United States Court of Appeals Second Circuit.
Arnold M. KRAVETZ, as Trustee in Bankruptcy of M.F.C. Card, Inc., Plaintiff-
Appellee,
v.
JOANGE BUILDING CORP., Defendant-Appellant.
No. 308, Docket 29274.
Argued Jan. 21, 1965.
Decided Feb. 16, 1965.
Action by trustee in bankruptcy against creditor to set aside transfer as
preferential. The United States District Court for the Eastern District of New
York, John F. Dooling, J., granted a summary judgment in favor of the trustee
and the creditor appealed. The Court of Appeals, Moore, Circuit Judge, held
that creditor-landlord having knowledge at time of execution sale, following
default judgment, that debtor intended to quit business and to leave stock-in-
trade and fixtures in rented store was sufficient to show creditor had
reasonable cause to believe that debtor was insolvent at time of sale which
would be set aside as a preferential transfer.
Affirmed.
West Headnotes
[1] Bankruptcy 2608(2)
51k2608(2) Most Cited Cases
(Formerly 51k166(4), 51k166(41/4))
Creditor's knowledge of insolvency is not necessary nor even actual belief
thereof, and all that is required is a reasonable cause to believe that the
debtor was insolvent at time of preferential transfer. Fed.Rule Civ.Proc. rule
38(b), 28 U.S.C.A.
[2] Bankruptcy 2608(2)
51k2608(2) Most Cited Cases
(Formerly 51k166(4), 51k166(43/4))
Creditor has reasonable cause to believe a debtor is insolvent when he has
notice of such facts respecting affairs and pecuniary conditions of debtor as
would lead a reasonably prudent businessman to conclusion that debtor is
insolvent. Fed.Rules Civ.Proc. rule 38(b), 28 U.S.C.A.
[3] Bankruptcy 2608(2)
51k2608(2) Most Cited Cases
(Formerly 51k166(4), 51k166(41/4))
Creditor-landlord having knowledge at time of execution sale, following default
judgment, that debtor intended to quit business and to leave stock-in-trade and
fixtures in rented store was sufficient to show creditor had reasonable cause to
believe that debtor was insolvent at time of sale which would be set aside as a
preferential transfer. Fed.Rules Civ.Proc. rule 38(b), 28 U.S.C.A.
[4] Bankruptcy 2727(2)
51k2727(2) Most Cited Cases
(Formerly 51k303(4))
$4,300 bid of creditor at public execution sale of bankrupt's goods established
value of property preferentially transferred to creditor in absence of evidence
showing disparity between amount bid and property's value which creditor did not
show was lower.
*562 Robert P. Herzog, New York City, for plaintiff-appellee.
Dreyer & Traub, Brooklyn, N.Y. (Samuel Kirschenbaum, Brooklyn, N.Y., of
counsel), for defendant-appellant.
Before MOORE, FRIENDLY and MARSHALL, Circuit Judges.
MOORE, Circuit Judge.
Arnold Kravetz, a trustee-in-bankruptcy for M.F.C. Card, Inc., sued Joange
Building Corp. to set aside as preferential a transfer of the bankrupt's
business assets to Joange at an execution sale made to enforce a default
judgment for Joange against the bankrupt. Neither party made demand for a jury
trial within the appropriate time, Fed.R.Civ.P. 38(b), and plaintiff moved for
summary judgment. Judge Dooling granted summary judgment for the trustee, and
Joange appeals.
Joange leased premises to the bankrupt for use in bankrupt's business. In
November 1959 it also made an unsecured loan of $5,000 to the bankrupt,
evidenced by a series of promissory notes payable quarterly until December 1961,
to enable bankrupt to buy fixtures and inventory. Bankrupt was soon in default
on nearly all notes due, some of which were dishonored on presentation. Rent
had not been paid for several months prior to the execution sale. Bankrupt
intended to discontinue the business and had surrendered the keys to Joange,
apparently intending also to leave all the fixtures on the premises. All this
Joange knew before the execution sale. In December 1962 bankrupt suffered a
default judgment for $4,328.30 in Joange's favor on the loan. At an execution
sale in January 1963, all of bankrupt's physical assets, stock-in-trade and
fixtures went for $4,175.00 ($4,300.25 including tax) to Joange as the highest
bidder at a public sale. On that day, bankrupt was insolvent.
