Nicholson v. First Inv. Co.

• Decision Date: 16 May 1983
• Docket Number: No. 81-7931,81-7931
• Court: U.S. Court of Appeals — Eleventh Circuit
• Parties: E. Penn NICHOLSON, Trustee for the Estate of Carolee's Combine, Inc., Plaintiff-Appellee, v. FIRST INVESTMENT COMPANY and Bill Beltzer, Defendants-Appellants.

Page 410

705 F.2d 410

E. Penn NICHOLSON, Trustee for the Estate of Carolee's

Combine, Inc., Plaintiff-Appellee, v. FIRST INVESTMENT COMPANY and Bill Beltzer, Defendants-Appellants.

No. 81-7931.

United States Court of Appeals, Eleventh Circuit.

May 16, 1983.

Gershon, Ruden, Pindar & Olim, Jay E. Loeb, Atlanta, Ga., for defendants-appellants.

Cotton, Katz, White & Palmer, Paul W. Bonapfel, Dodd, Driver, Connell & Hughes, E. Penn Nicholson, Atlanta, Ga., for plaintiff-appellee.

Appeals from the United States District Court for the Northern District of Georgia.

Before KRAVITCH, HENDERSON and ANDERSON, Circuit Judges.

ALBERT J. HENDERSON, Circuit Judge:

The appellant, First Investment Company ("First Investment"), appeals an adverse decision of the United States District Court for the Northern District of Georgia setting aside a transfer of funds from the bankrupt, Carolee's Combine, Inc. (the "Combine") to First Investment and returning the funds to the bankrupt's estate. The district court concluded that the trustee was entitled to void the transfer on several independent statutory grounds under the Bankruptcy Act of 1898. 11 U.S.C. Secs. 96, 107 & 110 (1976) (repealed). ¹ We agree that the payment constituted a voidable preference under Section 60 of the Bankruptcy Act, 11 U.S.C. Sec. 96, and affirm the judgment of the district court. ²

Carolee W. Davies formed the Combine, a Georgia Corporation, for the purpose of conducting an architectural antiques auction in October, 1976, in Atlanta, Georgia. In preparation for the auction, the Combine acquired merchandise such as old building components and transported the items to Atlanta for restoration. Davies secured financing for this enterprise through both corporate and personal loans.

In making arrangements for the auction, Davies obtained two loans totaling $40,000.00 from First Investment. The promissory notes evidencing the indebtedness in both instances obligated Davies personally rather than the Combine. Davies also granted First Investment a security interest in Combine assets. The loan transactions took place in Nebraska, First Investment's place of business. William Beltzer, the president of First Investment, had been involved in previous architectural antique auctions conducted by Davies and her husband, R.D. Davies, and authorized the financing for the Atlanta auction. Mrs. Davies deposited the funds obtained from First Investment into the Combine's corporate checking account at the First National Bank of Atlanta.

The auction took place on October 8 and 9, 1976. Prior thereto, the Davies and their bookkeeper estimated that the auction needed to generate approximately $800,000.00 in gross revenues in order to break even. Unfortunately, the auction did not meet these expectations; only $625,000.00 was realized from the sale. However, loan repayment checks drawn on the Combine account were mailed to many creditors, including First Investment, on the first day of the auction.

On October 15, 1976, Beltzer telephoned R.D. Davies at the auction site in Atlanta. Mr. Davies informed Beltzer that a $100,000.00 error overstating the auction sales income had been discovered. After that conversation, Beltzer telephoned Murray Newman, an acquaintance who had invested in the auction upon Beltzer's advice, and recounted the details of his conversation with R.D. Davies. During this discussion, Beltzer told Newman that he was sending a representative to Atlanta to present the corporate checks for payment at the Combine's bank. Beltzer offered his assistance to Newman in obtaining repayment and informed Newman that he was considering retaining bankruptcy counsel in Atlanta. First Investment did employ an Atlanta bankruptcy attorney on that day.

Mrs. Davies met with several creditors on October 17, 1976 and disclosed that the Combine would be unable to repay its debts in full. She ordered the bank to stop payment on certain finance charge checks on October 18, 1976. Finally, on October 18, 1976, Robert Arnold, a vice-president of First Investment, came to Atlanta and exchanged the Combine checks for cashier's checks at the Combine's bank.

An involuntary bankruptcy petition was filed against the Combine on February 4, 1977. The bankruptcy trustee brought this action against First Investment to set aside the transfer of funds it obtained from the Combine. ³

The district court set aside the transfer, stating, inter alia, that the payment constituted a voidable preference. ⁴ 11 U.S.C. Sec. 96. A preference is defined in the Bankruptcy Act as:

a transfer ... of any of the property of the debtor to or for the benefit of a creditor for or on account of an antecedent debt made by ... such debtor while insolvent and within four months [of the filing of the bankruptcy petition] ... the effect of which transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class.

