Miller v. Wells Fargo Bank International Corp., No. 74 Civ. 3714(MP).

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Citation: 406 F. Supp. 452
• Docket Number: No. 74 Civ. 3714(MP).
• Parties: Alan B. MILLER, as Trustee in Bankruptcy of American IBC Corp., Bankrupt, Plaintiff, v. WELLS FARGO BANK INTERNATIONAL CORP., Defendant.
• Decision Date: 22 December 1975

406 F. Supp. 452

Alan B. MILLER, as Trustee in Bankruptcy of American IBC Corp., Bankrupt, Plaintiff,
v.
WELLS FARGO BANK INTERNATIONAL CORP., Defendant.

No. 74 Civ. 3714(MP).

United States District Court, S. D. New York.

December 22, 1975.

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Weil, Gotshal & Manges, New York City, for plaintiff; Charles Seligson, Harvey R. Miller, Robert A. Weiner, and Fredric J. Leffel, New York City, of counsel

Dunnington, Bartholow & Miller, New York City, for defendant; Charles L. Stewart, Gerald E. Ross, and Roger R. Crane, Jr., New York City, of counsel.

OPINION AND FINDINGS

POLLACK, District Judge.

This is a plenary suit by a trustee in bankruptcy to recover, as voidable preferences, two loan repayments made by the bankrupt to the defendant bank in November 1973. Jurisdiction is conferred on the Court by 11 U.S.C. § 46 and 28 U.S.C. § 1331. The case was presented at a bench trial and has been fully briefed by the parties.

The plaintiff, a Trustee in Bankruptcy of American IBC Corporation (hereafter "AIBC"), was appointed on April 2, 1974. AIBC is a Delaware corporation which, among other activities, engaged in international currency transactions and other overseas investment. Its principal offices were in New York City. The defendant Wells Fargo Bank International (hereafter the "New York Bank"), an international bank which is a wholly owned but independently operated subsidiary of Wells Fargo Bank, N.A., of San Francisco, also maintains its principal office in New York City.

In April 1973 AIBC wished to engage in currency arbitrage involving dollars and Swiss Francs. It approached the New York Bank with whom it had a relationship and two loan transactions resulted. The New York Bank made two six-month loans of $1,000,000 each to AIBC on May 3 and 17, 1973, respectively, which were to be repaid in full in November of that year. AIBC used the funds in two separate currency arbitrage transactions with the Swiss Credit Bank in Zurich (hereafter, the "Swiss Bank") in which the dollars were first exchanged into Swiss Francs, the latter were held in interest-bearing time deposits

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in Europe, and on maturity thereof six months later the Swiss currency was exchanged back into dollars at a rate of exchange which was fixed initially and was favorable to AIBC.¹

The arbitrage transactions proceeded according to plan, and the New York Bank received repayment of the two loans, with interest, on the maturity dates of November 2 and November 19, 1973. Within four months thereafter, however, an involuntary petition in bankruptcy was filed against AIBC, on January 29, 1974, and the company was adjudicated bankrupt on February 14, 1974.

The New York Bank has put forward a number of different legal theories to support its contention that the two loan repayments are beyond the reach of the bankruptcy statutes, and did not constitute preferential transfers voidable by the Trustee. The Bank argues, alternatively, that (1) it was a secured party in that the two loans were secured by pledges of the Swiss Franc time deposits and the repayments were merely the liquidation of the collateral; (2) that it became an assignee in May of either the Swiss Franc time deposits or AIBC's right to receive dollars under the foreign exchange contracts with the Swiss Bank; (3) as to the second loan, the November 19 repayment was not a transfer of the bankrupt's property because AIBC had already assigned those funds in August to the Swiss Bank, which forwarded them to New York by mistake in November; and (4) without regard to the pledge or assignment theories, the satisfaction of the loans by debits to AIBC's account in November constituted a valid set-off by the New York Bank beyond reach of the Trustee. The defendant also denies the Trustee's contention that it had reasonable cause to believe AIBC was insolvent at the times of the loans and repayments.

