Mandel v. Scanlon

• Decision Date: 10 February 1977
• Docket Number: Civ. A. No. 75-250.
• Citation: 426 F. Supp. 519
• Parties: Philip MANDEL, as Trustee of William Gluckin & Co., Inc. a/k/a Naturflex v. John R. SCANLON and Katherine M. Scanlon.
• Court: U.S. District Court — Eastern District of Pennsylvania

426 F. Supp. 519

Philip MANDEL, as Trustee of William Gluckin & Co., Inc. a/k/a Naturflex v. John R. SCANLON and Katherine M. Scanlon.

Civ. A. No. 75-250.

United States District Court, W. D. Pennsylvania.

February 10, 1977.

Joseph W. Conway, Pittsburgh, Pa., for plaintiff.

Joseph F. McDonough, Pittsburgh, Pa., for defendant.

OPINION

KNOX, District Judge.

This case requires the court to consider the fundamental theme underlying the Bankruptcy Act, equality of distribution, under an unusual set of facts.¹ The plaintiff, Philip Mandel, is a trustee of a bankrupt corporation, William Gluckin and Company, Inc. Hereinafter: Gluckin. In his capacity as trustee, the plaintiff seeks to recover a transfer of money made by a subsidiary of Gluckin, Multipane, Inc. to the defendants, John R. and Katherine M. Scanlon. The plaintiff seeks this recovery in reliance upon the Bankruptcy Act provisions outlawing preferential transfers, 11 U.S.C. § 96 and fraudulent transfers, 11 U.S.C. § 107.

A nonjury trial held on September 29, 1976, disclosed a lengthy sequence of events involving the Scanlons and Multipane, Inc. preceding the filing of this lawsuit. Prior to 1968, the Scanlons were the sole shareholders of Architectural Building Specialties Company Hereinafter ABS, a Pennsylvania corporation engaged in the manufacture and sale of aluminum and glass building products. In the Spring of 1968, Mr. David Diamond, President of Multipane, Inc., approached the Scanlons, first by telephone and then at two meetings, with a proposition to buy ABS.

Mr. Diamond, and at the second meeting Mr. Gerald Gluckin, president of the parent corporation, represented to the Scanlons that Multipane had developed a new process to treat glass so as to improve its conductive properties. This process could be applied to ABS products.

As a result of these representations, the Scanlons agreed to sell ABS to Multipane for $98,000 of Gale Industries stock, Gale Industries being another subsidiary of Gluckin, and a five-year employment contract.

The Scanlons never received the Gale Industries stock which was the primary consideration for the sale of ABS to Multipane in spite of numerous phone calls and meetings. Finally, the Scanlons filed suit against Multipane in this district at Civil Action No. 70-1405 alleging that they were deceived into selling ABS to Multipane by fraudulent misrepresentations and omissions of material facts and were never paid the consideration due to them.

In May 1971, while the above action was pending, the Scanlons were notified that the assets of Multipane were to be sold at a bulk sale. The Scanlons filed a motion for preliminary injunction to enjoin this sale. The parties subsequently entered into a stipulation whereby $25,000 of the proceeds of the bulk sale were to be set aside to secure payment "of any final, non-appealable judgment entered in favor of plaintiffs and against defendant Multipane in this action".

In November, 1972, the Scanlons withdrew their lawsuits against Multipane in return for payment of $23,000 of the $25,000 originally set aside at the bulk sale with the remaining $2,000 to go to their attorneys.

In December, 1972, the Scanlons received a cashier's check for $23,000 drawn on a "factoring account" at the First National Bank of Boston from the attorneys for Multipane and Gale.

On February 27, 1973, Gluckin as Debtor filed a Chapter X Bankruptcy proceeding in the Southern District of New York.² On February 26, 1975, the present suit was filed in this court seeking recovery of the December, 1972, payment of $23,000 to the Scanlons.

(1) Preferences

Developing early in the common law of England and reflected in numerous drafts of the Bankruptcy Act in the United States, the law has looked with suspicion upon payments by a debtor to one or more creditors in preference to the general class of creditors.³ The Bankruptcy Acts in the United States have accordingly invalidated certain transfers occurring before bankruptcy to a preferred class of creditors.

The current act (11 U.S.C. § 96) according to Collier's treatise requires seven factors, all of which must be proven by the trustee to invalidate a transfer as being preferential.

