In re Kenval Marketing Corp.

• Citation: 69 BR 922
• Decision Date: 11 February 1987
• Docket Number: Bankruptcy No. 83-02723F,Adv. No. 86-1240F.
• Parties: In re KENVAL MARKETING CORPORATION, Debtor. Fred ZIMMERMAN, Trustee, Plaintiff, v. FREM CORPORATION, Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

69 B.R. 922 (1987)

In re KENVAL MARKETING CORPORATION, Debtor.

Fred ZIMMERMAN, Trustee, Plaintiff, v. FREM CORPORATION, Defendant.

Bankruptcy No. 83-02723F, Adv. No. 86-1240F.

United States Bankruptcy Court, E.D. Pennsylvania.

February 11, 1987.

Leon S. Forman, Blank, Rome, Comisky & McCauley, Philadelphia, Pa., for trustee/plaintiff, Fred Zimmerman.

Martin J. Aronstein, Morgan, Lewis & Bockius, Philadelphia, Pa., for defendant, Frem Corp.

OPINION

BRUCE FOX, Bankruptcy Judge:

This is an action by a trustee in a chapter 11 case to set aside a prepetition transfer pursuant to 11 U.S.C. § 544(b). The defendant has moved to dismiss the complaint pursuant to Bankr.Rule 7012 and Fed.R. Civ.P. 12(b)(6). The issue before me is whether a bankruptcy trustee may maintain an action, pursuant to section 544(b), to avoid a prepetition transfer which is allegedly preferential under applicable state law (in this case, 39 P.S. § 151), when the following facts coalesce: (1) the transfer took place within four months of a prepetition assignment for the benefit of creditors; (2) the assignee is not an unsecured creditor of the debtor and (3) there are actual unsecured creditors of the debtor.

For the reasons set forth below, I conclude that the trustee may maintain this action and I will deny defendant's motion.

I.

Since this case is before me on a motion to dismiss the complaint, the trustee's factual allegations set out in his complaint are accepted as true for purposes of deciding this motion. E.g., D.P. Enterprises v. Bucks County Community College, 725 F.2d 943 (3d Cir.1984); In re Grosse, 68 B.R. 847 (Bankr.E.D.Pa.1987).

On or about March 8, 1983, the debtor, Kenval Marketing Corp. executed an assignment for the benefit of creditors in Pennsylvania. On July 7, 1983, an involuntary petition under chapter 7 of the Bankruptcy Code was filed against the debtor. An order for relief was entered on April 12, 1984. On July 2, 1984, this bankruptcy case was converted from chapter 7 to chapter 11. A trustee was appointed by the court on October 14, 1984.

Less than four months before the assignment for the benefit of creditors took place, the debtor made several transfers to the Frem Corp., the defendant herein, as follows: (1) payment of $1,200.00 on December 29, 1982; (2) payment of $760.00 on January 10, 1983; and (3) payment of $2,000.00 on January 28, 1983. According to the trustee's complaint, these transfers were made while the debtor was insolvent (or in contemplation of insolvency), with intent to benefit the defendant and provide it with an unfair advantage and preference over other creditors.

II.

The trustee argues that the transfers at issue are voidable pursuant to the Pennsylvania Insolvency Statute, 39 P.S. § 151, which is made applicable in this court by 11 U.S.C. § 544(b).¹ Section 544(b) provides:

The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under 502 of this title or that is not allowable only under section 502(e) of this title.

39 P.S. § 151 provides:

If any person, persons, firm, limited partnership, joint-stock company or corporation, being insolvent or in contemplation of insolvency, with a view to give a preference to any creditor or person having a claim against, or who is under any liability for, such insolvent, shall procure, suffer or permit any judgment to be entered, by confession or otherwise, or any execution to be levied, or any attachment or sequestration to be made of any part of his, their or its real or personal property, or shall make any payment, pledge, assignment, transfer, conveyance or encumbrance thereof, either absolutely or as collateral security for a debt then existing, whether due or not, such judgment, execution, attachment, sequestration, payment, pledge, assignment, transfer, conveyance, or encumbrance shall inure to the benefit of all the creditors of such insolvent, if an assignment for the benefit of creditors be made or proceedings in insolvency be commenced within four months after such judgment, execution, attachment, sequestration, payment, pledge, assignment, transfer, conveyance, or encumbrance shall have been entered, issued, commenced, made or recorded, and in the case of personal property exclusive possession given.

Both parties recognize that the challenged transfers from the debtor to the defendant cannot be avoided under 11 U.S.C. § 547(b) since they took place more than ninety days prior to the bankruptcy filing. However, under 39 P.S. § 151, the "reach back" period for avoidance is four months prior to the assignment for the benefit of creditors and all the transfers in question here took place within this time period. Thus, if the trustee can use 39 P.S. § 151 (through 11 U.S.C. § 544(b)) and if he can establish the other elements necessary under the state statute, he can avoid the debtor's transfers to the defendant.

Section 544(b) is one of several Code provisions giving the trustee the power to set aside prepetition transfers of property. Unlike other Code provisions, such as sections 547, 548 and 549, section 544(b) contains no original substantive standards for determining whether a transfer is avoidable. As Collier states:

Section 544(b) does not create in the trustee any independent right or power of action with which to challenge an allegedly invalid transfer. Like Prometheus bound, the trustee is chained to the rights of creditors in the case under title 11. If there are not creditors within the terms of section 544(b) against whom the transfer is voidable under applicable law, the trustee is powerless to act so far as section 544(b) is concerned. It is not necessary, however, that there be more than one such creditor.

4 Collier on Bankruptcy ¶ 554.03, at 544-17 (15th ed. 1986) (footnotes omitted) (hereinafter "Collier").

The defendant's main argument in this case is textual: there is no actual creditor of the debtor, as required by section 544(b), who has the power under Pennsylvania law to void the transfer. The defendant contends that under the relevant state statutory provisions, 39 P.S. § 151 and § 71,² only an assignee (for the benefit of creditors) or a receiver in a state insolvency proceeding has the power to avoid the transfer at issue. The exercise of such power by an assignee or receiver would be for the benefit of all creditors, but this does not mean that the creditors themselves have the avoidance power under state law. The defendant then reasons that section 544(b) "does not permit the trustee to avoid transfers that are merely avoidable for the benefit of actual creditors, but only those that can be avoided by actual creditors." (Defendant's Memorandum of Law at 6 (emphasis in original)). In this case, the trustee concedes that an assignee is not a creditor of the debtor with an unsecured claim allowable under section 502. Accord, In re Komfo Products Corp., 247 F.Supp. 229 (E.D.Pa.1965) (assignee for benefit of creditors is not per se an actual creditor under section 70(e) of former Bankruptcy Act). Therefore, the defendant contends that even though there may be unsecured creditors of the debtor, since the assignee is not such a creditor, the trustee is without the assignee's power to avoid transfers under 39 P.S. § 151 and 11 U.S.C. § 544(b). See Countryman, The Use of State Law in Bankruptcy Cases (Part II), 47 N.Y.U.L.Rev. 631, 662-63 (1972).³

The trustee counters with two arguments. First, he argues that in an earlier proceeding in this bankruptcy case, this court held that the avoidance powers that the assignee could have asserted under 39 P.S. § 151 may be utilized by the trustee. In re Kenval Marketing Corp., 40 B.R. 445, 449 (Bankr.E.D.Pa.1984). The trustee submits that this earlier decision is the "law of the case." Second, the trustee argues, that caselaw in this Circuit establishes that a bankruptcy trustee may step into the shoes of a state law assignee for the benefit of creditors and exercise the assignee's avoidance powers under 39 P.S. § 151.

III.

The trustee asserts that Chief Judge Goldhaber's previous decisions in In re Kenval Marketing Corp., 38 B.R. 241 (Bankr.E.D.Pa.1984) (Kenval I) and 40 B.R. 445 (Bankr.E.D.Pa.1984) (Kenval II) are binding in this adversary proceeding as the law of the case. I do not agree.

In Kenval I, the court entered an order for relief against the debtor on an involuntary petition. In connection with that decision, the court rejected the assignee for the benefit of creditors' argument that abstention was appropriate under 11 U.S.C. § 305. In Kenval II, the assignee and the debtor requested that the court vacate its earlier order. This led the court to discuss the scope of the trustee's powers under section 544(b) in more detail. Chief Judge Goldhaber concluded that the trustee could utilize the powers of the assignee under 39 P.S. § 151. However, he also explained:

The essence of the difficulty in the matter at hand is that our decision to abstain must necessarily be grounded on the expected outcome of preference actions which have yet to be commenced or tried. From our perspective it seems unwise to burden a preliminary proceeding requiring prompt attention ... i.e., a hearing on an involuntary petition with the obligation to try ancilliary preference actions to determine if we should abstain from ordering relief.

40 B.R. at 449.

The doctrine of law of the case has been concisely summarized as follows:

Under the doctrine of the law of the case, a decision on an issue of law made at one stage of the case becomes binding precedent to be followed at successive stages of the same litigation.

1B J. Moore, Federal Practice ¶ 0.4041, at 117 (2d ed. 1984) (emphasis added) (hereinafter "Moore"), quoted in In re Grosse, 68 B.R. at 849. In the interest of finality and effective administration of justice,...