Palmer v. Radio Corporation of America, 71-1312.

Decision Date30 December 1971
Docket NumberNo. 71-1312.,71-1312.
Citation453 F.2d 1133
PartiesPhilip I. PALMER, Jr., etc., Plaintiff-Appellee, v. RADIO CORPORATION OF AMERICA, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Marvin S. Sloman, Earl F. Hale, Jr., Dallas, Tex., Carrington, Coleman, Sloman, Johnson & Blumenthal, Dallas, Tex., for defendant-appellant.

A. L. Vickers, Vernon O. Teofan, Ungerman, Hill, Ungerman & Angrist, Dallas, Tex., for plaintiff-appellee.

Before GEWIN, GOLDBERG and DYER, Circuit Judges.

GEWIN, Circuit Judge:

Appellee Philip I. Palmer, as trustee (the trustee) in bankruptcy of Maxwell Electronics Corporation (Maxwell), brought this plenary action under § 60b of the National Bankruptcy Act, 11 U.S.C. § 96(b) against appellant RCA Corporation (RCA) to recover an alleged preferential transfer. The district court granted the requested relief including interest from the time the action was commenced. We affirm the result reached, but for reasons different from those assigned by the district court.

This case was tried without a jury largely on stipulated facts. In October of 1969, Evans Broadcasting Corporation (Evans) made an offer in writing to Maxwell to purchase all of the assets of Maxwell's television broadcasting facility, KMEC-TV, in consideration of $40,000 in cash and the assumption of certain specified liabilities and obligations of Maxwell. The Directors and shareholders of Maxwell voted to accept the offer and a formal written agreement was entered into on November 4, 1968. Consummation of the contract was made "subject to and conditioned upon" the Federal Communications Commission's (FCC) approval of the transaction. FCC approval came on April 2, 1969. On May 13, 1969 the transaction was closed and Evans took possession of the Maxwell assets. On May 16, 1969, an involuntary petition in bankruptcy was filed against Maxwell and it was adjudicated a bankrupt on June 3, 1969.

Included in the Maxwell obligations assumed by Evans were 17 promissory notes held by RCA. Until May 12, 1969, the day before the transaction was closed, RCA had no involvement in the preceding events. On May 12, Evans approached Maxwell and requested that the assumption by Evans of the RCA liability be eliminated from the contract but Maxwell refused. Shortly thereafter, Evans and RCA agreed that certain of the notes which were past due according to their terms would be paid up-to-date,1 in consideration of which RCA would accept a reduction in the principal amount of $5,000. The total indebtedness was thus reduced to $14,759.22. Pursuant to that agreement the last payment was made in January of 1970. It is the transfer from Maxwell through Evans to RCA which was found by the district court to be preferential in violation of § 60(a) of the Bankruptcy Act, 11 U.S.C. 96(a) (1).

Before a transfer may be deemed preferential under § 60(a) six statutory elements must be present:2 (1) there must be a transfer of the debtor's property, (2) to or for the benefit of a creditor, (3) for or on account of an antecedent debt; (4) the transfer must be made or suffered while the debtor is insolvent, (5) within four months of bankruptcy; and (6) the effect of the transfer must be to allow the creditor to obtain a greater percentage of his debt than some other creditor of the same class. Section 60(b) adds the additional requirement that the transferee must have had reasonable cause to believe the debtor was insolvent at the time the transfer was made. Even though not expressly provided by the statute, it is implicit from the language used that the transfer must result in a diminution of the bankrupt estate.3

It is our conclusion that the district court was correct in finding that the requisite elements of a preference under § 60 are present. Despite RCA's protestations, the payment by Evans of the debt owed by Maxwell to RCA, even though indirect, constituted a transfer within the meaning of § 60(a).4 The transfer was for the benefit of RCA and on account of an antecedent debt. It was stipulated that RCA was an unsecured creditor of Maxwell. We deem the transfer to have occurred on May 13, 1969, within four months of the bankruptcy, and that it resulted in a diminution of the bankrupt estate. It was stipulated that Maxwell was insolvent on May 13, 1969 and there is no dispute as to the fact that RCA had reasonable cause to know of such insolvency. The parties further stipulated and the district court found that there were 66 other unsecured creditors of Maxwell who filed claims against Maxwell's bankrupt estate, totaling the sum of $2,270,635.34. The amount of funds available for distribution to unsecured creditors is $1,675.69 and there are no other sources which will materially increase the fund. Thus, the effect of the transfer was to allow RCA to get a greater percentage of its debt than other creditors of its class.

