Mack v. Bank of Lansing

• Decision Date: 27 January 1975
• Docket Number: Civ. No. G234-72-CA 5.
• Parties: Theodore MACK, as Designee of the Creditors' Committee of Texas Consumer Finance Corporation and Texas Consumer Finance Corporation, a Debtor in Possession, Plaintiffs, v. BANK OF LANSING, Defendant.
• Court: U.S. District Court — Western District of Michigan

396 F. Supp. 935

Theodore MACK, as Designee of the Creditors' Committee of Texas Consumer Finance Corporation and Texas Consumer Finance Corporation, a Debtor in Possession, Plaintiffs, v. BANK OF LANSING, Defendant.

Civ. No. G234-72-CA 5.

United States District Court, W. D. Michigan, S. D.

January 27, 1975.

COPYRIGHT MATERIAL OMITTED

Murray B. DeGroot, Grand Rapids, Mich., for plaintiff Mack.

Arthur Ungerman, Dallas, Tex., for plaintiff Consumer Finance Corp.

William D. Parsley, Lansing, Mich., for defendant Bank of Lansing.

FINDINGS OF FACT, OPINION, AND CONCLUSIONS OF LAW

CARL B. RUBIN, District Judge.

This is an action to recover allegedly voidable preferences pursuant to § 60 of the Bankruptcy Act, 11 U.S.C. § 96.

Pursuant to agreement and in accordance with Rule 42 of the Federal Rules of Civil Procedure, this case and Civil No. K87-72-CA 4, entitled: Texas Consumer Finance Corporation, Debtor in Possession, and Theodore Mack, Designee of the Creditors' Committee of Texas Consumer Finance Corporation v. Industrial State Bank and Trust Company, were consolidated for trial as to issues common to both and tried separately and in succession on issues unique to each case. Trial to the Court occurred on October 28, 29, 30, 1974. In accordance with the foregoing, and pursuant to Rule 52 of the Federal Rules of Civil Procedure, the Court does submit herewith its Findings of Fact, Opinion, and Conclusions of Law.

I FINDINGS OF FACT

1. Texas Consumer Finance Corporation, also referred to herein as "TCFC", was engaged prior to 1970 in the consumer finance business. It made small loans to individuals. It maintained branches in Texas, Oklahoma, Southern California and Louisiana. At the beginning of 1970 it had accounts with more than 50,000 customers. As is customary in the consumer finance industry, Texas Consumer Finance Corporation was both a lender and a borrower of cash. Its loans were usually small quantities and for purposes of financing the purchase of personal property or for other reasons satisfactory to their borrowers. Such loans bear substantial interest rates ranging from 18% to 36% per annum. Texas Consumer Finance Corporation did not purchase "paper" which represented financial transactions by sellers of personal property who accepted notes and mortgages in return for the sale of tangible merchandise.

2. As a borrower, Texas Consumer Finance Corporation dealt with numerous banks who extended credit for limited periods of time. It also sold preferred stock, its own "commercial paper," and negotiated long term loans. Other than the creation of creditors bearing different relationships to Texas Consumer Finance Corporation, these non-banking forms of cash acquisition have no significance herein.

By far the largest amount of cash was acquired from some 140 banks in the United States on the following basis: A line of credit was obtained from each of such banks representing the maximum amount that such bank was prepared to lend Texas Consumer Finance Corporation at any given time.

The bank loan would be negotiated on a 90-day basis, renewed periodically, and customarily repaid. It is a standard industry practice and Texas Consumer Finance Corporation did so arrange its affairs that in any 12-month period it would be a borrower for nine or ten months from a specific bank and paid up for the remaining two or three months. Such period of full payment is known as the "out period." As a result, more lines of credit were available than were in use at any given time.

3. The Texas Consumer Finance Corporation issued an audited statement once a year at the end of the calendar year. The statements contained the customary certificate from Price, Water-house & Company, a recognized national certified public accounting firm. The financial statement dated December 31, 1969, indicated a net worth of $12,500,000.00. In accordance also with the custom in the industry, this statement was distributed approximately April 1, 1970. The statement differed from the previous year's statement in that it did not contain a "funds statement,"¹ and in listing the banks with whom it had lines of credit, did not include the Republic Bank of Dallas, Texas.

4. A "funds statement" was not required as part of the financial statement, nor would it contain facts which could not be derived from the financial statement by a credit analyst. The financial statement contained no facts which would have brought the solvency of Texas Consumer Finance Corporation into question. Each defendant bank inquired as to the dropping of the line of credit by the Republic Bank of Dallas. That bank's response showed only a disenchantment with the new ownership and recent acquisition of Fidelity General Insurance Company. It specifically disclaimed any knowledge that Texas Consumer Finance Corporation was not a good credit risk.

