The complaint of the plaintiff debtor in possession, Phoenix Corporation, formerly known as Calumet Farm, Inc. ("Phoenix"), seeks to recover from Bank One, Lexington, N.A. ("Bank One") payments aggregating $328,814.14 as preferential transfers pursuant to 11 U.S.C. § 547(b) or as preferential conveyances under Kentucky Revised Statute ("KRS") 378.060 as made applicable by 11 U.S.C. § 544(b). In addition, Phoenix requests avoidance of an alleged security interest granted to Bank One in a 1990 foal by SECRETO out of RETIRE ("the SECRETO foal") on the grounds that Calumet Farm, Inc. ("Calumet") never granted a security interest in the foal to Bank One and that even if the court determines that it did, the security interest is avoidable as a preferential transfer pursuant to 11 U.S.C. § 547(b). Phoenix seeks judgment for the value of the foal. 11 U.S.C. § 550. Phoenix also objects to Bank One's proof of claim in the amount of $237,584.04.

Bank One contends that Calumet did grant the bank a security interest in the foal, that the avoidance action under KRS 378.060 is time barred, that $228,338.19 of the aggregate payments is not recoverable because that sum represents proceeds of the bank's collateral, and that the one year preference "reachback" period is not available to Calumet because an insider of the debtor, J. T. Lundy ("Lundy"), former president of Calumet, is not a creditor of Calumet or did not receive any benefit from the contested payments.

FINDINGS OF FACT:

On November 1, 1990 Calumet executed a promissory note in favor of Bank One in the principal amount of $450,000. The stated purpose of the note was renewal of a note dated October 22, 1989 in the principal amount of $500,000. The renewal note was secured pursuant to the terms of security agreements dated August 22, 1989 and October 22, 1989. By the security agreement dated October 22, 1989 Calumet granted to Bank One a security interest in equine collateral "including but not limited to" seven thoroughbred horses, specifically, six foals by stallions standing at Calumet (a 1989 foal by SECRETO out of SWEEP ALY, a 1989 foal by SECRETO out of DARLING MISS Q, a 1989 foal by SECRETO out of LIFE'S LIGHT, a 1989 foal by CAPOTE out of LADY TODA, a 1989 foal by SECRETO out of RETIRE, and a 1989 foal by ALYDAR out of HOT LOVE) and one thoroughbred mare owned by Calumet (DARLING MISS Q). On December 1, 1989 a Form UCC-1 financing statement was filed listing the seven thoroughbred horses as collateral. Lundy signed the financing statement as president of Calumet Farm, Inc.

The 1990 renewal note states:

The note was executed by Lundy as president of Calumet.

Lundy also signed a personal guaranty of Calumet's obligation evidenced by the renewal note. The Guaranty states in part:

On November 19, 1990 J. Keen Shackelford, Equine Lending Officer for Bank One, wrote Lundy a letter indicating the bank had agreed to "refinance a portion of" the October 22, 1989 Calumet note, which came due on November 1, 1990, under certain conditions. Lundy affixed his signature at the bottom of the letter in his capacity as president of Calumet, indicating Calumet's agreement to the conditions. Paragraph 3 of the letter agreement states, "The loan will be secured by horses currently held as collateral with the addition of the 1990 SECRETO/RETIRE."

A Form UCC-l financing statement was filed on December 11, 1990 listing as collateral a 1990 foal by SECRETO out of RETIRE. Lundy also signed this financing statement as president of Calumet Farm, Inc. A Schedule A attached to the financing statement clearly indicates Bank One claimed a security interest in the foal.

Between August 1, 1990 and March 27, 1991 Calumet made payments on the renewal loan in the total amount of $328,814.14. Payments made from August 1, 1990 through February 7, 1991 and on March 27, 1991, in the total amount of $100,475.95, are from unknown sources. Of that amount $18,309.28 was paid during the six-month period prior to Calumet's filing bankruptcy (1/23/91 - $666.66, 2/7/91 - $13,043.75, 3/27/91 - $4,578.87). Payments made on March 1, 1991, in the total amount of $228,338.19, were from sale proceeds and insurance proceeds of collateral described in the 1989 loan documents ($178,338.19 in sale proceeds from the January 1991 Keeneland Sale of a 1989 foal by SECRETO out of DARLING MISS Q, a 1989 foal by SECRETO out of LIFE'S LIGHT, a 1989 foal by SECRETO out of SWEEP ALY, and the thoroughbred mare DARLING MISS Q plus $50,000 in insurance proceeds from a 1989 foal by CAPOTE out of LADY TODAR). See Exhibit B to Bank One's Memorandum filed 1/6/94.

On July 11, 1991 Calumet Farm, Inc. filed a petition for relief under chapter 11 of the U. S. Bankruptcy Code in the U. S. Bankruptcy Court for the Eastern District of Kentucky and became a debtor in possession in this liquidating chapter 11 case. After Calumet Farm was sold the debtor changed its name to Phoenix Corporation, the new name of the plaintiff debtor in possession herein.

On December 16, 1992 insider Lundy filed a petition for relief under chapter 7 of the U. S. Bankruptcy Code in the U. S.

Bankruptcy Court for the Southern District of Florida. On May 17, 1993 that case was transferred to this court. On March 4, 1994 an order was entered denying Lundy a discharge for failure to comply with this court's order requiring him to turn over documents requested by the chapter 7 trustee. That order was set aside on May 5, 1994 on the condition that Lundy provide the trustee with information and documents regarding certain property. The issue of Lundy's discharge has not come before the court since that time.

