Thomas v. Gulfway Shopping Center, Inc., Civ. A. No. 66-C-118.

• Decision Date: 07 April 1970
• Docket Number: Civ. A. No. 66-C-118.
• Citation: 320 F. Supp. 756
• Parties: Harold A. THOMAS, Trustee in Bankruptcy of the Estate of Francine's, Inc., Bankrupt, v. GULFWAY SHOPPING CENTER, INC.
• Court: U.S. District Court — Southern District of Texas

320 F. Supp. 756

Harold A. THOMAS, Trustee in Bankruptcy of the Estate of Francine's, Inc., Bankrupt, v. GULFWAY SHOPPING CENTER, INC.

Civ. A. No. 66-C-118.

United States District Court, S. D. Texas, Corpus Christi Division.

April 7, 1970.

COPYRIGHT MATERIAL OMITTED

R. Briscoe King, Charles R. Porter, Jr., Corpus Christi, Tex., for plaintiff.

Lev Hunt and Harvey Weil of Kleberg, Mobley, Lockett & Weil, Corpus Christi, Tex., for defendant.

MEMORANDUM OPINION AND ORDER

SEALS, District Judge.

The plaintiff, as Trustee in Bankruptcy of the Estate of Francine's, Inc., brought this suit to avoid a preference under section 60 of the Bankruptcy Act, 11 U.S.C. § 96, and to recover from the defendant Gulfway Shopping Center, Inc. certain specified property that was transferred to this defendant by Francine's, Inc. within four months prior to the filing against Francine's of the petition initiating the Bankruptcy proceeding.

The defendant in this proceeding, as landlord, leased its building at 6020 Lexington Boulevard, Corpus Christi, Texas to Francine's, Inc. for five years, said term commencing on January 15, 1965 and ending on January 14, 1970. Francine's Inc. was to operate in the leased premises a ladies' ready-to-wear specialty clothing store. To secure the payment of all rentals or other sums due under the terms of the lease, Francine's, Inc. granted defendant Gulfway Shopping Center an express contract lien, in addition to the Statutory Landlord's Lien, upon all the fixtures, goods, and other property then or thereafter placed in or upon the leased premises. The lease was properly recorded as a chattel mortgage, both as to personal property and as to fixtures attached to realty, more than four months prior to bankruptcy.

On about Wednesday, January 5, 1966, Mrs. Frances Hamby, President of Francine's, Inc., came to Corpus Christi from Beaumont and informed Mr. James D. Peterson, Vice-President of Gulfway Shopping Center, Inc., that Francine's, Inc. had not met the owners' profit expections and that they were considering closing the store. Mr. Peterson suggested that Mrs. Hamby make certain advertising changes and offered to speak to Mr. Ray E. Peterson, owner of the defendant corporation, about a reduction in the rent of the leased premises, but Mrs. Hamby stated that a reduction in rent would not alleviate the corporation's financial problems. Francine's, Inc. conducted a one-half price sale on Friday and Saturday, January 7 & 8, 1966.

On the following Monday, January 10, 1966, Francine's, Inc. did not open its doors for business.

The evidence reflects that all wages and taxes were paid current when the business operations of Francine's terminated. The current rent had been paid to or through January 15, 1966. The last monthly rental installment due under the lease had been prepaid at the commencement of the lease.

Representatives of Francine's, Inc. and of Gulfway Shopping Center initiated negotiations for the cancellation of the lease. The negotiations culminated in a written document (defendant's exhibit 1), executed by Mrs. Hamby on February 8, 1966 and by the president of Gulfway on March 14, 1966, wherein it is stated that Francine's, Inc. agreed to convey to defendant all of the inventory and fixtures in the leased premises and $1,000 in cash, in consideration for which defendant agreed to cancel the lease agreement and all obligations of Francine's, Inc. thereunder. On February 1, 1966, defendant mailed a notice of this transfer of inventory to all creditors of Francine's, Inc. The provisions of the Texas Bulk Sales law were fully complied with by both parties.

Out of state creditors filed an involuntary petition in bankruptcy against Francine's, Inc. on May 20, 1966. On September 23, 1966, the Trustee in Bankruptcy mailed a letter to defendant, claiming that the transfer to be a voidable preference and demanding payment of $13,946.27, which was the Bankrupt's book value for the inventory, built-in fixtures and cash. The Trustee instituted this suit on December 6, 1966.

