Matter of CS Mersick & Co.
| Decision Date | 10 December 1979 |
| Docket Number | Bankruptcy No. H-77-630. |
| Citation | 1 BR 599 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In the Matter of C.S. MERSICK & CO., Bankrupt. Steven M. ZELMAN, Trustee, Plaintiff, v. G.E. ESHER, Jr., Joseph U. Labov, Individually and as Executor under the Will of Harry W. Labov, and Allan I. Sheppard, Executor under the Will of Harry W. Labov—dba Mersick Industrial Park, Defendants. |
Hebb & Gitlin, P.C., William E. Kelly, Hartford, Conn., for plaintiff.
Pasquale Young, New Haven, Conn., for defendants.
On June 27, 1977, an involuntary petition was filed against C.S. Mersick & Co. ("Mersick"), and it was adjudicated a bankrupt by default the following July 19th.
Prior to the adjudication, Mersick was in the possession of a building at No. 458 Sackett Point Road, North Haven, Connecticut under a 25-year lease dating from 1960. At all times, the lessors have been the same persons. During 1976 and 1977, the monthly rental provided for by said lease was $10,140.61. The lessors also held a "security deposit" of $22,500.00. The lease stated that in the event of an adjudication in bankruptcy of the tenant, the lessors had the option to terminate the lease upon six months' notice. A written modification to the lease in February, 1977 provided, inter alia, that if the rent was unpaid for ten days after the first of any month, the lessors had the right to notify the tenant by certified mail of the nonpayment of rent, and the tenant would have ten days thereafter to pay the same or be in default. No such notice was ever sent by the lessors under this provision of the lease.
Steven M. Zelman, as the trustee of Mersick, has filed a complaint against G.E. Esher, Jr., Joseph U. Labov, and Allan I. Sheppard ("lessors"), seeking (1) the return of rental payments in the amount of $27,121.40 on the basis that the said payments were preferences, and (2) the return of $22,500.00 as an amount fraudulently transferred by Mersick to the defendant-lessors.
An evidentiary hearing has been held after which the parties filed a written stipulation of additional facts with the Court.
The stipulation states that for the months of September, 1976 through February, 1977, rents were received from Mersick and deposited by the lessors in their bank on different dates during each month, varying from the 8th day of a month through the 30th day of a month. In March, 1977, the rent check was deposited by the lessors on March 14th, and again on March 21st, and each time, the check was returned by the bank for insufficient funds. A substituted check of Mersick was deposited on March 28, and was honored. In April, the rent was paid by two checks by Mersick, and when one check was dishonored, Mersick delivered another check on April 21st, which check was thereafter honored. The rent checks for the months of May and June, 1977, were duly honored. During each of the last three months, Mersick utilized a check of a sublessee to make up a portion of the rental payment.
The trustee presented two witnesses. The first was Joseph Labov, one of the lessors, who denied having any knowledge of the Mersick's insolvency at any time prior to the involuntary petition being brought. He stated that in late March, 1977, he met with the president of Mersick, Jordan Friedman, in Hartford, Connecticut. Mersick had a facility in Hartford, in addition to the one in North Haven. Friedman told Labov that Mersick needed a new plant because the Sackett Point Road location was an inefficient one for Mersick's purposes. Friedman advised Labov that he would like to get out of the lease in North Haven. At this time, Mersick occupied about 30% of the leased premises and subleased the balance. A major subtenant (50% of the entire space) was United Liquors Ltd. of Connecticut, Inc. ("United"). On June 16, 1977, a written agreement was reached whereby the lessors released Mersick from all liability under the lease, and, in return, Mersick released the lessors from any claim "it may have in its security deposit in the amount of $22,500.00". At the same time, the lessors and United entered into a lease agreement whereby United leased all the premises formerly leased by Mersick under exactly the same conditions and terms as in the original Mersick lease, except that United was relieved from the payment of the rent during the last two months of the lease term, provided that amount did not exceed $22,500.00. Labov testified that, in essence, he utilized the "security deposit" to make the deal with United, and no further security deposit was required from United. At no time was there any discussion of any financial problems of Mersick, according to Labov, with the entire transaction being one commenced and concluded at the request of Mersick's president.
