IN RE: CHAPTER 11 REXPLORE DRILLING, INC. CASE NO. 86-00287

UNITED STATES BANKRUPTCY COURT 

FOR THE EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE: CHAPTER 11

REXPLORE DRILLING, INC. CASE NO. 86-00287

DEBTOR

J. HUNT PERKINS, Trustee PLAINTIFF

V. ADV. NO. 88-0066

PETRO SUPPLY CO., INC. DEFENDANT

MEMORANDUM OPINION

This matter is before the court on motion of the defendant, Petro Supply Co., Inc., for summary judgment in an adversary proceeding initiated by the trustee to avoid certain preferential transfers pursuant to title 11 U.S.C. sec. 547 and KRS 378.060.

FINDINGS OF FACT:

Rexplore Drilling, Inc., formerly known as Koil Drilling, Inc., is in the business of drilling, completing and operating oil and gas wells throughout Kentucky. Petro Supply Co., Inc. maintains a place of business in Owensboro, Daviess County, Kentucky.

On May 16, 1985, Petro Supply filed the following materialmen's liens pursuant to KRS 376.140:

Petro sent a copy of the lien to Ashland Oil, Inc., which purchased the oil produced by Rexplore on the leases identified in the materialmen's liens filed in Ohio and McLean Counties. Ashland Oil notified counsel for Petro by letter dated June 19, 1985 that "[t]he interests of Koil Drilling Co. [in leases located in Ohio and McLean Counties] have already been placed in suspension because of prior litigation but we have marked our records to indicate the lien claim has been filed."

Petro filed civil action no. 85-CI-1228 in Daviess Circuit Court on October 23, 1985 against Rexplore Drilling, Inc., also known as Koil Drilling, Inc., alleging Rexplore and Koil purchased supplies, materials and services from Petro for certain oil and gas leases in Ohio County, McLean County, and Todd County, in the amount of $52,890.10 and failed to pay therefor. The complaint described the materialmen's liens previously filed by Petro.

On November 4, 1985, an agreed judgment was executed by the parties and entered by the Daviess Circuit Court in civil action 85-CI-1228. The agreed judgment provided that Rexplore Drilling, Inc. and Koil Drilling, Inc. are jointly and severally liable to Petro Supply for $52,890.10, plus interest at 13% per annum from April 30, 1985 and Petro's costs, payable at the rate of $5,000 per month beginning November 22, 1985 until paid in full. The order stated, "It is further agreed that if Defendants fail to make a payment on the date it comes due, then Plaintiff can immediately seek to enforce its judgment against Defendants in any manner allowed by law."

Payment of $5,000 was not made on November 22, 1985 as ordered. On December 9, 1985, Petro caused a garnishment order to be issued by the Daviess Circuit Court against Ashland Oil, Inc. The garnishment order was served on Ashland Oil on December 11, 1985, attaching all funds held by Ashland Oil as of that date that were attributable to Rexplore Drilling, Inc. Ashland Oil answered the garnishment order on December 30, 1985 and enclosed three checks totalling $21,070.94.

Additional garnishment orders were issued and served on Ashland Oil on January 9, 1986 and February 3, 1986. On March 6, 1986, Rexplore Drilling, Inc. by counsel made a $5,000 payment to Petro.

Rexplore Drilling, Inc. filed a petition for relief under chapter 11 of title 11 United States Code on March 21, 1986. J. Hunt Perkins was appointed trustee for Rexplore on August 27, 1986. The trustee initiated this action on March 21, 1988, within the time limitations established by title 11 U.S.C. secs. 108(a) and 546(a), to recover from Petro the sum of $26,070.94 as preferential transfers pursuant to title 11 U.S.C. secs. 544 and 547.

CONCLUSIONS OF LAW:

The issue now before the court concerns the applicability and scope of KRS 378.060. Because the transfer of $21,070.94 pursuant to an order of garnishment served on December 11, 1985 occurred more than 90 days prior to the date the petition was filed, the trustee must rely on KRS 378.060 made applicable by title 11 U.S.C. sec. 544(b), in order to recover that amount from Petro as a preferential transfer.

KRS 378.060 provides:

Petro maintains summary judgment in its favor is proper because: (1) there was no voluntary transfer by Rexplore to Petro; (2) there is no evidence in the record that Rexplore was insolvent at the time the garnishment order was served; and (3) the trustee has presented no evidence that Rexplore "intended" or "conspired" to prefer Petro over other creditors or that any fraud was involved in obtaining judgment or issuing garnishment.

The function of the court when considering a motion for summary judgment is not to resolve issues of fact but rather is to determine, based on the record before the court, whether the moving party has established an absence of any genuine issue regarding all material facts which would entitle the movant to judgment as a matter of law. 6 Moore's Federal Practice para. 56.15(3) (2d ed. 1987).

KRS 378.060 sets forth three primary elements of a preference:

1. There must be:

(a) a sale, mortgage or assignment by a debtor;

(b) a judgment suffered by a defendant; or

(c) an act or device done or resorted to by a debtor;

2. in contemplation of insolvency; and

3. with a design to prefer a creditor.

An agreed judgment executed by the debtor and one of its creditors constitutes a judgment suffered by a defendant or an act done by a debtor. An order of garnishment issued to enforce the agreed judgment must necessarily be construed to be an act or device done or resorted to by a debtor. If the statute were not so interpreted an insolvent debtor could effect a preference by executing an agreed judgment and purposefully failing to pay according to the terms thereof, thereby permitting the creditor to collect by garnishment. "The aim of this statute is to prevent insolvent debtors from making preferences in any mode among their creditors. . . . [I]t embraces every preference in contemplation of insolvency, however made. In enacting it the legislative eye

had in view equality." Grimes v. Grimes, 6 S.W. 333 (Ky. 1888). The fact that this transaction did not involve a direct transfer of funds from Rexplore to Petro does not remove the transfer from the ambit of KRS 378.060.

Petro has not established a lack of any issue of fact relating to the alleged insolvency of Rexplore. Petro merely has established that no discovery has yet been conducted on that issue. A similar statement may be made with regards to the issue of whether there was a design to prefer a creditor. Petro's assumption that a transfer made with a design to prefer a creditor is the equivalent of fraud is erroneous. "[I]t is generally held that a transfer made by an insolvent will be presumed to be made with such intent [to prefer a creditor] 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) (citations omitted). However circuitous the statement in Greathouse may be, it nevertheless suggests a determination of a preference question under KRS 378.060 may be made only after considering all circumstances surrounding the transaction.

There remain substantial issues of fact to be resolved in the trustee's action under KRS 378.060 to recover funds from Petro as

a preferential transfer. Petro's motion for summary judgment is overruled.

Dated:

By the court -

Judge

Copies to:

Taft McKinstry

J. Hunt Perkins

R. Allen Wilson