5. Defendant Bank of Lansing began its dealings with Texas Consumer Finance Corporation in August of 1966 at which time a line of credit of $250,000.00 was established with an interest rate at ½ of 1% over the prime rate. Texas Consumer Finance Corporation was required at all times, even during the "out period", to maintain an account balance equal to 20% of the maximum borrowable under the credit line. Transactions between the two companies continued in accordance with the custom as outlined in Finding of Fact 2 from August, 1966 through June, 1969. The line of credit was formally terminated by the Bank in September of 1969 but reinstated on the express condition that the Texas Consumer Finance Corporation would not use the line for the remainder of the 1969 year. On January 5, 1970, Texas Consumer Finance Corporation borrowed $165,000.00 from the Bank of Lansing evidenced by a promissory note payable on or about April 2, 1970, with interest at a rate equal to ½ of 1% over prime. Pursuant to the agreement that the balance remaining in the bank equal 20%, Texas Consumer Finance Corporation maintained a deposit in the sum of $33,000.00 with the Bank.

The January note matured on April 2, 1970, and was renewed for 88 days by a new note maturing June 29, 1970. In the spring of 1970 defendant experienced problems of liquidity and on May 20, 1970, the Bank of Lansing Executive Committee terminated lines of credit to consumer finance companies including Texas Consumer Finance Corporation. Notice of such termination was given. On June 26, 1970, Texas Consumer Finance Corporation requested an extension of the line for an additional ninety-one days due to the difficulty of restructuring its bank rotation schedule upon short notice.

On June 30, 1970, the Bank of Lansing appropriated the $33,000.00 compensating balance of Texas Consumer Finance Corporation and on July 2, 1970, declined to renew the note. On July 2, 1970, Texas Consumer Finance Corporation was granted an extension of time until July 6, 1970, to repay the $132,219.34 still owing on its note. A check in that amount was issued to the Bank of Lansing on July 6, 1970, received by them and paid by established bank processing procedures on July 13, 1970. At no time during this period was Texas Consumer Finance Corporation's solvency brought into question.

6. During the months of April, May, and June of 1970, banks extending lines of credit to Texas Consumer Finance Corporation decreased from 147 to less than 100. As of December 31, 1969, Texas Consumer Finance Corporation had borrowed 68.7% of its maximum lines of credit; by June 12, 1970, it had borrowed 89.1% of its maximum lines of credit. Between those two dates the total amount of borrowing decreased from $28,840,000 on December 31, 1969, to $17,584,000.00 on June 12, 1969.

7. The largest asset of a consumer finance business is its accounts receivable. Approximately 80% of the assets of Texas Consumer Finance Corporation were its direct installment loans. The statement of December 31, 1969, listed accounts receivable at $43,692,678.00. This amount was largely overstated. A large number of all accounts had not had a payment for over a year, had a last payment of $1.00 or less, or represented loans with monthly payments of less than $5.00 with a "balloon" payment at the end. The expert testimony of plaintiff witness Del Low, based upon his analysis of a computer print-out and the use of some statistical techniques, established by a preponderance of the evidence that Texas Consumer Finance Corporation was in fact insolvent on July 15, 1970, when defendant Bank of Lansing was repaid the face amount of its loan.

8. A preponderance of the evidence has established that the payment to this defendant was a transfer of property for the benefit of a creditor on account of an antecedent debt.

9. On August 17, 1970, Texas Consumer Finance Corporation filed a petition in the Bankruptcy Court for the Northern District of Texas, Fort Worth Division, seeking an arrangement under Chapter XI of the Bankruptcy Act. On December 29, 1970, an Order was entered by the Referee in Bankruptcy confirming a plan of arrangement. On April 6, 1971, Texas Consumer Finance Corporation, both as debtor in possession and debtor, assigned to plaintiff, Theodore Mack, designee of the Creditors' Committee, all causes of action which such Texas Consumer Finance Corporation had or might have against the defendant herein.

10. The payment to defendant Bank of Lansing occurred within four months before the filing of a petition initiating a proceedings under the Bankruptcy Act. Such payment constituted a transfer as defined under the Bankruptcy Act of property of a debtor for the benefit of a creditor on account of an antecedent debt. The payment enabled this defendant to obtain a greater percentage of its debts than other members of its class.

11. Texas Consumer Finance Corporation has failed to prove by a preponderance of the evidence that defendant had reasonable cause to believe it was insolvent on the dates of the transfers in question. Defendant...