Bankr. L. Rep. P 70,136 Robert J. Brown, Trustee v. First National Bank of Little Rock, Arkansas, Ark-La Materials, Inc., Debtor, 748 F.2d 490, 1st Cir. (1984)
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Scribd Government DocsBankr. L. Rep. P 70,136 Robert J. Brown, Trustee v. First National Bank of Little Rock, Arkansas, Ark-La Materials, Inc., Debtor, 748 F.2d 490, 1st Cir. (1984)
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Scribd Government Docs748 F.
2d 490
Bankr. L. Rep. P 70,136
Robert J. BROWN, Trustee, Appellant,
v.
FIRST NATIONAL BANK OF LITTLE ROCK, ARKANSAS,
Appellee.
Ark-La Materials, Inc., Debtor.
No. 84-1582.
United States Court of Appeals,
Eighth Circuit.
Submitted Nov. 13, 1984.
Decided Nov. 21, 1984.
Robert J. Brown, Little Rock, Ark., for appellant.
James C. Clark, Jr., Little Rock, Ark., for appellee.
Before ARNOLD, Circuit Judge, HENLEY, Senior Circuit Judge, and
JOHN R. GIBSON, Circuit Judge.
PER CURIAM.
Robert J. Brown, the trustee of the bankruptcy estate of Ark-La Materials, Inc.,
brought suit to avoid an alleged preferential transfer to the First National Bank
of Little Rock. The bankruptcy court1 denied the claim and the district court 2
affirmed. The question on appeal is whether certain payments by makers or
guarantors of a promissory note upon which the insolvent debtor is also liable
can be avoided by the trustee as illegally preferential. See 11 U.S.C. Sec.
547(b). We hold that the payments were not avoidable as preferential transfers
and affirm.
On November 19, 1979 Ark-La Materials, Inc., a corporation, executed a
promissory note in the amount of $45,000.00 payable to appellee, First National
Bank of Little Rock, Arkansas. The note was signed by George Locke as
chairman of the board of Ark-La. Locke, along with Fred Weaver and H. Allen
Gibson, also signed the note in their individual capacities making each
personally liable on the note as makers.
3
When Ark-La failed to pay the debt when it became due, the Bank demanded
payment from the co-makers. On January 24, 1980 Locke and Weaver, two of
the co-makers, presented the Bank with three checks as full payment of the
note. Each check was in the amount of $15,427.19, was made payable to ArkLa, and was presented personally to Phil Bronkhorst, an officer of the Bank.
Two of the checks were signed by Weaver and were payable from accounts of
other companies with which he was connected. 3 The third check was signed by
Locke and was payable from his own personal account.4 Thus, all the money
used to pay the note represented the personal funds of individual co-makers.
Weaver and Locke instructed Bronkhorst that the checks were to be used to pay
off the $45,000.00 note, plus all accrued interest. Pursuant to these instructions,
Ark-La's debt to the Bank on the note was reduced to zero.5
Ark-La filed a Chapter 11 petition in bankruptcy on March 14, 1980. The
trustee sought to avoid the January 24, 1980 payments arguing that they
represented a preferential transfer of the debtor's property within ninety days of
the filing of Ark-La's petition. See 11 U.S.C. Sec. 547(b). The bankruptcy court
denied the claim holding that the funds which were transferred were not
property of the estate and that the note payment was therefore not a preferential
transfer of debtor's funds. The district court agreed and affirmed.
The trustee has the burden of proving each of the elements of a preferential
transfer. First National Bank of Clinton v. Julian, 383 F.2d 329, 333 (8th
Cir.1967). One of these elements is that the property transferred must be
property of the bankrupt's estate. DeAngio v. DeAngio, 554 F.2d 863, 864 (8th
Cir.1977). It must be shown that the transfer depleted the debtor's estate. Id.
No such diminution has been shown here. All the funds used to pay the note
came solely from the individual co-makers. Therefore the amount of Ark-La's
property or funds available for distribution to the other creditors was not
reduced. Since the funds used to pay the note were not property of the debtor,
there was no preferential transfer.
The result might be different were there any evidence that the individual comakers received money or property from Ark-La in exchange for paying off the
note. Such indirect transfers from the debtor's estate may be avoided since they
result in a diminution of the bankrupt's estate. See Virginia National Bank v.
Woodson, 329 F.2d 836, 839 (4th Cir.1964); Miller v. Fisk Tire Co., 11 F.2d
301, 303 (D.Minn.1926); 4 Collier on Bankruptcy p 547.25 (15th ed.1984).
However, there is no such evidence here. The transfers by the co-makers were
made in order to extinguish their personal liability on the note and there is
nothing to show that they received anything from Ark-La in return. "
[P]ayments made by an indorser, surety or guarantor do not effect a preference
because there is no transfer of the debtor's property ...." 4 Collier on
Bankruptcy p 547.25, at p. 547-93. See also DeAngio, 554 F.2d at 864
(payment by third party not a preference where there is no diminution of
bankrupt's estate); Virginia National Bank, 329 F.2d at 839 (same); Inter-State
National Bank v. Luther, 221 F.2d 382, 393 (10th Cir.1955) (same); Olmstead
v. Massachusetts Trust Co., 11 F.2d 410, 411 (D.Mass.1926) (same).6
9
Therefore the judgment of the district court is affirmed.
The Honorable Charles W. Baker, United States Bankruptcy Judge for the
Eastern District of Arkansas
The Honorable G. Thomas Eisele, Chief Judge, United States District Court,
Eastern District of Arkansas
One check was drawn from the account of L & S Concrete Company and the
other was drawn from the account of Weaver-Bailey Contractors, Inc
The funds used by Locke to pay this portion of the note were acquired by him
through a personal loan from the First National Bank of Little Rock
Bronkhorst instructed his secretary to type an endorsement on the backs of the
checks which read "For the credit to Ark-La Materials." The trustee contends
this was improper. We agree with the district court, however, that this action
was clearly authorized by Locke in his capacity as chairman of Ark-La
The bankruptcy court appeared to imply that, had the co-makers paid the
money into Ark-La's account and then drawn a check from that account to pay
the Bank, a preference would have been created. We disagree. The mechanics
of the transfer may not necessarily be determinative. The paramount
consideration is whether there has been a diminution in the bankrupt's estate as
a result of the transfer
Where payment to a creditor is made by one liable as an indorser or guarantor,
out of his own funds, the creditor has not received a preference from the
insolvent debtor. It does not matter that in the course of the transaction the
party secondarily liable may have paid the money to the debtor, to be given by
him to the creditor, and the debtor may have turned it over to the creditor; for in
such a case the debtor took the money charged with a fiduciary obligation to
employ it toward extinguishment of the particular debt, and the money that the
creditor received was never a general asset of the debtor.
Grubb v. General Contract Purchase Corp., 18 F.Supp. 680, 682
(S.D.N.Y.1937) (citations omitted), aff'd, 94 F.2d 70 (2d Cir.1938). See also 4
Collier on Bankruptcy p 547.25, at p. 547-94-95 ("The rule is the same
regardless of whether the proceeds of the loan are transferred directly by the
lender to the creditor or are paid to the debtor with the understanding that they
will be paid to the creditor in satisfaction of his claim, so long as such proceeds
are clearly 'earmarked.' ") It is only where the transfer from the third party to
the debtor is not made upon condition that it be used to pay a certain creditor or
where the debtor, rather than the third party, has control of the funds, that a
preference may have been created. See Smyth v. Kaufman, 114 F.2d 40, 42 (2d
Cir.1940).
