Opinion
No. 78-B-1369
March 11, 1980
Former Bankruptcy Act — Preferences — Avoidance — Knowledge of Insolvency
A creditor had reasonable cause to be put on inquiry of the bankrupt's insolvency where the creditor was aware the bankrupt was delinquent in paying its debt and had liquidated the amount due under a judgment to a percentage less than the actual value owed. Therefore, a transfer within four months of the bankrupt's filing a petition in bankruptcy was a voidable preference under Sec. 60b of the Bankruptcy Act. See Sec. 60b at ¶ 2562 and Sec. 547 at ¶ 9529.
[Digest of Opinion]
The bankrupt in the instant case was delinquent in paying an account with the creditor since July, 1976. From that time until June, 1977, the bankrupt increased the amount owed to $29,885.80 for which the creditor sued in state court in June, 1977. The parties settled the action pursuant to a stipulation in Oct., 1977, which by its terms liquidated the debt as $24,762.00. Payments which were to be made pursuant to this settlement were often late, and in two instances, the bankrupt defaulted. These defaults caused the creditor to sue in May, 1978 for $17,931.81, the amount remaining unpaid. On May 15 and June 15, 1978, the bankrupt issued two checks in partial satisfaction of the debt underlying the judgment. The parties stipulated that the transfers occured within four months of the bankrupt's filing a petition in bankruptcy, and that at the time the transfers were made the bankrupt was insolvent. The trustee alleged that the payments consitituted a preferential transfer under Section 60 of the Bankruptcy Act.
All other elements of a preferential transfer having been proven the court considered whether the creditor had reasonable cause to believe the bankrupt was insolvent at the time of the subject transfers. The court noted that the standard is whether known facts and circumstances with respect to the debtor's financial condition are such as would put an ordinarily prudent man upon inquiry. The court found, that in light of the facts that the bankrupt had defaulted on two months payment, and that the creditor had entered judgment on the claim, subsequently liquidating the debt owing at less than 100% of its actual value, an "ordinarily prudent creditor would have made inquiry as to the company's condition. A reasonable inference, the court said, is that the creditor was aware that the bankrupt was not financially able to pay its full debt. Further, the bankrupt's attorney testified that he had told the creditor that its reason for defaulting on payments prior to the May, 1978 judgment was due to the "tenuous financial condition of the bankrupt at the time." Due deligence on the part of the creditor's attorney, the court said would have revealed numerous suits against the bankrupt within a twoyear period prior to the time of the subject transfers, with many judgments remaining outstanding. The court held, that the creditor had "closed their eyes" to the true condition of the bankrupt by accepting payments after having failed to execute on the judgment. Therefore, the trustee was entitled to judgment.