Steel Structures, Inc. v. Star Manufacturing Company, 72-1171
| Decision Date | 03 August 1972 |
| Docket Number | No. 72-1171,72-1172.,72-1171 |
| Parties | In the Matter of STEEL STRUCTURES, INC., Bankrupt-Appellee, v. STAR MANUFACTURING COMPANY and Detroit Gasket & Manufacturing Co., Petitioners-Appellants. |
| Court | U.S. Court of Appeals — Sixth Circuit |
COPYRIGHT MATERIAL OMITTED
Hugh W. Morgan, James A. Ridley, III, of Kramer, Dye, Greenwood, Johnson, Rayson & McVeigh, Knoxville, Tenn., James K. Giffen, of Fowler, Rowntree, Fowler & Robertson, Knoxville, Tenn., for appellants.
Issie L. Jenkins, Scott P. Crampton, M. Rothwacks, B. N. Hollander, of Dept. of Justice, Tax Division, Washington, D. C., John L. Bowers, Jr., U. S. Atty., Leon Steinberg, Trustee in Bankruptcy, Knoxville, Tenn., for appellees.
John A. Walker, Jr., Knoxville, Tenn., of Egerton, McAfee, Armistead, Davis & McCord, Knoxville, Tenn., for trustee.
Before PHILLIPS, Chief Judge, and TUTTLE* and O'SULLIVAN, Senior Circuit Judges.
This is an appeal from the decision of the District Court, 346 F.Supp. 332, affirming an order of the Referee in Bankruptcy which set aside a transaction as a fraudulent conveyance and voidable preference. We affirm on the basis of the comprehensive memorandum of Referee Clive W. Bare, set forth as an Appendix hereto.
Star Manufacturing Company further appeals from the District Judge's refusal to receive additional evidence. The District Court found that "the proposed evidence would not have changed its conclusions." We agree. Star has failed to show such abuse of discretion as would warrant overturning this decision.
Affirmed.
APPENDIX
MEMORANDUM, FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER
This controversy over the execution of a fourth mortgage on the bankrupt's real property which is attacked by the trustee as a lien obtained by legal or equitable proceedings within four months of bankruptcy, void under Sec. 67a(1) of the Bankruptcy Act; and/or a fraudulent transfer under Sec. 67d(3) of the Act; and/or a voidable preference under Sec. 60a and b of the Act. A fifth mortgage executed by the bankrupt at the same time is pertinent only insofar as it pertains to the entire transaction involving the bankrupt; Star Manufacturing Company of Oklahoma; and Detroit Gasket and Manufacturing Company, as the funds realized by the trustee from the sale of the real property are sufficient only to pay the first three mortgages in full and $10,000.00 on the fourth mortgage or to general creditors, as the facts and law require. Facts which have either been stipulated by the parties or found by the court are as follows.
(1) Steel Structures, Inc. (hereafter Steel Structures or bankrupt), entered into a contract with Detroit Gasket and Manufacturing Company (hereafter Detroit Gasket) to construct a steel addition
to an existing building belonging to Detroit Gasket in Newport, Tennessee. The contract was in the approximate amount of $27,000.00 and not bonded.
(2) Star Manufacturing Company of Oklahoma (hereafter Star) furnished materials for this construction to Steel Structures in the amount of $18,045.04.
(3) The contract was completed and Detroit Gasket paid Steel Structures in full in December, 1969, and/or January, 1970.
(4) On January 30, 1970, Star filed a Notice of Lien for materials and supplies furnished with the Register of Deeds, Cocke County, Tennessee. This notice of lien was filed against the property of Detroit Gasket.
(5) On April 30, 1970, Star filed an Original Lienor's Bill in the Chancery Court for Cocke County, Tennessee, naming as defendants Steel Structures and Detroit Gasket. This Bill was filed to enforce Star's claimed lien for materials and supplies as set forth in the Notice of Lien described above. A Writ of Attachment was issued April 30, 1970, and levied May 1, 1970.
(6) An agreed order was entered allowing Detroit Gasket until May 29, 1970, to answer or otherwise plead. On or about May 29, 1970, Detroit Gasket filed an Answer denying the validity of the claimed lien.
