In re Vasu Fabrics, Inc., Bankruptcy No. 82 B 12071 (PBA)

• Decision Date: 27 April 1984
• Docket Number: Adv. No. 83-5813A.,Bankruptcy No. 82 B 12071 (PBA)
• Parties: In re VASU FABRICS, INC., Debtor. NEW YORK CREDIT ADJUSTMENT BUREAU, INC., Trustee, Plaintiff, v. JUST IN-MATERIALS DESIGNS, LTD., Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

39 B.R. 513 (1984)

In re VASU FABRICS, INC., Debtor.

NEW YORK CREDIT ADJUSTMENT BUREAU, INC., Trustee, Plaintiff, v. JUST IN-MATERIALS DESIGNS, LTD., Defendant.

Bankruptcy No. 82 B 12071 (PBA), Adv. No. 83-5813A.

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

April 27, 1984.

Patterson, Belknap, Webb & Tyler, New York City, for trustee; David W. Dykhouse, Rees W. Morrison, New York City, of counsel.

Lauritano & Schlacter, New York City, for defendant Just In-Materials Designs, Ltd.; Jed R. Schlacter, New York City, of counsel.

MEMORANDUM DECISION ON TRUSTEE'S MOTION FOR SUMMARY JUDGMENT

PRUDENCE B. ABRAM, Bankruptcy Judge:

On October 26, 1982 an involuntary petition for relief under Chapter 7 of the Bankruptcy Code was filed against the debtor, Vasu Fabrics, Inc. ("Vasu" or the "Debtor"). An order for relief was entered on November 23, 1982. The Trustee, New York Credit Adjustment Bureau, Inc. ("Trustee"), was appointed on February 2, 1983. On July 21, 1983, the Trustee commenced this adversary proceeding against Just In-Materials Designs, Ltd. ("Just In") seeking to recover $9,000 as a preferential payment under Section 547 of the Bankruptcy Code, 11 U.S.C. § 547. On December 14, 1983, the Trustee moved for summary judgment. The defendant, Just In, has opposed the motion. Oral argument was heard on January 9, 1984. Following argument, additional submissions were made in response to certain questions raised by the court during the argument.

The motion for summary judgment must be denied as the Trustee has failed to establish that there are no material undisputed facts. However, because of the importance to the future course of this litigation, the court has determined that it should proceed to consider and resolve the various legal issues presented to it on the summary judgment motion.

FACTS

On December 8, 1981, or approximately ten (10) months prior to the filing of the Chapter 7 petition, Just In commenced an action in the United States District Court for the Southern District of New York (the "District Court Action") against Vasu alleging copyright infringement of a textile pattern, unfair trade practices and unfair competition. Just In sought, inter alia, $500,000 in damages. About eight months later in early August, 1982, Just In served an amended complaint which added Ivan Melamed and Susan Melamed, the principals and shareholders of Vasu, as defendants.

Approximately one month before the filing of the Chapter 7 petition and on September 30, 1982, Just In entered into a settlement agreement with the three defendants, Vasu, Ivan and Susan Melamed, in the District Court Action. Pursuant to the terms of the agreement, Vasu and the Melameds agreed to pay to Just In $9,000 in full settlement of Just In's copyright infringement, unfair competition and unfair trade practice claims against them. The Debtor and the Melameds represented that they had sold no more than approximately 14,509 yards of fabric bearing the disputed design and that there was no outstanding inventory of the fabric remaining. The three defendants further agreed permanently to cease and desist from any activity with respect to the disputed textile design. A consent judgment was entered on October 7, 1982 permanently enjoining the three defendants from use of designs substantially similar to the plaintiff's copyrighted design.

Payment to Just In of the $9,000 due under the settlement agreement was apparently made on September 29, 1982 prior to the signing of the settlement agreement. Payment was made in the form of a bank check payable to Just In issued by Chemical Bank on September 29, 1982 in the amount of $9,000. On September 29, 1982, the Debtor issued its own check in the amount of $9,000 to Chemical Bank. In the upper left hand corner of the check was the notation: "For settlement of Just In-Materials Designs, Ltd."

The Debtor's schedules reflect creditors are owed in excess of $500,000. The total assets scheduled by the Debtor are $27,955. The Trustee presently is holding assets of the Debtor's estate totalling $130,000.

DISCUSSION

In order to recover a payment alleged to be preferential, the Trustee must establish, by a preponderance of the evidence, each element of the cause of action created by Section 547(b) of the Bankruptcy Code.¹ Matter of Kennesaw Mint, Inc., 32 B.R. 799, 803 (Bkrtcy.N.D.Ga.1983). There is no dispute that the $9,000 payment to Just In was made within 90 days of the filing of the Chapter 7 petition. Thus, Code § 547(b)(4) is satisfied.

