12.2.2.2 Notes - Shiro v. Drew

NOTE

1. A trustee in bankruptcy is empowered to set aside or "avoid" certain transfers made by the bankrupt prior to the institution of bankruptcy proceedings and to draw the property transferred back into the estate for the benefit of all the bankrupt's unsecured creditors. Among the trustee's avoiding powers is his power to set aside certain entirely legitimate but preferential transfers to favored creditors. The two key elements of a so-called voidable preference (there are several more) are that it be for an antecedent debt and be made shortly before the debtor's bankruptcy; the idea is to frustrate last-minute efforts by the debtor to insure better treatment for some of his creditors, even where (as in the principal case) the creditor receiving the preference has a perfectly valid claim against the estate. Contemporaneous exchanges (where the debtor receives something in return at the same time that he makes his transfer) are not treated as preferences on the theory that they do not deplete the debtor's estate and therefore do not disadvantage other creditors. See Jackson, Avoiding Powers in Bankruptcy, 36 Stan. L. Rev. 725 (1984).

The elements of a voidable preference are defined in §547 of the Bankruptcy Code of 1978, which replaced §60 of the Bankruptcy Act. There are some important differences between these two sections, but for purposes of understanding the principal case, they may be disregarded.

Since One of the elements of a preference is that it be for an antecedent debt, it must be determined when a transfer, alleged to be preferential, was made. There are two different moments at which Fiberlast might be said to have transferred the proceeds of its Radome contract to the defendant: on November 1, when it promised to do so, and on February 11, when the funds themselves were paid over. If, for voidable preference purposes, the transfer is deemed to have occurred on the earlier of these two dates, then it cannot have been for an antecedent debt since the defendant did not make his loan until some time after November 1; hence, Judge Gignoux's lengthy discussion of the distinction between an assignment (which constitutes the present transfer of a property right) and a promise (which is a commitment to make such a transfer in the future). Does this distinction — supported by a great deal of ancient legal learning — make much sense to you? Does not a promisee also acquire an immediate property right by virtue of the promise he receives, i.e., the right to sue for damages if the promisor fails to perform? This right, however, so long as it is unsecured, is only an inchoate or general right against the entirety of the debtor's estate, not a right to specific property. Is this what distinguishes an assignment from a promise?

2. Under Article 9 of the Uniform Commercial Code, the terms "account" and "general intangibles" are used to describe the types of intangible claims which the common law called "choses in action." These terms are defined in Code §9-106 as follows:

"Account" means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. "General intangibles" means any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money. An rights to payment earned or unearned under a charter or other contract involving the use or hire of a vessel and all rights incident to the charter or contract are accounts.

§9-106 was amended in 1972; for a brief discussion of the pre-1972 version of §9-106, see the Note following Speelman v. Pascal, infra p. 1492.

3. U.C.C. §9-302 provides (by negative implication) that the transferee of an interest in accounts can "perfect" his interest (whether the transfer is an outright sale or merely for security) only by making a filing in the appropriate public office (§9-302). (Section 9-302(1)(e) excepts from this requirement "an assignment of accounts which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts of the assignor.") So long as the transferee's interest remains unperfected, it is subordinate to the claims of competing lien creditors. Section 547(e)(1)(A) of the Bankruptcy Code provides that the transfer of an interest in personal property is made "at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time" and otherwise at the time the transfer is perfected. For the purposes of §547(e), the transfer of an interest in personal property is deemed to be perfected "when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee." As to just when this happens the Bankruptcy Code is silent, leaving the question to be decided by state law (in this case, Article 9 of the Uniform Commercial Code). Does the enactment of the Code affect the outcome in Shiro v. Drew? Does it complicate or simplify Judge Gignoux's analysis? If the assignee in Shiro falls within the §9-302(1)(e) exception, how is his dispute with the trustee to be resolved? For a recent discussion of the scope of this exception, see In re B. Hollie Knight Co., 605 F.2d 397 (8th Cir. 1979).

4. Suppose that Proctor and Drew had sent a copy of the letter of November 1, 1956, to the Hazeltine Company, requesting that Hazeltine pay Proctor and Drew from the proceeds of the Radome contract the $2056.87 advanced by them to Fiberlast. Do you think that Hazeltine could safely disregard the request? Or should it make further inquiries? Or could it safely pay Proctor and Drew the amount requested?

5. Judge Gignoux assumed that the trustee in bankruptcy could not have recovered the money from Drew if Fiberlast had, on November 1, 1956, "assigned" the proceeds of the Radome contract Note that, as of that date, Fiberlast had not even begun performance of the contract. The assumption is, then, that there can be a presently effective assignment of the unearned proceeds of an executory contract. On this point, see Rockmore v. Lehman, reprinted infra p. 1477.