Matter of Foreman Industries, Inc.

• Decision Date: 24 March 1986
• Docket Number: Bankruptcy No. 3-81-03005,Adv. No. 3-83-0582.
• Citation: 59 BR 145
• Court: U.S. Bankruptcy Court — Southern District of Ohio
• Parties: In the Matter of FOREMAN INDUSTRIES, INC., Debtor. FOREMAN INDUSTRIES, INC., Plaintiff, v. BROADWAY SAND & GRAVEL, Defendant.

59 B.R. 145 (1986)

In the Matter of FOREMAN INDUSTRIES, INC., Debtor FOREMAN INDUSTRIES, INC., Plaintiff, v. BROADWAY SAND & GRAVEL, Defendant.

Bankruptcy No. 3-81-03005, Adv. No. 3-83-0582.

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

March 24, 1986.

Bruce A. Buren, and Thomas R. Noland, Altick and Corwin, Dayton, Ohio, for plaintiff/co-counsel for Official Creditors' Committee.

Ronald D. Keener, New Lebanon, Ohio, for defendant.

R.C. Gibbs, Cunningham, Gibbs & Cavalieri, L.P.A., Columbus, Ohio, for debtor.

DECISION GRANTING PLAINTIFF'S COMPLAINT TO RECOVER PREFERENTIAL TRANSFER

THOMAS F. WALDRON, Bankruptcy Judge.

This is a case arising under 28 U.S.C. § 1334(a) and having been referred to this court is determined to be a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (F), in which the plaintiff-debtor, Foreman Industries, Inc., seeks to recover as a preference money paid to the defendant, Broadway Sand & Gravel. This matter is before the court on plaintiff's complaint, defendant's answer, the joint pretrial statement of plaintiff and defendant, the evidence presented at the trial, and the post-trial briefs of the plaintiff and the defendant.

The parties agreed to a jointly filed stipulation which established the following facts:

1. This court has jurisdiction over this proceeding;

2. The date the Order of Relief was entered is October 13, 1981 (pursuant to an Order of this court dated February 16, 1983, consolidating a voluntary petition under Chapter 11, with an involuntary petition under Chapter 7, Title 11, U.S.C.);

3. The applicable law governing preferential transfers is 11 U.S.C. § 547;¹

4. On or before June 25, 1981, the defendant sold goods to the plaintiff totaling $845.87, under invoice Nos. 29529, 29601 and 29702, dated June 19, June 22 and June 25, 1981, respectively; and

5. It was the usual course of business between the plaintiff and the defendant for the plaintiff to pay the defendant for materials and supplies and for the defendant to receive payment within sixty (60) days of the date of its invoice.

The parties further agreed during the trial that the check for $845.87 was issued by the plaintiff, Foreman Industries, Inc., to the defendant, Broadway Sand & Gravel, on August 5, 1981, and honored by the bank on August 16, 1981.

The parties disagree as to whether August 5 or August 16, 1981, is the date on which the alleged preferential transfer of funds took place. Also the defendant disagrees that the plaintiff was insolvent on the date of the transfer under 11 U.S.C. § 547(b)(3), whether that date was August 5 or August 16, 1981. Finally, the defendant disagrees, even assuming the plaintiff was insolvent, that the transfer would be deemed preferential because it falls within the exceptions provided by 11 U.S.C. § 547(c)(1) or (c)(2). The defendant does not dispute, however, that the plaintiff has met his burden of proof with respect to § 547(b)(1), (2), (4) and (5).

The court sets forth its findings of fact and conclusions of law at this point to provide a guide for the balance of this decision:

1. July 15 to October 13, 1981 was the preference period under 11 U.S.C. § 547(b)(4);

2. August 16, 1981, the date the bank honored the check issued by the plaintiff to the defendant, was the date of the transfer for purposes of 11 U.S.C. §§ 547(b), (c)(1) and (c)(2);

3. June 19, June 22 and June 25, 1981, the dates of defendant's invoices to the plaintiff, were the dates of delivery of the goods and the dates on which the debts were incurred for purposes of 11 U.S.C. § 547(c)(2)(B);

4. The plaintiff was insolvent on August 16, 1981, and throughout the entire preference period;

5. The plaintiff established a preferential transfer under 11 U.S.C. § 547(b) in the amount of $845.87; and

6. The defendant did not establish an exception under 11 U.S.C. § 547(c)(1) or (c)(2).

I. PREFERENTIAL TRANSFER UNDER 11 U.S.C. § 547(b)

A. Date Of Transfer Under § 547(b)

In order for a transfer to be found preferential, the plaintiff must establish by a preponderance of the evidence the following five elements:

(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor — (1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the filing of the petition; or

(B) between 90 days and one year before the date of the filing of the petition, if such creditor, at the time of such transfer —

(i) was an insider; and

(ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer; and

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b). Sportfame of Ohio, Inc. v. Wilson Sporting Goods Co. (In re Sportfame of Ohio, Inc.), 40 B.R. 47, 54 (Bankr.N.D.Ohio 1984); Hunter v. S.K. Austin Co. (In re Beck), 25 B.R. 947, 951 (Bankr.N.D.Ohio 1982).

