In re Hogg

• Decision Date: 12 December 1983
• Docket Number: Bankruptcy No. 383-00002,Adv. No. 383-0026.
• Citation: 35 BR 292
• Parties: In re Clairen D. HOGG and Jeannette Hogg, Debtors. FIRST POTTER COUNTY BANK and Clyde Starks, Receiver, Plaintiffs, v. Clairen D. HOGG, Jeannette Hogg, and Thomas M. Maher, Trustee, Defendants.
• Court: U.S. Bankruptcy Court — District of South Dakota

35 B.R. 292 (1983)

In re Clairen D. HOGG and Jeannette Hogg, Debtors FIRST POTTER COUNTY BANK and Clyde Starks, Receiver, Plaintiffs, v. Clairen D. HOGG, Jeannette Hogg, and Thomas M. Maher, Trustee, Defendants.

Bankruptcy No. 383-00002, Adv. No. 383-0026.

United States Bankruptcy Court, D. South Dakota.

December 12, 1983.

Craig E. Smith, Neumayr & Smith, Gettysburg, S.D., for plaintiffs First Potter County Bank and Clyde Starks, Receiver.

William Jason Groves, Rapid City, S.D., for defendants Clairen D. Hogg and Jeannette Hogg.

Thomas M. Maher, Maher, Bastian & Bode, pro se.

Robert J. Haar, Asst. U.S. Atty. on behalf of the United States of America, Farmers Home Administration.

MEMORANDUM DECISION

PEDER K. ECKER, Bankruptcy Judge.

The facts in this case are not complicated. The First Potter County Bank of Gettysburg, South Dakota (bank), made a loan to the Gettysburg Livestock Exchange, Inc. (corporation), which was backed by a ninety per cent guarantee of the Farmers Home Administration. The loan was secured by a first mortgage on the Gettysburg sales barn, a restaurant, lounge, sundry personal property, and the personal guarantee of the debtors, Clairen and Jeannette Hogg, who are the sole officers and shareholders of the corporation. Eventually, the corporation defaulted on its obligations to the bank and the bank proceeded to foreclose on the collateral. Because the collateral pledged to secure the loan was not sufficient to cover the corporate indebtedness, the bank obtained a deficiency judgment against the debtors based on the debtors' personal guarantees of the corporation's debt.

Prior to the corporation's defaulting on its loan to the bank, the debtors sold their ranch to generate $100,000. in cash which was used to purchase a certificate of deposit (c.d.) from the First National Bank of Redfield, South Dakota. The c.d. was issued in the names of the debtors and was subsequently assigned to the New Hampshire Insurance Company as security for the insurer issuing a livestock seller's bond in favor of the corporation. The New Hampshire Insurance Company took physical possession of the c.d. at its offices located in New Hampshire.

The bank attempted to execute on its deficiency judgment against the debtors by serving a summons and affidavit of garnishment upon the First National Bank of Redfield on August 19, 1982, and on the New Hampshire Insurance Company on August 20, 1982. The bank served a notice of garnishment on the debtors and the corporation on August 25, 1982. The bank did not obtain physical possession of the c.d. until October 20, 1982. The debtors filed their joint petition in bankruptcy under chapter 7 on January 17, 1983.

The trustee has challenged the transfer of the c.d. from the debtors to the bank as a preferential transfer under 11 U.S.C. § 547. The purpose of section 547 is to discourage creditors from racing to the courthouse to dismember the debtor during his slide into bankruptcy and to facilitate equality of distribution among similar creditors. In re Arnett, 13 B.R. 267, 269 (Bkrtcy. E.D.Tenn.1981), aff'd at 17 B.R. 912 (D.C.E. D.Tenn.). Subsection 547(b) prescribes the test for a preferential transfer:

Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the petition; or

(B) between 90 days and one year before the date of the filing of the petition, if such creditor, at the time of such transfer—

(i) was an insider; and

(ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer; and

(5) that enables such creditor to receive more than such creditor would receive if—

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

All of the five enumerated elements must be present to establish a transfer and the trustee has the burden of proof on each element by a preponderance of the evidence. In re Gruber Bottling Works, Inc., 16 B.R. 348, 351 (Bkrtcy.E.D.Pa.1982). A preference has been defined as ". . . a transfer that enables a creditor to receive payment of a greater percentage of its claim against the debtor than it would have received if the transfer would not have been made and it had participated in the distribution of the assets of the bankruptcy estate." In re Arnett, supra at 268.

