United States District Court, N.D. California
ORDER AFFIRMING BANKRUPTCY COURT
JEFFREY S. WHITE, District Judge.
This matter comes before the Court upon consideration of the appeal filed by E. Lynn Schoenmann ("Trustee") from the Bankruptcy Court's Order granting a motion for summary judgment filed by Bank of the West ("BOTW") in an adversary proceeding captioned Schoenmann v. Bank of the West, AP No. 12-03171 (the "Adversary Proceeding").
Pursuant to Civil Local Rule 16-4, the Court deems this case submitted on the papers without oral argument. After review of the record on appeal, consideration of the parties' papers, and the relevant legal authority, the Court hereby AFFIRMS the Bankruptcy Court's ruling on BOTW's motion for summary judgment.
The following facts are undisputed, unless otherwise noted. In May 2009, BOTW extended a $200, 000 revolving line of credit to the debtor, Tenderloin Health ("Debtor"). In August 2011, BOTW loaned Debtor an additional $100, 000. These loans were secured by Debtor's personal property, including its deposit accounts with BOTW. (Trustee's Excerpts of Record ("Trustee EOR"), Tab 5, Request for Judicial Notice, Exhibit E, Declaration of Hazim Elbgal ("Elbgal Decl."), ¶¶ 4-7, Exs. A-D.)
On April 11, 2012, Debtor sold its only real property for approximately $1, 295, 000.00. On April 21, 2012, Debtor's deposit accounts with BOTW had a balance of $173, 015.00.
On June 13, 2012, escrow closed on the sale of Debtor's real property (the "Transfer Date"). On that day, Debtor used a portion of that sale to pay off the $190, 595.50 it owed BOTW (the "Debt Payment"). (Elbgal Decl., ¶ 9; Trustee EOR, Tab 8, Declaration of David Hernandez ("Hernandez Decl."), ¶ 3.) On that same day, Debtor transferred proceeds of the sale in the amount of $526, 402.05 into its deposit accounts with BOTW (the "Deposit Payment"). (Hernandez Decl., ¶ 3.) Immediately prior to the simultaneous Debt Payment and the Deposit Payment, Debtor's deposit accounts had a balance of $51, 844.11. After the Debt Payment and Deposit Payment, those accounts had a balance of $576, 603.03. (Elbgal Decl., ¶¶ 16-17, Exs. K-L; Trustee EOR, Tab 9, Supplemental Declaration of Hazim Elgbal, ¶¶ 4-5, Ex. A.)
On July 20, 2012, Debtor filed its voluntary petition for bankruptcy relief under Chapter 7 of the United States Bankruptcy Code (the "Petition Date").
On December 12, 2012, Trustee filed the Adversary Proceeding against BOTW, in which the Trustee alleged the Debt Payment was a preferential transfer. (Trustee EOR, Tab 1, Complaint.) On June 27, 2013, BOTW moved for summary judgment. It presented two theories in support of its argument that the Trustee would not be able to establish an essential element of her preference claim. First, BOTW argued that in a hypothetical liquidation proceeding, in which the Debt Payment was not made, the Debtor's deposit accounts contained sufficient funds on the Petition Date to satisfy its debt to BOTW in full. Second, BOTW argued that even if its lien on the deposit accounts was partially avoidable, it had a right of set-off which would have enabled it to receive the same amount in a hypothetical liquidation proceeding as it did from the Debt Payment.
On July 31, 2013, following a hearing, the Bankruptcy Court granted BOTW's motion. (Trustee EOR, Tab 10 ("Tentative Ruling"), Tab 11 (Transcript of Hearing ("Tr.")), Tab 12 (Order Granting Motion for Summary Judgment ("Order").) The Bankruptcy Court found the BOTW's right to set-off argument persuasive, and granted summary judgment in BOTW's favor. The Bankruptcy Court summed up its reasoning as follows:
[BOTW] could have asserted a right to setoff in a hypothetical Chapter 7 liquidation in which the Debt Payment had not been made. Since there would have been sufficient funds in the Deposit Account to satisfy [BOTW's] claim in full, [BOTW] would have received the same in the hypothetical liquidation as it did as a result of the Debt Payment. Because of this, [Trustee] cannot establish at least one necessary element of her preference claim.
(Tentative Ruling at 6:1-9.)
The Trustee filed a timely notice of appeal and elected to proceed before this Court. The Court will address additional ...