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In re Meredosia Harbor & Fleeting Service Inc.

decided: November 8, 1976.

IN THE MATTER OF: MEREDOSIA HARBOR & FLEETING SERVICE, INC. AND RIVER ROAD MARINE REPAIR, INC. FARMERS & TRADERS STATE BANK OF MEREDOSIA, LIEN CLAIMANT-APPELLANT,
v.
ROBERT M. MAGILL, TRUSTEE-APPELLEE



Appeal from the United States District Court for the Southern District of Illinois. Nos. S-BK-70-1365, 1366 - Harlington Wood, Jr., Judge.

Fairchild, Chief Judge, Cummings and Tone, Circuit Judges.

Author: Cummings

CUMMINGS, Circuit Judge.

This case arises from the denial of two Illinois banks' petitions to reclaim two vessels, allegedly subject to a maritime mortgage, or the proceeds from their sale in the hands of the bankruptcy trustee of the corporate mortgagor.

In 1970, John D. Rasco formed two companies, viz., Meredosia Harbor & Fleeting Service, Inc. and River Road Marine Repair, Inc., its wholly owned subsidiary, to build and repair boats. During that year, the corporations were building the Mary Ann, a river towboat, and the Anita Marie, a harbor towboat.

In early 1970, Rasco engaged upon a fraudulent scheme to obtain funds from appellant Farmers & Traders State Bank of Meredosia (Meredosia Bank) and its subrogor, Schuyler State Bank of Rushville (Rushville Bank). Rasco opened checking accounts in the corporate names and in his own name in those banks and in another Illinois bank and an Oklahoma bank. During the summer of 1970, he commenced kiting checks among the various banks. The kite was discovered by bank examiners in auditing the Meredosia Bank in early September 1970. Because of the check kite and Rasco's own unsecured borrowings on his account and on each corporation's account from the Meredosia and Rushville Banks, the Meredosia Bank lost $170,000 and the Rushville Bank $130,000.

Neither of Rasco's corporations ever had any paid-in capital, and neither issued any stock. Both corporations were insolvent in early September 1970. The Meredosia Bank was aware of Rasco's check kiting as early as July 1970, and the Rushville Bank realized in early September 1970 that Rasco was insolvent and in an overdraft position. There was evidence of connivance between some of the bank officers and Rasco.

On October 1, 1970, River Road Marine Repair, Inc., pursuant to the banks' demand, mortgaged the Mary Ann and the Anita Marie to the banks to secure the indebtedness of $300,000, consisting of $170,000 cash previously advanced by the Meredosia Bank and $130,000 cash previously advanced by the Rushville Bank. Attached to the mortgage was Rasco's October 1, 1970, affidavit stating that the mortgage was made by Rasco as president of River Road Marine Repair, Inc.,

"in good faith without any design to hinder, delay or defraud any existing or future creditor of the mortgagor (shipowner) or any lienor of the vessel mortgaged; and that this affidavit is made pursuant to the order of the Board of Directors of said corporation."

Both vessels were incomplete on October 1.

On November 6, 1970, the mortgagor River Road Marine Repair, Inc. and Rasco's other corporation, Meredosia Harbor & Fleeting Service, Inc., filed reorganization petitions under Chapter XI of the Bankruptcy Act. On the same day, they filed petitions to consolidate their Chapter XI proceedings. Consolidation orders were entered the same day by the bankruptcy referee and Alonzo Sargent was appointed as their receiver.

On November 20, 1970, the receiver sent a notice to all the creditors listed in the debtor's schedule of creditors, fixing the time and place for the first meeting of creditors and for various subsequent hearings. As sent out, the notice specified that the last date to file claims was June 14, 1971. The final paragraph of the notice referred to the fact that River Road Marine Repair, Inc.'s petition for arrangement had been consolidated with that of Meredosia Harbor & Fleeting Service, Inc. and that the cases were to proceed under one title, viz., In the Matter of Meredosia Harbor & Fleeting Service, Inc., No. S-BK-70-1365. The receiver's summary of liabilities and assets of the consolidated debtors attached to the notice unrealistically valued the Mary Ann at $450,000 and the Anita Marie at $135,000. The debtors' personal property schedule filed by Rasco on December 14, 1970, listed the Mary Ann's incomplete value as "unknown" and the Anita Marie's incomplete value as $80,000. Rasco listed corporate debts of $504,350.08 and $59,132.65, or a grand total of $563,482.73.

In the consolidated proceeding, an adjudication of bankruptcy was entered on January 4, 1971, and receiver Sargent was appointed as trustee. Ten days thereafter, the trustee petitioned for leave to sell both unfinished vessels and other property of the consolidated bankrupts. On the following day, the referee in bankruptcy sent a notice to the creditors to show on or before January 25, 1971, why the property should not be sold. On June 25, 1971, he authorized the sale of the bankrupts' property, there having been no contest to the January 15 show cause order. On December 14, 1971, he approved the trustee's sale of the Anita Marie for $21,500. A month thereafter, he approved the sale of the Mary Ann and other miscellaneous personal property of the bankrupt for $25,000.

On February 7, 1973, the Meredosia Bank filed an objection to the trustee's January 2, 1973, final report, indicating that it had a maritime mortgage for the two vessels for $300,000, and stating that the trustee's counsel had previously advised the bank that the proceeds of the sale of the two vessels would not be expended until it was determined whether the mortgage was a valid lien. In March 1973, the Meredosia Bank filed a petition to reclaim the vessels or the proceeds of their sale, and a similar reclamation petition was filed in June 1973 by the Rushville Bank.

On May 1, 1974, the bankruptcy referee overruled the Meredosia Bank's objections to the final account of the trustee*fn1 and denied both banks' reclamation petitions. At the same time, he entered supporting findings of fact, conclusions of law and an opinion. In his opinion, the referee noted that the October 1, 1970, mortgage was given for an antecedent debt of $300,000 caused by Rasco's check-kiting scheme. He observed that the bankrupts were hopelessly insolvent at the time of the mortgage transaction. He held that the mortgage on the towboats was void as a preference. He also held that the mortgage was invalid for want of a ...


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