In re Network 90°, Inc., Bankruptcy No. 87 B 03915

• Decision Date: 23 January 1989
• Docket Number: Bankruptcy No. 87 B 03915,Adv. No. 87 A 0421.
• Citation: 98 BR 821
• Parties: In re NETWORK 90°, INC., Debtor. David R. HERZOG, As Trustee of the Estate of Network 90°, Inc., Plaintiff, v. SUNARHAUSERMAN, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

98 B.R. 821 (1989)

In re NETWORK 90°, INC., Debtor David R. HERZOG, As Trustee of the Estate of Network 90°, Inc., Plaintiff, v. SUNARHAUSERMAN, Defendant.

Bankruptcy No. 87 B 03915, Adv. No. 87 A 0421.

United States Bankruptcy Court, N.D. Illinois, E.D.

January 23, 1989.

Jeffrey H. Hornstein, Holleb & Coff, Chicago, Ill., for plaintiff.

Kate Poverman, Sidley & Austin, Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

JACK B. SCHMETTERER, Bankruptcy Judge.

On March 13, 1987, Network 90° ("Debtor") filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Debtor then instituted this seven count Complaint against Defendant SunarHauserman seeking to avoid allegedly preferential transfers pursuant to 11 U.S.C. § 547(b). Debtor also sought to avoid two postpetition transfers pursuant to 11 U.S.C. § 549(a).

Debtor moved for Summary Judgment as to Counts V and VI of its Complaint. Defendant moved for Summary Judgment on Counts I, II III, IV and VII of the Complaint and also cross motioned for Summary Judgment on Counts V and VI.

Subsequently, this case was converted to one under Chapter 7. David R. Herzog was appointed Trustee. This Court permitted the Trustee to substitute himself as Plaintiff in the preference action. Trustee adopted the Complaint and filed an amended Motion for Summary Judgment and Partial Summary Judgment. In his amended Motion, the Trustee seeks Summary Judgment in his favor on Counts III, V and VI, and Partial Summary Judgment on Counts I, II and IV. For reasons set forth below, Plaintiff's motions for Summary Judgment are entirely denied, and Defendant's motions for Summary Judgment are entirely allowed.

I. UNDISPUTED FACTS

The undisputed facts are taken from the pleadings, supporting materials, the joint stipulations of facts, and the papers filed by the parties pursuant to Local District Rule 12.

Network 90°, Inc. (the "Debtor") is an Illinois Corporation with its principal address in Chicago, Illinois. Its business operations consisted of a dealership for full service contract furnishings. Complaint ¶ 3; Answer ¶ 3.

SunarHauserman is an Ohio Corporation with its principal office at 5711 Grant Avenue, Cleveland, Ohio 44105. It is a manufacturer of furniture, textiles, and movable walls for office interiors. Complaint ¶ 4; SunarHauserman's Amended Statement of Material Facts as to Which There is No Genuine Issue (Def. Amended Stmt. of Facts) ¶ 3.

Network 90° became a dealer of SunarHauserman products in March of 1985. SunarHauserman required that Network 90° provide it with a standby letter of credit with respect to each order, provide for direct payment from the customer to SunarHauserman, or provide that the customer make payment by means of a check jointly payable to Network 90° and SunarHauserman. In or about early July, 1985, the two parties reached the following oral agreement (the "Agreement"):

(a) Network 90° would instruct its customers to pay invoices from Network 90° with checks payable jointly to Network 90° and SunarHauserman;

(b) The customer would send the checks directly to Network 90° (or, the customer would send the check to SunarHauserman who would forward the check unendorsed to Network 90°, according to Def. Amended Stmt. of Facts at ¶ 11);

(c) Network 90° would endorse the check and send it to SunarHauserman; and

(d) SunarHauserman would endorse the check, deposit it, and remit the difference to Network 90° Plaintiff stated in his Statement of Material Facts (at ¶ 6) that SunarHauserman would apply the proceeds of each check to pay both current invoices and Debtor\'s past due obligations to the Defendant

Debtor's Statement of Material Facts (Debtor Stmt. of Facts) ¶ 6; Def. Amended Stmt. of Facts ¶¶ 10-11.

Subsequently, Network 90° agreed to an expansion of the agreement (the "Expanded Agreement"). According to the Debtor, SunarHauserman refused to sell the Debtor furnishings and equipment needed to fill an order sent to SunarHauserman on July 29, 1986 notwithstanding the original Agreement. Therefore, the Debtor orally agreed to the Expanded Agreement to induce SunarHauserman to continue to sell furnishings and equipment to it. Subsequently, the parties acted under and pursuant to the Expanded Agreement. Debtor Stmt. of Facts ¶ 9. According to SunarHauserman, by the summer of 1986 the Debtor had become substantially indebted to SunarHauserman for orders SunarHauserman had filled that were not paid with joint checks from customers, and therefore the parties agreed to the Expanded Agreement. While the litigants differ somewhat as to the origin of that agreement, there is no dispute that it was agreed to. The Expanded Agreement included the following terms:

(a) Network 90° would forward all checks it received from its customers to SunarHauserman without endorsement;

(b) Network 90° would grant SunarHauserman a power of attorney to endorse and negotiate checks that were jointly payable to Network 90° and SunarHauserman;

(c) SunarHauserman would endorse the checks, deposit them, and apply the proceeds to both the current invoices it had submitted to Network 90° and to Network 90°\'s past due obligation.¹

Debtor Stmt. of Facts ¶ 9; Def. Amended Stmt. of Facts ¶ 13.