[1][2] In his affidavit opposing summary judgment, Berfond, an officer of
Joange, professed only ignorance of bankrupt's insolvency and absence of
reasonable cause to believe it. Although bankrupt's President, Max Fraiden,
stated that he had told Berfond that he was 'having a difficult time' meeting
his obligations to all his creditors, Berfond claimed that he 'had no idea' and
'did not know' whether bankrupt had any business creditors or whether they were
being paid. We would be surprised *563 if any creditor-landlord of a small
greeting-card store, whose notes and rent were in default, would not suspect
that his debtor-tenant had some unpaid suppliers. Moreover, the test is not the
subjective one of what Berfond believed but the objective one of what he had
reasonable cause to believe.
Knowledge of insolvency is not necessary, nor even actual belief thereof; all
that is required is a reasonable cause to believe that the debtor was insolvent
at the time of the preferential transfer. A creditor has reasonable cause to
believe that a debtor is insolvent when such a state of facts is brought to the
creditor's notice, respecting the affairs and pecuniary condition of the debtor,
as would lead a prudent business person to the conclusion that the debtor is
insolvent. 3 Collier, Bankruptcy P60.53(1), at 1057-58 (Moore & Oglebay 14th
ed. 1964). Where the trustee alleges that the defendant had reasonable cause to
believe that the debtor was insolvent, an averment by the defendant that he had
no personal knowledge of the debtor's insolvency is insufficient. Id. at
P60.61(1), at 1119.
[3] The facts undisputedly known by Joange as of the date of the execution sale
(January 3, 1963) more than meet the requirements of reasonable belief. As the
facts related above demonstrate, this is not a case where the transferee merely
knew that the bankrupt had failed to pay a debt when due, which, although a
relevant fact, see Roth v. Fabrikant Bros., Inc., 175 F.2d 665, 669 (2d Cir.
1949), is not enough standing alone, cf. Bostian v. Levich, 134 F.2d 284, 286
(8th Cir. 1943). Here it was not standing alone, there was the quitting of the
business and the intention to leave the stock-in-trade and fixtures; nor has
defendant suggested that a trial would develop new or different facts. The only
question would concern the proper inferences to draw. Given all the facts
indisputably known to Joange, the inference that a prudent man would have
believed that the debtor was unable to meet its obligations as they arose was so
compelling that the judge could properly draw it without the need of a trial.
[4] A further question is raised as to the value of the property transferred,
which determines the amount which the trustee's judgment may recover. The
trustee sued for $10,000. The schedule of bankrupt's assets listed only stock-
in-trade and fixtures, which were valued at $9,200. It was Fraiden's opinion
that the value of the inventory alone, excluding fixtures, was about $5,000.
However, Judge Dooling found that Joange's 'bid at the auction sale of $4,300.25
establishes the value of the property in the absence of credible evidence of a
different value.' The problem, Joange claims, is that the bid was not in any
way acceptable as 'some proof of value' because both the trustee and Joange
agreed that 'the bid * * * was artificial and in no way related to the actual
value of the assets remaining * * *.' Although 'the price realized on a forced
sale may not always be the measure of a 'fair valuation' * * *,' Adler v.
Greenfield, 83 F.2d 955 (2d Cir. 1936), in some circumstances it may be used.
Here, as in Adler, there was a public sale. And, although Joange now baldly
asserts in its brief that it bid an amount 'far in excess of the value of the
assets,' here also, as in Adler, nothing in the record suggests that the value
of the assets was appreciably less than the amount bid. Indeed, the only other
evidence-- Fraiden's testimony and the schedule of assets-- points in the other
direction, indicating that only the trustee could gain on a further inquiry into
the value of the property. It was the trustee who, seeking $10,000, first said
that the $4,300 bid was not related to value-- unquestionably because the bid
was thought to be too low. However, the trustee is now satisfied with his
judgment. Judge Dooling's conclusion that the bid adequately established value
might be less convincing if the bid was 'in no way related to the actual value,'
or that it significantly *564 exceeded the value. But there was no proof of any
such disparity. The judgment has been attacked by the transferee, not by the
trustee. No reason has been given for the assumption that reliance on the bid
to establish value led to an unreasonably high figure. Nor can it be assumed
that the bid would exceed the value of the property. If the value was lower,
Joange had ample opportunity to demonstrate the disparity.
Affirmed.
341 F.2d 561
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