(7) On July 29, 1970, Hugh W. Morgan (an attorney representing Star), Thomas S. Matthews (President of Steel Structures), Doyle Vaden (Vice-President and Secretary of Steel Structures), John O. Threadgill (an attorney representing Steel Structures), and James K. Giffen (an attorney representing Detroit Gasket), assembled at the office of John O. Threadgill, and the Lienor's Bill filed by Star against Steel Structures and Detroit Gasket was settled on the following basis:
Steel Structures executed and delivered to Detroit Gasket a promissory note in the amount of $16,276.54 secured by a fourth mortgage on Steel Structures\' real estate located in Knox County. Detroit Gasket delivered two checks to Steel Structures payable to Steel Structures and in the amounts of $16,240.54 and $36.00. The former check was endorsed by Steel Structures and delivered to Star together with a promissory note in the amount of $1,804.50 secured by a fifth mortgage on the Steel Structures, Knox County, real estate. The latter check was delivered to the Cocke County Chancery Court Clerk for payment of court costs of Star\'s Lienor\'s Bill filed in that court. Star executed a release of its claimed lien and all the parties approved for entry an agreed order of dismissal with full prejudice of the suit commenced by Star against Steel Structures and Detroit Gasket.
(8) On July 29, 1970, after the transaction referred to in paragraph (7), the assets and liabilities of Steel Structures were the same as set forth in its petition in bankruptcy filed on August 11, 1970. The summary of such debts and assets taken from Schedules A & B of such petition are as follows:
Taxes due United States .............. $ 23,959.73
Taxes due States ..................... 1,630.73
Secured claims ....................... 48,287.04
Unsecured claims ..................... 107,185.17
Accommodation Paper .................. 7,440.22
___________
Schedule A—Total ................. $188,502.89
Real Estate .......................... $ 35,000.00
Stock in trade ....................... 55,115.00
Debts due on open accounts ........... 75,319.58
Deposits of money in banks
and elsewhere .................... 50.00
___________
Schedule B—Total ................. $165,484.58
(9) During May or June of 1970, Mr. Matthews, President of Steel Structures, and Doyle Vaden, Vice-President and Secretary of Steel Structures, discussed the advisability of filing a petition in bankruptcy on behalf of said corporation with E. L. Hicks, Certified Public Accountant of Knoxville, Tennessee. During the latter part of July or the first part of August, 1970, Messrs. Matthews and Vaden discussed the filing of a petition in bankruptcy for the corporation with Max M. Morrison, attorney of Knoxville, Tennessee. Mr. Morrison's petition for compensation at attorney for the bankrupt filed September 3, 1970, reflects conferences with officers of the bankrupt commencing August 2 and ending August 10 when the petition and completed schedules were sworn to by Mr. Matthews.
Lien obtained by legal or equitable proceeding within four months before the filing of the bankruptcy petition.
The trustee's first attack on the transaction in question is based on Sec. 67a(1) of the Bankruptcy Act which provides as follows:
"Every lien against the property of a person obtained by attachment, judgment, levy, or other legal or equitable process or proceedings within four months before the filing of a petition initiating a proceeding under this Act by or against such person shall be deemed null and void (a) if at the time when such lien was obtained such person was insolvent or (b) if such lien was sought and permitted in fraud of the provisions of this Act."
The trustee cannot prevail under this section. No lien was obtained by legal or equitable process or proceedings against any property of the bankrupt. The Original Lienor's Bill filed by Star against Steel Structures and Detroit Gasket in the Chancery Court for Cocke County, Tennessee, sought to enforce a lien against property owned by Detroit Gasket—not by the bankrupt. Also, Sec. 67a(1) relates to and invalidates liens obtained by legal or equitable proceedings and not contractual liens. Such liens, however, may, of course, be invalidated if they constitute voidable preferences under Sec. 60 of the Act or fraudulent conveyances under Sec. 67d.
Collier summarizes the conditions that must be satisfied in order for the trustee to avoid a lien under Sec. 67a(1) as follows:
"A lien obtained in or pursuant to judicial proceedings, to be voidable at the suit of the trustee or the debtor, as the case may be, must, however, satisfy certain conditions: (1) it must attach the property of the bankrupt which passes to the trustee under Sec. 70a or is exempt under Sec. 6; (2) it must have been acquired within four months prior to the initiation of the bankruptcy proceedings; and (3) it must either have attached during the insolvency of the bankrupt, or it must have been sought and permitted in fraud of the provisions of the Act." Collier on Bankruptcy, 14th Ed., Vol. 4, Sec. 67.03, p. 66.
As heretofore stated, neither Star nor Detroit Gasket obtained a lien against the bankrupt's property in or pursuant to a judicial proceeding. The trustee's attack under Sec. 67a(1) therefore fails.
Fraudulent transfer under Sec. 67d(3) of the Bankruptcy Act.
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