TIME OIL COMPANY v. Wolverton

• Decision Date: 12 March 1974
• Docket Number: No. 71-2273.,71-2273.
• Citation: 491 F.2d 361
• Parties: In the Matter of Charles W. Wolverton, fdba Wolco Stations and Wolverton Oil Company, Bankrupt No. 78006. TIME OIL COMPANY, Appellant, v. Charles W. WOLVERTON, and Wolverton Oil Company, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

491 F.2d 361 (1974)

In the Matter of Charles W. Wolverton, fdba Wolco Stations and Wolverton Oil Company, Bankrupt No. 78006.

TIME OIL COMPANY, Appellant, v. Charles W. WOLVERTON, and Wolverton Oil Company, Appellees.

No. 71-2273.

United States Court of Appeals, Ninth Circuit.

January 3, 1974.

Rehearing Denied March 12, 1974.

Bernard Petrie (argued), San Francisco, Cal., for appellant.

William E. Anderson, Jr. (argued), William I. Cohen, Palo Alto, Cal., Daniel Aronson, Jr., of Anixter & Aronson, Burlingame, Cal., for appellees.

Before HAMLIN, KOELSCH and ELY, Circuit Judges.

OPINION

HAMLIN, Circuit Judge:

This bankruptcy appeal comes before us in an unusual posture. All of the bankrupt's creditors have been paid 100 cents on the dollar. A creditor, however, appeals from the denial by the United States District Court for the Northern District of California of a petition to review the Referee in Bankruptcy's decision denying its claim upon surplus monies remaining in the bankrupt's estate.¹

The issue herein presented, characterized by the district court as one of first impression, was succinctly summarized by the referee:

"A preferential transfer is made to secure an antecedent debt. The transferee, being unable to return the property, pays its value to the trustee. Later, all allowed claims properly filed are paid. A surplus exists.

"May a creditor receive from a bankruptcy estate not only the amount of his debt, but the value of the property the bankrupt has given him to secure the debt?"

The referee concluded that the creditor was limited to receiving from the bankrupt's estate only the amount of the debt. The district court agreed. We affirm.

FACTS

The bankrupt, appellee herein, doing business as Wolverton Oil Company and Wolco Stations, operated a retail gasoline service station in Sunnyvale, Santa Clara County, California. On February 7, 1964, he was indebted to his supplier, Time Oil Company (Time), appellant herein, for the purchase of petroleum products in the amount of $22,560.33. On that date, the bankrupt assigned and transferred to Time, as security for said indebtedness and consideration for future consignments of gasoline, the following: (1) the leasehold on the above noted Sunnyvale service station, said lease having two years remaining on its original term, plus two renewal options for five years each, (2) the sum of $3,600, which had been deposited with the lessor as prepaid rent, and (3) improvements which the bankrupt had constructed and installed upon the premises covered by the lease.

The value of the leasehold assigned and transferred, including the amount of the prepaid rent, but excluding the value of the improvements, as found by the referee, was the sum of $36,000.00.

In April, 1964, within four months after the assignment and transfer noted above, the bankrupt filed a voluntary Petition in Bankruptcy, and was adjudicated a bankrupt. Subsequent to April, 1964, Time used up the prepaid rent on the property which had been assigned to it to secure the debt owed by the bankrupt, and failed to exercise the option to renew the aforementioned lease. In late 1966, Time abandoned the property, returning to the landlord its rights, title and interest therein.

In April, 1966, the trustee brought a preference action against Time for recovery of the property assigned and transferred to it in February, 1964, or its value. After a trial held in July, 1968, the referee found that the assignment and transfer constituted a voidable preference as defined in section 60 of the Bankruptcy Act (hereinafter the Act), 11 U.S.C. § 96.² The referee further found that Time had converted the assigned leasehold by failing to exercise the option to renew.

Upon the referee's finding of the voidable preference, it became incumbent upon Time to return the object of that preference, the leasehold, to the bankrupt's estate. Section 60(b) of the Act, 11 U.S.C. § 96(b). However, Time could not return that which it had converted and, in lieu thereof, the referee ordered Time to pay into the bankrupt's estate the leasehold's value, plus interest, a total sum of $45,308.08. The referee had ascertained this exact value largely upon the basis of the value of the five-year renewal option periods.

In March, 1969, the referee entered a judgment awarding the $45,308.08 to the trustee, payable to him by Time.

A Petition for Review was filed by Time from this judgment. The United States District Court for the Northern District of California (Harris, J.) denied the petition, and also denied a concurrently filed Motion for Relief from said judgment under section 60(b) of the Federal Rules of Civil Procedure. No appeal was taken by appellant from these orders and they became final. Thereafter, the trustee duly recovered from Time the $45,308.08 in payment of the judgment entered by the referee.

Acting for himself, and prior to the issuance of the preference order and judgment, the bankrupt had secured a new lease on the very property it had previously assigned and transferred to Time. The bankrupt took possession of the property in January, 1967, under a new five-year lease, with a five-year renewal option. Apparently, the operation of the service station under this new lease was profitable.

In the meantime, in March, 1965, the bankrupt had purchased from the trustee cause of actions for violations of the antitrust laws by the major oil companies. That sale, however, was consummated without notice to the creditors. The United States District Court for the Northern District of California (Zirpoli, J.) therefore set aside the order confirming said sale, and this court affirmed. Wolverton v. Shell Oil Company, 442 F.2d 666 (9 Cir. 1971.)³ The result was to cast into the bankrupt's estate in excess of $150,000 in settlement proceeds. These funds created a substantial surplus in the bankruptcy estate.

In November, 1971, the referee entered his order directing the trustee to pay in full all properly filed claims, and to distribute a notice of additional time in which to file claims not previously filed.

Time then filed a claim for $45,308.08, the amount of the preference judgment it had been ordered by the referee to pay to the trustee and refiled its claim of $22,560.33.⁴

The original indebtedness owed by the bankrupt to Time, $22,560.33, was paid in full. But the referee, sustaining the trustee's objection, held that Time's sole legitimate claim was limited to this amount, i. e., the amount owed before the preferential transfer, and that Time was not entitled to recover both the amount of said debt and the value of the property given by the bankrupt to secure this indebtedness.

The issue for review is properly before us on appeal.⁵

DISCUSSION

Consideration of Time's arguments for reversal is prefaced by our identifying and separating the three aforementioned orders resulting in review.

We first noted the order and judgment in the preference action against Time, in favor of the Trustee in Bankruptcy (hereinafter preference order). The referee, after a trial, concluded that Time had converted the security it received for the indebtedness (the service station leasehold), and ordered Time to reimburse the bankrupt estate at the value thereof ascertained by the referee. Judge Harris affirmed this order, and Time took no appeal therefrom. The order is therefore final.

We also noted the order holding that Time had no interest in the excess estate monies beyond the sum of the indebtedness owed by the bankrupt. That order was also affirmed by Judge Harris, and is the subject of this appeal.

The other order, confirming the antitrust sale, reversed by Judge Zirpoli who was in turn affirmed by this court in Wolverton v. Shell Oil Company, supra, is of mere historical significance here.

Because Time did not appeal the preference order, we must accept it at face value. That order set aside a preference pursuant to section 60(b) of the Act. The preference consisted not of a payment, but rather of security. This is a distinction without a difference, however, because a transfer set aside pursuant to section 60(b) of the Act includes the creation of a security interest. Section 1(30) of the Act, 11 U.S.C. § 1(30).

Explicit in the preference order is the finding that the secured property could not be recovered, inasmuch as it consisted of a leasehold which the referee found Time had converted. Section 60(b) of the Act specifically provides that, if the secured property has been converted, the trustee is entitled "to recover * * * its value * * *." See California Mercury Record Distributors, Inc. v. Phelps, 283 F.2d 261 (9 Cir. 1960). Accordingly, the referee ascertained the value of the leasehold, plus interest, a total sum of $45,308.08. His judgment in favor of the trustee and against Time for that sum was consistent with the relevant Bankruptcy Act provisions.

Time, having disgorged its preference by payment of the above noted figure, was then in a position to recover the outstanding debt owed to it by the bankrupt, the sum of $22,560.33. See section 57(g) of the Act, 11 U.S.C. § 93(g); Katchen v. Landy, 382 U.S. 323, 330, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966).

Time's contention that it is entitled to not only the amount of the debt owed prior to the preferential transfer, but also to the value of the converted property received from the bankrupt as security for said debt is predicated entirely upon equitable considerations.

Working from the premise that there now exists a substantial surplus in the bankruptcy estate, Time contends that to permit the bankrupt to retain the $45,308.08 it recovered for Time's conversion of the service station leasehold, when the bankrupt has independently acquired a new lease on those very same premises, would result in an inequitable windfall for the latter.

Collier states that "(t)he whole purpose of the bankruptcy system is to make the bankrupt's property available to his creditor...