Section 547(b)(3)—"Insolvent"

Turning to Code § 547(b)(3), Just In has disputed that the Debtor was insolvent. The schedules filed by the Debtor reflect a substantial excess of liabilities over assets. Nor does the amount recovered by the Trustee beyond the value of the assets stated in the petition eliminate the deficit.

Code § 547(f) provides:

"For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition."

This presumption requires Just In to come forward with some evidence to rebut the assertion of insolvency. Matter of Lucasa International, Ltd., 13 B.R. 596 (Bkrtcy.S. D.N.Y.1981). The mere speculation that the schedules may not be accurate would be insufficient to rebut the statutory presumption at trial. See Matter of Emerald Oil Co., 695 F.2d 833 (5th Cir.1983). Just In argues that discovery is necessary on the issue of insolvency to determine whether the schedules are accurate, and until such time as discovery can be had, the motion should be denied. Although discovery should perhaps have already been had, apparently it was not. The court will permit Just In further discovery on this issue. At trial, unless Just In comes forward with evidence sufficient to rebut or meet the presumption, the court will be bound to rule in the Trustee's favor on this issue.

Section 547(b)(2)—"Antecedent Debt"

Just In denies that the settlement payment was "for or on account of an antecedent debt owed by the Debtor before such transfer was made" and thus that Code § 547(b)(2) is not satisfied. Just In states that:

"it may very well be that a claim of the defendant Just In came into being upon commencement of defendant\'s copyright suit against Vasu. However, it is submitted that no debt arose prior to September 30, 1982—the date of the Settlement Agreement involved herein." Brief at 7.

Just In then argues the finding of a preference requires payment of an antecedent debt, not an antecedent claim.

The term "antecedent debt" is not a term defined in the Bankruptcy Code. Of its component parts, the term "antecedent" is not defined; the term "debt" is defined in Code § 101(11) as "liability on a claim." Claim is defined in Code § 101(4) as:

"(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

"(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured;"

"Creditor" is defined in Code § 101(9)(A) as an entity "that has a claim against the debtor that arose at the time of or before the order for relief." The differences in these three terms are ones of point of view: "debt" concerns itself with the debtor's obligation; "claim" concerns itself with the creditor's right. Bankruptcy Code § 547 in dealing with preference is written from the perspective of the debtor; thus it is appropriate that the term "debt" is used. No significance can be read into the use of the term "antecedent debt" rather than "antecedent claim."

As the definition of "debt" is "liability for a claim," it might be urged that the term "debt" carries with it the requirement that the debtor's obligation be an established or conceded one, not merely one asserted against it. This reading lacks persuasiveness. The Bankruptcy Code does not define the term "liability". Black's Law Dictionary (4th ed. 1968) contains the following definition:

"The word is a broad legal term. It has been referred to as of the most comprehensive significance, including almost every character of hazard or responsibility, absolute, contingent, or likely." (Emphasis added.)

Further, the Code's definition of "claim" includes unliquidated, disputed and contingent rights to payment. There is liability on a claim even though the claim is disputed, contingent or unliquidated, providing that liquidation occurs, the dispute is resolved or adjudicated, and the contingency happens. Just In's argument that it may have been the holder of a claim at the time it commenced the District Court Action, but that the Debtor was not then correspondingly liable on a debt, is rejected in favor of simply symmetry: claim is the flip side of the debt coin. The legislative history states that "the terms debt and claim are co-extensive: a creditor has a `claim' against the debtor; the debtor owes a `debt' to the creditor." H.R. No. 95-595, 95th Cong. 1st Sess. 309-310 (1977), U.S. Code Cong. & Admin.News 1978, 5787, 6266, 6267.²

The Bankruptcy Code has an expansive definition of "claim" that is a significant departure from the former Bankruptcy Act. Under the former Bankruptcy Act, a patent infringement claim which was not fixed as to liability prior to the filing of a petition in bankruptcy was not a "provable" claim. Thus no dividend or distribution under a plan was payable on the infringement claim and the claim was legally unaffected by any discharge, although there might be no remaining source from which it could ultimately be collected. Haynes Stellite Co. v. Chesterfield, et al., 97 F.2d 985 (6th Cir.1938); Goldsmith v. Overseas Scientific Corporation, 188 F.Supp. 530 (S.D.N.Y.1960). The concept of...