Schoenmann v. Bank of the West (In re Tenderloin Health)

Ninth Circuit majority goes for a difficult issue when an easier answer was available.

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Case Type:
Case Status:
14-17090 (9th Circuit, Mar 07,2017) Published
Ninth Circuit holds that courts may entertain hypothetical preference actions within Section 547(b)(5)’s hypothetical liquidation when such an inquiry is factually warranted, supported by appropriate evidence, and so long as the hypothetical preference action would not result in a direct conflict with another section of the Bankruptcy Code. In this case, Bank received a preference, despite it being full secured by funds in the Debtor's deposit account because the transfer of funds into the deposit account was itself a hypothetical preference.
Procedural context:
Trustee sued to avoid preference, and defendant Bank moved for summary judgment. The bankruptcy court granted the Bank's motion, and the district court affirmed. The Ninth Circuit reversed. A concurring opinion would have remanded the case to district for further evaluation of the Bank's defenses to the hypothetical preference.
Bank made loans to the Debtor secured by the Debtor's deposit accounts with the Bank. The Debtor sold property, and used the sale proceeds to pay off the bank loan ($190,595), and deposited the rest into its bank account ($526,407), which deposit thereby became subject to the Bank's lien (except that the Bank had at the same time been paid off). About a month later, the Debtor filed a Chapter 7 petition. 90 days prior to the petition, the Debtor had $173,015 in its deposit account at the Bank. The Ninth Circuit reasoned that, in a hypothetical liquidation, the payment to the Bank and the deposit arising from the sale proceeds were both potentially avoidable, and that in effect the Bank's position went from being secured in the amount of $173,015 to fully paid during the preference period, and thus the Bank did receive more than it would have received under the "liquidation test" or "greater amount test" of 547(b)(5).
A. WALLACE TASHIMA and MILAN D.SMITH, JR., Circuit Judges, and EDWARD R. KORMAN, District Judge, sitting by designation.

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