The opinion of the court was delivered by: BRENNAN
This action involves the determination of the existence of a preference under the provisions of the Bankruptcy Act in the matter of the payment of $ 8,050 to the two defendants within a period of four months prior to an adjudication in bankruptcy. The facts are undisputed. They are set out below in narrative form.
On Jan. 29, 1951 the Little Falls Dairy Co., Inc. (hereinafter referred to as 'Little Falls' or the 'bankrupt') entered into a written agreement with Gimpel Farms Inc. whereby Little Falls agreed to sell and deliver to Gimpel Farms, who agreed to purchase, four tanks of milk weekly consisting of not less than 350 cans of milk per tank, commencing Mar. 1, 1951 and terminating on Feb. 28, 1952. Gimpel Farms Inc. agreed to make payment for the milk so delivered weekly following receipt of bill from the seller. The sales agreement granted to Gimpel Farms the option of renewing the contract for an additional period of one year from the expiration date thereof.
On the same date, the defendants entered into a written agreement to loan to Little Falls the sum of $ 30,000 to be repaid at the rate of $ 1,000 per month, commencing Apr. 1, 1951 with interest at the rate of 7 1/2% per annum.
On Feb. 20, 1952 the sales agreement between Little Falls and Gimpel Farms Inc. was extended an additional year in accordance with the option contained in the original agreement.
On July 24, 1951 an additional writing termed an 'agreement' was executed by Little Falls and the two individual defendants. The body of the document is set out below.
'Now, Therefore, it is agreed by and between the parties hereto, as follows:
'1. That the said agreement dated January 29th, 1951 be deemed modified by the addition of the following provisions:
'It is further understood and agreed that in the event of failure to deliver milk from Little Falls Dairy Co. Inc. as per contract at any time it is then agreed that Gimpel Farms, Inc. is then authorized to pay to David Gimpel and Moe Bolstein any and all debts and claims owing to them by Little Falls Dairy Co., Inc. and remit the balance, if any, to Little Falls Dairy Co., Inc.; to the extent of such payment to David Gimpel and Moe Bolstein, the said account is assigned to David Gimpel and Moe Bolstein.
'In all other respects the said agreement dated the 29th day of January, 1951 shall be deemed in full force and effect.'
As far as the record discloses, the obligations of all parties under the agreements were performed in accordance with their terms until Jan. 25, 1953 when Little Falls failed to deliver milk to Gimpel Farms Inc. in accordance with the original sales agreement. On that date Gimpel Farms was indebted to Little Falls for milk delivered in an amount somewhat in excess of $ 8,050. At the same time Little Falls was indebted to Messrs. Bolstein and Gimpel on account of the loan agreement, above referred to, in an amount of $ 8,050. On Jan. 28, 1953 Gimpel Farms Inc. paid to the defendant Bolstein $ 4,025 and a like sum to defendant Gimpel. Such payments were made under the provisions of the agreement of Jan. 24, 1951, which is set forth above.
Little Falls filed a petition under Chapter 11 of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. in the Clerk's office of this district on Feb. 16, 1953. The plan submitted failed and Little Falls was adjudicated a bankrupt on Apr. 22, 1953. A trustee was thereafter appointed who brings this action against the individual defendants to recover from each the sum of $ 4,025. The action proceeds upon the theory that the payments, above referred to, were made within a period of four months prior to bankruptcy and constitute a preference under the provisions of Sec. 60 of the Bankruptcy Act, 11 U.S.C. § 96.
The only additional relevant fact, which should be added, is that at all of the times pertinent here, the individual defendants were officers and directors of Gimpel Farms Inc. This fact accounts for the knowledge that Gimpel Farms had of the existence of the agreement of July 24, 1951. The record is otherwise entirely silent as to any formal notification of such agreement given to Gimpel Farms.
The above facts are readily understood and there is no problem in connection therewith. The construction and application of the agreement of July 24, 1951 is actually the crux of this litigation. No question is raised but what the problem here is to be solved under the provisions of New York State law as construed and applied in New York State court decisions. Manchester Nat. Bank v. Roche, 1 Cir., 186 F.2d 827; In re Barnett, 2 Cir., 124 F.2d 1005, at page 1008, Okin v. Isaac Goldman Co., 2 Cir., 79 F.2d 317.
Before attempting any discussion of the law which must be applied, it seems logical to consider and interpret the agreement of July 24, 1951. It is plain that the primary purpose of the agreement is to afford the individual defendants additional security to insure the ...