In re Health Gourmet, Inc.
| Decision Date | 05 May 1983 |
| Docket Number | Adv. No. A80-0055.,Bankruptcy No. 79-1992-JG |
| Citation | 29 BR 673 |
| Parties | In re HEALTH GOURMET, INC., Debtor. CONSUMERS CREDIT UNION, Plaintiff, v. Irving WIDETT, Trustee of Health Gourmet, Inc., Defendant. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Alan Garber, David Strauss, Boston, Mass., for plaintiff.
Steven Shulman, Boston, Mass., for defendant.
Before the Court is the Motion for Summary Judgment of the Plaintiff, Consumers Credit Union, ("Consumers" or "the Bank") on its Complaint to determine secured status with respect to the property of the debtor, Health Gourmet, Inc. ("Health Gourmet" or "the debtor"). The trustee opposes summary judgment and seeks to avoid the security interest as a fraudulent conveyance under bankruptcy and state law. Subsequent to the filing of the complaint and upon agreement of the parties, the court ordered a sale of the debtor's assets with valid liens to attach to the proceeds of the sale. The issue is whether the credit union has a valid lien which should attach to the proceeds of the sale.
The affidavits and depositions on file disclose the following undisputed facts. From September of 1978 until the filing of an involuntary bankruptcy petition on October 29, 1979, Health Gourmet, Inc. operated a restaurant at 175 Massachusetts Avenue, Boston, Massachusetts. Jerome Rubin ("Rubin") was the sole officer and director. He also owned fifty per cent of the stock. The other fifty per cent of the stock was held by a Mr. Gilbert Golden. In June 1979, the debtor required additional capital to meet its expenses, and Rubin believed that Gilbert Golden would loan funds to the debtor to meet its expenses. Thereafter Rubin engaged in the following series of check-writing transactions.
Rubin wrote checks to Health Gourmet from his personal checking account at the Consumers Credit Union totalling $9,500 dated June 6, June 14, and June 19, 1979, in the amount of $2,500, $3,500 and $3,500 respectively. In order to cover the amounts of these checks, Rubin wrote three other checks to himself totalling $9,500 on the checking account of Emporium Publications S.A., Inc., a corporation which he owned. The Emporium Publications' checks were dated: June 8, June 15, and June 20, 1979 in the amounts of $2,500.00, $3,500.00 and $3,500.00 respectively. Rubin deposited the Emporium Publications checks into his personal Consumers Credit Union account. The deposit of the Emporium Publications' checks in Rubin's Consumers Credit Union account made it appear that there were sufficient funds to cover Rubin's checks to the debtor. As a result, the Consumers Credit Union paid each of Rubin's three checks to the debtor when they were presented for payment through the commercial bank collection process. Ultimately there were insufficient funds in the Emporium Publications account to cover the $9,500 in checks written on it, and as a result, the Emporium Publications checks bounced. The Consumers Credit Union had paid Rubin's personal checks to the debtor on what turned out to be overdrawn funds from Rubin's account.
When the Consumers' Credit Union discovered the $9,500 in overdrafts, Elliott H. Stone, Treasurer of Consumers Credit Union, called Rubin and demanded payment of the $9,500. Rubin explained to Mr. Stone that he had incurred the overdrafts on behalf of Health Gourmet, Inc. while attempting to meet its expenses. Rubin stated that although the debtor did not have the money to pay back the Credit Union at the time, he wanted to repay Consumers Credit Union out of future operating expenses from Health Gourmet. Mr. Stone arranged for the Consumer Credit Union to make a loan to Health Gourmet of $9,500 to eliminate the overdraft in Rubin's account. Exhibit 4 to Rubin's deposition indicates that on July 6, 1979, Consumers Credit Union issued a check for the sum of $9,500 payable to "Jerome Rubin or Consumers Credit Union". The $9,500 check was deposited in Consumers Credit Union's account at the Shawmut Bank of Boston, N.A. On July 6, 1979, Health Gourmet, Inc., by its President, Rubin, executed a promissory note and security agreement covering the equipment, fixtures and inventory of the debtor located at 175 Massachusetts Avenue, Boston, Massachusetts. This promissory note was co-signed by Rubin individually. On July 6, 1979, proper financing statements were filed with the City of Boston and Secretary of State's office.
On October 29, 1979, an involuntary petition under Chapter 7 of Title 11 of the United States Code was filed against Health Gourmet. At the time of the filing of the petition, Health Gourmet, Inc. owed Consumers Credit Union $9,762.44.
Pursuant to a Stipulation and Order entered into by the Interim Trustee and those creditors asserting security interests in the assets of the debtor, the debtor's assets were liquidated at public auction on January 29, 1980. The sale brought approximately $13,692.00 in proceeds less appraisal and auctioneers fees of $1,418.63 for a net of $12,273.37, which the trustee holds pending resolution of this dispute.
The trustee does not dispute that the Bank complied with the requirements of Mass.Gen.Laws Chapter 106 Section 9-203 or that the requisite financing statements were recorded. The trustee attacks the debtor's transfer of a security interest in its assets solely on the basis that it was a fraudulent conveyance under both state and bankruptcy law.
In support of its motion for summary judgment the bank contends that the grant of the security interest was not a fraudulent conveyance as a matter of law because the transaction was supported by fair consideration and value. There is no dispute that the security interest was granted within one year prior to the filing of the petition.
For the plaintiff to prevail on its motion for summary judgment and establish its secured position as a matter of law, it must establish beyond any factual controversy that the transaction was not a fraudulent transfer. Matter of S & W Exporters, 16 B.R. 941 (Bkrtcy.S.D.N.Y.1982). Summary judgment is inappropriate in the present case because the trustee's defense that the transfer was a fraudulent conveyance may be meritorious, depending upon the circumstances surrounding the transfer.
11 U.S.C. Section 548(a)(1) grants the trustee the power to:
"avoid any transfer of an interest of the debtor in the property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor (1) made such transfer or incurred such obligation with actual intent to hinder, delay or defraud any entity which the debtor was or became on or after the date that such transfer occurred or such obligation was incurred, indebted . . ." ... or if the debtor . . . 2(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (b)(i) was insolvent on the date that such transfer was made or such obligations was incurred, or became insolvent as a result of such transfer or obligation." 11 U.S.C. Section 548.
Transactions similar to that accomplished in the present case have been invalidated as fraudulent transfers under the former Bankruptcy Act and the...
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