This matter is before the court on the motion of Calumet Farm, Inc. for partial summary judgment.

FINDINGS OF FACT:

The following facts are not in dispute. See Stipulations of Fact filed January 24, 1994; Calumet's Proposed Findings of Fact and Conclusions of Law filed January 12, 1994; The First National Bank & Trust Company's Proposed Findings of Fact and Conclusions of Law filed January 11, 1994.

On September 30, 1986, Calumet Farm, Inc. by and through its president J. T. Lundy, executed a promissory note in favor of White Birch Farm, Inc. in the original principal amount of $6,500,000 for the purchase of a one-half interest in the thoroughbred stallion MOGAMBO. An interest payment in the amount of $98,150 on the debt evidenced by the note became due and owing on January 31, 1991.

Calumet Farm, Inc. maintained a demand deposit checking account at The First National Bank and Trust Company, Georgetown, Kentucky. On Friday, March 8, 1991, J. T. Lundy directed an employee of Calumet, Angela Hollearn, to pay by way of a wire transfer the interest payment due to White Birch Farm, Inc. It was the customary practice of Calumet to set off amounts owed to White Birch against sums White Birch owed to Calumet. As of March 8, White Birch owed a sum of money to Calumet for board bills and other expenses. After calculating the amount of the setoff Ms. Hollearn determined that Calumet owed to White Birch the sum of $77,301.58. Calumet intended to wire transfer the sum of $77,301.58 to White Birch Farm.

Ms. Hollearn then contacted by telephone an employee of The First National Bank & Trust Company, Lori Pettit, and instructed Ms. Pettit to wire funds, the amount of which is now in dispute, to the account of White Birch Farm, Inc. at Citibank in New York and to reference the wire transfer "MOGAMBO Interest Payment." On March 8, 1991, the sum of $770,301.58 was deducted from Calumet's account at First National and was transferred by wire transfer to White Birch. Calumet contends it authorized First National to transfer only $77,301.58.

From March 8, 1991 through March 29, 1991, First National honored all checks presented on Calumet's account despite the apparent lack of funds available in the account. At the start of business on March 29, 1991, Calumet's account at First National was overdrawn in the amount of $170,823.07.

On March 29, 1991, J. T. Lundy, president of Calumet Farm, Inc., executed on behalf of Calumet a promissory note in favor of First National in the amount of $500,000 and a security agreement to secure payment of the indebtedness owed under the terms of the promissory note. The security agreement grants to First National a security interest in Calumet's 50% interest in the stallion MOGAMBO and

On March 29, 1991, First National applied $201,000 of the $500,000 loan proceeds to satisfy Calumet's indebtedness to First National resulting from its overdrafts in the amount of $170,823.07 and to cover checks then outstanding. On April 3, 1991, after filing a UCC-1 in the office of the Fayette County Clerk, First National credited the remaining $299,000 of the loan proceeds to Calumet's account.

Calumet filed a petition for relief under chapter 11, title 11 United States Code on July 11, 1991.

Calumet filed this adversary proceeding against First National. In count I of its amended complaint filed July 9, 1993, Calumet alleges First National was negligent in making a wire transfer of an incorrect amount. Calumet seeks damages in the amount of $693,000, which represents the difference between the amount Calumet contends it authorized First National to transfer to White Birch, $77,301.58, and the amount First National transferred, $770,301.58. In count II of the amended complaint Calumet seeks a determination that Calumet's granting of a security interest in its interest in MOGAMBO and proceeds thereof and in the proceeds of any cause of action related to the wire transfer constitutes a preference which may be avoided pursuant to 11 U.S.C. § 544(b) and KRS 378.060 and KRS 378.070. Calumet requests in count III of the amended complaint a judgment declaring void any security interest claimed by First National in proceeds resulting from avoidance of any preferential transfer.

On April 11, 1994, Calumet filed the motion for summary judgment now before the court. Calumet seeks summary judgment on counts II and III of its amended complaint.

