In re Love
| Decision Date | 17 June 1993 |
| Docket Number | Adv. No. 92/00123.,Bankruptcy No. 91-41556-11 |
| Citation | 155 BR 225 |
| Parties | In re John B. LOVE, d/b/a Record Coin Shop, Debtor. ESTATE OF John B. Love, Plaintiff, v. FIRST INTERSTATE BANK OF MONTANA, Defendant. |
| Court | U.S. Bankruptcy Court — District of Montana |
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Steven E. Cummings, Murphy, Robinson, Heckathorn & Phillips, P.C., Kalispell, MT, for First Interstate Bank of Montana, N.A.
Steven M. Johnson, Esq. Church, Harris, Johnson & Williams, Great Falls, MT, and Ward E. Taleff, Alexander, Baucus & Linnell, P.C., Great Falls, MT, for Unsecured Creditors Committee.
In this adversary proceeding, the attorneys for the Unsecured Creditor's Committee (UCC) of the estate of John B. Love, a Chapter 11 Debtor, commenced a preference action against Defendant, First Interstate Bank of Montana (FIB)1, to recover $175,000 paid by John Love within 90 days of the filing of the Chapter 11 bankruptcy petition. After answer, trial of the cause was held on March 23, 1993. Memoranda have been filed by parties in support of their respective positions and the matter is ripe for decision. Many of the facts have been submitted by a Statement of Agreed Facts. In addition, exhibits have been entered in evidence which support the agreed facts. After examination of the agreed facts, exhibits and oral testimony, I determine the Plaintiff has sustained the burden of proof and is entitled to judgment against the Defendant Bank for the sum of $175,000 as a preference under 11 U.S.C. § 547.
The agreed facts are as follows:
1. John B. Love filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in this Court on or about September 20, 1991.
2. The Debtor's Plan of Reorganization was confirmed by Order of this Court on November 26, 1991. The provisions of the Plan of Reorganization include the authority of the UCC to pursue certain actions, including these adversary proceedings.
3. These proceedings are brought under Rule 7001 et seq., Federal Rules of Bankruptcy Procedure and pursuant to the Plan of Reorganization by the UCC on behalf of the estate.
4. Jurisdiction is vested in this Court by 28 U.S.C. § 1334(b) and 11 U.S.C. §§ 547(b), 548 and 510(c). The case arises under Title 11, United States Code and involves a complaint to set aside certain transfers or to obtain relief from transactions by the Debtor, and to equitably subordinate debt. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F) and (O).
5. Venue is proper in this Court by reason of 28 U.S.C. § 1409.
6. FIB is a national bank corporation with offices in Cut Bank, Montana.
7. Karla Love (KL) is the spouse of the Debtor and has been at all times relevant to these proceedings.
8. On October 23, 1990, John Love ("Debtor" or "JL") and KL executed and delivered to FIB a promissory note in the principal amount of $600,000. The promissory note was unsecured and had a maturity date of January 15, 1991. A true and correct copy of the promissory note is admitted as Exhibit 1.
9. The note was not paid at maturity. On February 27, 1991, by which date the loan balance had been reduced to $425,000, JL and KL executed and delivered to FIB a Change in Terms Agreement. By the provisions of that document the maturity of the debt was extended to April 1, 1991. A true and correct copy of the Change In Terms Agreement is admitted as Exhibit 2.
10. Neither JL nor KL paid the note at the time of the extended maturity.
11. On June 28, 1991, FIB, JL and KL executed an Agreement And Release Of All Claims ("the Agreement"). A true and correct copy of the Agreement is admitted as Exhibit 3.
12. The sum of $175,000 was paid on June 28, 1991, by Record Coin Shop/John B. Love, check number 1056, dated June 28, 1991, drawn on account number XXXXXXXXX with First Federal Savings Bank of Montana, Cut Bank office, deposited in First Interstate Bank on June 28, 1991. The check cleared the Federal Reserve Bank July 1, 1991. A true and correct copy of the June 28, 1991 check is admitted as Exhibit 4.
13. The sum of $150,000 was paid by Karla Love on or about July 26, 1991, by check number 2841 drawn on the account of Karla Kay Love with the First State Bank of Shelby, account number 54 8300. A true and correct copy of the check is admitted as Exhibit 5.
14. The Agreement and the payments made to FIB under it occurred within 90 days of the date of filing the petition for relief and during the period when the Debtor was presumed to be insolvent.
15. On May 14, 1991, JL borrowed $100,000 from Par Oil Company ("Par Oil"). The obligation is represented by a promissory note of that date, a true and correct copy of which is admitted as Exhibit 6. KL is named as a borrower on Exhibit 6, but only JL executed the note.