On February 28, 1992 Lundy filed in Calumet's bankruptcy case a proof of claim for the approximate amount of $448,246 "for services rendered to the Debtor in the sale of horses and other equine interests for and on behalf of the Debtor." Lundy's claim asserts that Calumet is also indebted to him in an undetermined amount "equal to the fair-market value of stallion breeding seasons" which Lundy allegedly earned in his capacity as stallion manager, thoroughbred manager and syndicate manager of various stallions standing at Calumet Farm. Lundy did not file a claim based on his contingent liability as guarantor of Calumet's obligation to Bank One.

On July 9 1993, within two years after the order for relief was entered in the Calumet Farm, Inc. case, the debtor in possession commenced this adversary proceeding.

CONCLUSIONS OF LAW:

I

By the combination of the letter agreement of November 19, 1990, executed by J. T. Lundy as president of the debtor, and the Financing Agreement filed of record in the Fayette County Clerk's Office on December 11, 1990, with Schedule A thereto, paragraph 1 of which contains appropriate words of conveyance, Bank One acquired a perfected security interest in the 1990 foal of RETIRE

by SECRETO. David J. Leibson & Richard J. Nowka, The Uniform Commercial Code of Kentucky, §10.2(B), at 779 (2nd ed. 1992). Accordingly, Bank One shall be granted summary judgment on Count I of the complaint.

II

The security agreement by which Bank One acquired a security interest in the 1990 foal of RETIRE by SECRETO was executed and the security interest of the bank was perfected several weeks after the execution of the November 1, 1990 note which was unconditionally guaranteed by insider Lundy. The perfection occurred on December 11, 1990, within one year of Calumet's bankruptcy. Accordingly, the motion of Bank One for summary judgment on Count II of the complaint is denied.

III

The 1991 Keeneland sale proceeds in the amount of $178,043.75 from the sale of the three 1989 SECRETO foals and the $50,000 insurance proceeds from the 1989 CAPOTE foal are not recoverable by the debtor in possession as preferential payments. Bank One had a perfected security interest in these thoroughbreds dating back to December 1, 1989, more than a year prior to commencement of these bankruptcy proceedings. The renewal of the October 22, 1989 note accomplished by the November 1, 1990 note did not affect the validity of the security interest of the bank in these thoroughbreds. Bank One is entitled to summary judgment on Count III of the complaint to the extent the complaint seeks recovery as preferential those payments received by the bank which represent proceeds of the bank's collateral.

IV

The foregoing ruling as to Count III of the complaint applies as well to bar recovery under the Kentucky preference statute of the March 1, 1991 payments representing proceeds of collateral received by the bank within six months of bankruptcy. The amount recoverable by the debtor in possession under the Kentucky preference statute is that represented by the payments totaling $18,309.28 made on January 23, February 7 and March 27, 1991. The six-month reach back period under Kentucky preference law with respect to these payments had not expired when bankruptcy intervened. Consequently, there is a possibility these payments may be recoverable by the debtor in possession as preferential under the Kentucky statute. Bank One is entitled to summary judgment limiting the recovery of the debtor in possession under Count IV of the complaint to $18,309.28.

V

The waiver of subrogation rights executed by Lundy differs from the waiver of such rights executed by the guarantor in Hendon v. Associates Commercial Corp. (In re Fastrans, Inc.), 142 B.R. 241 (Bankr. E.D. Tenn. 1992). In that case the guarantee explicitly waived the inside guarantor's rights against the debtor including "any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim" against the debtor. The guarantee executed by Lundy merely postponed his rights of subrogation, reimbursement, indemnity or other recourse until Calumet's note to the bank is paid in full and satisfied. This guarantee merely postponed the payment of Lundy's contingent claim in the same manner as does the Bankruptcy Code. 11 U.S.C. § 509(c). Lundy still held a contingent claim against the debtor as guarantor of the November 1, 1990 note and was a creditor of Calumet on the date of commencement of this chapter 11 case. Covey v. Northwest Community Bank (In re Helen Gallagher Enterprises, Inc., 126 B.R. 997 (Bankr. C.D. Ill. 1991).

The argument that Lundy did not benefit from the payments made by the debtor to Bank One because Lundy was insolvent when he guaranteed payment of Calumet's note or because Lundy's obligation as guarantor of the debtor's note to Bank One has been discharged

in bankruptcy is unavailing.

At the time of the payments made by the debtor, Calumet, to the non-insider Bank One between August 1 and February 7, 1991 and on March 27, 1991, in the total amount of $100,475.95, the insider guarantor, Lundy, realized a corresponding dollar-for-dollar reduction on the guarantee. In re Sufolla, Inc., 2 F.3rd 977, 984 (9th Cir. 1993). Lundy had benefitted from these transfers at the time they were made and was a beneficiary of the transfers on the date of Calumet's bankruptcy. Lundy's bankruptcy might be relevant in interpreting section 547(b)(1) of the Code only if his bankruptcy had occurred prior to that of Calumet. See Levit v. Ingersoll Rand Fin. Corp. (In re V.N. Deprizio), 86 B.R. 545, 543 (N. D. Ill. 1988). Lundy's subsequent bankruptcy should not defeat a cause of action under 11 U.S.C. § 547 that vested in the debtor in possession on the date of Calumet's bankruptcy.

The motion of Bank One for summary judgment on the complaint in its entirety is overruled. Some of the payments received by the bank during the extended preference period may be recoverable as payments that were for the benefit of Lundy.

VI

The objection to the allowance of the claim of the bank is premature until such time it is actually determined whether some of

the payments received by the bank are avoidable as preferences.

Dated:

By the court -

________________________________

JOE LEE,

CHIEF JUDGE

Copies to:

Russell A. Tolley

Laura F. Nix

Laura Day DelCotto

Harvie B. Wilkinson

U. S. trustee