Additional relevant undisputed facts are set forth in the discussion of the individual counts hereinbelow.

II. THE COUNTS CHARGED

A. Count I

In Count I the Trustee alleges that the cashing of Time, Inc. check number 177693 by SunarHauserman constituted a preferential transfer under § 547(b) of the Bankruptcy Code, and can therefore be avoided. In their joint stipulation the parties stipulate to the following facts concerning Count I:

1. On or about September 25, 1986, Time Inc. ("Time") submitted purchase order no. 36756 for office equipment, furnishings and installation services from the Debtor ("Time-PO # 36756"). Time-PO # 36756 was addressed to the Debtor and SunarHauserman at 430 West Erie, Chicago, Il 60610.

2. On or about September 25, 1986, the Debtor submitted purchase order nos. 3089, 3089A ("N90-PO # 3089" and "N90-PO # 3089A") to the Defendant for the equipment and furnishings needed to fill Time-PO # 36756.

3. SunarHauserman acknowledged N90-PO # 3089 and N90-PO # 3089A and supplied the equipment and furnishings that the Debtor ordered pursuant to them which the Debtor needed to fill Time-PO # 36756. SunarHauserman later submitted invoices nos. 360790-1, 1016200, 1016304, 1016694, 1016280 and 1017451 to the Debtor for such furnishings and equipment.

4. On or about October 17, 1986, the Debtor submitted purchase order no. 3206 ("N90-PO # 3206") to the Defendant for additional equipment and furnishings needed to fill Time-PO # 36756.

5. SunarHauserman acknowledged N90-PO #3206 and supplied the equipment that the Debtor ordered pursuant to it which the Debtor needed to fill Time-PO # 36756. SunarHauserman later submitted invoice no. 1017267 to the Debtor for such furnishings and equipment.

6. On or about January 22, 1987, the Debtor submitted invoice nos. 902003 and 901983 ("N90-I # 902003" and "N90-I # 901983") to Time for the equipment, furnishings and installation services which the Debtor provided to Time pursuant to Time-PO # 36756.

7. On or about October 29, 1986, Time submitted purchase order no. 36958 for office equipment, furnishings and installation services from the Debtor ("Time-PO # 36958"). Time-PO # 36958 was addressed to the Debtor.

8. On or about October 30, 1986, the Debtor submitted purchase order no. 3268 ("N90-PO # 3268") to SunarHauserman for the equipment and furnishings needed to fill Time-PO # 36958.

9. SunarHauserman acknowledged N90-PO #3268 and supplied the equipment and furnishings that the Debtor ordered pursuant to it which the Debtor needed to fill Time-PO # 36958. On or about January 9, 1987, the Defendant submitted invoice no. 1017268 to the Debtor for such furnishing and equipment.

10. On or about January 22, 1987, the Debtor submitted invoice no. 901984 ("N90-I # 901984") to Time for the equipment, furnishings and installation services which the Debtor provided to Time pursuant to Time-PO # 36958.

11. On or about February 18, 1987, Time issued check no. 177693 ("Time-ck # 177693") in the sum of $222,085.40 as payment for the equipment, furnishings and services covered by N90-I # 902003 and N90-I # 901984.

12. Time-ck # 177693 was made jointly payable to the Debtor and SunarHauserman.

13. The Defendant endorsed the Debtor\'s name on Time-ck # 177693 and cashed it.

In its Answer to the Complaint, SunarHauserman alleges the following affirmative defenses:

The complaint fails to state a claim upon which relief can be granted.

The check Defendant received never constituted property of the Debtor\'s estate and thus there was no preferential transfer of Debtor\'s property.

To the extent that the Debtor may have had an interest in the proceeds of the check negotiated by Defendant, the transfer to Defendant was (a) in payment of debts incurred by the Debtor in the ordinary course of the Debtor\'s business or in the ordinary course of the Debtor\'s and Defendant\'s financial affairs; (b) made in the ordinary course of business or financial affairs of Debtor and Defendant; and (c) made according to ordinary business terms.

Debtor\'s claim to the proceeds of the check arose out of the same transaction as SunarHauserman\'s claim against the Debtor. Accordingly, SunarHauserman is entitled to retain the proceeds of this check under the doctrine of recoupment.

In Defendant's Motion for Summary Judgment (Def. Motion for S.J.) and supporting Memorandum, it further alleges (citing the affidavit of the Manager of Credit and Collections for SunarHauserman, Mr. Cebula, ¶ 11) that in late January or early February of 1987, SunarHauserman contacted Time, TTM and United, the issuers of the joint checks, and requested them to send the joint checks directly to SunarHauserman....