RCA's major contentions are that there was no transfer by Maxwell to Evans for its benefit on May 13, 1969, that any transfer for RCA's benefit was perfected on November 4, 1968, and that there was no diminution or depletion of the bankrupt estate by any payment to RCA. We think it clear that there was a transfer for the benefit of RCA within the terms of the statute and that such transfer actually benefited RCA. Indirect transfers have long been held to be within the scope of § 60(a).5 There is no requirement, as RCA contends that payment must come out of specific assets or funds transfered by the bankrupt to the middle party (Evans).6 It is sufficient that RCA received from Evans payment of a debt owed it by Maxwell which Maxwell had specifically bargained with Evans to pay.

Although the transfer was indirect, it nevertheless resulted in a diminution of Maxwell's estate. When Maxwell agreed to transfer its assets to Evans in exchange for cash and Evans' assumption of the RCA liabilities, the effect was that Maxwell agreed to accept less than the fair value of the assets in exchange for Evans' assumption of Maxwell's liabilities. This exchange and the ultimate payment to RCA resulted in a diminution or depletion of the bankrupt estate which favored RCA over other creditors.

We agree with the district court's finding that the transfer occurred within four months of bankruptcy. However, the lower court based its judgment on the erroneous conclusion that the Maxwell-Evans contract created an equitable lien and that the agreement was a conditional sales contract. Upon that basis the court reasoned that under Texas law a conditional sales contract is in effect a chattel mortgage which may be recorded under Tex.Civ.Stat.Ann. Art. 5490 (1968).7 Thus, continued the court, since § 60(a) (6) of the Bankruptcy Act is applicable with respect to an equitable lien, the transaction must be perfected as against bona fide purchasers. Since in Texas a bona fide purchaser is preferred over a prior unrecorded chattel mortgage and here the contract was not recorded, the court concluded that under § 60(a) (2) the time of transfer was deemed to have been made immediately before the filing of the involuntary bankruptcy petition.

The court's reasoning would be correct if an equitable lien had been created and if the agreement was a conditional sales contract within the commonly accepted meaning of that phrase. However we think it a distortion of Texas law to hold that the November 4 agreement created an equitable lien. The authorities cited by the district court simply do not support such a characterization.8 Nor do we think it a reasonable interpretation of Texas law to term the Maxwell-Evans agreement a conditional sales contract. Merely because consummation was contingent upon FCC approval does not make the contract a conditional sales contract within the accepted meaning of that phrase. Such contracts usually arise when the buyer is given possession of the thing purchased and the seller retains the title until the conditions of purchase are fulfilled.9 The agreement here was conditional but in the sense that FCC approval was a condition precedent to final consummation of the contract.

Our differences with the district court lie not with its answers to the questions presented but with its analysis. Because we are confronted here with an indirect transfer we focus first upon the Maxwell-Evans agreement and appropriate provisions of the Bankruptcy Act.

The Bankruptcy Act provides:

A transfer of property other than real 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. A transfer of real property shall be deemed to have been made or suffered when it became so far perfected that no subsequent bona fide purchase from the debtor could create rights in such property superior to the rights of the transferee.10

The Act goes on to provide that if a transfer is not perfected as required by the quoted statute prior to the filing of a petition in bankruptcy then it shall be deemed to have been made "immediately before the filing of the petition."11 For the purpose of determining when a transfer is perfected state law is applied.12

The most difficult aspect of this case is that the agreement to transfer was made prior to the four month period while the actual transfer was completed just prior to bankruptcy. Had the agreement, FCC approval, and final consummation of the transaction all occurred within the four month period a perferential transfer would likely be considered obvious in the circumstances disclosed by the record. Research has not revealed a similar case in which a buyer agreed to assume a debtor-bankrupt's liability as part of the consideration for a sale of assets to be consummated in the future. However, the Ninth Circuit in Kent-Reese Enterprises v. Hempy,13 held that even though a written agreement was entered...

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