This matter was heard by the court on January 18, 1995, on the motion of the defendant, Central Bank and Trust Company, for summary judgment dismissing the plaintiff trustee's complaint against the bank. At the same time and place the court heard the motion of the plaintiff trustee, James D. Lyon, for partial summary judgment against the defendants David Gaskin and Central Bank.

By Count Four of the amended complaint the trustee alleges that a payment in the amount of $35,099.00 made by the debtor to the defendant Central Bank and Trust Company on November 23, 1993, is avoidable under 11 U.S.C. § 548 as a fraudulent conveyance and under 11 U.S.C. § 547 as a preferential conveyance.

On October 13, 1993 the defendant David Gaskin, an insider of the debtor, obtained a loan from Central Bank and Trust Company evidenced by a mortgage note for the amount of $35,760.50. To secure the indebtedness evidenced by the note Gaskin and his wife Angela granted to the bank a second mortgage on their residence at 992 Woodshire Way a/k/a 4705 Sharon Drive, Lexington, Fayette County, Kentucky. The loan documents indicate the loan was for business use, to purchase inventory for the debtor, Kentucky Truck and Van Center, Inc. It appears to be conceded that the proceeds of the loan were used for this purpose.

On November 23, 1993 the debtor issued a check to Central Bank and Trust Company in the amount of $35,099.00 to pay off the mortgage note executed by Gaskin. On December 9, 1993 the bank released its mortgage on the residence of the Gaskins.

Based on these facts the court ruled at the hearing on January 18, 1995 that the debtor had received reasonably equivalent value in the form of money or inventory enhancement in exchange for the payment to Central Bank with the result that the payment to the bank was not a fraudulent conveyance. Accordingly, the court ruled that count four of the complaint, insofar as it seeks to avoid the transfer to the bank as a fraudulent conveyance, should be dismissed.

The court reserved ruling on the question of whether the payment to the bank may be avoidable by the trustee as a preferential conveyance.

The debtor filed its petition for relief under chapter 7 of the Bankruptcy Code on February 2, 1994. The November 23, 1993 payment of $35,099.00 was made to Central Bank within 90 days of the debtor's bankruptcy. There is a presumption that the debtor was insolvent at the time of the payment. 11 U.S.C. § 547(f). The payment benefitted David Gaskin, an insider, by relieving him of the obligation to the bank.

Central Bank contends the payment is not avoidable by the trustee because David Gaskin was not a creditor of the debtor. Counsel for the bank contends the $35,760.50 which Gaskin borrowed from the bank for the purchase of inventory for the debtor was a capital contribution rather than a loan by Gaskin to the debtor and therefore Gaskin was not a creditor of the debtor. Consequently, it is the position of the bank that the repayment of the loan was not a transfer to or for the benefit of a "creditor" of the debtor within the meaning of 11 U.S.C. § 547(b)(1). The bank was not a creditor of the debtor; it was a creditor of Gaskin. Counsel for the bank argues that neither was Gaskin a creditor of the debtor because the bank loan proceeds which Gaskin poured into the debtor should be viewed as a capital contribution rather than a loan by Gaskin to the debtor.

According to Black's Law Dictionary a capital contribution is a means by which a shareholder makes additional funds available to the corporation (i.e., placed at the risk of the business) without the receipt of additional stock. Such contributions are added to the basis of the shareholders existing stock investment and do not generate income to the corporation. I.R.C. § 118. Black's Law Dictionary Special Deluxe Fifth Edition, West Publishing Company 1979. Under this test the monies advanced by Gaskin in the belief that he was protecting his interest in the corporation cannot be viewed as a capital contribution because as we now know he was not a shareholder in the corporation and had no existing stock interest or investment in the corporation to protect. Also, the fact the sum advanced to the corporation by Gaskin was repaid so quickly indicates it was a loan rather than a capital contribution. Consequently, Gaskin was a creditor of the debtor.

Accordingly, the motion of Central Bank and Trust Company for summary judgment dismissing count four of the complaint against the bank insofar as it seeks recovery from the bank as the initial transferee of a preferential payment should be overruled.

The motion of the trustee for summary judgment in the amount of $35,099.00 against Central Bank and Trust Company and David Gaskin should be sustained.

Should Central Bank and Trust Company pay the foregoing amount to the trustee, the mortgage of the bank on the residence of the defendants, David Gaskin and Angela Gaskin, shall be reinstated as if it had never been released.

Dated:

By the court -

_____________________________

JOE LEE, CHIEF JUDGE

Copies to:

Randy Shaw, Esq.

James D. Lyon, Esq.

Tracey Wise, Esq.

Scott Rickman, Esq.

David K. Gaskin

Angela Gaskin

In conformity with the memorandum opinion of the court this day entered, IT IS ORDERED AND ADJUDGED that the motion of the defendant, Central Bank and Trust Company, for summary judgment dismissing Count Four of the complaint against the bank insofar as it seeks recovery from the bank as the initial transferee of a preferential payment is overruled.

IT IS FURTHER ORDERED AND ADJUDGED that the motion of the plaintiff trustee, James D. Lyon, for summary judgment in the amount of $35,099.00 against defendants Central Bank and Trust Company and David Gaskin is sustained.

Dated:

By the court -

______________________________

JOE LEE, CHIEF JUDGE

Copies to:

Randy Shaw, Esq.

James D. Lyon, Esq.

Tracey Wise, Esq.

Scott Rickman, Esq.

David K. Gaskin

Angela Gaskin