In re McCormick, Bankruptcy No. 579-1045
| Decision Date | 03 September 1980 |
| Docket Number | Bankruptcy No. 579-1045,Adversary No. 580-0001. |
| Citation | 5 BR 726 |
| Parties | In re Kevin M. McCORMICK, Debtor. Kathryn A. BELFANCE, Trustee of the Estate of Kevin M. McCormick, Plaintiff, v. BANCOHIO/NATIONAL BANK, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
Kathryn Belfance, Akron, Ohio, Trustee.
Frederick S. Corns, Akron, Ohio, for BancOhio Nat. Bank.
FINDING AS TO COMPLAINT TO RECOVER PERSONAL PROPERTY
The Trustee filed a complaint to recover $647.48 from BancOhio/National Bank, a creditor of the debtor. The trustee alleges that the debtor made the payment on an antecedent debt within 90 days prior to the filing of his petition for relief under the Bankruptcy Code. Further the trustee claims that the debtor was insolvent and the payment resulted in the creditor receiving a greater percentage of payment of its debt than other creditors.
The trial was held and this Court makes the following finding of fact and law.
1. On November 27, 1979 the debtor, Kevin Michael McCormick, filed a voluntary petition in Bankruptcy under Chapter 7 of Title 11, United States Code.
2. BancOhio/National Bank was scheduled as a secured creditor with a claim in the amount of $6,500.00. The security was scheduled as a 1975 Pontiac Transam which the debtor valued at $3,000.00.
3. City Loan was scheduled as a secured creditor with a claim in the amount of $2,200.00. The security was scheduled as a stereo which the debtor valued at $250.00. All other creditors of the debtor were scheduled as unsecured creditors with claims totaling $1,528.73.
4. The debtor's total scheduled assets amount to $3,835.00, which includes the car valued at $3,000.00.
5. Kathryn Belfance was appointed interim trustee and serves as trustee as provided for under 11 U.S.C. § 702(d) of the Bankruptcy Code.
6. On January 8, 1980 the trustee agreed to the application and order to abandon the 1975 Pontiac to BancOhio/National Bank as the automobile had a probable value of $2,950.00 and the amount claimed due and owing by BancOhio was $4,446.26.
7. BancOhio took the automobile as security for an installment loan it made to the debtor in 1978. Installments on said loan were payable on the 15th of each month in the amount of $219.16.
8. The debtor's last three payments of $219.16 were made on August 16, 1979, September 19, 1979, and October 15, 1979. No payment was made in November 1979.
9. BancOhio/National Bank presented no evidence to rebut the presumption, under 11 U.S.C. § 547(f), of the debtor's insolvency on and during the 90 days preceding the filing of the petition for relief.
10. The original loan and security interest was made in 1978.
1. Has the trustee proven the elements necessary to void a transfer as a preference under 11 U.S.C. § 547(b)?
2. Is BancOhio/National Bank entitled to claim a setoff under section 553 of the Bankruptcy Code?
3. Are the installment payments made by the debtor excepted under section 547(c)(2) from treatment as voidable preferences?
DISCUSSION OF LAW
The Trustee had filed a complaint to recover the amount of three installment payments of $219.19 each, which the debtor made to BancOhio on August 16, 1979, September 19, 1979, and October 15, 1979 pursuant to an automobile loan contract signed in 1978.
In her complaint the trustee alleges that the installment payments are voidable preferences under section 547(b) of the Bankruptcy Code. In its answer, BancOhio maintains that the payments are not avoidable because they did not diminish the debtor's estate as required by section 547(b)(5). BancOhio argues alternatively that it may claim the payments as a setoff under section 553 and that the payments also fall within the scope of section 547(c)(2), which excepts certain transfers made within the ordinary course of business from avoidance as a preference.
To recover property under the preference avoidance provisions of the code, the trustee must show that the allegedly preferential transfer meets specific criteria. The transfer must have been made to or for the benefit of a creditor, in payment of an antecedent indebtedness, while the debtor was insolvent and must have occurred within ninety days prior to the filing of the bankruptcy. The payment must have enabled the creditor to receive more than it would have received in a liquidation proceeding under the Bankruptcy Code, had the payment not been made. These requirements are enumerated in section 547(b) which provides as follows:
As applied to the matter before the Court, section 547(b) subsections (4)(A) and (5) require the trustee to prove that the debtor made the payments within the ninety-day preference period and that BancOhio received more than it would otherwise have received had the payments not been made. If the trustee fails to establish these elements, the Court cannot sustain the complaint to avoid the transfer.
The first of the disputed payments is not a preference, since the debtor did not make that payment within the ninety-day period preceding the date of filing his petition in bankruptcy. The preference period began on August 26, 1979, ninety days prior to the November 27, 1979 filing. The debtor had already made his car payment several days earlier on August 16, 1979. The Court must therefore overrule the complaint of the trustee to recover the amount of the August 16, 1979 payment.
However, the court will sustain the complaint of the trustee to recover the amount of the payments made on September 19, 1979 and October 15, 1979, since these payments meet the requirements of section 547(b)(4)(A).
The debtor while insolvent paid these installments within the ninety-day preference period. The payments enabled BancOhio to receive more than it would have received had it been paid only in the liquidation proceedings according to the provisions of the Code.
BancOhio argues to the contrary and asserts that since the Bankruptcy Code provides for the payment of secured creditors in liquidation proceedings, it received no more than it otherwise would have received had the payments not been made. The thrust of this defense is that the payments did not diminish the estate and therefore fail to satisfy the requirement of section 547(b)(5). BancOhio maintains that as a secured creditor it could not have been preferred.
However, this assumption is incorrect since BancOhio is only partially secured. Its status as a secured creditor is determined by section 506(a) which provides as follows:
(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor\'s interest in the estate\'s interest in such property, . . .
11 U.S.C. § 506(a).
Under section 506(a), BancOhio has a secured claim for only $2,950.00, the value of its collateral, and an unsecured claim of $1,496.25, the balance of the debt, per application and order of abandonment-finding No. 6. In liquidation, BancOhio would have received payment on this unsecured claim only on a pro-rata basis with other unsecured creditors. If the two car payments made on September 19, 1979 and October 15, 1979 were credited to the unsecured balance on the debtor's account, BancOhio received more than it would have received on a pro-rata basis with other unsecured creditors, who have as yet received no dividends at all.
The Court must assume, in the absence of proof to the contrary, that the payments were credited towards the unsecured portion of the debt, since this course of action would comport with standard business practice. Consequently, one must conclude that BancOhio received greater payment on its unsecured claim than other unsecured creditors and that the transaction satisfies the requirements of section 547(b)(5). The court must therefore sustain the complaint of the trustee to recover the amount of the September 19, 1979 and October 15, 1979 payments.
BancOhio maintains alternatively that it is entitled to a setoff under section 553 of the Bankruptcy Code. A setoff does not occur automatically, however, and BancOhio offered no proof that it had taken the necessary steps to effectuate a setoff. Consequently BancOhio's claim to a setoff also fails.
In Baker v. National City Bank of Cleveland, 511 F.2d 1016 (6th Cir. 1975), the Sixth Circuit Court of Appeals held that a setoff must be accompanied by some act of consummation and by clear proof that the party claiming setoff actually exercised the right. A mere declaration of an intent to setoff retrospectively does not establish a setoff.
The Court in Baker provided that three steps must be taken to accomplish a setoff. There must first have been a decision to exercise the right to setoff, a subsequent action which completes the setoff, and finally, a record which verifies that the action has been taken, such as a bookkeeping entry or a copy of a telegram to the depositor indicating that a setoff has...
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