disposing of the rights of the trustee and the defendants in certain equipment that had been sold by the debtor to the shareholder. Waldschmidt v. Ranier, 5 B.R. 53, (Bkrtcy. M.D.Tenn. 1980).1 As noted in paragraph 13 of the memorandum entered on July 14, 1980, there were almost one hundred transactions between the shareholder and the debtor during the period June 1978 through November 1979, when the debtor ceased doing business. As a result of the shareholder's purchase of the equipment, the shareholder became indebted to the debtor for a period of time. On June 5, 1979, however, an advance made to the debtor by the shareholder rendered its aggregate advances in excess of its obligations to the debtor, and thereafter the debtor was indebted to the shareholder in varying amounts. At present the debtor owes the shareholder the sum of $387,844.16. Most of the advances made by the shareholder subsequent to June 5, 1979, were in the form of deposits made to cover the debtor's payroll to ensure completion of jobs in progress. Generally, payments that the debtor received from these jobs were applied to the indebtedness to the shareholder. In entering the partial judgment in July, the court continued under advisement the issue of whether payments made by the debtor subsequent to June 5, 1979, constituted voidable preferences under § 547(b)2 of the Bankruptcy Reform Act of 1978. All of the payments were made within one year prior to the filing of the involuntary petition on January 25, 1980.

The shareholder does not dispute that these payments made were transfers of the debtor's property as required by § 547(b). The shareholder asserts that it was not a creditor of the debtor, that the transfers were not in payment of antecedent debts owed to it, that the debtor was not insolvent at the time of the transfers, that the shareholder had no reasonable cause to believe that the debtor was insolvent at the time of the transfers, and that, even if the transfers are characterized as voidable preferences, they come within the exceptions provided by § 547(c)(1), (2), (4).

Transfer to or for the Benefit of a Creditor under § 547(b)(1)

The Bankruptcy Reform Act of 1978 hereinafter referred to as the Code to distinguish

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it from the prior Bankruptcy Act of 1898 includes in its definition of "creditor" an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." 11 U.S.C. § 101(9)(A). The Code defines "claim" as a
right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, secured, or unsecured. . . .

11 U.S.C. § 101(4)(A). The legislative history of § 101(4) indicates that the drafters intended by it to provide the "broadest possible definition":

the bill contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.

S.Rep.No. 95-989, 95th Cong., 2d Sess. 22 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787; H.R.Rep.No. 95-595, 95th Cong., 1st Sess. 309 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787.

It is readily apparent that the shareholder was a creditor of the debtor's for the purpose of § 547(b).

Antecedent Debt under § 547(b)(2)

The Code defines "debt" as a "liability on a claim." 11 U.S.C. § 101(11). The legislative history of § 101(11) indicates that the terms "debt" and "claim" are coextensive and that the debtor owes a debt to the creditor to the extent that the creditor has a claim against the debtor. S.Rep.No. 95-989, 95th Cong., 2d Sess. 23 (1978); H.R. Rep.No. 95-595, 95th Cong., 1st Sess. 310 (1977).

At all times subsequent to June 5, 1979, the debtor was indebted to the shareholder. Thus each of the transfers from the debtor to the shareholder was "for or on account of an antecedent debt owed by the debtor before such transfer was made."

Insolvency of the Debtor under § 547(b)(3)

Section 547(b)(3) requires a showing that, at the time of the transfer that is sought to be avoided, the debtor was insolvent. Although section 547(f) provides a presumption of insolvency during the 90 days prior to filing, the trustee still has the ultimate burden of persuasion, the presumption merely requiring that the party against whom it exists to come forward with some evidence to rebut it. S.Rep.No. 95-989, 95th Cong., 2d Sess. 89 (1978); H.R.Rep.No. 95-595, 95th Cong., 1st Sess. 375 (1977); 4 Collier, Bankruptcy ¶ 547.26 (15th ed. 1980).

Section 101(26)(A) defines "insolvent" with reference to an entity other than a partnership as

financial condition such that the sum of such entity\'s debts is greater than all of such entity\'s property, at a fair valuation, exclusive of-
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity\'s creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this title;. . . .