Preliminary to establishing these five elements, however, is the determination of the date the transfer occurred for purposes of 11 U.S.C. § 547(b). Plaintiff argues the transfer occurred on August 16, 1981, the date the bank honored its check to the defendant. The defendant argues the transfer occurred on August 5, 1981, the date the plaintiff wrote the check. The majority of courts would agree with the plaintiff's position, as they "have held that the debtor transfers no property, within the meaning of section 547(b), when he issues his own check. As under old section 60, the transfer occurs when and if the drawee bank honors the check" (emphasis in original; footnotes omitted). Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand.L.Rev. 713, 761 (1985). See, e.g., Klein v. Tabatchnick, 610 F.2d 1043 (2d Cir.1979); Ducker v. The Isaac Building Corporation (In re Bridges Enterprises, Inc.), 44 B.R. 979 (Bankr.S.D.Ohio 1984); Remes v. Acme Carton Corporation (In re Fasano/Harriss Pie Company), 43 B.R. 871 (Bankr.W. D.Mi.1984). The rationale for this view is that the check does not operate as an assignment of funds; it is merely an order to pay on demand. Klein, 610 F.2d at 1049. Professor Countryman notes that this rationale arises out of an interpretation of Uniform Commercial Code §§ 3-409(1), 3-413(2) and 4-402 which provide that liability runs to the drawer under his contingent promise to pay the creditor if the drawee bank does not. Countryman, supra at 761-62. This reasoning comports with Ohio law, which provides that a check is deemed paid when the "process of posting" as defined under § 1304.01(A)(18) is completed or the check is paid in cash. OHIO REV.CODE ANN. § 1304.19(A) U.C.C. § 4-213 (Page 1979); In re Bridges Enterprises, Inc. at 982. Furthermore, until a check is honored by the drawee bank, not only can a third person acquire rights superior to those of a payee, but the drawer can stop payment. Grogan v. Chesebrough-Ponds, Inc. (In re Advance Glove Manufacturing Co.) 25 B.R. 521, 524-25 (Bankr.E.D.Mich.1982). Accordingly, the date of the transfer for purposes of 11 U.S.C. § 547(b) is August 16, 1981.

B. Debtor's Insolvency Under § 547(b)(3)

Having met its burden of proof in establishing that the transfer was "to or for the benefit of the creditor;" that it was "for or on account of an antecedent debt owed by the debtor before such transfer was made;" that it was made "on or within 90 days before the date of the filing of the petition;" and that it enabled the creditor to receive more than he would if "(A) the case were a case under Chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title," § 547(b)(1), (2), (4) and (5), the plaintiff must establish that the transfer on August 16, 1981, was "made while the debtor was insolvent." § 547(b)(3). The debtor is aided in his proof by 11 U.S.C. § 547(f) which provided: "For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition." See also Clay v. Traders Bank of Kansas City, 708 F.2d 1347, 1351 (8th Cir.1983). "Insolvent" means:

(A) with reference to an entity other than a partnership, financial condition such that the sum of such entity\'s debts is greater than all of such entity\'s property, at a fair valuation, exclusive of —

(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity\'s creditors; and

(ii) property that may be exempted from property of the estate under section 522 of this title;

11 U.S.C. § 101(26) (Supp.V.1981); cf. § 101(29) following the Bankruptcy Amendments and Federal Judgeship Act of 1984. Insolvency then is essentially a balance sheet test: that is, a debtor is insolvent when the debtor's liabilities exceed the debtor's assets, excluding the value of preferences, fraudulent conveyances and exemptions. Although couched as a legal concept, it is basically a factual determination, Briden v. Foley, 776 F.2d 379, 382 (1st Cir.1985); Clay at 1350, for which "the ultimate burden of persuasion" still rests with the plaintiff. Clay at 1351. The parties have stipulated to plaintiff's exhibit 4 "Summary of debts and property (From the statements of the debtor in Schedules A and B)" which was signed on November 24, 1981 by Jon G. Mills, and showed that on November 24, 1981, the plaintiff had $18,790,701.84 in liabilities and $17,917,981.01 in assets. At the trial, Jon Gary Mills, testified that he has been President of plaintiff corporation since September 30, 1981, and had been its General Manager...