In re Hudson Feather & Down Products, Inc.
| Decision Date | 28 July 1982 |
| Docket Number | Bankruptcy No. 78 B 2744 (CHG) |
| Citation | 22 BR 247 |
| Parties | In re HUDSON FEATHER & DOWN PRODUCTS, INC., Bankrupt. HUDSON FEATHER & DOWN PRODUCTS, INC., Plaintiff, v. B&B ASSOCIATES, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Finkel, Goldstein & Berzow, New York City, for bankrupt; Harold S. Berzow, New York City, of counsel.
Chester B. Salomon, New York City, trustee in bankruptcy; David M. Green, New York City, of counsel.
In this Chapter XI proceeding filed under the Bankruptcy Act of 1898 (former 11 U.S.C. § 701, et seq.), B&B Associates, Inc. ("B&B") has filed an administration claim for $10,499.50, allegedly due it for commissions on sales procured under a sales agency agreement. The debtor herein, Hudson Feather & Down Products, Inc. ("Hudson"), has brought on by motion a two-pronged "Application" which (1) objects to the amount of the claim and seeks its reduction to $2,435.15, and (2) asserts a "counterclaim" in the amount of $16,000 based on preferential payments allegedly received by B&B within four months of Hudson's petition for relief under the bankruptcy laws. At the trial on Hudson's motion, Hudson conceded that it was not seeking any affirmative recovery with respect to the alleged preference, recognizing itself to be barred by the two-year statute of limitations imposed by § 11e (former 11 U.S.C. § 29(e)), but was invoking § 57g (former 11 U.S.C. § 93(g)) of the Bankruptcy Act to bar allowance of B&B's claim.
All the issues were tried on May 13, 1982, the Court reserving for decision whether a preference, if established, would reduce the amount allowable on B&B's administration claim.
1. On November 8, 1978, Hudson, which is in the business of selling feathers and down, filed for relief under Chapter XI and thereafter continued in business as a debtor-in-possession. Under its plan of arrangement, its creditors will receive approximately 7 percent of the face amount of their claims.
2. From at least as early as September, 1978 until Hudson filed for relief, it was insolvent in that its liabilities exceeded its assets. During this period of time, its condition steadily deteriorated.
3. Hudson's fiscal year ends September 30th. At the close of its 1978 fiscal year, its balance sheet showed a deficit of $3,770,000; at the close of its 1977 fiscal year, although its balance sheet showed a small surplus, this was due to the failure to write off as worthless an asset with a book value of $1,087,000. Hudson's financial situation continued unchanged from the close of its 1978 fiscal year until it filed for relief under Chapter XI.
4. When Hudson filed its petition for relief, its Chief Executive Officer was Morris Schachne, and one of its principal creditors was Arthur Puro and a corporation which he owns, Windsor Trading Corp. During the course of the Chapter XI proceeding, Puro assumed joint control with Schachne sometime in early 1979, and thereafter became Hudson's president, replacing Schachne as Chief Executive Officer.
5. B&B, which is now itself in bankruptcy, was engaged in business in the Orient and began soliciting orders on behalf of Hudson sometime in 1977, and in June, 1978, the then President of Hudson, James England, wrote the following letter to B&B in Korea:
6. B&B employed a subagent in Taiwan, Taiwan-Scott Co., Ltd., to which it paid a commission of one percent on orders secured by Hudson from that country. Among the customers in Korea who placed orders with Hudson through B&B were "Shu Kwang Ind. Co., Ltd." and "Dharma."
7. Under B&B's arrangement with Hudson, it received a 2 percent commission on all sales it produced. Their method of operation was that B&B would secure an order from a customer, then it would "telex back to New York, through our New York office, to have them contact Hudson and request that they send an offer, directly into the customer." If the customer agreed to the offer, it would open up a letter of credit to the benefit of Hudson. When Hudson received payment under the letter of credit, it would send a copy of the bill of lading to B&B, and B&B would then bill Hudson for the commissions due it. B&B earned about $40,000 a year in commissions from Hudson based on around a dozen sales a year. According to Donald Beebe, B&B's President, Hudson customarily paid B&B within 30 days of receiving its bill.
8. From July, 1978 until Hudson filed for relief under the bankruptcy laws, Donald Beebe was in almost daily communication with Schachne and was aware that at least by August, 1978, Hudson was having a serious problem in meeting its obligations, had a "cash flow" problem and was being pressed for money by Puro, to whom Hudson was heavily indebted.
