Opinion
No. 74 B 1376
April 18, 1980
Former Bankruptcy Act — Preferences — Avoidance — Knowledge of Insolvency
A creditor, aware that the bankrupt was unable to pay its note when due, brought suit, instead of consenting to another rollover, as had been the practice, and recorded the mortgage which secured the note two months before the bankrupt filed a petition in bankruptcy. These facts not only were sufficient to put a reasonable creditor on inquiry, but established that the creditor did inquire into and confirm the bankrupt's insolvency. Accordingly, the bankruptcy judge's order dismissing the trustee's claim under Section 60b of the Bankruptcy Act was reversed. See Sec. 60(b) at ¶ 2562 and Sec. 547(b) at ¶ 9529.
[Digest of Opinion]
On October 3, 1974, the bankrupt filed a petition for an arrangement under Section 322 of Chapter XI of the Bankruptcy Act. Among the assets of the bankrupt was a parcel of real estate operated as a gas station. A title search, conducted in connection with a proposed sale of the property by the trustee disclosed on August 8, 1974, less than two months before the bankrupt filed his petition, that the creditor's predecessor recorded a promissory note dated four years earlier, which stated that it was secured by an assignment of the gas station lease and by a mortgage on a parcel adjoining the gas station property. In January, 1975, the creditor commenced a mortgage foreclosure proceeding against the bankrupt.The trustee commenced this proceeding seeking voidance of the transfer which took place at the recordation of the note and mortgage deed, on the ground that at the time of the transfer, the creditor had reasonable cause to believe that the debtor was insolvent.
"The inquiry begins, of course with a determination of the facts actually known to the transferee and proceeds to a consideration of whether these facts were sufficient to put the transferor on inquiry as to the financial condition of the transferee." Hygrade Envelope Corp. v. Gibraltor Factors Corp. 366 F.2d 584, (2 Cir. 1966). In the present case, the court found, that the conduct of the creditor clearly revealed its concern respecting the solvency of the bankrupt.
"After a long series of loans, the bankrupt, told the creditor it would be unable to pay the $90,000 note when it bacme due. Instead of consenting to another rollover, the creditor brought suit on the note and after, four and one half years of waiting, abruptly recorded the mortgage which secured it." The court reasoned that the only reason for the creditor not recording the note and mortgage earlier was to create for the debtor a false appearence of financial strength — an imagew conducive to the extension of credit to the debtor by others. Accordingly, the bankruptcy Judge's order dismissing the complaint was reversed and the action was remanded for proceedings consistent with this judgment.