UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
TRI-CITY TURF CLUB, INC.
d/b/a Mountain Meadows
f/d/b/a Riverside Downs
DEBTOR CASE NO. 94-10360
PHAEDRA SPRADLIN, Trustee PLAINTIFF
VS. ADV. NO. 94-1011
PHILIP D. JARVIS d/b/a JARVIS
SURETY INSURANCE CO., INC.;
PORTSMOUTH BLOCK, INC. d/b/a
SCIOTO BLOCK; M.L. VAUGHN and
NICCOLETTE VAUGHN; INSULATIONS, INC.;
NCI BUILDING SYSTEMS, L.P.
d/b/a MIDWEST METALLIC; ADDINGTON
HOLDING COMPANY, INC. and ADDWEST
The plaintiff and one of the defendants in this proceeding, NCI Building Systems, L.P. d/b/a Midwest Metallic (ANCI@), are back before the Court on NCI=s Motion for Summary Judgment. These two parties have previously been before the Court on Motions for Summary Judgment which were overruled. NCI has reiterated its position that it is entitled to judgment as a matter of law on the issue of whether the plaintiff may recover a sum paid by the debtor which was due on a contract between NCI and defendant Philip Jarvis (AJarvis@), either under the UCC or 11 U.S.C. '547(b).
This Court has already disposed of the question of whether the debtor is aAbuyer@ under the Uniform Commercial Code in its Memorandum Opinion and Order entered on November 6, 1996. The Court determined that the debtor could not recover as a Abuyer@ pursuant to KRS 355.2-711. The remaining question posed by NCI=s Motion for Summary Judgment is, therefore, whether the transfer was preferential.
The record in this case indicates that in April 1994, the debtor and Jarvis entered into a contract for the construction of racetrack facilities (Athe Phase II contract@). NCI was not a party to this contract. NCI entered into an agreement with Jarvis for the fabrication of steel to construct the grandstand (Athe steel contract@) in July 1994. The debtor was not a party to this contract, but it was a third-party beneficiary of it (See November 6, 1996 Memorandum Opinion). Per the terms of the steel contract, NCI was to be paid $357,000.00 as a condition of its acceptance of the contract and the commencement of the drawing, engineering and fabrication work. Jarvis requested the debtor to advance this sum to NCI, which it did.
A number of shipments of steel were made to the construction site between August 30 and September 19, 1994. On September 21, 1994, Jarvis informed NCI that the balance due on the steel contract would not be paid and directed NCI to remove the steel already delivered from the construction site. Jarvis received written notice of reclamation from NCI on the same date. By reason of its notice of reclamation, NCI did not deliver three loads of steel of approximately 40,000 pounds each. Between September 22 and 23, 1994, the majority of the steel was picked up from the site, but approximately two trailer loads were left there, along with a portion of aApanel load.@
An involuntary bankruptcy petition was filed in regard to the debtor on October 24, 1994. The debtor filed its voluntary Chapter 11 petition on November 17, 1994. The case was converted to Chapter 7 a year later on November 17, 1995. A bankruptcy auction was held at the construction site on August 6 and 7, 1996, and the steel that had been left at the site was sold for $9,000.00. After expenses and costs the sale netted $7,200.00.
In addressing the question of whether NCI=s taking of the steel is a voidable preference pursuant to 11 U.S.C. '547(b), the Court would again refer to its Memorandum Opinion of November 6, 1996. Therein it was determined that the debtor had demonstrated that it had an interest in the property in question, but that it had not established any of the other elements of a preference action. Those elements include that the transfer was made to or for the benefit of a creditor, for or on account of an antecedent debt owed by the debtor before the transfer was made, while the debtor was insolvent, and within the appropriate preference period. The section also requires that the transfer enable the creditor to receive more than it would have in a Chapter 7 case in which the transfer had not been made and the creditor received payment of the debt to the extent provided in such a case. All of these elements must be proved in order for a preferential transfer to be established.
NCI contends that the plaintiff has not established any of these elements. It posits the primary issue as whether it was a creditor of the debtor. NCI points out that it has never filed a claim in the debtor=s bankruptcy case, and that the debtor did not list NCI as a creditor. The plaintiff=s position on the issue of NCI as a Acreditor@ of the debtor is embodied in the following statement in her Response to Motion for Summary Judgment: AJarvis contracted with NCI for the steel, but Jarvis required Tri-City to pay the bill in order to get the steel delivered, thus making NCI a creditor that was owed money by Tri-City on an antecedent debt, ....@ This statement is unsupported by reference to any authority. In any event, the transfer of money is not the transfer under consideration here; it is, instead, the transfer of the steel.
In fact, it is the transfer itself that the Court must focus on, and not the transferee, for purposes of determining whether it is avoidable. Section 547(b)(1) requires that the transfer beAto or for the benefit of a creditor.@ The pick-up of the steel benefitted Jarvis, a creditor of the debtor, in that it reduced his liability to NCI for the payment of the price of the steel. As stated by the court in Houston Heavy Equipment Co., Inc. v. Gould, 198 B.R. 693 (S.D.Tex. 1996),
>For the benefit of= does not mean >benefits.= The phrase in the code comes encrusted with legal meaning that makes it distinct from a mere incidental, collateral benefit. A transfer made to relieve a debt owed to the transferee is distinguishable from the relief from potential liability that a guarantor of that debt might enjoy as a consequence of the debtor=s paying its independent obligation. A payment for the benefit of an insider is a transfer for which the debtor has no independent liability. The purpose of the payment must be the discharge of a liability of the person for whom the transfer is made, ....
At 695. Although the within matter does not concern transfers to or forAinsiders@ the reasoning is the same.
With the establishment of the fact that the pick-up of the steel was made for the benefit of a creditor, the other elements of'547(b) fall into place. The transfer was made on account of an antecedent debt (that owed to Jarvis), within ninety days of the filing of the within bankruptcy case, while the debtor was presumed to be insolvent. The transfer also allowed Jarvis to be placed in a better position than other creditors of the debtor in that his liability to NCI for the steel was reduced or eliminated, and the interest of the debtor in this property inured exclusively to his benefit and not that of all the other creditors.
It is therefore the opinion of this Court that defendant NCI=s Motion for Summary Judgment on the issue of whether its reclamation of the subject steel was a preferential transfer should be overruled. An order in conformity with this opinion will be entered separately.
By the Court -
Robert S. Ryan, Esq.
John O. Morgan Jr., Esq.