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Geeslin v. Blackhawk Heating & Plumbing Co.

OPINION FILED DECEMBER 31, 1979.

JOSEPH D. GEESLIN, JR., PLAINTIFF-APPELLEE AND CROSS-APPELLANT,

v.

BLACKHAWK HEATING & PLUMBING CO., INC., DEFENDANT-APPELLANT AND CROSS-APPELLEE. — (ROBERT D. WILCOX, DEFENDANT-APPELLEE AND CROSS-APPELLANT.)



APPEAL from the Circuit Court of Cook County; the Hon. ARTHUR L. DUNNE, Judge, presiding.

MR. PRESIDING JUSTICE SIMON DELIVERED THE OPINION OF THE COURT:

Joseph Geeslin, liquidator of United Bonding Insurance Company (UBIC), seeks to recover from Blackhawk Heating and Plumbing Company (Blackhawk) assets transferred to Blackhawk pursuant to a settlement of Blackhawk's lawsuit against UBIC, and a declaration that Geeslin, not Blackhawk, is entitled to an escrow fund established by UBIC and Prudence Mutual Casualty Company (also in liquidation). Geeslin alleges that Blackhawk obtained the assets, and its interest in the escrow, as a voidable preference. He also alleges that Blackhawk's interest in the escrow is an unperfected security interest, and so has no priority. The circuit court held that there was no voidable preference, but that Geeslin had superior rights in the escrow. Both sides appeal. We hold for Blackhawk on both issues.

I

• 1 The voidable preference issue is governed by Indiana law, for UBIC is an Indiana insurance company in liquidation in the Indiana courts>. To have the transfer of assets voided as a preference, the liquidator (Geeslin) must show (i) that UBIC was insolvent, (ii) that UBIC intended to prefer Blackhawk, and (iii) that Blackhawk had reasonable cause to believe a preference would occur. (1935 Ind. Acts, ch. 162, § 42, Ind. Code § 27-1-4-14(a) (1976).) No Indiana case law interprets these requirements. They were copied from old Federal bankruptcy acts, so the parties have directed us mostly to old Federal cases.

The main legal dispute concerns the second element, UBIC's intent to give a preference. Geeslin argues that under the Federal cases, this requirement had been virtually read out of the act. It is enough, Geeslin says, to show that a preference actually resulted; in other words, that the creditor received more than he would have in liquidation. From this, Geeslin argues, the required intent must be inferred, on the principle that one intends the natural consequences of one's acts.

Whatever earlier Federal cases may have held, we agree with Blackhawk that this approach was rejected in Wilson v. City Bank (1873), 84 U.S. (17 Wall.) 473, 21 L.Ed. 723. In that case, the creditor had sued the debtor, who, having no defense, made none; the creditor obtained and executed on a judgment; the debtor was then placed in bankruptcy; and the trustee tried to recover the money as a preference. The Supreme Court denied recovery, declaring that "there must be the positive purpose of doing an act forbidden by [the Bankrupt Act of 1867], and the thing described must be done in the promotion of this unlawful purpose." (Wilson, 84 U.S. 473, 484, 21 L.Ed. 723, 727.) Geeslin argues that Wilson stands only for the proposition that no presumption arises from inaction, as opposed to a positive act. The debtor in Wilson passively allowed the creditor to levy on his property; here, UBIC voluntarily concluded and paid a settlement.

We believe the court's reasoning leads to a broader conclusion. The debtor, said the court, acted with propriety in not raising false or dilatory defenses to suit. He could not otherwise have prevented the preference except by filing for voluntary bankruptcy. However, he had no obligation to do this; to impose such an obligation would subvert the scheme of the bankruptcy act. In the court's words:

"Such an obligation would take from the right the character of a privilege, and confer on it that of a burdensome and, often, ruinous duty.

We do not construe the act as intended to cover all cases of insolvency, to the exclusion of other judicial proceedings. * * * [I]t still leaves, in a great majority of cases, parties who are really insolvent, to the chances that their energy, care, and prudence in business may enable them finally to recover * * *. All experience shows both the wisdom and justice of this policy.

Many find themselves with ample means, good credit, large business, technically insolvent * * *. But, by forbearance of creditors, by meeting only such debts as are pressed, and even by the submission of some of their property to be seized on execution, they are finally able to pay all, and to save their commercial character and much of their property. * * * any creditor can institute proceedings in a bankrupt court. But until this is done, their honest struggle to meet their debts and to avoid the breaking up of all their business, is not, of itself, to be construed into * * * a fraud upon the act." (Emphasis added.) (84 U.S. 473, 485-86, 21 L.Ed. 723, 727-28.)

Since the debtor in Wilson could not be expected — legally, morally, or practically — to prevent the preference, no logical inference arose from his failure to do so. (Wilson, 84 U.S. 473, 484, 21 L.Ed. 723, 727.) The court's concern for logic based on experience, as well as its sensitivity to the morals and realities of business practice, belies the arbitrary and rigid interpretation of the case that Geeslin suggests.

• 2 The principle to be derived from Wilson, we believe, is more modest and sensible. Intentions are hard to prove by direct evidence. The law therefore allows an evidentiary presumption that a debtor does not give a preference unless he intends to do so. Normally businesses do not just give away money for no reason. But the presumption may be overcome. Where there is evidence establishing an alternative motive for the debtor's acts, the inference is less weighty. The court should not be blinded to facts.

This interpretation may lead to delay, or even allow some unlawful preferences to escape detection. There is much to be said for a rule that does not look to actual intent. Many modern statutes (starting with the bankruptcy act of 1898) are more mechanical. But Indiana has adopted and maintained an intent test in its legislation long after the problems became apparent and other jurisdictions responded with reform acts; and we must apply the Indiana statute.

Since the evidence in this case is complex, we shall merely summarize the highlights and our conclusions. The witnesses were heard by a Federal judge, who turned out to have no jurisdiction. When the case recommenced in the Cook County circuit court, the parties stipulated that the witnesses, if called, would testify as they did in the Federal court. Consequently, the circuit court judge heard no live testimony. Although we are not bound to defer to the findings of the ...


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