Sarachek v. Luana Savings Bank

‘Ordinary course’ defense failed when overdrafts spiked during the preference period.

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Case Type:
Case Status:
16-1856, 16-1955 (8th Circuit, Jun 15,2017) Published
Affirming the district court (N.D. Iowa), (1) deposits that were applied against "true overdrafts," as determined under Iowa law, were avoidable as preferences; whereas deposits that were applied against intraday overdrafts were not avoidable because the bank was a "mere conduit" for those deposits; (2) the bank did not have an ordinary course of business defense because the number and amount of overdrafts during the 90-day preference period were significantly greater than during the 1-year look-back; & (3) the bank could properly net the overdraft debt against funds in another account.
Procedural context:
The Chapter 7 trustee sued the defendant bank under §§ 547 and 550 to avoid and recover deposits made into the debtor's checking account during the 90-day preference period. The bankruptcy court found that the trustee could recover some, but not all, of the deposits. The district court affirmed, and the parties cross-appealed.
The debtor maintained two bank accounts at the defendant bank (Luana), a checking account and another, more static account. During the 90-day preference period, the checking account balance was always negative. Regardless, Luana honored the debtor's overdrafts. Unfortunately for Luana (at least with respect to legal fees), the number and amount of overdrafts was significantly greater than in the year look-back period. Fortunately for Luana, the debtor kept $1.4MM in the other account during the preference period. Shortly before the debtor filed its Chapter 7 petition, Luana "netted" the $1.4MM in the debtor's account against the overdraft debt in the debtor's checking account. Even though there was no written evidence of a netting agreement, the debtor's testified that the debtor treated the checking account and the other account as "netted."

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