IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
KANNRY & MORTON, INC., No. 1-87-00878
KANNRY & MORTON, INC.,
v. A.P. No. 1-87-0204
NORCAL ELECTRONICS, INC.,
Amended Memorandum of Decision After Trial
On April 28, 1986, defendant Maryland Hotel, Ltd., ordered 87 television sets from the
debtor, which operates a retail electronics business. Since defendant was not ready to take
delivery, the debtor agreed to set the televisions aside and hold them on one of its premises. The
debtor at first set the televisions aside, but after a few months began selling them to other retail
customers and sending them out to its other retail outlets as part of their regular inventory. By
the end of 1986, all of the televisions had been sold or sent to the retail outlets and none were
still held aside for defendant.
Defendant made payments for the televisions as follows:
4/28/86 $ 254.54
Defendant received one television on July 18, 1986, and 86 on May 5, 1987. All of the 86
televisions delivered on May 5 were either drawn from the regular inventory of the debtor's retail
outlets or purchased from the debtor's supplier at that time. According to the serial numbers,
a few of the televisions were the same ones that had been originally set aside for defendant.
Others were not even the same model originally ordered.
The debtor's Chapter 11 petition was filed on May 19, 1987. By this adversary
proceeding, the debtor seeks to avoid the transfer of televisions as a preference. The debtor
concedes that the final payment was substantially contemporaneous with the transfer and
accordingly seeks recovery of only $16,892.50.
Contrary to defendant's first argument, there is no requirement that an avoidable preference
be only for the payment of money. Section 547(b) of the Bankruptcy Code provides for the
avoidance of transfers of property
; section 550(a) provides that the property involved in the
avoided transfer be returned unless the court orders its value paid instead. If during the
preference period and from its general inventory the debtor satisfied an antecedent obligation to
supply televisions, then the requirements of 547(b) are present. See Matter of Intern. Gold
Bullion Exchange, Inc.
(Bkrtcy.S.D.Fla.1986) 60 B.R. 256.
Defendant is incorrect in arguing that it was the owner of any of the televisions prior to their
actual delivery on the eve of bankruptcy. California Civil Code section 3440 provides that every
transfer of personal property not accompanied by an actual and continued change in possession
is void as against the transferor's creditors. Because delivery was practicable, segregation and
labeling would not have satisfied the delivery and possession requirements even if the televisions
had remained segregated. In re Black & White Cattle Co.
(9th Cir.1986) 783 F.2d 1454, 1458.
Section 2402(2) of the California Commercial Code does not help defendant because the length
of time between purchase and actual delivery was not commercially reasonable. Even if the
original segregation were considered to constitute a constructive delivery notwithstanding Black
& White Cattle
, the debtor subsequently converted the televisions by transferring them backto
its own general inventory, and the transfer from inventory to defendant on the eve of bankruptcy
was a preference.
Defendant is not entitled to judgment in its favor as to those few televisions which, by serial
number, can be identified as having been originally set aside for defendant. Because they were
not continuously set aside, the transfer was void as to the debtor's creditors until actual delivery,
which was within the preference period. Section 547(e)(2)(B) of the Bankruptcy Code provides
that a transfer for preference purposes is made when it is perfected; section 547(e)(1)(B)
provides that a transfer of personal property is perfected when a creditor of the debtor cannot
acquire rights superior to those of the transferee. In this case, even though defendant paid for
the televisions long before, it did not acquire rights superior to the debtor's creditors until it took
actual delivery on the eve of the debtor's bankruptcy. Pursuant to section 547(e)(1)(B), a
preferential transfer took place at that time.
Defendant's argument that this transaction falls within the "ordinary course of business"
exception of 547(c)(2) is not persuasive. This exception is meant to cover situations where, over
a period of time, the debtor and the transferee have established a regular schedule of deliveries
and payments between each other. Its scope of protection is limited to trade obligations which
are kept current or are paid in full within an initial billing cycle. In re Craig Oil Co.
Cir.1986) 785 F.2d 1563, 1567. The exception does not apply to a unique transaction, especially
where there is a lapse of a year between payment and delivery. Such a transaction can hardly be
called a normal noncash business transaction, and normalcy is the test for applicability of section
547(c)(2). Matter of Xonics Imaging, Inc.
(7th Cir.1988) 837 F.2d 763, 766. The section is to
be read narrowly in favor of the debtor's estate. In re First Software Corp.
(Bkrtcy.D.Mass.1988) 81 B.R. 211, 213. See also In re Energy Co-op, Inc.
(7th Cir.1987) 832
F.2d 997, 1004, holding that in order to use section 547(c)(2) as a defense the creditor
mustshow that the debtor incurred its debt and paid the creditor in ways similar to other
transactions. Defendant has made no such showing here.
Defendant's arguments regarding section 547(b)(5)(C) reflect a misunderstanding of its
meaning. In this case, unless all unsecured creditors would receive 100% in Chapter 7, the
requirements of this section are met. In re Lewis W. Shurtleff, Inc.
(9th Cir.1985) 778 F.2d
1416, 1417. Thus, a finding that the debtor was insolvent on both the date of the transfer and
the date it filed its petition is ipso facto
a finding that the requirements of section 547(b)(5)(C)
are present. Pursuant to section 547(f), the debtor is presumed insolvent at these times.
The debtor is wrong in one respect. Once the transfer is ordered avoided the estate is entitled
to recover the televisions or, if the court orders, their value. Section 550(a). The proper
measure of monetary recovery is the cost to the debtor to replace the televisions in its inventory
(not the contract price), less the $6,657.70 paid contemporaneously. Since the debtor's cost was
$21,251.30, the proper amount of the judgment is $14,593.60. The debtor's estate shall have
judgment in this amount, together with interest at the legal rate from and after October 30, 1987,
and costs of suit.
Pursuant to FRCP 52(a) and Bankruptcy Rule 7052, this memorandum constitutes findings
and conclusions. Pursuant to Rule 9021, the Trustee, who has been appointed since trial was
held in this matter and is now the proper party plaintiff, shall submit an appropriate form of
Dated: October 10, 1988 ______________________