The only other witness at the hearing was William J. Shea, the treasurer and controller of Mersick. He was unable to testify as to any knowledge that the lessors might have had of Mersick's financial condition. The bankruptcy schedules which Mersick filed in this proceeding, after adjudication, had been compiled by Mr. Shea. They show that Mersick claimed assets of $1,173,000.00, and that Mersick had been in business since 1849. It also appears that there were over 350 separate creditors of Mersick at the time of the petition, with claims in excess of $3,000,000.00. Shea also confirmed that March, 1977 was the first time a Mersick rent check ever was dishonored. It was stipulated at trial that Mersick was insolvent at all relevant times.
The trustee alleges that the rent payments received by the lessors for the four months prior to the bankruptcy petition are voidable preferences under § 60b of the Bankruptcy Act. He also maintains that the "transfer" of the "security deposit" of $22,500.00 constitutes a fraudulent conveyance within § 67(d)(2) of said Act.
The purpose behind prohibiting preferences is to prevent favoritism. Whether or not a transfer of property is to be held a preference for the purposes of bankruptcy law is determined by § 60a(1) of the Bankruptcy Act.1 If a transfer fails to exhibit each and every element of the definition found in § 60a(1), it is not a preference. 3 Collier on Bankruptcy ("Collier") (14th Ed.), ¶ 60.02 at 759. The lessors deny that an essential element of § 60a(1) applies to the rent payments alleged to be preferential by the trustee. Specifically, the lessors deny that these payments were "for or on account of an antecedent debt". They claim they were for a present consideration. The issue dividing the parties is thus one of characterization. Are rent payments made as these payments were, to be characterized as for a present consideration or for an antecedent debt?
No case has been offered by either party, nor has the Court found one, which precisely addresses the issue. A limited body of case law supports 3 Collier, ¶ 60.19 at 853, n. 20, that "current payments of rent may be said to rest on a present consideration".2 This proposition is entirely consistent with the general policy of § 60 that payment for current expenses incidental to the operation of a business is not a preference. 3 Collier, ¶ 60.23 at 873. Although the cases cited in note 2 supra do not treat the question of when rent payments are current, the trustee has not pointed to any authority deciding that rent payments made within the month in which they fell due may constitute voidable preferences. A tenant's failure to pay rent on the date it falls due (normally in advance of the period to which it applies) does not terminate a lease, but, rather, gives rise to a right in the landlord to terminate — a right never exercised here. Mayron's Bake Shops v. Arrow Stores, 149 Conn. 149, 176 A.2d 574 (1961). The Mersick lease established an annual rent to be paid in monthly installments, suggesting that the period for which each installment was to be consideration was the month in which the installment fell due. Payment during that month would be for present consideration, and the Court so holds.
Even if the Court were to conclude that payments made as these payments were constituted a preference under § 60a(1), a further burden rests on the trustee. For such a preference to be recoverable by the trustee, the trustee must show, under the terms of § 60b, that the lessors had "reasonable cause to believe that the debtor (was) insolvent" at the time the rent payments were made.3 On the evidence presented in this case, the trustee has not discharged his burden of proof. Despite the somewhat checkered history of rent payment during the last months preceding bankruptcy the lessors need not have reasonably believed anything more than that Mersick had temporary cash-flow problems. Mersick was presumably a substantial business concern, established in 1849, with a 16-year track record as a responsible tenant. There were over 350 creditors at this time. "A creditor is not chargeable with knowledge of the debtor's insolvency where the same could only be disclosed by the debtor's books of account to which the creditor has no access". 3 Collier, ¶ 60.54 at 1079.
For the foregoing reasons, the Court concludes that the rent payments made to the lessors during the four months preceding the bankruptcy petition were not for an antecedent debt and that even if they were, the trustee, having failed to show the lessors' requisite constructive knowledge of insolvency, may not recover them.
Fraudulent transfers under the Bankruptcy Act are governed by the terms of § 67d of the Act.4 For a transfer to fall within the prescription of § 67d, fair consideration must be lacking. The trustee alleges that the surrender by Mersick of a $22,500 "security deposit" to the lessors in exchange for a release from their future obligations under the lease does not constitute fair consideration,...
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