16. The Par Oil note was secured by a second mortgage on the residence of JL and KL, as well as a security interest in certain personal property of JL, consisting of motor vehicles. The mortgage was also dated and executed May 14, 1991. It was recorded May 20, 1991, in the office of the Glacier County Clerk and Recorder. A true and correct copy of the mortgage is admitted as Exhibit 7.
17. On May 14, 1991, JL executed and delivered to Par Oil a security agreement granting Par Oil a security interest in a 1986 Chriscraft Inboard boat, a 1988 Cadillac Eldorado, a 1989 Ford Bronco and a 1989 Chevrolet Suburban. A true and correct copy of the security agreement is admitted as Exhibit 8.
18. On May 24, 1991, the lien of Par Oil was noted on the records of the Motor Vehicle Division of the State of Montana as to the Cadillac, the boat and the Suburban, and on June 7, 1991, as to the Bronco. True and correct copies of the Notices of Lien Filing are admitted as Exhibits 9, 10, 11 and 12.
19. In the Debtor's bankruptcy proceedings and in connection with the transaction with FIB, JL did not claim as exempt any portion of his life insurance which had a cash surrender value.
20. On or about July 25, 1991, KL received a money order from Christie's auction of $190,000. The funds represented the proceeds from the sale of a ring.
21. The Par Oil check to John Love was dated May 14, 1991, and was deposited to his Record Coin Shop account with First Federal Savings Bank on June 28, 1991. The proceeds of insurance were deposited to the Record Coin Shop account on June 20, 1991, in deposits of $17,750, and $5,993.46. True and correct copies of the deposit tickets to the account are admitted as Exhibit 13. True and correct copies of the Statement Summary for the Record Coin Shop/John B. Love account at First Federal Savings Bank for the months May, June and July 1991, are admitted as Exhibits 14, 15 and 16.
22. The files of First Interstate contain no reference to a Par Oil Company loan to John Love as part of his settlement with the Bank.
23. First Interstate did not know the source of the funds represented by the $175,000 payment.
24. First Interstate has no correspondence with and did not communicate with Par Oil about a loan or possible loan to John Love.
Additional trial Exhibits admitted into evidence show that as of July 1, 1991, the Debtor had scheduled assets of $1,661,940 against liabilities of $4,057,007. FIB's debt is not scheduled as a liability and a number of obligations are listed as disputed. A bank official noted that "Love is slightly under water even ignoring the disputed debts." The Agreement and Release of All Claims between the Debtor, Karla Love and the Bank was fully satisfied by timely payments to the Bank of $325,000 in full satisfaction of the outstanding Bank debt of over $438,000, which debt was totally unsecured.
The promissory note signed by the Debtor in favor of Par Oil for $100,000 bears a maturity date of May 14, 1996, and contains no other terms and conditions except the interest rate and that the note is secured by a real estate mortgage and security on vehicles. The president of Par Oil testified over objection by the Plaintiff that Par Oil loaned the funds to the Debtor in order to allow the Debtor to pay the proceeds to the Bank. Under these facts, the Bank contends the "earmarking" doctrine provides a defense against the preference claim. The president also stated that the collateral given to secure the Par Oil note was not valued at the time of the transaction. However, the title registration lien filing for each vehicle shows the lien value at $20,000 on each of the four notices of lien filing. In addition, the Debtor's one-half interest in the family residence, according to the post-trial memorandum of FIB, based on the Debtor's bankruptcy Schedules, shows equity by the Debtor of about $30,000. Contrary to FIB's statement, the Debtor's homestead exemption has no effect on the mortgage interest by reason of Mont.Code Ann. Section 70-32-202(3). These values would indicate the Par Oil note was fully secured at the date of the loan.
One of the powers of a Chapter 11 Debtor is the authority under 11 U.S.C. § 547(b) to avoid certain payments made by the Debtor that would enable a creditor to receive payment of a greater percentage of his claim against the Debtor than would have been received if the transfer had not been made and he had participated in the distribution of the assets of the bankruptcy estate under the Bankruptcy Code. In recovering a voidable preference, a Chapter 11 debtor as the bankruptcy trustee, 11 U.S.C. § 1107(a), advances the policy favoring equality of distribution among similarly situated creditors of the estate. Begier v. Internal Revenue Service, 496 U.S. 53, 58, 110 S.Ct. 2258, 2262, 110 L.Ed.2d 46 (1990). Voidable preferences are brought into the estate and thus made available for pro rata distribution among creditors of equal priority.
Section 547(b) permits a Chapter 11 debtor as the trustee to avoid any transfer of an interest in the debtor's property made within 90 days of the filing of the bankruptcy petition where the...
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