The trustee argues that the c.d. was transferred to the bank within the ninety-day statutory period prior to the filing of the debtors' bankruptcy petition and, in the alternative, that the bank is an insider and, therefore, even if the transfer did not take place within the ninety-day period, it surely occurred within a year from the date the debtors filed their petition in bankruptcy. Because the Court concludes that the transfer of the c.d. to the bank is a preferential transfer within the ninety-day period, it need not and has not addressed the trustee's insider argument.

The bank does not dispute that the debtors transferred property to it on account of an antecedent debt made while the debtors were insolvent and that the transfer enabled it to receive more than it would have received in a liquidation had the transfer not occurred. Moreover, the record clearly reflects that the trustee has more than met his burden of proof on four of the five elements listed above. A $100,000. c.d. was transferred from the debtors to the bank. The transfer was on account of an antecedent debt as it arose from a previously acquired default judgment. The bank has failed to rebut the statutory presumption that the debtors were insolvent during the ninety days immediately preceding the date of the filing of the instant petition. See 11 U.S.C. § 547(f); Matter of Lucasa Intern., Ltd., 14 B.R. 980, 982 (Bkrtcy.S.D.N.Y. 1981). It is uncontroverted that the bank will receive more if it is allowed to keep the c.d. that it would be entitled to in a liquidation had that transfer not occurred.

The dispute in this case centers around when the c.d. was transferred. Indeed, the dispositive issue is whether the service of a garnishment summons on a garnishee holding a c.d. perfects the garnishor's interest against a hypothetical creditor who holds a judicial lien arising out of a simple contract obtained subsequent to the service of the garnishment summons but prior to the garnishor taking actual possession of the c.d.

For purposes of 11 U.S.C. § 547, a transfer of personal property is perfected as defined in section 547(e)(1)(B) as:

For the purposes of this section—

. . . .

(B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.

A transfer is made as defined in 11 U.S.C. § 547(e)(2):

For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made—

(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time;

(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days; or

(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; and

(ii) 10 days after such transfer takes effect between the transferor and the transferee.

Thus, it is clear that a transfer is made when it takes effect between the parties if it is perfected against judgment lien creditors then or within ten days thereafter. Otherwise, it is made when perfected or, if not perfected before bankruptcy, the transfer is deemed to have been made immediately before bankruptcy. In re Kelley, 3 B.R. 651, 654 (Bkrtcy.E.D.Tenn.1980). Subsection 547(e) requires the application of both federal and state law. State law determines when a transfer is "perfected," the so-called simple contract test, and federal law determines when a transfer is "made." See In re Mailbag Intern., Inc., 28 B.R. 905, 907 (Bkrtcy.Conn.1983); Matter of Canup Mechanical, Inc., 1 B.R. 703 (Bkrtcy. M.D.Fla.1979) (application of section 60(b) of the old Bankruptcy Act, the forerunner of 11 U.S.C. § 547(b), requires similar reference to state and federal law in regard to preferences).

In the instant case, the bank contends that it obtained a perfected interest in the c.d. when it served the garnishment summons on the garnishee, New Hampshire Insurance Company, on August 20, 1982. Furthermore, the bank also insists that the transfer was made on August 20, 1982. The bank cites several and the Court has discovered numerous bankruptcy decisions from other jurisdictions that have addressed the question of when a garnishor's interest in garnished property becomes perfected against a creditor on a simple contract with a judicial lien and the related question of when such a transfer is "made." Matter of Woodman, 8 B.R. 686 (Bkrtcy.W. D.Wis.1981) (under Wisconsin law, lien becomes effective when garnishment summons is served); In re Burnham, 12 B.R. 286 (Bkrtcy.N.D.Ga.1981) (lien arises when original garnishment summons is served); In re Brinker, 12 B.R. 936 (Bkrtcy.Minn. 1981) (service of garnishment summons creates a lien); In re Evans, 16 B.R. 731 (Bkrtcy.N.D.Ga.1982) (service of garnishment summons creates a lien if and when the debtor has rights in the property transferred); In re Hallmark Properties, Inc., 22 B.R. 451 (Bkrtcy.Haw.1982) (post-judgment garnishment liens against debtors were perfected upon service of garnishee summons); In re Ford, 29 B.R. 364 (Bkrtcy.W.D.Mo. 1983) (a creditor having a perfected...