In re General Office Furniture Wholesalers, Inc.

• Citation: 42 BR 232
• Decision Date: 17 August 1984
• Docket Number: Bankruptcy No. 82-00457-A,Adv. No. 82-0481-A.
• Parties: In re GENERAL OFFICE FURNITURE WHOLESALERS, INC., Debtor. GENERAL OFFICE FURNITURE WHOLESALERS, INC., Plaintiff, v. U.S. FURNITURE INDUSTRIES, INC., Defendant.
• Court: Bankr. V.I.

42 B.R. 232 (1984)

In re GENERAL OFFICE FURNITURE WHOLESALERS, INC., Debtor.

GENERAL OFFICE FURNITURE WHOLESALERS, INC., Plaintiff, v. U.S. FURNITURE INDUSTRIES, INC., Defendant.

Bankruptcy No. 82-00457-A, Adv. No. 82-0481-A.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

August 17, 1984.

Merrill Cohen, Bethesda, Md., for debtor.

Edward F. Rodriguez, Jr., Boothe, Prichard & Dudley, Fairfax, Va., for defendant.

Richard J. Stahl, Stahl & Buck, P.C., Annandale, Va., trustee in bankruptcy.

MEMORANDUM OPINION

MARTIN V.B. BOSTETTER, Jr., Bankruptcy Judge.

An involuntary petition for relief under Chapter 7 of the Bankruptcy Reform Act of 1978 ("the Code") was filed against the debtor, General Office Furniture Wholesalers, Inc., ("debtor") on April 8, 1982.¹ A Complaint to Recover Preferential Payments was filed December 6, 1982. The complaint was amended at the December 12, 1983 trial to include recovery of post-petition payments. The controversy is over eight payments made by debtor to U.S. Furniture Industries, Inc. ("USFI") against the latter's invoices for USFI merchandise sold by debtor to the federal government.² The payments were made between January 27, 1982 and April 20, 1982 and total $171,716.30. The issue before the Court is whether debtor's payments were made using "property of the debtor." 11 U.S.C. § 547(b).

Debtor was in the furniture wholesaling business, selling both to commercial clients and, through the General Services Administration ("GSA"), to federal government agencies. Defendant in this action, USFI, is a furniture manufacturer. Debtor began selling USFI merchandise to the government when debtor acquired on April 9, 1979, Contract Distributors, Inc. ("CDI"), through which USFI had theretofore sold its merchandise to the government. The history of CDI's relationship with USFI is a necessary background to understanding the present circumstances. That relationship was spelled out in a February 8, 1979 Memorandum of Agreement which the presidents of both companies signed. See Appendix. According to the testimony of an officer of USFI who attended the meeting at which the agreement was produced, the agreement was prompted by the upcoming merger of CDI into debtor and a desire of the parties to continue the same arrangement post-merger.

CDI and USFI conducted their financial transactions through a "lockbox" account managed by a bank in High Point, North Carolina. GSA payments for USFI merchandise sold by CDI were made into this account, whereupon the bank would draw two checks on the account. The checks represented the moneys due USFI for the merchandise and CDI for selling the furniture. Authorized signatories for CDI and USFI would exchange the checks, countersigning each one. CDI then would keep the check on which it was payee and USFI would keep the check on which USFI was payee. This arrangement enabled USFI to secure payment to itself upon GSA's payment to CDI.

Undisputed evidence was adduced at trial that in February 1979, at a meeting between USFI, CDI, and the debtor, the president of USFI advised debtor that if debtor wanted to do business with USFI, debtor would have to agree to the lockbox account. This procedure differed from debtor's usual practice of factoring its accounts receivable by assigning them to Lazere Financial Corporation ("Lazere"). Under the factoring process, debtor would assign an account receivable to Lazere and ship the order to the customer. Debtor would also invoice the customer through Lazere. The foregoing arrangement allowed debtor to draw from Lazere up to 85% of the face value of the invoice. Customer payments were sent either directly to Lazere or first to debtor and then by debtor to Lazere. USFI, however, did not want debtor to factor any accounts receivable generated from USFI merchandise. Debtor's agreement to abide by USFI's wishes is evidenced by a February 16, 1979 letter to USFI's president from debtor's principal who had attended the February meeting between USFI, CDI, and debtor:

As per our discussion, I am reiterating our commitment that we will not factor any government receivables for merchandise manufactured by United States Furniture Industries that we or any of our subsideries sic hold under a GSA contract.

