Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_05-cv-02430/USCOURTS-cand-4_05-cv-02430-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy cases and proceedings under title 11

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

DEUTSCHE BANK SECURITIES INC., f/k/a

DEUTSCHE BANC ALEX BROWN, INC.,

Appellant,

v.

JOHN T. KENDALL, AS CHAPTER 7

TRUSTEE,

Appellee.

___________________________________

IN RE:

CONSILIENT, INC. aka INFOCANVAS

SOFTWARE, INC.,

Debtor.

 /

No. C 05-2430 CW

ORDER AFFIRMING

JUDGMENT OF THE 

BANKRUPTCY COURT 

Bankruptcy Case No.

02-40383 NK

Appellant Deutsche Bank Securities, Inc. (DBS) appeals the

bankruptcy court's judgment granting Appellee Chapter 7 Trustee

John T. Kendall's motion for summary judgment. Having considered

Case 4:05-cv-02430-CW Document 13 Filed 02/14/06 Page 1 of 9
United States District Court

For the Northern District of California

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1 The parties do not dispute the facts of the case.

2

all of the papers filed by the parties, the Court affirms the

ruling of the bankruptcy court. 

BACKGROUND

On October 10, 2000, Jonathan Hare, an insider of Consilient,

Inc., the bankrupt debtor, borrowed $1.5 million from DBS (the Hare

Loan), providing Evolve stock as collateral.1 On the same day,

Hare loaned that $1.5 million to Consilient, which in return gave

Hare an unsecured subordinate promissory note (Sub Note) due six

months later. About a month thereafter, Hare executed a pledge

agreement whereby he gave the Sub Note to DBS as additional

security for the Hare Loan. On April 4, 2001, shortly before the

Sub Note was due, Hare and Consilient extended its maturity date

and increased Consilient's debt to $1.6 million. Consilient also

opened an account at DBS with a $1.6 million balance and executed a

guaranty granting Hare and DBS authority to draw upon Consilient's

DBS account to satisfy the Sub Note. 

In the summer of 2001, the Oak Hill Entities loaned Consilient

about $4.25 million. Oak Hill perfected a blanket security

interest on all of Consilient's assets, including all of its

investment property. 

By early October, 2001, Consilient was in default on some of

the Oak Hill loans and Oak Hill demanded the $1.6 million in

Consilient's DBS account. Hare and DBS disputed Oak Hill's right

to the money. On October 19, 2001, DBS froze the funds in

Consilient's account, informing Oak Hill and Hare that, because of

Case 4:05-cv-02430-CW Document 13 Filed 02/14/06 Page 2 of 9
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their threats to sue, DBS would give them notice of any change in

its position before disbursing the funds to itself or anyone else. 

On November 30, 2001, after no progress was made among the parties

towards resolving their differences, DBS transferred $1.38 million

from Consilient's account to DBS to repay the Hare Loan, leaving a

residue in the debtor account of approximately $300,000. On the

same day, shortly after DBS transferred the $1.38 million, Oak Hill

foreclosed on all of its collateral with Consilient, including

Consilient's DBS account. DBS and Oak Hill ultimately settled

their dispute by splitting the $1.38 million between them. 

On January 23, 2002, Consilient filed a voluntary Chapter 7

bankruptcy and the Trustee was duly appointed. Thereafter, Oak

Hill obtained relief from the automatic stay to complete the

foreclosure and obtain the $300,000 remaining in Consilient's DBS

account. 

On April 25, 2003, pursuant to 11 U.S.C. §§ 547(b), 548(a) and

550(a), the Trustee filed a Complaint to Avoid and Recover

Preferential Transfers, or in the Alternative, Avoid and Recover

Fraudulent Transfer, against defendants DBS and Hare. On April 19,

2004, the Trustee brought a motion for summary judgment to resolve

all claims in the Complaint, contending that DBS had failed to

raise a valid defense to avoid a finding of a preference under 11

U.S.C. § 547. 

DBS opposed the motion. DBS asserted that because Oak Hill's

security interest covered all of Consilient's assets, including the

$1.38 million, none of that amount was available to pay unsecured

creditors. DBS contended that its transfer of the $1.38 million

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thus was not a preference because it did not diminish the estate

assets available to pay unsecured creditors, despite its concession

that the requirements of § 547(b) were otherwise met and despite

its failure to assert any § 547(c) defenses to avoidance of a

finding of preferential transfer.

On July 6, 2004, the bankruptcy court issued an order granting

the Trustee's summary judgment motion and finding that the transfer

of funds to DBS was a preferential transfer. On July 9, 2004, DBS

filed this appeal of the bankruptcy court's order granting summary

judgment. 

STANDARD OF REVIEW

A bankruptcy court’s decision to grant summary judgment is

reviewed de novo. In re Nourbakhsh, 162 B.R. 841, 843 (9th Cir.

BAP 1994) (citing Jones v. Union Pac. R.R. Co., 968 F.2d 937, 940

(9th Cir. 1992)); In re Baird, 114 B.R. 198, 201 (9th Cir. BAP

1990). A reviewing court must determine whether the bankruptcy

court correctly concluded that there was no genuine issue of

material fact and that the moving party was entitled to judgment as

a matter of law. Nourbakhsh, 162 B.R. at 843 (citing Baird, 114

B.R. at 201). 

