In re New Life Builders, Inc.

• Decision Date: 18 November 1999
• Docket Number: Bankruptcy No. 97-10726 B. Adversary No. 99-1018 B.
• Citation: In re New Life Builders, Inc., 241 B.R. 507 (Bankr. W.D. N.Y. 1999)
• Parties: In re NEW LIFE BUILDERS, INC., Debtor. Thomas A. Dorey, As Trustee in Bankruptcy of New Life Builders, Inc., Plaintiff, v. Perfetti Builder's Hardware, Inc., 1655 Third Avenue, Niagara Falls, New York 14304, Defendant.
• Court: U.S. Bankruptcy Court — Western District of New York

241 B.R. 507 (1999)

In re NEW LIFE BUILDERS, INC., Debtor Thomas A. Dorey, As Trustee in Bankruptcy of New Life Builders, Inc., Plaintiff, v. Perfetti Builder's Hardware, Inc., 1655 Third Avenue, Niagara Falls, New York 14304, Defendant.

Bankruptcy No. 97-10726 B. Adversary No. 99-1018 B.

United States Bankruptcy Court, W.D. New York.

November 18, 1999.

Donald H. Michalak, Fredonia, NY, for Plaintiff-Trustee.

Bloom, Neubeck & Shonn, LLP, Eric A. Bloom, of counsel, Buffalo, NY, for Defendant.

CARL L. BUCKI, Bankruptcy Judge.

In this adversary proceeding, the chapter 7 trustee seeks to recover an allegedly preferential levy against a bank account of the debtor. The present motions focus upon the requirement of 11 U.S.C. § 547(b)(4)(A), that the transfer be made "on or within 90 days before the date of the filing of the petition." At issue is the date of transfer. Specifically, did a transfer occur when the sheriff actually recovered funds or at some earlier point in the process of executing the defendant's judgment?

Between September 8 and October 27 of 1995, New Life Builders, Inc., ("New Life") purchased various building supplies from Perfetti Builder's Hardware, Inc. ("Perfetti"). When New Life thereafter failed to complete payment of its account, Perfetti commenced an action against New Life in the Supreme Court for Erie County, New York. Ultimately, a judgment in the amount of $10,756.14 was entered in Perfetti's favor on October 16, 1996. As allowed by New York law, Perfetti's attorney then served a restraining notice on Lake Shore Savings & Loan Association. With a hold thereby being placed on accounts that New Life maintained at that bank, Perfetti delivered an execution to the Chautauqua County sheriff, who then served a notice of levy upon Lake Shore Savings & Loan Association on November 12, 1996, Responding to this levy, Lake Shore issued a check to the sheriff on November 14, 1996, in the amount of $6,831.61. The sheriff then remitted these funds to Perfetti.

New Life Builders, Inc., the debtor herein, filed a petition for relief under Chapter 7 of the Bankruptcy Code on February 11, 1997. Thus, the ninetieth day prior to the filing of the bankruptcy petition was November 13, 1996. Believing that a transfer of the debtor's property occurred one day later when Lake Shore issued its check to the sheriff, the case trustee commenced the present action to recover that payment as a preference. In its answer, Perfetti asserted as an affirmative defense that the transfer occurred prior to November 13, either when counsel served the restraining notice on October 28 or when the sheriff served the notice of levy on November 12. The case trustee has now moved to dismiss this affirmative defense, and in his response, Perfetti has cross-moved to dismiss the complaint.

Section 547 of the Bankruptcy Code establishes the standards for recovery of preferences. Subdivision (e) of this section contains several rules defining the occurrence of a transfer. Although preferences are purely creations of federal statute, these rules of transfer look to state law to settle their essential components. Barnhill v. Johnson, 503 U.S. 393, 397-98, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). For purposes of the present controversy, the starting point for our analysis is 11 U.S.C. § 547(e)(2). In relevant part, it provides that for purposes of section 547,

A transfer is made —

(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time . . . ;

(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days; or

(C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of — (i) the commencement of the case; or (ii) 10 days after such transfer takes effect between the transferor and the transferee.

Thus, the occurrence of a transfer will relate to the perfection of that transfer. Under each of the three alternatives in subdivision (e)(2), the transfer is deemed to have occurred no later than the point of perfection. Perfection is defined in subdivision (e)(1)(B), which provides that a transfer of personal property "is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee."

Under New York law, Perfetti acquired a lien on the debtor's personal property when Perfetti delivered the execution to the sheriff at a date more than ninety days prior to the filing of the bankruptcy petition. This rule is well summarized by New York Jurisprudence 2nd:

A lien is obtained upon the personal property of the judgment debtor, except upon such property as is exempt, when the execution has been actually delivered to the sheriff to be executed. Moreover, the lien upon the personal property arises, not when a levy is made, but at the moment when the execution is delivered to the officer.

54 N.Y. Jur.2d Enforcement of Judgments § 158 (1986). See Baker v. Hull, 250 N.Y. 484, 488, 166 N.E. 175 (1929). Bankruptcy courts have ruled similarly. For example, in In re Marceca, 129 B.R. 369, 370 (Bankr.S.D.N.Y.1991), Judge Howard Schwartzberg concluded that in New York, "the judgment creditor acquires a lien on personal property of the debtor when the execution is delivered to the sheriff." This general rule, however, requires some refinement. Although delivery of the execution to the sheriff will create a lien, the court must further inquire whether that lien is perfected under the standard of 11 U.S.C. § 547(e)(1)(B). Specifically, under the New York statute, could another creditor on a simple contract still have acquired a judicial lien that is superior to that of Perfetti? Before answering this question, we must place the issue into the context of New York law relative to enforcement of money judgments.

Article 52 of the Civil Practice Law and Rules contains the statutory provisions for the enforcement of money judgments in New York State. Subdivision (a) of section 5202 defines an execution creditor's rights in personal property:

Where a judgment creditor has delivered an execution to a sheriff, the judgment creditor\'s rights in a debt owed to the judgment debtor or in an interest of the judgment debtor in personal property, against which debt or property the judgment may be enforced, are superior to the extent of the amount of the execution to the rights of any transferee of the debt or property, except:

1. A transferee who acquired the debt or property for fair consideration before it was levied upon; or

2. A transferee who acquired a debt or personal property not capable of delivery for fair consideration after it was levied upon without knowledge of the levy.

Subject to the two stated exceptions, the delivery of an execution to the sheriff will effect a lien that is superior to the rights of all other transferees. In the present instance, the levied account was an asset of the debtor, and no third party had acquired that asset prior to the levy. Of no relevance, therefore, is the first exception, which deals with rights arising from a pre-execution transfer. Under New York law, deposits in a bank account are not cash, but a debt owed to the depositor. Sundail Construction Co. v. Liberty Bank of Buffalo, 277 N.Y. 137, 13 N.E.2d 745 (1938), 9 N.Y. Jur.2d Banks § 238 (1980). As "a debt or personal property not capable of delivery", the debtor's levied account is the type of asset to which the second exception refers. Here, the sheriff took possession of the account prior to an acquisition by any party without knowledge of Perfetti's interest. Accordingly, there is no competing transferee who might assert a priority of interest by reason of the second exception. Nonetheless, in...