"Briefly stated the elements of a preference under § 60a consist of the following: . . . a debtor

(1) making or suffering a transfer of his property, (2) to or for the benefit of a creditor, (3) for or on account of an antecedent debt resulting in a depletion of the estate, (4) while insolvent, and (5) within four months of bankruptcy or of the original petition under Chapters X, XI, XII or XIII of the Act, (6) the effect of which transfer will be to enable the creditor to obtain a greater percentage of his debt than some other creditor of the same class. The creditor's knowledge or reasonable cause to believe that a preference is effected by a transfer to him is no longer an element in determining whether such transfer constitutes a preference under subdivision a of § 60. However, under subdivision b a preference avoidable by the trustee in bankruptcy only upon proof of the additional element that (7) the creditor receiving or to be benefited by the preference had reasonable cause to believe that the debtor was insolvent. If any one of the elements of a preference as enumerated in § 60a is wanting, there is no necessity of considering an avoidance of the transfer under § 60b, since a preference under the terms of § 60 itself has not been established. Thus a transfer lacking any element (1)-(6) supra, is unassailable as a preference, except insofar as § 70 may come into play. (11 U.S.C. 110.)

On the other hand, where a preference as defined in § 60a is found to exist, there can, nevertheless, be no avoidance of such a preference under § 60b unless the transferee had reasonable cause to believe that the debtor was insolvent. In all such cases the burden of proving the existence of these essential elements is upon the trustee seeking to avoid the transfer." 3 Collier on Bankruptcy § 60.02.

This court holds that the trustee has failed to establish elements 2, 3, 6 and 7 of a preference and therefore the payment to the Scanlons cannot be voided under § 60. As Collier points out, the failure of proof as to any one of these elements constitutes sufficient grounds to dismiss the plaintiff's claim that a voidable preference exists.

In his post trial brief, the plaintiff appears to concede that the Scanlons were not creditors of Gluckin. (The second required element of a preference.)

"In any event defendants do not fit the definition of a "creditor" of the Debtor, i. e., `anyone who owns a debt, demand, or claim provable in bankruptcy . . .'. 11 U.S.C.A. § 1(11). Defendants were creditors of Multipane, Inc. and/or Gale and not of the Debtor."

This is a correct statement of the law. In the case of Brinig v. American Credit Bureau, Inc., 439 F.2d 43, 45 (9th Cir. 1971), the court held that:

"subsection 1(11) imposes at least two distinct limitations upon the meaning of the term `creditor': (1) the person must have the kind of claim that can be proved in bankruptcy, and (2) the debt, demand, or claim must involve a liability of the bankrupt."

Since all of the Scanlons' dealings prior to this lawsuit were with Multipane, including the $23,000 settlement, the Scanlons were clearly creditors of Multipane and not the bankrupt Gluckin. The required debtor-creditor relationship under § 60 and § 1(11) therefore does not exist and the plaintiff has failed to establish the existence of a preference on this ground alone.

The separate corporate existence of Gluckin and Multipane applies with equal force to invalidate the third and the sixth elements of the plaintiff's case. It was an antecedent debt of Multipane's which was paid and one of Multipane's general creditors was preferred. In short, Gluckin was a third party to all of the relevant transactions between Multipane and the Scanlons and the payment of $23,000 to the Scanlons is not the sort of preferential payment which is intended to be invalidated by § 60.

Finally, even if the $23,000 payment were to be viewed as being preferential, it could not be avoided because the trustee has failed to establish the seventh element of his case.⁴ The testimony at trial clearly established that the Scanlons had no reasonable cause to believe that the debtor, Gluckin, was insolvent, or to even inquire into the matter. The $23,000 was paid by a cashier's check which did not identify the source of the underlying funds. The payment was made pursuant to agreement to set aside funds entered into in May 1971. The face of the check in May 1971 indicates that it was issued on the basis of funds contained in a factoring account at the First National Bank of Boston. Thus, the Scanlons had no knowledge that the funds came from Gluckin let alone that Gluckin was insolvent at the time of payment. See Seligson v. Roth, 402 F.2d 883 (9th Cir. 1968); Conway v. Neff, 330 F.Supp. 1180 (E.D.Pa.1971).

For all the above reasons,...