In re Hygrade Envelope Corp.

• Decision Date: 01 April 1968
• Docket Number: Docket 31766.,No. 267,267
• Citation: 393 F.2d 60
• Parties: In the Matter of HYGRADE ENVELOPE CORP., Bankrupt. Samuel S. BARANOW, Trustee in Bankruptcy of Hygrade Envelope Corp., Appellant, v. GIBRALTAR FACTORS CORP., Respondent.
• Court: U.S. Court of Appeals — Second Circuit

393 F.2d 60 (1968)

In the Matter of HYGRADE ENVELOPE CORP., Bankrupt.

Samuel S. BARANOW, Trustee in Bankruptcy of Hygrade Envelope Corp., Appellant, v. GIBRALTAR FACTORS CORP., Respondent.

No. 267, Docket 31766.

United States Court of Appeals Second Circuit.

Argued February 19, 1968.

Decided April 1, 1968.

Abraham L. Popper, New York City (Popper & Popper, William I. Popper, New York City, on brief), for appellant.

Louis P. Rosenberg, Brooklyn, N. Y. (Sydney Krause, New York City, on brief), for respondent.

Before FRIENDLY and SMITH, Circuit Judges, and GIGNOUX, District Judge.^*

FRIENDLY, Circuit Judge:

Hygrade Envelope Corp. was adjudicated a bankrupt in the District Court for the Eastern District of New York on a voluntary petition filed on January 24, 1963. On November 26, 1962, it had transferred to Gibraltar Factors Corp. a term insurance policy in the face amount of $100,000 on the life of its vice president and general manager, Jack Wohl.¹ A referee in bankruptcy and the district court initially rejected a counterclaim by the trustee under § 60b to recover as a preference the proceeds of the policy, $101,000, collected by Gibraltar as a result of Wohl's sudden death on December 5, 1962, on the ground that Gibraltar did not have "reasonable cause to believe" Hygrade was insolvent on November 26. On a previous appeal we disagreed and remanded the cause "so that the referee may make further findings and conclusions on the issues, reserved by him, whether the transfer was for or on account of an antecedent debt, § 60a(1), and whether, if the transfer was preferential, Gibraltar is entitled to a set off under § 60c," as well as the claim, first advanced on Gibraltar's petition for rehearing in this court, "that the trustee is not entitled to recover because the insurance policy was exempt property under New York Insurance Law § 166(1) * * *." 366 F.2d 584, 589-590 (2 Cir. 1966).

The case returns to us with reaffirmance of the dismissal of the trustee's counterclaim by the same referee and a different district judge but with sharp disagreement between them as to the reason. The referee sustained the argument that the proceeds of the policy were within the exemption conferred by § 6 of the Bankruptcy Act; he thought, however, that apart from this "the trustee has proved all of the elements required for a preference to be voided under the provision of Section 60 of the Bankruptcy Act and that consequently the trustee would be entitled to judgment on his counterclaim," free of any set-off by Gibraltar for advances subsequent to November 26, 1962. The district judge concluded that the policy was not exempt but held that the transfer was not "for or on account of an antecedent debt," and that in any event the transfer was only in the amount of $393, the sum Hygrade would have realized on surrender of the policy, or at most $1000, the cost of a new one-year policy, and should be disregarded as de minimis. We hold the trustee is entitled to recover on his counterclaim reduced, however, by certain amounts as explained below.

I.

Gibraltar's contention with respect to exemption rests on the third sentence of § 166, subd. 1 of the New York Insurance Law, McKinney's Consol. Laws, c. 28, which we quote in the margin.² Judge Weinstein ruled that the phrase "effected by any person" applies only to natural persons despite § 37 of New York's General Construction Law, McKinney's Consol. Laws, c. 22, defining "person" to include a corporation, and that in any event Gibraltar could not take advantage of "the allowances to bankrupts of the exemptions which are prescribed by the laws of the United States or by the State laws in force at the time of the filing of the petition in the State wherein they have had their domicile * * *," authorized by § 6 of the Bankruptcy Act. Agreeing with the latter ruling we have no occasion to pass upon the former.