11 U.S.C. Sec. 96(a)(1). A preference is voidable by the trustee in bankruptcy if it can be shown that the creditor had reasonable cause to believe that the debtor was insolvent at the time of the transfer. 11 U.S.C. Sec. 96(b). See International Minerals & Chemical Corp. v. Moore, 361 F.2d 849 (5th Cir.1966); Mayo v. Pioneer Bank & Trust Company, 297 F.2d 392 (5th Cir.1961). ⁵

At the outset, we find that the "transfer" occurred when the appellant exchanged the Combine corporate checks for cashier's checks on October 18, 1976. The Bankruptcy Act provides that for the purpose of determining whether a preference has taken place,

a transfer of property ... shall be deemed to have been made or suffered at 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.

11 U.S.C. Sec. 96(a)(2). In the case of a check, the transfer is not completed at the time of delivery. Creditors could prevent collection of the funds through such means as garnishment of the bank account. Although in the non-bankruptcy context, a check honored in the regular course of business relates back to the date of delivery, see Duke v. Sun Oil, 320 F.2d 853, 861 (5th Cir.1963), under the "so far perfected" language of the Bankruptcy Act, the date of transfer is the date when the check is honored by the paying bank. Accord, Fitzpatrick v. Philco Finance Corp., 491 F.2d 1288, 1293 (7th Cir.1974). Contra, Shamrock Golf Company v. Richcraft Inc., 680 F.2d 645 (9th Cir.1982).

The appellant concedes that the transfer occurred within four months of the bankruptcy petition and that payment was made on account of an antecedent debt. It argues, however, that the debtor was not insolvent at the time of the transfer, that the payment did not deplete the estate and that it did not have reasonable cause to believe that the debtor was insolvent.

The evidence sufficiently established that the Combine was insolvent at the time of the transfer. The company's balance sheets as of that date were introduced into evidence and revealed that its liabilities exceeded its assets. On October 17, 1976, the day before the transfer, Mrs. Davies met with four major consignors of auction property and notified them that she would not be able to repay them in full. Prior to the auction, it was estimated that $800,000.00 in revenues were needed before the enterprise could succeed; only $650,000.00 was received from sales. This evidence refutes any notion that the Combine was not insolvent on October 18, 1976.

As the appellant points out, if the transfer did not diminish the bankrupt's estate, then there could be no preference. In re Souder, 449 F.2d 284 (5th Cir.1971). However, the evidence established that the transfer did, indeed, deplete the estate. If First Investment had not received the payment, the funds would have remained in the estate subject to the trustee's lien. Even assuming that Mrs. Davies' grant of a security interest in Combine assets to First Investment was effective, the interest was not perfected. Under the Bankruptcy Act, the trustee occupies the status of a hypothetical lien creditor. 11 U.S.C. Sec. 110(c). See, e.g., In re Equitable Development Corp., 617 F.2d 1152 (5th Cir.1980); In re Tillery, 571 F.2d 1361 (5th Cir.1978); In re Clifford, 566 F.2d 1023 (5th Cir.1978); In re Ludlum Enterprises, Inc., 510 F.2d 996 (5th Cir.1975); In re Leggett, 505 F.2d 120 (5th Cir.1974). As such, the trustee may prevail over creditors who are subordinate to lien creditors under state law. In re Clifford, 566 F.2d at 1025; In re Ludlum Enterprises, Inc., 510 F.2d at 999; In re Manuel, 507 F.2d 990, 992 (5th Cir.1975). Under Georgia law, "an unperfected security interest is subordinate to the rights of ... (b) a person who becomes a lien creditor before the security interest is perfected." Ga.Code Ann. Sec. 109A-9-301(1)(b) (1979). This analysis confirms that the trustee, as a hypothetical lien creditor, has an interest that is superior to First Investment's unperfected interest. Therefore, under the so-called "strong arm" provision of the Bankruptcy Act (11 U.S.C. Sec. 110(c)), the trustee could avoid the lien and bring the collateral into the bankrupt's estate. See In re Tillery, 571 F.2d at 1366.

Moreover, the record discloses that if the transfer was valid, First Investment would have achieved payment of a larger proportion of its loan than other comparable creditors of the bankrupt corporation. Under the preference provision of the Bankruptcy Act, the trustee must prove that the payment "enable[d] such creditor to obtain a greater percentage of his debt than some other creditor of the same class." 11 U.S.C. Sec. 96(a)(1). MacLachlan, Handbook of the Law of Bankruptcy, Sec. 256 (1956). Once it is ascertained that a secured creditor is unperfected, as in this case, that creditor is on equal footing with unsecured creditors and falls into the "class"...