Debtor, therefore, established an account at Virginia National Bank ("VNB") exclusively for payments received on debtor's non-assigned, non-factored, USFI-generated accounts receivable. The direct testimony of an officer of debtor described the operation as being the same as that which had existed between USFI and CDI.

Debtor, however, sometimes received a single GSA payment covering both USFI and non-USFI merchandise. In such cases, debtor would deposit the lump payment in the non-assigned account and then draw a separate check, over its signature only, in order to transfer the non-USFI portion of the payment to Lazere.

The complaint lists as preferential a total of twelve payments made by debtor to USFI. USFI concedes that four of the twelve, made with checks drawn on a "sole account" of debtor pursuant to debtor's "outright purchases" from USFI, were preferential. The remaining eight payments were made with checks drawn on the non-assigned account pursuant to debtor's sales of USFI merchandise to the government and GSA's subsequent payment to debtor for that merchandise. With respect to seven of the eight payments, trustee proceeds under section 547 of the Code, which allows avoidance of "any transfer of property of the debtor" if all of five enumerated conditions are met. 11 U.S.C. § 547(b); see In re General Office Furniture Wholesalers, Inc., 37 B.R. 180, 182 (Bankr.E.D.Va.1984). With respect to the eighth payment, trustee asserts as authority section 549 of the Code, which deals with postpetition transactions and allows avoidance of "a transfer of property of the estate" if two conditions are met, subject to exceptions. 11 U.S.C. § 549(a). The seven pre-petition payments sought to be avoided under section 547 will be addressed first.

The preamble to section 547(b) embodies two conditions for avoiding a payment: that the payment constitute a "transfer" and that the transfer be of "property of the debtor." The Code defines "transfer" as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property." 11 U.S.C. § 101(41). USFI does not dispute that debtor's payments, made by check from the non-assigned account, constituted "transfers." Thus, the issue in the case at bar is whether the funds drawn from the non-assigned account to make the seven payments sought to be avoided were "property of the debtor."

Trustee argues for debtor that (1) debtor's role in the billing and receipt process giving rise to the non-assigned account funds, and particularly (2) debtor's access to and control over the funds, make the funds property of the debtor. USFI, on the other hand, characterizes debtor's payments as improper distributions of USFI's share of the proceeds from furniture sales to GSA. USFI maintains that debtor had no rights to the funds except to the portion representing debtor's commission.

The Code does not define "property" as used in section 547(b), "but the various things which constitute the estate of a debtor are enumerated in section 541." 4 Collier on Bankruptcy, ¶ 547.082, at 547-32 (15th ed. 1984). Section 541's definition of property of the debtor's estate is useful to determine what constitutes property of the debtor under section 547 for two reasons: (1) as sections 541(a) and 301 indicate, property of the debtor is property of the estate upon filing of the bankruptcy petition subject to any exemptions claimed under section 522; and (2) the principle of section 547 is to avoid "only those preferential transfers that result in a depletion of the debtor's estate and that do not fall within one of the exceptions listed in section 547(c)." 4 Collier on Bankruptcy, ¶ 547.21, at 547-79 to 547-85 (15th ed. 1984) (emphasis added).

Section 541(a) of the Code defines a debtor's estate broadly to include "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). This definition presents the problem of defining an "interest" in property. "The existence and nature of the debtor's interest in property . . . are determined by non-bankruptcy law. Neither the Code nor the Bankruptcy Act provides any rules for determining whether the debtor has an interest in property." 4 Collier on Bankruptcy, ¶ 541.021, at 541-10 (15th ed. 1984). The Code of Virginia is silent regarding the issue before the Court.³ However, "where parties contract lawfully and their contract is free from ambiguity or doubt, the agreement between them furnishes the law which governs them." Russell Co. v. Carroll, 194 Va. 699, 703, 74 S.E.2d 685 (1953); Mercer v. South Atlantic Life Ins. Co., 111 Va. 699, 702, 69 S.E. 961 (1911).

The only direct evidence of the contract between the parties with respect to the non-assigned VNB account is that introduced into evidence as the "signature card" for the account. The Title of Account is listed as "Contract Distributors—A Division of General Office Furniture Wholesalers, Inc." and the account address and telephone number is that of debtor's business office. The card bears three signatures— those of Stanley R. Taylor, Arthur Hirst, and Lucy Patterson—in the spaces denominated president, vice president, and secretary, respectively. Those individuals were, in fact, the president, vice president, and treasurer of defendant USFI. The card is dated "4-19-79."

The card does not indicate whether the three signatories were the only authorized signatories for the account or how many of the three signatures were needed in order to draw on the account. On the face of the arrangement between the bank and the parties, therefore, the evidence as to...