In re Santoro Excavating, Inc.

• Decision Date: 16 September 1983
• Docket Number: Adv. No. 83 ADV. 6106,83 ADV. 6127.,Bankruptcy No. 82 B 20039
• Citation: In re Santoro Excavating, Inc., 32 B.R. 947, 10 B.C.D. 1369 (Bankr. S.D.N.Y. 1983)
• Parties: In re SANTORO EXCAVATING, INC., Debtor. In re Philip SANTORO, Ruth Santoro, Frank G. Santoro and Frank D. Santoro, Third Party Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

32 B.R. 947 (1983)

In re SANTORO EXCAVATING, INC., Debtor In re Philip SANTORO, Ruth Santoro, Frank G. Santoro and Frank D. Santoro, Third Party Defendants.

Bankruptcy No. 82 B 20039, Adv. Nos. 83 ADV. 6106, 83 ADV. 6127.

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

September 16, 1983.

Teitelbaum & Gamberg, P.C., New York City, for trustee.

Spencer V. Hinckley, New Rochelle, N.Y., for Philip Santoro, et al. third party defendants.

McGovern, Connelly & Davidson, New Rochelle, N.Y., for Barclays Bank of New York and third party defendants.

DECISION ON COMPLAINT BY TRUSTEE TO VOID ALLEGED PREFERENTIAL TRANSFER

HOWARD SCHWARTZBERG, Bankruptcy Judge.

This preference suit by the trustee in bankruptcy is premised on a release of collateral worth $20,000 by the defendant bank to third party defendants, who had pledged $40,000 in collateral with the bank to secure the debtor's $35,000 obligation to the bank. Contemporaneously with the release of the collateral, the bank deducted $20,000 from the debtor's bank account, all of which occurred within 90 days before the bankruptcy petition was filed with this court.

The trustee in bankruptcy argues that the defendant bank did not occupy a secured status within the meaning of Code § 506(a) because the bank did not have a lien on property in which the estate had an interest in view of the fact that the collateral was owned by the third party defendants. Therefore, the trustee reasons that the bank received more than it would receive in a Chapter 7 distribution. The bank denies that it received a preference and maintains that it received nothing more than it would have received in liquidation. Additionally, the bank contends that if a preferential transfer did occur, the third party defendants should be liable since they received the benefits of the transaction.

FINDINGS OF FACT

1. On January 18, 1982 the above named debtor, Santoro Excavating, Inc., filed with this court a petition for relief under Chapter 11 of the Bankruptcy Code. On May 19, 1982, the case was converted for liquidation under Chapter 7 of the Bankruptcy Code and the plaintiff was appointed as the trustee in bankruptcy.

2. The defendant, Barclays Bank of New York ("Barclays"), was a creditor of the debtor since September 30, 1981, when the debtor acknowledged a $35,000 loan obligation to Barclays and executed a secured demand note in favor of Barclays for $35,000. The note was secured by four United States Treasury Bills, each in the amount of $10,000, for a total of $40,000. The Treasury Bills had been pledged as security by Philip Santoro, Ruth Santoro, Frank G. Santoro, and Frank D. Santoro, who were principals and relatives of principals of the debtor.

3. On January 7, 1982, eleven days before the debtor filed its Chapter 11 petition, Barclays was requested by the principals to release $20,000 from the security held by Barclays in connection with the loan to the debtor and to charge the amount released against the debtor's account with Barclays. Accordingly, Barclays sold $20,000 in pledged Treasury Bills and released this amount to the pledgors. Contemporaneously with this transaction, Barclays deducted $20,000 from the debtor's bank account on January 7, 1982.

