Matter of Evans Potato Co., Inc.

• Decision Date: 13 November 1984
• Docket Number: Bankruptcy No. 3-82-02876,Adv. No. 3-84-0153.
• Citation: 44 BR 191
• Parties: In the Matter of EVANS POTATO COMPANY, INC. John R. BUTZ, Trustee In Bankruptcy, Plaintiff, v. SOHIGRO SERVICE COMPANY.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

44 B.R. 191 (1984)

In the Matter of EVANS POTATO COMPANY, INC. John R. BUTZ, Trustee In Bankruptcy, Plaintiff, v. SOHIGRO SERVICE COMPANY.

Bankruptcy No. 3-82-02876, Adv. No. 3-84-0153.

United States Bankruptcy Court, S.D. Ohio, W.D.

November 13, 1984.

John R. Butz, Trustee.

John T. Ducker, Dayton, Ohio, for defendant.

DECISION AND ORDER

CHARLES A. ANDERSON, Bankruptcy Judge.

Presently before the Court is complaint of the Trustee in Bankruptcy seeking to recover as voidable preferences two transfers to defendant Sohigro Service Company, Inc. The Court heard this matter on August 3, 1984. The following is based on the evidence adduced, on a joint stipulation of facts, and on the pleadings.

Debtor, Evans Potato Company, Inc. (hereinafter Evans Potato), has been in the business of growing, marketing and transporting potatoes since 1967. John Evans is its president and controlling shareholder.

In April, 1981, Sohigro opened a credit account in the name of Evans Potato. But in less than one year, Sohigro was forced to close this account, after the balance had been paid in full, due to unfavorable credit reports.

Almost two months later, Earl M. Evans (owner of the land, but not a corporate officer or stockholder) applied for a personal credit account with Sohigro. On his application, Earl used the address of his personal residence and indicated that it was a new application for himself, a proprietor. In the section on the application entitled "Retail Outlet Manager's Opinion," a Sohigro employee had noted, "This would be Earl Evans who owns the land, not Evans Potato." Thus, Sohigro carefully distinguished the two customers. On the basis of these facts, Sohigro approved Earl's application and opened an account in his name.

As reflected on two invoices both dated May 5, 1982, Sohigro sold goods valued at $2,754.22 to Earl. There is no doubt that the goods were picked up and used by Debtor, Evans Potato. As payment for these goods, Sohigro received from Debtor two certified checks dated July 20, and July 27, 1982. These checks are the alleged preferential transfers.

On October 27, 1982, the Evans Potato Company, Inc. filed a voluntary petition in bankruptcy under Chapter 11. Upon an application of the unsecured creditor's committee, the Court converted this case to Chapter 7 by an order dated September 27, 1983.

On May 21, 1984, the Trustee filed this complaint to recover, under 11 U.S.C. § 547, the two payments by certified checks from Debtor to Sohigro. The Trustee alleges that all five elements of a preference are present and that Earl M. Evans acted only as guarantor of the debts of Evans Potato Company.

Sohigro counters that the debt falls outside the definition of a preference found in § 547, since the transfer was not "for or on account of an antecedent debt owed by the debtor," per § 547(b)(2), and it did not allow Sohigro to "receive more than such creditor would receive" per § 547(b)(5). On the facts, the Court agrees.

By applying for a personal line of credit with Sohigro, Earl Evans acknowledged that he alone would be responsible for ensuing debts. It was he who arranged for the purchase of the goods. It follows, then, that it is he who is responsible for payment. It does not affect Sohigro, or the nature of the debt owed it, that Earl apparently had the goods delivered to Debtor and arranged for Debtor to pay Sohigro directly. Such an arrangement cannot change the fact that Debtor had no account with Sohigro, since it had been specifically closed months before. Having no account, Debtor could not incur a debt owing to Sohigro.¹ Numerous cases hold that there can be no preference when there is no debtor-creditor relationship. Ellet-Kendall Shoe Co. v. Martin, 222 F. 851 (8th Cir.1915); In Re Kayser, 177 F. 383 (3rd Cir.1910), Mandel v. Scanlon, 426 F.Supp. 519 (W.D.Pa.1977); Ortlieb v. Baumer, 6 F.Supp. 58 (S.D.N.Y.1934); Hudson Valley Quality Meats, Inc. 29 BR 67 (Bkrtcy.N.D.N.Y.1982).

The Trustee has offered no evidence to support his contention that Earl was merely acting as the guarantor of Debtor's indebtedness. Rather, the evidence before the Court shows that Earl acted as an individual and not as a guarantor. Neither his credit application nor the invoices mention a possible guaranty relationship. Further, Sohigro was clear in showing that it had wanted no further business dealings with Debtor by closing Debtor's account and later by extending credit to "Earl Evans who owns the land, not Evans Potato."

Assuming, arguendo, that Earl by some oral or tacit arrangement with John was guarantor or even alter ego, Sohigro was neither privy to nor bound by such an undisclosed arrangement.

The fact that the Debtor paid the account gave the Trustee good reason to scrutinize and carefully probe into the transaction, since the purchase obviously was made by Earl for the benefit of the Debtor after its credit with Sohigro had been terminated. Unfortunately, Earl was never called to testify by either of the litigants as to his connection with the Debtor. If Sohigro was a participant in a subterfuge, there has been no evidence submitted of such fact.

Thus, since property of the Debtor was not transferred to a creditor of the Debtor, the Trustee's complaint as to a preference must be denied.

However, the Court is constrained to give further consideration to this case concerning a possible fraudulent transfer, although not argued by the parties. Section 548(a) provides that

"The trustee may avoid any transfer of interest of the debtor in property, or any obligation incurred by the debtors that was made or incurred on or within one year before the date of filing of the petition, if the debtor:

* * * * * *

(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation and

(B)(i) was insolvent on the date such transfer was made or such obligation as incurred, or became insolvent as a result. . . .

Section 548(c) provides an exception to the voidability of fraudulent transfers in favor of a "transferee or obligee of such a transfer or obligation that takes for value and in good faith."

The general rule is that payment of or assumption of a third party's debt by an insolvent is a transfer without fair consideration and is thus fraudulent. In Re BF Bldg. Corp. 312 F.2d 691 (6th Cir.1963). Collier states that "transfers made to benefit third parties are clearly not made for a fair consideration or for value unless the debtor is also benefitted." 4 Collier on...