Inland Security Company, Inc. v. Estate of Kirshner

• Decision Date: 09 September 1974
• Docket Number: No. 43626.,43626.
• Parties: In the Matter of INLAND SECURITY COMPANY, INC., William C. Paxton, Trustee, Plaintiff, v. ESTATE of George KIRSHNER, Defendant.
• Court: U.S. District Court — Western District of Missouri

382 F. Supp. 338

In the Matter of INLAND SECURITY COMPANY, INC., William C. Paxton, Trustee, Plaintiff, v. ESTATE of George KIRSHNER, Defendant.

No. 43626.

United States District Court, W. D. Missouri, W. D.

September 9, 1974.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

William C. Paxton, Trustee, Independence, Mo., for plaintiff.

Ben R. Swank, Jr., Kansas City, Mo., for defendant.

FINAL JUDGMENT AFFIRMING ORDER OF THE REFEREE IN BANKRUPTCY OF NOVEMBER 19, 1973, FINDING THE TRANSFER OF A CERTAIN PROMISSORY NOTE ON FEBRUARY 28, 1971, TO BE FRAUDULENT AND VOID AS AGAINST THE PLAINTIFF AND DIRECTING THAT THE NOTE AND DEED OF TRUST BE TURNED OVER TO THE PLAINTIFF

WILLIAM H. BECKER, Chief Judge.

This cause comes before this Court on the defendant's notice of appeal, filed herein on December 19, 1973, pursuant to Bankruptcy Rule 801. In this appeal, defendant seeks to secure review and reversal of the order of the Referee in Bankruptcy entered on November 19, 1973. In that order the Referee concluded that the transfer of a certain promissory note secured by a deed of trust encumbering property located at 2645 Brooklyn, Kansas City, Missouri, of the Christian Pentecostal Church Association, was fraudulent and void under Section 67d(2)(a) of the Bankruptcy Act. In that order the Referee directed that the defendant turn over the promissory note and the deed of trust, together with any and all collections received therefrom since February 28, 1971, to the Trustee, plaintiff herein.

In order to clarify the issues for consideration herein, a brief chronological summary of the facts of record follows.

The bankrupt, Inland Security Company, was a Missouri corporation which engaged in managing its own properties and servicing secured promissory notes owned by others, generally referred to by Inland Security Company as "clients." George F. Kirshner, who for many years was the President, Director and controlling stockholder of Inland Security Company, was also generally referred to as one of Inland Security Company's "clients." In the servicing of its clients' notes, Inland Security received monies paid by clients' obligors and at monthly periods would send such accumulated monies to the respective clients, acting as an agent.

The general practice of Inland Security with respect to its "client" and managing officer George F. Kirshner differed. Monies collected for Mr. Kirshner were not paid over directly to him individually but were credited to him and placed in Inland Security's general operating account and were used by Inland Security for its own purposes and that of its clients. Under this practice, Mr. Kirshner's unsecured open account was credited upon the receipt by Inland Security of such monies owing to Mr. Kirshner. The increase in Mr. Kirshner's account generally equalled the amount of this money either retained or received on his account.

Over the years, Inland Security accrued a substantial unsecured account payable to Mr. Kirshner. On February 28, 1971, four months before Mr. Kirshner's death and seven months and nineteen days before the petition in bankruptcy was filed, there was owing to Mr. Kirshner as creditor the unsecured sum of $104,597.33 on open account. This sum represented the sums of money advanced by Mr. Kirshner over a number of years while he was President, Director, managing officer, and controlling stockholder of Inland Security Company. In February of 1971, Mr. Kirshner transferred the proceeds of a loan from the Linwood State Bank to Inland Security Company in the amount of approximately $20,000.

On February 28, 1971, Mr. Kirshner, as President of Inland Security, endorsed and transferred to himself as an individual a secured promissory note given by the Christian Penecostal Church Association ("Church" hereinafter) on October 1, 1969, in the original sum of $13,000, on which there remained unpaid the sum of $12,354.97, which was credited against Mr. Kirshner's unsecured open account, leaving a balance due him on his account with Inland Security in the amount of $92,242.36. This promissory note which Mr. Kirshner transferred to himself was secured by a first deed of trust on real property and improvements located at 2645 Brooklyn, Kansas City, Missouri. At the same time, Mr. Kirshner caused the balance of the open cash account due him from Inland Security to be reduced by the same amount of the principal balance then owing on this note, which was $12,354.97.

Mr. Kirshner died on July 2, 1971, holding as his individual property at his death the promissory note of the Church secured by the deed of trust of the property located at 2645 Brooklyn, Kansas City, Missouri.

