In re HP King Co., Inc.

Citation64 BR 487
Decision Date24 September 1986
Docket NumberBankruptcy No. S-84-00961-5,Adv. No. S-86-0009-AP.
CourtU.S. Bankruptcy Court — Eastern District of North Carolina
PartiesIn re The H.P. KING COMPANY, INC., Debtor. Gregory B. CRAMPTON, Trustee for The H.P. King Company, Inc., Plaintiff, v. DOMINION BANK OF BRISTOL, N.A., a/k/a Dominion National Bank, Defendant.

Gregory B. Crampton, Raleigh, N.C., Trustee.

Peter J. Sarda, Raleigh, N.C., Mark M. Lawson, Bristol, Va., for defendant.


A. THOMAS SMALL, Bankruptcy Judge.

The matter before the court is the trustee's complaint for avoidance of a preferential transfer pursuant to 11 U.S.C. §§ 547 and 550. A trial was held in Raleigh, North Carolina, on August 26, 1986.


This bankruptcy court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, and 157, and the General Order of Reference entered by the United States District Court for the Eastern District of North Carolina on August 3, 1984. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(F), which this court may hear and determine.


The debtor, The H.P. King Company, Incorporated, filed a chapter 11 bankruptcy petition on June 22, 1984. The case was converted to a case under chapter 7 of the Bankruptcy Code on February 20, 1985. In April of 1984, the debtor made three payments to the defendant, Dominion Bank of Bristol, N.A., on account of an unsecured note in an amount totalling $129,261.19.

By a letter dated March 12, 1985, from the chapter 7 trustee to the attorney for the defendant, formal demand was made for repayment of the funds transferred. This court finds that this demand was adequate and proper even though it was not sent directly to officers of the defendant bank. The defendant has not offered any evidence that the demand sent to the attorney did not, in fact, serve to promptly notify the bank. Evidence presented by the trustee shows that it was appropriate to send the demand to the defendant's attorney. Both the bank and the attorney were located in Bristol, Virginia. When the trustee wrote to a vice-president for the bank concerning the debtor's estate several months prior to the demand for payment, he received a response from counsel for the bank. This properly suggested to the trustee that future communications to the bank should be addressed to counsel.

When the bank failed to repay the transferred funds, the trustee filed in this court on January 14, 1986, a complaint to avoid preferential transfers pursuant to 11 U.S.C. § 547. On July 11, 1986, before the matter was heard in this court, the defendant paid the trustee $129,261.19, the amount originally transferred from the debtor to the defendant in April of 1984. The defendant no longer contests the preferential nature of those April transfers.


Since the funds originally transferred from the debtor to the defendant have been returned to the debtor's estate, the only remaining issue for this court to decide is what interest, if any, the trustee is entitled to recover from the defendant. The trustee seeks interest on $129,261.19, the amount of the preferential transfer, from March 15, 1985, three days after his demand for payment was mailed to the defendant's attorney, until July 11, 1986, the date payment was made. It is the trustee's position that the applicable interest rate should be determined by the law of Virginia, the state where the note was made which created the antecedent debt for which the preferential payments were made. The trustee contends that the applicable Virginia statute is Va.Code § 6.1-330.10 (1983), which establishes a judgment rate of interest of 12% per annum. The defendant denies any obligation to pay interest on the preferential transfer.

Although the Bankruptcy Code does not

directly address the subject,1 it is well settled that in an action to set aside a preference the trustee is entitled, under the bankruptcy court's equitable powers, to prejudgment interest from the date of demand for its return, or in the absence of a prior demand, from the date of the filing of the complaint. Matter of Foreman Industries, Inc., 59 B.R. 145, 155 (Bankr.S.D. Ohio 1986); In re Demetralis, 57 B.R. 278, 284 (Bankr.N.D.Ill.1986); In re Fulghum Construction Corp., 45 B.R. 112 (Bankr.M. D.Tenn.1984); In re Independent Clearing House Co., 41 B.R. 985, 1015 (Bankr.D. Utah 1984). Contra In re Video East, Inc., 33 B.R. 61, 63 n. 8 (Bankr.E.D.Pa. 1983). The rationale for allowing prejudgment interest on avoided preferential transfers was well stated in Foreman Industries at 155:

If litigation to recover a prefiling transfer is successful, recovering only the amount originally transferred is not adequate. Not only would the one creditor have received one hundred per cent (100%) of the amount owed by the debtor, but the creditor would also have had total control and use of the property transferred, including the opportunity to simply invest the amount in question until any litigation concerning the transfer was concluded — a situation which would not be true for other creditors. At the same time, the debtor\'s estate would have been deprived not only of the property transferred, to which it was rightfully entitled, but also the control and use of the property, particularly for investment purposes. In such a situation, all creditors and claimants of the estate would have had the amount they were entitled to receive diminished not merely by the wrongful transfer of the funds, but also by the continued retention of those funds. The wrongful retention of those funds can be redressed by an award of prejudgment interest. The awarding of prejudgment interest is compensatory. It compensates the debtor\'s entire estate for the use of those funds for the period of time that they were wrongfully withheld from the estate.

The arguments presented by the defendant for not allowing interest in this case are not persuasive. The defendant claims that it has lost the ability to proceed against the guarantors of the note, but it presented no evidence to show why that is so. If the defendant was concerned that the passage of time might diminish its ability to pursue guarantors, it could have repaid the transferred funds to the debtor's estate earlier than it did. In In re Fulghum Construction Corp., 45 B.R. 112 (Bankr.M.D.Tenn.1984), the court rejected the defendant's argument that the trustee should not be entitled to prejudgment interest on an avoided transfer because the defendant was not responsible for any delay in litigation. As in Fulghum, the defendant here has not convinced this court that interest should be denied because of delays in litigation.

The defendant also asserts that interest should not be awarded unless it is shown that the trustee would have invested the avoided funds in an interest bearing account. At trial, the trustee for the debtor's estate indicated that all funds in the estate had, in fact, been earning interest, and counsel for the defendant seemed satisfied with that response. In any event, this court does not believe that, in order to recover prejudgment interest, the trustee should be required to show that the value of the debtor's estate would have been enhanced but for the defendant's retention of improperly transferred property of the estate. See In re Fulghum Construction Corp., in which the court awarded the trustee interest despite the defendant's argument that the evidence established that the value of the debtor's estate increased due to its transactions with the debtor.

Finally, the defendant challenges the adequacy of the demand for payment made by the trustee because it was mailed to the attorney for the defendant, rather than to officers of the defendant bank. The defendant has not cited any authority in support of its claim of inadequacy. This court has found that notice to the attorney did, in fact, constitute notice to the bank.

This court holds that the trustee is entitled to interest on the avoided transfer for the period from March 15, 1985, the date of demand, to July 11, 1986, the date of payment. The court now turns to the issue of the appropriate rate of interest.

The trustee argues that the "Erie doctrine"2 requires this court to look to the law of Virginia in determining the applicable rate of interest in this case. The trustee contends that the relevant state statute is Va.Code § 6.1-330.10 (1983), which establishes a judgment rate of interest of 12% per annum.3 The availability of prejudgment interest is a substantive issue of the law of damages, rather than a procedural issue. Ford Motor Co. v. Transport Indemnity Co., 45 B.R. 843, 846 (E.D.Mich. 1984). Therefore, under the Erie doctrine, state law will apply to questions involving prejudgment interest in diversity cases. United States v. Dollar Rent A Car Systems, Inc., 712 F.2d 938, 940 (4th Cir.1983). However, when a right to recovery arises under and is governed by federal law, federal law also governs the availability of interest. Id. at 941; Ford Motor Co. at 846.

Although many issues adjudicated in bankruptcy court concern rights arising under state law,4 the avoidance of a preferential transfer is not one of them. The source of a trustee's right to avoid a preferential transfer is section 547 of the United States Bankruptcy Code. Section 547 does not merely provide a mechanism for enforcing in bankruptcy court a right existing independently under state law; it creates the right. Because liability in a preferential transfer case arises from § 547, federal, not state law governs the determination of the appropriate rate of interest. In re E.D. Presley Corp., 44 B.R. 781, 784 (Bankr.S.D.Fla.1984). See also In re Production Steel, Inc., 60 B.R. 4 (Bankr.M.D.Tenn.1986) (applying federal law); Matter of Foreman Industries, Inc., 59 B.R. 145, 157 (Bankr.S.D.Ohio 1986) (applying federal law); In re...

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