On the basis of the record, the Court finds that the two repayments to the defendant Bank, on November 2 and 19, 1973, constituted preferential transfers under § 60 of the Bankruptcy Act, 11 U.S.C. § 96; and since the Court also finds that the defendant Bank had reasonable grounds to believe AIBC was insolvent in November 1973, the funds may be recovered by the Trustee for the benefit of the bankrupt's estate. As is discussed hereinafter, none of the Bank's

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legal theories is supported in the evidence; they are in the nature of ex post facto rationalizations which are neither persuasive nor tenable

I. The Elements of a Preference

A transfer is preferential under § 60(a)(1) of the Bankruptcy Act, 11 U.S.C. § 96(a)(1), only if it satisfies all the elements of that statute. It must (1) transfer the property of the debtor, (2) to or for the benefit of a creditor, (3) for or on account of an antecedent debt, (4) at a time when the debtor is insolvent, (5) within four months before the filing of a bankruptcy petition, and (6) enable one creditor to obtain a greater percentage of his debt than some other creditor of the same class. In addition, the trustee may void a transfer deemed preferential under § 60(a)(1) only if, under § 60(b), the creditor receiving it had reasonable cause to believe the debtor was insolvent at the time the transfer was made.

It is apparent that, if the defenses of the defendant Bank fall, all six elements of a preferential transfer are present in the facts of this case. The repayments on November 2 and 19 were made from the bankrupt's assets² for the benefit of the New York Bank, its creditor, in order to extinguish the antecedent debts incurred by the bankrupt the preceding May. Furthermore, the parties have stipulated that AIBC was insolvent at all times on and after June 1, 1973; the payments in November took place within four months of the filing of the bankruptcy petition in January, and the defendant Bank, by receiving payment in full of the bankrupt's obligations, clearly received a greater percentage of its debt than similarly-situated bankruptcy claimants. All that remains for the Trustee to prove is that the defendant Bank had reasonable cause to believe AIBC was insolvent at the time the payments were made.

This analysis of the facts must be altered considerably, however, if any of the defendant's defenses mentioned previously are sustained. The New York Bank's pledge and assignment theories affect the dates on which the transfers of AIBC's property would be deemed to

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have occurred under the Bankruptcy Act, for § 60(a)(2) of the Act defines the time a transfer occurs as "the time when it became so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee."³ Thus, the transfers at issue here would not be deemed to have taken place within four months of bankruptcy if a valid pledge or assignment had been furnished to the defendant and had become enforceable against third parties prior to that time. See Bachner v. Robinson, 107 F.2d 513, 515 (2d Cir. 1939). As to the New York Bank's other defenses, a valid set-off is accorded statutory protection from preference attack; and the allegation that the second loan repayment came from the assets of the Swiss Bank, not the bankrupt, rebuts the existence of the first element of a preferential transfer

Consequently, in order to determine whether the two November payments constituted a voidable preference, this Court must first decide whether the defendant Bank had reasonable cause to believe that the bankrupt was insolvent in November 1973; if it did, the Court must then evaluate each of the defenses asserted by the New York Bank. Since the details of the two loans vary, the analysis of the defendant's pledge and assignment theories will be undertaken separately for each loan.

II. Reasonable Cause to Believe AIBC Insolvent

The Trustee need not prove that the New York Bank had actual knowledge of the bankrupt's insolvency in order to defeat a preferential transfer under § 60(b) of the Bankruptcy Act. Instead, the plaintiff need show only that the transferee had "reasonable cause to believe that the debtor was insolvent" at the time the transfer was made. Section 60(b), 11 U.S.C. § 96(b) (1970); 3 Collier on Bankruptcy ¶ 60.36, at 913 (14th ed. 1975) (hereafter "Collier").

A "mere suspicion" that the transferor is insolvent does not constitute "reasonable cause." Grant v. First National Bank, 97 U.S. 80, 24 L.Ed. 971 (1878); In re Hygrade Envelope Corp., 366 F.2d 584 (2d Cir. 1966). Reasonable cause is established, however, where the creditor has notice of "such a state of facts . . respecting the affairs and pecuniary condition of the transferor as would lead a prudent business person to the conclusion that the transferor is insolvent." Robinson v. Commercial Bank of North America, 320 F.2d 106, 107 (2d Cir. 1963). Moreover, the creditor may not "close his eyes" to preserve his ignorance of the debtor's true condition, and is chargeable with notice of all facts which a reasonably diligent investigation would have disclosed, where a person of ordinary prudence would have made inquiry. Id. The New York Bank may not be absolved from a duty of inquiry because, believing itself a secured creditor, it did not need to look to the bankrupt's financial standing as the basis for its decision to extend credit. See Clower v. First State Bank, 343 F.2d 808, 811 (5th Cir. 1965) (bank held to reasonable cause standard, including duty of inquiry, despite its reliance on solvent accommodation endorser of...