Appeal by a debtor in a proceeding under Chapter 7 of the Bankruptcy Code from an order of the District Court for the Southern District of New York, Daivd N. Edelstein, Judge, which affirmed the entry of an order for relief under Chapter 7 by Bankruptcy Judge Lifland, 15 B.R. 755 (Bankr. S.D.N.Y. 1981).
Friendly and Newman, Circuit Judges, and Wyzanski, District Judge.*fn*
This appeal is from an order of Judge Edelstein in the District Court for the Southern District of New York which affirmed an order entered by Bankruptcy Judge Lifland, 15 B.R. 755 (Bankr. S.D.N.Y. 1981), granting a creditor's petition for involuntary bankruptcy under § 303(b)(2) and (h) of the Bankruptcy Code. The debtor contended that the order was improperly granted on two grounds: The first was the failure of the petitioning creditor to show that the "debtor is generally not paying such debtor's debts as such debts become due". The second was that the indebtedness to the petitioning creditor was disputed. Although such questions are often difficult to resolve, and the first is a close one here, we have concluded that the bankruptcy judge and the district court correctly granted relief in this case.
B.D. International Discount Corporation (B.D.I.) was in the business of trading bankers acceptances and other money market instruments. For more than ten years B.D.I. maintained its principal bank accounts at the Chase Manhattan Bank (Chase). On three separate occasions Chase mistakenly credited B.D.I.'s checking account with sums in the massive total amount of $7,268,745.92. These incorrect credits took place on October 3, 1979, October 4, 1979, and November 16, 1979, but were not discovered by Chase until late November, 1980. In November, 1980, B.D.I. transferred a total of $4.3 million from its account at Chase to a bank in Holland for the account of its sole stockholder, Segrex, S.A., a Swiss corporation. By the end of that month, B.D.I. had ceased operating, and had transferred its remaining assets of $240,000 into its attorney's escrow account. On November 28, 1980, a new entity, B.D. Discount of America, Inc. was created. This corporation engages in the same type of business and operates at the same location as B.D.I. had done.
On December 3, 1980, Chase demanded repayment from B.D.I. A series of negotiations took place between representatives of Chase and representatives of B.D.I. During the course of the subsequent bankruptcy proceedings, it was learned that in April, 1981, B.D.I. received a $710,000 payment from a third party in settlement of litigation, and that this money was not held in B.D.I.'s attorney's escrow account but was transferred to the account of Segrex as a loan. On May 13, 1981, after negotiations between Chase and B.D.I. had proved fruitless, Chase filed an involuntary petition in bankruptcy under § 303(b)(2) seeking the entry of an order for relief under Chapter 7 (liquidation) of the Bankruptcy Code, 11 U.S.C. § 303(b)(2).*fn1
B.D.I. moved that the bankruptcy court should dismiss the petition primarily on the ground that Chase did not qualify as a petitioner under § 303(b)(2) since its claim was contingent*fn2 or, alternatively, that the court should abstain under § 305.*fn3 B.D.I. also raised the question whether Chase had shown that B.D.I. was generally not paying its debts as they became due -- an issue more properly reserved for the trial under § 303(h)*fn4 -- and the bankruptcy judge dealt with this in his opinion denying the motion to dismiss, 13 B.R. 635, 638-39 (Bankr. S.D.N.Y. 1981), as well as in his opinion after the trial, 15 B.R. at 759-63 (Bankr. S.D.N.Y. 1981). In the list of creditors B.D.I. filed pursuant to court order and Bankruptcy Rule 104(e), it named four identified creditors, whose claims were stated to be "contingent, disputed, and unliquidated" and "three or fewer Unidentified Beneficial Owners of certain GNMA pool securities (identities and addresses unknown)". The former group included Chase and Citibank, N.A. The latter appeared at the hearing and represented that it was owed "at least $2300.00" by B.D.I. In re B.D. International Discount Corp., supra, 13 B.R. at 639. B.D.I. conceded in open court that at the time of its motion to dismiss the petition, the law firm of Willkie, Farr & Gallagher had been a creditor in the amount of $75,000, id., but stated that the law firm's claim had been paid by Howard O'Flynn, a former officer of B.D.I. In addition, the City of New York filed a Proof of Claim of $43,320.00 for unpaid occupancy and corporation taxes, some of which had been unpaid since June, 1977. Finding that Chase's claim was not contingent and that there was no sound basis for abstention, the Bankruptcy Judge denied B.D.I.'s motion for dismissal or abstention but permitted it to file an answer to the petition within five days "limited to the statutory grounds set forth in § 303(h)(1)(2)." 13 B.R. at 640.