DISCUSSION

In order for a trustee in bankruptcy to avoid a preferential payment to a creditor on account of an antecedent debt owed by the debtor within 90 days before the date of the filing of the petition, the trustee must establish that the questioned repayment enabled the creditor to receive more than the creditor would have received upon liquidation under Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 547(b)(5). The defendant, Barclays Bank of New York, argues that it is fully secured by United States Treasury Bills that were pledged by the principals and relatives of principals of the debtor. Thus, Barclays reasons that the release of $20,000 in security to the pledgors and the contemporaneous $20,000 charge against the debtor's bank account did not affect Barclay's position against the debtor's estate, because Barclays was fully secured and would be paid in full upon the liquidation of the debtor's assets under Chapter 7 of the Code. This court has stated in previous cases that a payment to a creditor with an allowed fully secured claim is not a preference. See In re Castillo, 7 B.R. 135, 137 (Bkrtcy.S.D.N.Y.1980); In re Community Hospital of Rockland County, 15 B.R. 785, 788 (Bkrtcy.S.D.N.Y.1981); In re PDQ Copy Center, Inc., 26 B.R. 77, 79 (Bkrtcy.S.D.N.Y.1982).

However, Barclays did not have a lien on property of the debtor; the collateral was pledged by the third party defendants. A lien on property of another does not give rise to a secured claim against the debtor's estate. Ivanhoe Building & Loan Association v. Orr, 295 U.S. 243, 245-46, 55 S.Ct. 685, 686-87, 79 L.Ed. 1419 (1935); In re United Cigar Stores Co. of America, 73 F.2d 296, 297 (2d Cir.1934), cert. denied sub nom. Irving Trust Co. v. Bankers Trust Co., 294 U.S. 708, 55 S.Ct. 405, 79 L.Ed. 1243 (1935); Swarts v. Fourth National Bank, 117 F. 1, 7 (8th Cir.1902); In re Claxton, 21 B.R. 905, 907 (Bkrtcy.E.D.Va.1982). Therefore, the fact that the bank held collateral which could satisfy its antecedent debt claim in full did not mean that it occupied a secured status vis-a-vis property of the estate and that it was invulnerable to the trustee's preference suit. This point was clearly expressed in Swarts v. Fourth National Bank as follows:

The test of a preference, as we have seen is whether or not a transfer or payment will have the effect to pay on one claim a larger dividend, out of the estate of the bankrupt than that estate will pay on other claims of the same class. It is its effect upon the equal distribution of the estate of the bankrupt, not its effect upon the creditor, that determines the preference. The same dominant thought controls and determines the classification of the creditors. Those creditors who are entitled to receive out of the estate of the bankrupt the same percentage of their claims are in the same class, however much their owners may have the right to collect from others than the bankrupt. Their relations to third parties, their right to collect of others, the personal security they may have through indorsements or guaranties, receive no consideration, no thought. It is the relation of their claims to the estate of the bankrupt, the percentages their claims are entitled to draw out of the estate of the bankrupt, and these alone, that dictate the relations of the creditors to the estate, and fix their classification and their preferences.

117 F. at 7 (emphasis added).

In the instant case, Barclays took $20,000 from the estate of the debtor when it deducted this amount from the debtor's account. However, the unsecured creditors could draw no comfort from Barclays' contemporaneous release of $20,000 in collateral because the collateral was not property of the estate and was not released to the debtor. The $20,000 from the sale of the Treasury Bills was returned to the third party defendants who had originally pledged the Treasury Bills with Barclays. Thus, the third party defendants who requested Barclays to release the $20,000 to them in exchange for Barclays' charging a like amount against the debtor's bank account, were, in fact, the actual beneficiaries of the transaction. Barclays' position remained constant; it could look to the remaining Treasury Bills that were pledged by the third party defendants for full satisfaction of its outstanding claim.

A somewhat similar transaction developed in In re Church Buildings and Interiors, Inc., 14 B.R. 128 (Bkrtcy.W.D.Okl.1981), where the debtor owed $40,000 to a bank. As security for the loan the bank held the personal guarantees of two of the debtor's officers who had sufficient net worth to satisfy the debt. Within the 90-day period before the bankruptcy petition was filed the bank released the two guarantors in exchange for a security agreement from the debtor which granted the bank a security interest in all of the debtor's tangible and intangible property. The court concluded that it might be found that a...