No. BK-1-76-1605United States Bankruptcy Court, E.D. Tennessee
January 23, 1979
Former Bankruptcy Act — Creditors — Voidable Preference — Knowledge of Insolvency
KELLEY, Bankruptcy Judge
A creditor had reasonable cause to believe the bankrupt was insolvent at the time of making a transfer since contrary to prior business practice between the parties, the creditor had the transfered check certified, “obviously” for fear the check would not clear. Further, if the creditor had made reasonable inquiry, it would have learned of the bankrupt’s insolvency. See Sec. 60(b) at § 2562 and Sec. 547(b) at¶ 9529.
Former Bankruptcy Act — Liens — Voidable Preference Exception
The creditor’s lien as a supplier of building materials was not excepted from the voidable preference provisions of the Bankruptcy Act under Section 67(b) since the property on which the creditor could have perfected a lien was property of a third party, the property owner was not in bankruptcy, and the provisions of the Act did not affect the property. See Sec. 67(b) at ¶ 2643 and Sec. 54 at ¶ 9524.
[Digest of Opinion]
The bankrupt was a building contractor, who for the last ten years had regularly bought building materials from the creditor. Prior to the present contested payment, the bankrupt had paid his account within one to three months. However, due to severe financial difficulty, the bankrupt was late in payment. After extended collection efforts, the bankrupt forwarded a check to the creditor, requesting that he hold the check until he was “able to make it good.” The creditor’s credit manager who had the check certified, testified that he did not make inquiry about the bankrupt’s financial condition and that he did not know the bankrupt was insolvent when the check was certified.
The trustee contends that the payment to the creditor was a voidable preference under Section 60(a) and (b) of the Bankruptcy Act since certification of the check left the bankrupt without any funds to pay creditors.
The bankrupt’s undisputed testimony is that on the date of bankruptcy his assets were approximately $40,000 and his liabilities $200,000.00. A former employee of the bankrupt also testified that during the six months preceding bankruptcy, invoices could not be paid, many accounts were behind, and there were numerous calls asking for payment. From the entire record the court found that the creditor received a preference as defined by Section 60a of the Act. Hence, whether the preference was voidable turned on whether the creditor had reasonable cause to believe the debtor was insolvent at the time of payment.
The debtor had been in business almost ten years and had regularly done business with the creditor. In all of this time, the creditor only had the check immediately received before the one in question certified. The court found, that the creditor’s primary worry was “obviously that he feared the check would not clear if deposited in the ordinary course of business.” Further, the creditor was on notice to make further inquiry of the debtor before dealing with him as a solvent person; and if he had made reasonable inquiry, he would have learned of the debtor’s insolvency. The court, therefore, concluded that the creditor had reasonable cause to believe the debtor was insolvent at the time of the transfer.
The last contention of the creditor was that payment to it under the facts of this case did not effect a preferential transfer under the terms of Section 67b of the Act.
Section 67b of the Act creates an exception for statutory liens, and the exception has been construed to include payments to satisfy statutory liens. However, the court observed, the exception was intended by Congress to favor statutory lienors whose work or goods contributed to the value of the “bankrupt’s” property. In the present case, the property on which the creditor could have perfected a lien was property of a third party. The property owner was not in bankruptcy, and the provisions of the Act did not affect the property. Consequently, the creditor’s argument was dismissed.