If Hygrade had not assigned the policy, no exemption could have been asserted since the second sentence of § 166, subd. 1, which would then have been the only basis for one, exempts the policy from the claims of the creditors and personal representatives of the person insured (here Wohl) rather than of creditors of its owner. Gibraltar thus cannot take advantage of the principle that an assignee of exempt property may have the benefit of the exemption accorded by § 6 since the estate otherwise available to creditors will not be diminished by the assignment. See Rutledge v. Johansen, 270 F.2d 881, 883 (10 Cir. 1959); 1 Collier, Bankruptcy ¶ 6.11 (1967). On the face of things, it would seem incongruous that a policy not exempt in the bankrupt's hands should become so when preferentially assigned to a creditor, as would be rather apparent if the policy here had possessed a substantial cash surrender value. If New York intended to accomplish any such result, as a literal reading of the third sentence of § 166, subd. 1 might suggest, it meant to do something Congress did not allow. Section 6 of the Bankruptcy Act is limited to allowances "to bankrupts" and while we have expanded this to include members of the bankrupt's immediate family who have been named as beneficiaries, see In re Messinger, 29 F.2d 158, 68 A.L.R. 1205 (2 Cir. 1928), cert. denied, Reilly v. Messinger, 279 U.S. 855, 49 S.Ct. 351, 73 L.Ed. 996 (1929); Schwartz v. Holzman, 69 F.2d 814 (2 Cir.), cert. denied, 293 U.S. 565, 55 S. Ct. 76, 79 L.Ed. 655 (1934); In re Keil, 88 F.2d 7 (2 Cir. 1937); Schwartz v. Seldon, 153 F.2d 334, 169 A.L.R. 1375 (2 Cir. 1945), we know of no principle and have not been informed of any precedent that would justify expanding the exemption Congress allowed "to bankrupts" so as to include a policy of life insurance, not exempted by state law for the bankrupt, when this is in the hands of an unrelated person.

II.

The referee thought that because of the new security taken by Gibraltar for advances made to Hygrade after November 26, 1962, the assignment of the insurance policy was solely "for or on account of" the then existing indebtedness of between $300,000 and $400,000 which was only partially secured. The district judge reached an opposite conclusion, "that the assignment of the policy was taken as consideration for future financing of a business all hoped would be saved." If the understanding was in fact that the policy should constitute security only for new advances, we fail to perceive how Gibraltar could be allowed to use the proceeds to secure old ones. What seems entirely plain is that the parties made no such sharp distinctions as have now been attributed to them; the insurance policy was meant to secure advances both old and new according as need might arise.

While application of the proceeds of the policy to repayment of fresh advances made in reliance thereon would not constitute a voidable preference, their application to the payment of antecedent debts would, see 3 Collier, Bankruptcy ¶ 60.19 at 855 (1967), subject only to the point concerning the amount of the transfer we will next consider. Save for that, the case is indistinguishable from the many holdings that where the fair value of security given by the debtor exceeds the new loan, there is a voidable preference — assuming the other elements exist — insofar as the security is applied in satisfaction of an antecedent debt. See, e. g., Aulick v. Largent, 295 F.2d 41, 45 (4 Cir. 1961); United Pacific Insurance Co. v. United States, 358 F.2d 966, 175 Ct.Cl. 118 (1966); In re Schindler, 223 F.Supp. 512 (E.D.Mo.1963); MacLachlan, Bankruptcy, 292-93 (1956); 4 Remington, Bankruptcy § 1661.3 (1957).

III.

Gibraltar's next line of defense, sustained by the district judge, is that any transfer to it was so minuscule in amount as not to constitute a preference. It argues that there would have been no preference if it had bought the policy for $393, which indeed it could have included as a financing charge so that no money would have had to pass, and that the depletion effected by the assignment cannot have been greater than this or, at most, the $1000 required to buy a replacement policy. This concentration on the situation as of November 26 gives insufficient weight to the final portion of the definition of a preferential transfer in § 60a (1), to wit, "the effect of which transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class." Palmer Clay Products Co. v. Brown, 297 U.S. 227, 229, 56 S.Ct. 450, 451, 80 L.Ed. 655 (1936), teaches that under this language "Whether a creditor has received a preference is to be determined, not by what the situation would have been if the debtor's assets had been liquidated and distributed among his creditors at the time the alleged preferential payment was made, but by the actual effect of the payment as determined when bankruptcy results." See 3 Collier, Bankruptcy ¶ 60.35 and ¶ 60.36. Continental & Commercial Trust & Sav. Bank v. Chicago T. & Savings Co., 229 U.S. 435, 33 S.Ct. 829, 57 L.Ed. 1268 (1913), relied upon by Gibraltar, stands only for the undoubted proposition that the challenged transfer must deplete the estate to be preferential; it nowhere indicates that depletion should be measured at the time of the transfer. Virginia National Bank v. Woodson, 329 F.2d 836 (4 Cir. 1964), also cited by Gibraltar, may be similarly distinguished.³ Moreover, the trustee's position accords with the equities as we view them. On November 26, 1962, Gibraltar knew the continuance of Hygrade's business to be parlous at best. It knew also that everything depended on Wohl; according to Gibraltar's vice president, when Wohl sought continued advances, "we told him we would want additional insurance on his life because he was the key man in the business and without him we felt the business would not continue," as proved all too true. Gibraltar must have realized that Wohl's life was equally important to other creditors, who would...