Under the mistaken impression that the denial of its motion to dismiss would preclude it from contesting at the trial the validity of the Chase claim for the purposes of 11 U.S.C. § 303(h)(1), B.D.I. took an interlocutory appeal to the District Court for the Southern District of New York. That court, Sofaer, J., held that B.D.I. was not precluded from later contesting the validity of the Chase claim at the § 303(h)(1) trial, and went on to say that "the Bankruptcy Judge should be doing something to permit himself at least to know that there is at least a substantial basis for the debt, something like that, even if it is not a definitive determination that the debt is owing."
Thereafter a trial was held pursuant to § 303(h). Chase presented persuasive testimony concerning the validity of its claim. Specifically, William Aimetti, the executive responsible for securities services at the bank carefully documented, through testimony and internal memoranda kept in the ordinary course of business, the nature of Chase's claim against B.D.I. Bankruptcy Judge Lifland found this testimony to be both "competent and credible." 15 B.R. at 762. In addition to this documentation, Aimetti testified to a telephone conversation between himself and Rudolfo Cusamano, then president of B.D.I., in which Cusamano acknowledged the accuracy of bank records which summarized and documented the three transactions that gave rise to the Chase claims but sought to arrive at a mutually satisfactory schedule of repayments, 15 B.R. at 761. Also of significance were financial statements of B.D.I., prepared by B.D.I.'s accountants, which contained the following entry: "Payable to Bank $7,269,052." The Bankruptcy Court properly considered this to be a "damaging admission", 15 B.R. at 762.*fn5
In contrast, while formally denying the validity of its debt to Chase, B.D.I. "did not offer a scintilla of substantive proof to rebut the Chase claim", 15 B.R. at 762.*fn6 On the basis of the evidence presented by Chase and the absence of any contrary evidence, Bankruptcy Judge Lifland concluded that "Chase clearly established a 'substantial basis' for its claim", 15 B.R. at 762, and therefore included the claim in his determination whether B.D.I. was generally not paying its debts under 11 U.S.C. § 303(h)(1). Final adjudication of the validity of the Chase claim was postponed and is to be resolved in a subsequent trial. 15 B.R. at 764 n.26.
The Bankruptcy Court then went on to conclude that B.D.I. was generally not paying its debts as they became due, basing its conclusion on what it described as the "totality of the record before the Court." 15 B.R. at 764.*fn7 The principal factors that led to this conclusion were: first, that B.D.I. had ceased its business operations entirely and had placed all of its assets in a lawyer's escrow account; second, that the past due debt to Chase comprised an exceedingly large share of the debtor's assets; and, third, that the Bankruptcy Court considered there were "special circumstances" that made the administration of this case in the bankruptcy court "appropriate." Among these special circumstances were the transfer of $4.3 million out of the country to Segrex, the subsequent $710,000 loan to Segrex, and the creation of B.D.I.'s successor entity, B.D. Discount of America. 15 B.R. at 764. Accordingly it granted relief under § 303(h).
The debtor appealed to the district court which affirmed substantially on the opinion of the Bankruptcy Judge. It then appealed to this court.
The provisions of § 303(h) were an innovative provision of the Bankruptcy Code, replacing the acts of bankruptcy required for involuntary bankruptcy by § 3a(1)-(6) of the Act of 1898. Unhappily the language "the debtor is generally not paying such debtor's debts as such debts become due" is woefully lacking in clarity.
The legislative history sheds a limited amount of light. Putting aside the portion of the history relating to what is now § 303(h)(2), the story runs as follows: The bill recommended by the Commission on the Bankruptcy Laws of the United States, 93d Cong., 1st ...