The Code thus retains the balance-sheet test of insolvency of the prior Bankruptcy Act of 1898, as amended, hereinafter referred to as the Act to distinguish it from the Bankruptcy Reform Act. S.Rep.No. 95-989, 95th Cong., 2d Sess. 25 (1978); H.R. Rep.No. 95-595, 95th Cong., 1st Sess. 312 (1977); 4 Collier, Bankruptcy ¶ 547.26.

The party seeking to void a preference thus must establish the fair valuation of all of the debtor's assets at the time of the transfer. See Levit, The Archaic Concept of Balance Sheet Insolvency, 47 Am. Bankr.L.J. 215, 219 (1973). The cases under the prior Act established that "fair valuation" signified the reasonable estimate of what could be realized from the assets by converting them into, or reducing them to, cash under carefully guarded, if not ideal, conditions. Hunter Press, Inc. v. Connecticut Bank & Trust Co., 420 F.Supp. 338, 341 (D.Conn.1976); In re Alexandria Sand and Gravel Co., 17 C.B.C. 11, 16 (S.D.Ohio 1978) (B.J.); 1 Collier, Bankruptcy ¶ 1.193 (14th ed. 1974). Fair valuation was held by the courts not to be synonymous with a distressed

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or forced sale price. Hunter Press, Inc. v. Connecticut Bank & Trust Co., 420 F.Supp. 338, 341 (D.Conn.1976); Darby v. Shawnee Southwest, Inc., 399 F.Supp. 587, 591 (W.D.Okl.1975). The proper standard applied under the former Act was that enunciated in Syracuse Engineering Co. v. Haight, 110 F.2d 468, 471 (2d Cir. 1940)
Fair valuation of an estate such as this might conceivably be based on forced sale prices, or on fair market prices, or on so-called intrinsic values, irrespective of sale. A proper regard for the interests of the bankrupt, as well as for the interests of his creditors, compels the conclusion that fair market price is the most equitable standard. Bonbright and Pickett, Valuation to Determine Solvency under the Bankruptcy Act, 29 Col.L.Rev. 582, 597, 598; 1 Collier on Bankruptcy (14th ed. 1940) 74-81, collecting cases. It involves a value that can be made available for payment of debts within a reasonable period of time. In re United Finance Corp., supra 104 F.2d 593 (7th Cir. 1939); Babbitt v. Read, 2 Cir., 236 F. 42, 47, certiorari denied 243 U.S. 648, 37 S.Ct. 475, 61 L.Ed. 946; Stern v. Paper, D.C.N.D., 183 F. 228, 230, 231, affirmed 8 Cir., 198 F. 642. And fair market value implies not only a "willing buyer," but a "willing seller." Grandison v. National Bank of Commerce, 2 Cir., 231 F. 800, 804, certiorari denied 242 U.S. 644, 37 S.Ct. 213, 61 L.Ed. 542; Irvin Trust Co. v. Manufacturers\' Trust Co., D.C.S.D.N.Y., 6 F.Supp. 185; Collier, supra at 77.

The fair value of the debtor's property may be established from balance sheets, financial statements, appraisals, expert testimony, and other affirmative evidence. Edmondson v. Caldwell (In re Phippens), 4 B.R. 155, 159 (Bkrtcy.M.D.Tenn. 1980). Reduction in the face value of the debtor's assets may be appropriate if those assets are not susceptible to liquidation and thus cannot be made available for the payment of debts within a reasonable time. Constructora Maza, Inc. v. Banco de Ponce, 616 F.2d 573 (1st Cir. 1980).

The legislative history of § 547 does not reveal any intention on the part of Congress to change the state of the law relating to proof of insolvency that was in effect under the former Act.

The trustee's proof consisted of a series of corporate balance sheets; the testimony of Nolan, a certified public accountant who was one of the shareholder's two general partners; the testimony of the debtor's former president; and that of its former secretary-treasurer, James Gray. The shareholder's proof consisted principally of the testimony by Charles Linden, a certified public accountant who had prepared certain of the debtor's balance sheets.

The corporate balance sheet for the...

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