CONCLUSIONS OF LAW:

The granting of a security interest prior to the date on which a petition for relief is filed in "all claims, causes of action, choses in action, judgments or rights to recover arising out of or relating in any way to" the wire transfer does not vest in First National a security interest in recoveries had by the debtor in possession under 11 U.S.C. § 544(b) and KRS 378.060. KRS 378.060 sets forth a cause of action that is assertable by a creditor of the debtor. Title 11 U.S.C. § 544(b) grants to the trustee, and the debtor in possession by operation of 11 U.S.C. § 1107, the power to "avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is avoidable under applicable law by a creditor holding an unsecured claim . . . ." Prior to the intervention of bankruptcy the debtor lacks any interest in a cause of action to avoid a preferential transfer under state law that is subject to encumbrance by the debtor. The transfer is avoidable by the debtor only by reason of section 544(b) pursuant to which the debtor stands in the shoes of a creditor holding an unsecured claim. See In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983). The security interest of First National in "all claims, causes of action, choses in action, judgments or rights to recover arising out of or relating in any way to" the wire transfer is unenforceable against any judgment in favor of the debtor in possession against First National or White Birch Farm to the extent the judgment represents avoidance or recovery of a preferential transfer by the debtor in possession standing in the shoes of a creditor.

The granting of a security interest in favor of First National Bank on March 29, 1991 constituted a preferential transfer under KRS 378.060 at least to the extent of $170,823.07, the amount by which Calumet's account at First National was overdrawn.

KRS 378.060 provides:

KRS 378.060.

First National concedes Calumet was insolvent at the time the security interest was granted. The transfers occurred within six months preceding bankruptcy. The only contested issues are whether Calumet granted to First National a security interest "with the design to prefer" First National and whether the "simultaneous debt" exception applies.

A transfer will be presumed to be made with the design to prefer if the transfer is made while the debtor is insolvent. In re Rexplore Drilling, Inc. (Perkins v. Petro Supply Co., Inc., 971 F.2d 1219 (6th Cir. 1992). "[A] transfer made by an insolvent will be presumed to be made with such intent if in fact it does constitute a preference and a man of ordinary prudence under like circumstances would know that the transaction would so operate." Greathouse v. Millard, 320 S.W.2d 630, 632 (Ky. 1958) (cited in Rexplore, 971 F.2d at 1223).

At the time the security interest was granted Calumet was indebted to First National Bank in the amount of $170,823.07, the amount by which Calumet's account at First National was overdrawn. At the time of the transfer Calumet maintained that its account was not overdrawn and that the bank committed the error which resulted in an unintended reduction in the balance of Calumet's account in the amount of $693,000. First National claims the question of fault must be determined before the question of whether Calumet owed a preexisting debt to First National can be determined. Regardless of who made the mistake, it is clear that First National treated the account as being in overdraft status. First National charged against Calumet's account the amount of $770,301.58 for the wire transfer. First National continued to honor checks presented on the account but considered the account as having a negative balance. At the start of business on March 29, 1991, Calumet "owed" to First National the sum of $170,823.07, which debt at the time was unsecured. Calumet then granted to First National a security interest to secure a $500,000 loan. First National immediately credited Calumet's account with the sum of $201,000, $170,823.07 of which satisfied the indebtedness owing to First National by reason of the overdraft. The granting of a security interest to secure repayment of a preexisting unsecured debt in the amount of $170,823.07 constituted a preferential transfer which is avoidable by the debtor in possession.

With respect to the question of whether the March 29, 1991 security interest constituted a preferential transfer to the extent of $30,176.93 ($201,000 - $170,823.07) or to the extent of $299,000 (the amount advanced by First National to Calumet on April 3, 1991), the court finds there are unresolved issues of fact which make summary judgment encompassing these amounts inappropriate.

Dated:

By the court -

Chief Judge

Copies to:

J. James Johnson

Robert M. Watt

Jack G. Jones, Jr.