On October 19, 1971, Inland Security Company filed a petition for bankruptcy, and on that same date it was adjudged a bankrupt. The first meeting of creditors was held on November 22, 1971, and William C. Paxton, Esquire, was elected, thereafter qualified and is now serving as trustee of the estate of the bankrupt.

On May 12, 1972, the estate of George F. Kirshner filed a petition for relief in the Bankruptcy Court, therein advising the Court of the sale and transfer of a certain promissory note secured by a deed of trust on property located at 2645 Brooklyn, Kansas City, Missouri. The Court was further advised that the obligor Church was confused as to whom payments should be made to and requested the Court to direct the Trustee to disclaim any interest therein. Following the holding of a hearing on that petition, the Referee entered an order on June 12, 1972, therein finding that a controversy existed as to the ownership of the note and directing that, until the Bankruptcy Court entered its findings upon the merits of the issue of ownership of the note, the makers thereof were to pay the delinquent installments and all future payments on the note as the same became due to Ben R. Swank, Jr. In the order it was further directed that these payments be deposited in an escrow savings account in the City National Bank & Trust Company in the name of Ben R. Swank, Jr., counsel for defendant, and William Paxton, Trustee. Pursuant to this order the account was opened and payments were deposited as directed.

Thereafter, on July 25, 1972, the Trustee filed a petition seeking to set aside the sale and transfer of the secured note of the Church to Mr. Kirshner, alleging it to be fraudulent and requesting the Bankruptcy court to order a "turn over" of the note to the bankrupt and an accounting of the proceeds collected thereon. A pretrial conference was held by the Referee on November 17, 1972, at which time the contentions of the parties were further presented and argued. The Referee requested that written briefs on the matter be submitted to him.

After consideration of the record, the briefs and stipulations of the parties, the Referee entered his memorandum opinion and order on November 19, 1973, finding therein that "there was not fair consideration"; that the receipt of "a secured note is not the fair equivalent of an unsecured indebtedness"; and that ". . . there was a breach by Kirshner of the fiduciary relationship between Kirshner and the bankrupt." Based on these findings, the Referee concluded that ". . . the transfer by the defendant on February 28, 1971 of a certain promissory note in the sum of $12,354.97 secured by a deed of trust encumbering 2645 Brooklyn, Kansas City, Missouri and made by the Christian Penecostal Church Association is fraudulent and void as against the plaintiff under § 67d(2)(a) of the Bankruptcy Act and is hereby held to be null and void." In that same order, the Referee directed that the ". . . defendant turn over said note and deed of trust together with any and all collections received therefrom since February 28, 1971 to plaintiff." This appeal of that order by the estate of Mr. Kirshner to this Court followed.

Section 67d(2) (a) of the Bankruptcy Act provides as follows:

"Every transfer made and every obligation incurred by a debtor within one year prior to the filing of a petition initiating a proceeding under this Act by or against him is fraudulent (a) as to creditors existing at the time of such transfer or obligation, if made or incurred without fair consideration by a debtor who is or will be thereby rendered insolvent, without regard to his actual intent. . . ."

To come within the scope of Section 67d(2) (a), a transfer must be: (1) within one year prior to the filing of a petition initiating a proceeding under the Bankruptcy Act; (2) there must be existing creditors at the time of the transfer; (3) the transfer must be made at a time the debtor is insolvent or will thereby be rendered insolvent; and (4) the transfer must be made or incurred without fair consideration. See, Bullard v. Aluminum Company of America, 468 F.2d 11, 13 (7th Cir. 1972).

In his order of November 19, 1973, the Referee in Bankruptcy found and concluded that all four of the above-noted criteria had been met with respect to the transfer of February 28, 1971. In reviewing the Referee's order of November 19, 1973, and the correctness of that decision in respect to the application of the four noted criteria for establishing a fraudulent transfer under Section 67d (2)(a) of the Bankruptcy Act, this Court must be guided by Bankruptcy Rule 810, which provides as follows:

"Upon an appeal the district court may affirm, modify, or reverse a referee's judgment or order, or remand with instructions for further proceedings. The court shall accept the referee's findings of fact unless they are clearly erroneous, and shall give due regard to the opportunity of the referee to judge of the credibility of the witnesses." See also, Advisory Committee's Note on Bankruptcy Rule 810. (Emphasis added.)

The Referee's findings of fact will be accepted by this Court unless the same are shown to be "clearly erroneous." A finding is clearly erroneous if ". . . the reviewing court on the entire evidence is left with...