9. Around July, 1978 or earlier, Hudson began factoring its accounts receivable, i.e., borrowing money against them, from Walter E. Heller & Co 10. Between July 14, 1978 and November 2, 1978, Hudson issued the following checks to B&B in payment of past-due commissions:
Bank Number Amount Date
Chemical 12472 $ 5,000 7/14/78
Chemical 12831 1,000 7/21/78
Chemical 12832 1,000 7/25/78
Chemical 12833 1,000 7/26/78
Chemical 12834 1,000 7/27/78
Chemical 12835 1,000 7/28/78
Chemical 13096 1,000 9/06/78
Chemical 13235 500 10/12/78
Chemical 13236 500 10/16/78
Chemical 13237 500 10/18/78
Chemical 13238 500 10/20/78
First Jersey 1117 500 10/31/78
First Jersey 1118 500 11/02/78
Chemical 12814 1,000 7/27/78
Chemical 12815 1,000 7/28/78 (DX-B)
11. Many of these checks were issued together, and several were postdated. No invoices supporting these payments were produced.
12. In a conversation with Arthur Puro sometime in September or October, 1978, Donald Beebe described Hudson as in "bad shape," said that it would be going out of business, that it could not pay its bills, and that it was giving him postdated checks. He suggested entering into a business arrangement with Puro, selling down to Korea and Taiwan.
13. The monies paid B&B totaling $16,000, all received in payment of an antecedent indebtedness, exceeded what B&B would have received on these obligations in the Chapter XI proceeding. At least $3,000 of this money was received at a time when B&B's President had reasonable cause to believe Hudson to be insolvent.
14. After Hudson filed under Chapter XI, B&B continued to solicit business on its account, reassuring customers that all would be well. However, at the request of one customer, two orders intended for Hudson were filled by Featherworks Corp., a subsidiary of Hudson.
15. On January 10, 1979, Hudson sent B&B a check for $1,000 on account of commissions then due it. At the same time, Schachne told Donald Beebe that Puro, who had just begun running Hudson jointly with Schachne, did not want to continue paying commissions to B&B, and that his agency was in jeopardy.
16. On March 2, 1979, Hudson billed B&B for $38.50 to cover the cost of a down vest sent B&B as a sample.
17. On March 7, 1979, B&B billed Hudson $4,927.50 for commissions due it ("First Invoice").
18. Following receipt of this invoice, Hudson sent a document entitled "ANNOUNCEMENT" to all its customers in Korea, about ten in number, and to B&B's subagent in Taiwan, Taiwan-Scott, Ltd., signed "The Management." The announcement read, in part: "As of March 9, 1979, Beebe Associates will no longer represent HUDSON FEATHER & DOWN PRODUCTS, INC. and FEATHERWORKS CORPORATION in the Far East." The announcement asked that orders be sent directly to Hudson or Featherworks, and concluded: "We look forward to a continuous good business relationship with you and shall handle your orders expeditiously." (Debtor's Ex. C.) Copies of this document were sent B&B's office in Korea and in New York. The copy sent Korea was returned marked "Moved, Left No Address." The copy sent New York was not returned.
19. Although Donald Beebe disclaims knowledge of this announcement, the Court does not credit his denial.
20. In March or April, 1979, Puro traveled to Korea, Hong Kong, and Taiwan to sell down for Hudson. While there, he called on the customers who had previously purchased from Hudson. Among the customers Puro saw was Shu Kwang Ind. Co., Ltd. and Dharma. Dharma placed an order with him at that time for 20,000 pounds of 80/20 down.
21. After Puro learned from B&B's agent and subagent in Taiwan that he had not been paid his percentage on commissions claimed to be owing on two orders obtained for Hudson and incidental expenses, Hudson, without securing any authorization first from B&B, paid Taiwan-Scott Ltd., Inc. $1,354.03.
22. On May 7, 1979, Hudson sent B&B two checks: one drawn by itself to the order of B&B in the amount of $1,961.50; the other drawn by Featherworks in the amount of $472.65. The two checks totaled $2,434.15. This represented the amount Hudson calculated to be due B&B as commissions as shown on the First Invoice after deducting the $1,000 earlier paid B&B and the following debits:
Sample vest ................. $ 38.50
United Airlines bill ........ 50.82
Taiwan-Scott billing ........ 1,354.03
Shu Kwang Sample ............ 50.00
23. The checks were not submitted for payment because...
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