DISCUSSION

Neither party disputes the facts found by the bankruptcy

court. Accordingly, this Court reviews de novo the law governing

preferential transfers and the application of that standard to the

undisputed facts as found by the bankruptcy court. 

The Bankruptcy Code allows a bankruptcy trustee to void

payments made within ninety days of the filing of the bankruptcy

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petition under certain circumstances. Section 547(b) of the

Bankruptcy Code establishes the circumstances under which a payment

is an avoidable preference: 

Except as provided in subsection c. of this section, the

trustee may avoid any transfer of an interest of the

debtor in property--

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the

 debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made--

(A) on or within 90 days before the date of the

filing of the petition; or

(B) between ninety days and one year before the date

of the filing of the petition, if such creditor at

the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such 

creditor would receive if--

(A) the case were a case under chapter 7 of this

title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to 

the extent provided by the provisions of this title.

11 U.S.C. § 547(b). The parties do not dispute that the transfer of

Consilient's account to DBS fulfills these requirements. Nor does

DBS assert any of the defenses to avoidance of transfer enumerated

in 11 U.S.C. § 547(c).

Instead, DBS asks the Court to apply the Ninth Circuit's

diminution-of-the-estate doctrine, which is normally used to

determine whether property that is transferred belongs to the debtor

for purposes of § 547. In re Superior Stamp & Coin Co., Inc., 223

F.3d 1004, 1007 (9th Cir. 2000).

The diminution of estate doctrine has been developed to test

whether a debtor controlled transferred property to the extent

that he owned it: Essentially, the transfer must diminish

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directly or indirectly the fund to which creditors of the same

class can legally resort for the payment of their debts, to

such an extent that it is impossible for other creditors of

the same class to obtain as great a percentage as the favored

one.

In re Kemp, 16 F.3d 313, 316 (9th Cir. 1994).

The Ninth Circuit cases cited by DBS discuss use of the

diminution-of-the-estate doctrine to determine whether transfers by

a debtor of borrowed funds constitute transfers of the debtor's

property for purposes of § 547, an issue that is undisputed here. 

See id.; In re Nucorp Energy, Inc., 902 F.2d 729, 732-33 (9th Cir.

1990) (stating that property did not belong to debtor for purposes

of § 547 because the estate was not diminished by the transfer); In

re Futoran, 76 F.3d 265, 267-68 (9th Cir. 1996) (concluding that

prepayment of future spousal obligations diminished the value of

the estate). However, none of these cases implies that this

doctrine should be applied as an alternative to § 547(b). Instead,

these cases discuss the diminution-of-the-estate doctrine in

relation to § 547(c) defenses not asserted here. Cf. In re Nucorp

Energy, Inc., 902 F.2d at 732-33 (discussing diminution of estate

in the context of § 547(c)(1) defense); In re Futoran, 76 F.3d at

267-68 (addressing diminution of estate in the context of

§ 547(c)(4) defense). The Ninth Circuit's use of the doctrine does

not support ignoring the criteria set forth by § 547(b) for

avoiding transfers. 

Moreover, applying the requirements of § 547(b) to the facts

of this case does not undermine the equitable purpose of preference

law to accomplish proportionate distribution of the debtor's assets

among its creditors. DBS relies on In re Hanson Restaurant, Inc.,

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155 B.R. 758 (Bankr. D. Minn. 1993). In Hanson, the trustee sued a

guarantor to avoid an alleged preferential transfer of collateral

to an undersecured creditor. The court held that "a transfer to an

undersecured, perfected, first priority creditor toward

satisfaction of its debt, cannot be a preferential transfer to

either the obligee or its guarantor." Id. at 760. The court

stated that such a transfer does not diminish the estate. Id. 

The Court is unpersuaded by Hanson. Under the Bankruptcy

Code, undersecured creditors are treated as holding two claims; one

fully secured and the other unsecured. 11 U.S.C. § 506(a); In re

Fox, 229 B.R. at 165 n.2; see also In re McCormick, 5 B.R. 726,

729-30 (Bankr. N.D. Ohio 1980) (finding that preferential treatment

of transfers to undersecured creditors comports with standard

business practice); In re Ludford Fruit Products, Inc., 99 B.R. 18,

23 (Bankr. C.D. Cal. 1989) (concluding that an undersecured

creditor received greater payment on its unsecured claim than other

unsecured creditors and that transaction satisfied the requirements

of an avoidable preference); In re Auto Train, 800 F.2d 1153, 1157

(D.C. Cir. 1986) (declaring that payments to an undersecured

creditor are attributable to the unsecured portion of the debt

despite evidence of the parties' contrary intent). In such a

situation, pre-petition transfers received by the undersecured

creditor are deemed preferential because there is a presumption

that an undersecured creditor first applies any transfer it

receives from the debtor to the unsecured portion of the debt. 

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CONCLUSION

For the foregoing reasons, the decision of the bankruptcy

court granting the Trustee's motion for summary judgment is

affirmed. 

IT IS SO ORDERED.

Dated: 2/14/06

 

CLAUDIA WILKEN

United States District Judge

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C-05-2420 CW

U.S. Bankruptcy Court

1300 Clay Street 

Suite 300 

P.O. Box 2070 

Oakland, CA 94604 

Randall J. Newsome

U.S. Bankruptcy Judge

1300 Clay Street, Suite 300 

P.O. Box 2070 

Oakland, CA 94604 

Case 4:05-cv-02430-CW Document 13 Filed 02/14/06 Page 9 of 9