Brown v. Callaway Bank (In Re Meritt)
1980 Bankr. LEXIS 3870, 7 Bankr. Ct. Dec. (CRR) 28, 7 B.R. 876 (1980)
Rule of Law:
Under Bankruptcy Code § 547, the perfection of a security interest for an antecedent debt constitutes a 'transfer' at the time of perfection if it occurs more than 10 days after the debt was incurred, and if this perfection happens within 90 days of the debtor's bankruptcy filing, it is a voidable preferential transfer.
Facts:
- On June 4, 1979, The Callaway Bank loaned the debtors, Mr. and Mrs. Meritt, $10,000 for the purchase of thirty stainless steel farrowing crates for their hog farm operation.
- On June 4, 1979, the Meritts signed a security agreement describing the farrowing crates and a UCC financing statement.
- The Meritts purchased the farrowing crates shortly after receiving the loan from The Callaway Bank.
- The loan note was originally due in 60 days but was subsequently extended for numerous 60-day periods because the Meritts did not pay it from the sale of wheat.
- On March 6, 1980, The Callaway Bank filed the UCC financing statement, describing the collateral as 'machinery and equipment,' with the Callaway County Recorder of Deeds' office.
- On May 5, 1980, the Meritts filed for bankruptcy.
- The Callaway Bank later sold 15 of the crates for $200 each and the remaining 15 for $130 each, incurring sales expenses of $195, for total proceeds of $4,755.00.
Procedural Posture:
- The Trustee filed a complaint in the U.S. Bankruptcy Court for the Western District of Missouri, seeking to set aside a preferential transfer under Section 547 of the Bankruptcy Code against The Callaway Bank.
- The matter was tried before the Bankruptcy Court in Jefferson City, Missouri, on November 6, 1980.
- At the outset of trial, the Trustee voluntarily dismissed paragraph 18 of the complaint, stating no interest or claim to $7,000 allegedly paid to the bank by the debtors.
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Issue:
Does the perfection of a security interest within 90 days of a debtor's bankruptcy filing, for a loan made more than 10 days prior, constitute a preferential transfer voidable by the bankruptcy trustee under 11 U.S.C. § 547?
Opinions:
Majority - Frank P. Barker, Jr.
Yes, the perfection of a security interest within 90 days of a debtor's bankruptcy filing, for a loan made more than 10 days prior, constitutes a preferential transfer voidable by the bankruptcy trustee under 11 U.S.C. § 547. The court determined that the perfection of a security interest unequivocally constitutes a 'transfer' under 11 U.S.C. § 101(40). Pursuant to 11 U.S.C. § 547(e)(2)(B), if a transfer is perfected more than 10 days after it takes effect between the transferor and transferee, it is deemed 'made' at the time of perfection. In this case, the loan was made on June 4, 1979, but the security interest was not perfected until March 6, 1980, more than 10 days later. Therefore, the 'transfer' occurred on March 6, 1980, which was within 90 days of the May 5, 1980, bankruptcy filing. The court found all five elements of a voidable preference under § 547(b) to be met: 1) the transfer benefited The Callaway Bank by changing its status to a perfected secured party; 2) it was for an antecedent debt; 3) the debtors were presumed insolvent under § 547(f), a presumption The Callaway Bank failed to rebut; 4) the transfer occurred within 90 days of bankruptcy; and 5) it enabled The Callaway Bank to receive more than it would have in a Chapter 7 liquidation as a perfected secured creditor. The court rejected The Callaway Bank's argument for the § 547(c)(1) contemporaneous exchange exception, finding the eight-month gap between the loan and perfection was not 'in fact a substantially contemporaneous exchange.'
Analysis:
This case emphasizes the critical importance of prompt perfection of security interests for creditors. It firmly establishes that a delay beyond 10 days in perfecting a security interest can lead to the 'transfer' date being fixed at the time of perfection, potentially bringing it within the 90-day preference period. Creditors who fail to perfect timely risk having their security interests voided by a bankruptcy trustee, which could significantly impact their recovery in a Chapter 7 liquidation. The ruling also clarifies the narrow scope of the 'contemporaneous exchange for new value' exception, affirming that it does not insulate transfers with substantial delays between the debt's creation and perfection.