In the pre-trial order entered in this cause, the parties made the following admissions of fact:

1. The plaintiff is the duly appointed, qualified and acting Trustee in Bankruptcy of the Estate of Francine's, Inc., a Bankrupt;

2. The proceeding before the court is a proceeding to avoid a preference, and the court has jurisdiction;

3. The plaintiff, on September 23, 1966, duly demanded of defendant the payment of the preferential payments, and defendant has not complied with this demand;

4. The property alleged in the Original Complaint to have been transferred to defendant was in fact so transferred;

5. Francine's, Inc., Lessee, and Gulfway Shopping Center, Inc., Lessor, were in a landlord-tenant relationship at the time of the transfer in question;

6. The transfer in question occurred within four months of the filing of the Petition in Bankruptcy;

7. The lease agreement between Francine's Inc. and Gulfway Shopping Center, Inc. was recorded in the chattel mortgage records more than four months prior to the filing of an Involuntary Petition in Bankruptcy, and was indexed both as a chattel mortgage on personalty and as a chattel mortgage on fixtures affixed to realty; and

8. The provisions of the Texas Bulk Sales law, Vernon's Ann.Tex.Rev.Civ. Stat. Art. 4001, were fully complied with by Gulfway and Francine's relative to the transfer made the basis of this suit.

In a general sense, the transfer made the basis of this suit did constitute a perference—the defendant received a preferred payment, or transfer of the debtor's property, while other creditors received little or nothing. But a preferential transfer, absent additional considerations which compel a different result, are upheld at common law as a perfectly legitimate manner in which to conduct one's affairs. See, e. g., Canright v. General Fin. Corp., 35 F.Supp. 841 (E.D.Ill.1940); Abeken v. United States, 26 F.Supp. 170 (D.C.Mo.1939); 3 Collier, Bankruptcy Par. 60.02, .03 (14th ed. 1964); Seligson, Preferences Under the Bankruptcy Act, 15 Vand.L. Rev. 115 (1961).

At common law a preferential transfer was not considered immoral or improper. Courts of equity, as well as courts of law, allowed a debtor to prefer one creditor over another if the transfer was designed to pay or secure an honest debt. The debtor had the unquestioned right `to confess a judgment in favor of a particular creditor, for an honest debt then due,' and the right of such judgment to hold its priority could not be challenged.

Seligson, supra, at 115.

Thus, only when a preference is legislatively proscribed may it be invalidated simply because it is a preference, without more. 3 Collier, Bankruptcy Par. 60.02 at 755 n. 3 (14th ed. 1964).

The plaintiff has not proved fraud, deceit, or any other element that would render the transfer to defendant invalid under the common law. Hence the remaining inquiry is whether the transfer constituted a legislatively proscribed preference.

As authority for his assertion that the instant transfer has been declared legislatively to be an avoidable preferential transfer, plaintiff relies upon § 60 of the Bankruptcy Act, 11 U.S.C. § 96. The elements of a preference, as that term is used in § 60 of the Bankruptcy Act, are set out in subdivision (a) (1) of that section, 11 U.S.C. § 96(a) (1). To constitute such a preference there must be (1) 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) made within four months before the filing by or against him of the petition in bankruptcy, and (5) the effect of which transfer enables such creditor to obtain a greater percentage of his debt than some other creditor of the same class.

Section 60(b), 11 U.S.C. § 96(b), sets forth the conditions under and extent to which such a § 60(a) (1) preference may be avoided. Before a Trustee in Bankruptcy may avoid a § 60(a) (1) preference, section 60(b) requires that the creditor receiving the transfer or to be benefited thereby or his agent, must have had reasonable cause at the time the transfer was made to believe that the debtor was insolvent.

The absence of any one of the requisite elements set forth in § 60(a) (1) precludes a finding of a Bankruptcy Act "preference" and, despite the presence of all the requisite elements set forth in § 60(a) (1), the absence of any requisite condition under § 60(b) negates the existence of a preference that is voidable by the Act. Bumb v. Valley Electric Co., 419 F.2d 107 (9th Cir. 1969); 3 Collier, Bankruptcy Par. 60.36, at pg. 874 (14th ed. 1964); 4 Remington on Bankruptcy § 1657, at pg. 197. The law places the burden of establishing each of these elements in § 60(a) (1) and (b) squarely upon the shoulders of the Trustee. Bumb v. Valley Electric Co., supra; Aulick v. Largent, 295 F.2d 41 (4th Cir.1961); Moran Bros. Inc. v. Yinger, 323 F.2d 699 (10th Cir.1963); 3 Collier, Bankruptcy, Par. 60.62 (14th ed. 1964). The trustee must overcome by satisfactory proof a presumption that arises in support of the validity of the transfer. 3 Collier, supra, at pp. 1123-1127.

In support of its position that the transfer made the basis of this suit was not a preferential transfer made voidable by the Bankruptcy Act, defendant urges that defendant had, in addition to a statutory landlord's lien, a valid chattel mortgage on the inventory and fixtures of the bankrupt which was recorded more than four months prior to bankruptcy, so that the defendant's taking possession of such inventory and fixtures in consideration for the cancellation of this lien was proper. Defendant bases its claim of a valid and enforceable chattel mortgage on a provision in the original lease agreement wherein Francine's granted the defendant "an express contract lien, in addition to the Statutory Landlord's Lien, upon any and all fixtures, goods, and other property of any kind or character * * *...