Memorandum of Decision Re: Using Insider Preference

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re WARREN M. FRANCIS, JR.,                                       No. 1-86-01664      Debtor. ________________________/ WILLIAM B. GROVER, Trustee,      Plaintiff,    v.                                                                                  A.P. No. 1-88-0043 WARREN M. FRANCIS, SR.,      Defendant. ___________________________/
Memorandum of Decision
     In October, 1984, the debtor borrowed $150,000.00 from his father, defendant Warren Francis, Sr. To evidence the debt, the debtor prepared and signed a note reciting 15 percent interest. The note was secured by 2000 shares of the debtor's professional dentistry corporation.      During the year prior to the debtor's bankruptcy filing, he paid his father $44,848.00, of which the debtor allocated $24,848.00 to interest. In this adversary proceeding, the Trustee seeks to recover these payments as usurious and to avoid them as insider preferences.      The usury issue is fairly easily resolved. The Court has no trouble finding that treble damages are not appropriate, as it is clear that there was a desire on the debtor's part to pay his father interest equal to that his father was paying to the bank from which he had borrowed the money to make the loan to his son. Where the borrower knowingly and willingly initiates and consents to usurious interest, treble damages are not appropriate. White v. Seitzman (1964) 230 Cal.App.2d 756, 763-64. Since usurious payments are merely deducted from principal anyway (Matter of Vehm Engineering Corp. (9th Cir.1975) 521 F.2d 186, 189), the Trustee is not entitled to any recovery on a usury theory.      The outcome in this case hinges on the method of valuing the stock held by the defendant as collateral. If the defendant is fully secured, the provisions of section 547(b)(5) make payments to him unavoidable because the payments diminished his lien and increased the debtor's equity in the collateral. 4 Collier on Bankruptcy (15th Ed.) sec. 547.09, pp. 547-38 to 39.      The defendant attempted to prove that the value of the debtor's dental practice greatly exceeded the amount owed on the note, so that he was fully secured. The problem with this theory is that such a value can only actually be obtained if the debtor promises not to compete with his former corporation by opening a new office next door and soliciting his former patients. Since the debtor cannot be forced to so agree, the Court does not see how the value of his practice (which is in essence his skilland patient following) can be attributed to the stock of his professional corporation. To hold otherwise would be inequitable to the estate, which is prohibited by section 541(a)(6) of the Code from realizing any of the "equity" the defendant says exists in the stock. See In re Swanson (9th Cir. BAP 1984) 36 B.R. 99, 100. The test is diminishment of the estate; the transferee cannot argue no diminishment of the estate based on a value for the collateral which the estate cannot recover.      The Court finds that in determining under section 547(b)(5) whether a transferee is oversecured, the value of the collateral is the value the estate could realize and not the value which might be realized if the debtor, after bankruptcy, voluntarily contributes consideration which is not property of the bankruptcy estate. Accordingly, the value of the stock of the debtor's professional corporation is its net asset value without the debtor's covenant not to compete.      From the evidence, the Court finds that during the year before bankruptcy the corporation's recoverable assets were $145,000.00 in cash, receivables, and equipment, and that its debts during this time were $51,600.00. It is therefore clear that the defendant was undersecured, and the requirements of section 547(b)(5) have been met.      The Court further finds that the defendant was a creditor and insider, the debtor was insolvent in the year before bankruptcy, and during that year $44,848.00 was paid to the defendant from the debtor on account of an antecedent debt. Accordingly, the Trustee is entitled to a judgment in that amount, together with interest at the legal rate from and after March 31, 1988. The Trustee shall also recover his costs of suit.      Counsel for the Trustee shall submit an appropriate form of judgment. This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: September 13, 1988                                                                          ________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy