# U ni te d S ta te s Co ur t of A pp ea ls

For the Eig hth Circu it

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No. 1 6- 18 56

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In re: Agri Pro ces so rs , Inc

.

ll ll ll ll ll ll ll ll ll ll l Deb to r

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Jo se ph E. Sarach ek , in hi s ca pa ci ty as Ch ap te r 7 Tru st ee

ll ll ll ll ll ll ll ll ll ll l

App el le e

v.

Lua na Sav in gs Ban k

ll ll ll ll ll ll ll ll ll ll l

App el la nt

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Am eri can Ban ke rs Ass oc ia ti on ; Io wa Ban ke rs Ass oc ia ti on

ll ll ll ll ll ll ll ll ll ll l

Amici on Beha lf

of App el la nt (s

)

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No. 1 6- 19 55

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In re: Agri Pro ces so rs , Inc

.

ll ll ll ll ll ll ll ll ll ll l Deb to r

----- ----- ----- ----- ----- -----Jo se ph E. Sarach ek , in hi s ca pa ci ty as Ch ap te r 7 Tru st ee

ll ll ll ll ll ll ll ll ll ll l

App el la nt

v.

Lua na Sav in gs Ban k

ll ll ll ll ll ll ll ll ll ll l

App el le e

----- ----- ----- ----- ----- -----

Am eri can Ban ke rs Ass oc ia ti on ; Io wa Ban ke rs Ass oc ia ti on

ll ll ll ll ll ll ll ll ll ll l

Amici on Beha lf

of App el le e(s

)

__ __ __ __ __ __
App eal s fr om

Uni te d S ta te s Di st ric t Co ur t fo r th e Nor th ern Dis tri ct of I owa - Dub uq ue

__ __ __ __ __ __

Su bm it te d: Jan ua ry

12 , 20 17
Fil ed : J un e 1 5, 2 01 7

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Befo re LOKEN, BEAM, and BENTON, Circu it Ju dg es

.

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BENTON, Circu it Ju dg e.

In th e 90 da y s befo re fil in g fo r ba nk ru pt cy , Agr ip ro ces so rs , In c., wire d fu nd s

co ve rin g ov erd raft s at Lua na Sav in gs Ban k. The ba nk ru p t c y tru st ee, Jo se ph E.

Sara ch e k, arg ue s th os e ov erd raft -co ve rin g de po si ts are av oi da bl e tra ns fers

-2

-reco ve rab le fro m Lua na

. The ba nk ru pt cy co ur t fo un d Sara ch ek co ul d reco ve r so m e 1

de po si ts bu t no t ot he rs

. S a rach ek an d Lua na cro ss -ap pe al ed

. The di st ric t co ur t 2

affi rm ed

. The pa rti es ag ai n cro ss -ap pe al

. Hav in g juri sd ic ti on un de r 28 U.S.C.
§§ 15 8( d) (1 ) an d 1 29 1, t hi s co ur t af fir m s.

I.

Agr ip ro ces so rs ha d two acco un ts wit h Lua na rel ev an t he re— acco un t 14 30 (a

ch eck in g acco un t) an d acco un t 36 77 88 (wh os e pu rp os e th e pa rti es di sp ut e )

. Th is

ap pe al is ab ou t ov erd raft s of th es e acco un ts

. Lua na ’s po li cy w a s t o pr ov is io na ll y

se tt le al l ch eck s on Agr ip ro ces so rs ’ ch eck in g acco un t an d de bi t th at acco un t. W he n

pr ov is io na l se tt le m en t/ de bi ti ng cau se d or co nt rib ut ed to a ne ga ti ve acco un t ba la nc e,

an “ in tra da y ov erd raft ” oc cu rred

. By Io wa la w, Lua na ’s pr ov is io na l se tt le m en t di d 3

no t be co m e fin al un ti l m id ni gh t th e ne xt bu si ne ss da y

. Io w a Cod e §§ 55 4.4 10 4( 1) (j),

55 4.4 30 1

. Lua na ge ne ral ly le t pr ov is io na l se tt le m en ts be co m e fin al at th e m id ni gh t

de ad li ne , ev e n i f t h e y cau se d or co nt rib ut ed to a ne ga ti ve ba la nc e. W he n Lua na
al lo wed pr ov is io na l se tt le m en ts cau si ng or co nt rib ut in g to a ne ga ti ve ba la nc e to

be co m e fin al at th e m id ni gh t dead li ne , a “ tru e ov erd raft ” oc cu rred

. Thro ug ho ut th e

90 da y s be fo re Agr ip ro ces so rs pe ti ti on ed fo r ba nk ru pt cy , it de po si te d fu nd s to co ve r
bo th in tra da y

an d t ru e o ve rd raft s.

Dur in g th e 90 -d ay pr efer e n c e p eri od —Au gu st 6, 20 08

, to Nov em be r 4,

20 08 —t he ch eck in g acco un t’s ba la nc e flu ct ua te d bu t was al way s ne ga ti ve

. Fo r m os t

The Hon or ab le Tha d J. Co ll in s, Ch ie f Ju dg e, Uni te d St at es Ban kr up tc y Co ur t 1
fo r th e Nor th ern Dis tri ct of I owa

.

The Hon or ab le Lin da R. Rea de

, th en Ch ie f Ju dg e, Uni te d St at es Dis tri ct Co ur t 2
fo r th e Nor th ern Dis tri ct of I owa

.

The di st ric t co ur t ap pl ie d Io wa la w to Agr ip ro ces so rs ’ ba nk in g wit h Lua na

. 3
The pa rti es do no t ch al le ng e th at ap pl ic at io n.

-3

-of th e pe rio d, acco un t 36 77 88 ha d $1 .4 m il li on in it

. Lua na sa y s it “ ne tt ed ” th e two

acco un ts

, co ns id eri ng th e 36 77 88 fu nd s whe n de te rm in in g whe th er th e ch eck in g

acco un t was ov erd rawn

. Pu t an ot he r way , Lua na sa y s t ha t so lo ng as th e ch eck in g

acco un t ha d m or e th a n n e g a ti ve $1 .4 m il li on , it tre at ed Agr ip ro ces so rs as ha vi ng a

po si ti ve ba la nc e (an d th us tre at ed Agr ip ro ces so rs as if no ov erd raft s oc cu r r e d ).

Sara ch ek di sp ut es th at Luan a p ro pe rly “ ne tt ed ” th e two acco un ts

.

Near th e en d of th e pr efer en ce pe rio d, Lua na tra ns ferr ed th e $1 .4 m il li on fro m

acco un t 3 67 78 8 t o t he ch eck in g a cco un t.

Agr ip ro ces so rs pe ti ti on ed fo r Ch ap te r 7 ba nk ru pt cy

. Sara ch ek fil ed to reco ve r
de po si ts co ve rin g bo th in tra da y an d tru e ov erd raft s, as well as th e $1 .4 m il li on Lua na

tra n s f erre d th e ch eck in g acco un t. Lua na arg ue d no ne of th e de po si ts were

reco ve rab le

, r ai se d affi rm at iv e de fen se s, an d co nt en de d th e $1 .4 m il li on was no t

reco ve rab le be cau se it was a pr ot ect ed se to ff. The ba nk ru pt cy co ur t fo un d Sara ch ek

co ul d reco ve r th e tru e ov erd raft s bu t no t th e in tra da y ov erd raft s. It reject ed Lua na ’s

affi rm at iv e de fen s e s. And it fo un d th at se to ff was im pr op er bu t di d no t affe ct

Sara ch ek ’s reco ve ry

. On cro ss -ap pe a l s , th e di st ric t co ur t affi rm ed th e ba nk ru pt cy

co ur t. It he ld th at th e ba nk ru pt cy co ur t erre d in fin di ng th e se to ff imp r o p e r , bu t

co nc lu de d th at erro r di d no t affe ct Sara ch ek ’s re c ov ery. The pa rti es ag ai n cro ss

ap pe al

.

II.

“ Thi s co ur t sit s as a se co nd co ur t of rev ie w in ba nk ru pt cy m at te rs , rev ie win g
in te rp ret at io ns of l aw de no vo an d fact ua l fin di ng s for clea r erro r.” In re Pee t , 81 9

F.3 d 10 67

, 10 69 (8 th Ci r. 20 16 ) (in te rn al qu ot at io n m ark s om it te d)

. Und er cl ear erro r

rev ie w, th is co ur t wil l “o v e r t ur n a fact ua l fin di ng on ly if it is no t su pp or te d by

su bs ta nt ia l ev id en ce i n th e reco rd , i f it is ba se d o n a n e rro ne ou s v ie w of t he law, o r

-4

-if we are le ft wit h th e de fin it e an d fir m co nv ic ti on th at an erro r was m ad e.” Linc ol n

Pro vi si on , Inc . v. Puret

z , 77 5 F .3d 10 11 , 10 14 (8t h C ir. 2 01 5)

.

III.

A ba nk ru pt cy tru st ee m ay “ av oi d” a de bt or ’s tra ns fer of a pr op ert y in te res t (1 )

“ to or fo r th e be ne fit of a cred it or ”; (2 ) “ fo r or on acco un t of an an te ced en t de bt owe d
by t h e d eb to r be fo re su ch tra ns fer was m ad e”; (3 ) “ m ad e whi le th e de bt or was
in so lv en t” ; (4 ) “ m ad e

. . . wit hi n 90 da y s be fo re th e da te of th e fil in g of th e pe ti ti on ”;

an d (5 ) “ th at en a b l e s [ th e] cred it or to rece iv e m or e” th an it wou ld rece iv e un de r
Ch ap te r 7 if th e tra ns fer ha d no t be en m ad e. 11 U.S.C. § 54 7( b)

. The tru st ee ha s th e
b u r de n to pr ov e a tra ns fer is av oi da bl e. § 54 7( g)

. The tru st ee m ay no t av oi d a

tra ns fer i f a cre di to r pr ov es an ex cep ti on ap pl ie s. § 5 47 (c), (g )

.

If a tra ns fer is av oi da bl e, th e tru st ee m ay reco ve r it fro m “ (1 ) th e in it ia l

tra ns fere e of su ch tra ns fer or th e en ti ty fo r who se be ne fit su ch tra ns fer was m ad e; or (2 ) an y im m ed ia te or m ed ia te tra n s f e r ee of su ch in it ia l tra ns fere e.” § 55 0( a)

. The

tru st ee m ay no t reco ve r fro m a “ m ere co nd ui t fo r an av oi da bl e tra ns fer.” In re

Ree ves , 65 F.3d 67 0, 6 76 (8t h C ir. 1 99 5)

.

IV.

The di st ric t co ur t fo un d Sara ch ek co ul d no t reco ve r Agr ip ro ces so rs ’ in tra da y

ov erd raft -co ve rin g de po si ts fro m Lua na fo r two in de pe nd en t reas on s. Fi rs t, it fo un d

th at Agr ip ro ces so rs ’ “ in tra da y ov erd raft s do no t gi ve ris e t o a n t eced en t de bt .” Se e § 54 7( b)(2 ) ; Law s v. Unit ed Mo

. Ba nk of

Ka ns as Ci ty

, N.A.

, 98 F.3 d 10 47

, 10 51 (8 th

Ci r. 19 96 ) (“ [R]ou ti ne ad va nc es ag ai ns t un co ll ect ed de p o si ts do no t crea te a ‘deb t’

to t h e ba nk .”). Seco nd

, “ wit h res pe ct to th e in tra da y ov erd raft s, th e Ban k

. . . was
fu nc ti on in g as a m ere co nd ui t.” Se e § 55 0( a) ; I n r e Ree ves , 65 F.3 d at 67 6. On

ap pe al

, Sara ch ek arg ue s th e in tra da y ov erd raft s are an te ced en t de bt

. Bu t he do es no t

-5

-arg ue th at Lua na was m or e th an a “ m ere co nd ui t” whe n i t rece iv ed in tra da y

ov erd raft -co ve rin g de po si ts

. Eve n if th is co ur t d eci de d t ha t th e in tra da y ov erd raft s

were an te ced en t de bt s, th e di st ric t co ur t’s “ m ere co nd ui t” fin di ng wou ld st a n d

,
pr ev en ti ng Sara ch ek fro m reco ve rin g in tra da y -o ve rd raft -co ve rin g de po si ts fro m

Lua na

. Thi s co ur t de cl in es to co ns id er Sara ch ek ’s an te ced en t-d eb t arg um en t be cau se
it wou ld no t affe ct th e ou tc om e of th is c a s e

. S e e In re Ra il wo rk s Co rp

. , 76 0 F.3 d

39 8, 40 3 (4 th Ci r. 20 1 4 ) ( “O f co ur se , if th e fu nd s are no t reco ve rab le un de r § 55 0,

th en it m at te rs no t whe th er th ey are av oi da bl e un de r § 54 7.” ). Se e al so In re Wi ll

ae rt
, 9 4 4 F.2 d 46 3, 46 4 (8 th Ci r. 19 91 ) (“ The fu nd am en ta l pu rp os e of se ct io n 54 7( b) ’s

av o i d a b l e pr efer en ce pr ov is io n is to res to re th e ba nk ru pt cy es ta te to it s

pr e-p refe ren ti al tra ns fer co nd it io n. Sect io n 55 0( a) is th e ve hi cl e th at al lo ws th e

tru st ee t o a cco m

pl is h t hi s.”)

. 4

V.

The di st rict co ur

t fo und Sa ra ch ek co uld re co ve r A gr ipr oc es sor s’ tr ue -o ve rd raft

co ve rin g de po si ts fro m Lua na

. Lua na arg ue s th e di st ric t co ur t erre d be cau se (A) tru e

ov erd raft s di d no t crea te de bt s, se e § 54 7( b)(2 )

, an d (B) ev en if th e de po si ts were

av oi da bl e, Sara ch ek can no t re co ve r th em fro m Luan a.

A.

Lua na as ks th is co ur t to ho ld

, on po li cy gr ou nd s, th at Agr ip ro ces so rs ’ tru e

ov erd raft s are no t de bt

. Bu t th is is su e is co nt ro ll ed by th e Ban kr up tc y Co de an d th is

So m et im es , tru st ees can reco ve r av oi de d tra ns fers wit ho ut th e § 55 0 rem ed y

. 4

Se e Cent

. V a. Cm t y

. C ol l. v. Ka tz
, 54 6 U.S. 35 6, 37 1- 72 (2 00 6) (ex pl ai ni ng th at a

“ m ere de cl arat io n of av oi da nc e” is so m et im es su ffi ci en t to reco ve r a tra ns fer) ; In re Bur ns , 32 2 F.3 d 42 1, 42 7 (6 th Ci r. 2 0 0 3 ) (“ The tru st ee’s rem ed y of reco ve ry is

ne ces sa ry on ly w h e n th e rem ed y of av oi da nc e is in ad eq ua te .”). Here, ho wev er, Sara ch ek do es ne ed th e § 55 0 rem ed y to ge t wha t he se ek s— ret ur n of Agr ip ro ces so rs ’
in tra da y -o ve rd raft -co ve rin g d ep os it s.

-6

-co ur t ’s p r e c e de nt

. “ The te st fo r whe n a de bt is in cu rred is whe th er th e de bt or is

le ga ll y ob li ga te d to pa y .” Law s , 98 F.3 d at 10 51

. Se e al so 11 U.S.C. § 10 1( 12 )
(“ The te rm ‘deb t’ m ean s li ab il it y on a cl ai m .”). Und er Io wa la w, “ pa y m en t by a ba nk

of an ov erd raft is co ns id ered an un se cu red lo an

. . . a nd /o r an ex te ns io n of cred it to

a cu st om er.” Cl

in to n Nat

. Ba nk v. Sa uci er , 58 0 N .W .2d 71 7, 72 0 (Io wa 19 98 )
(ci ta ti on om it te d)

. Se e al so Mi dl an d Fund

i n g, LLC v. Jo hns on , 13 7 S. Ct

. 14 07

, 14 11 (2 01 7) (“ St at e la w us ua ll y de te rm in es whe th er a pe rs on ha s [a rig ht to

pa y m en t].”). W he n Lua na al lo wed pr ov is io na l se tt le m en ts of ch eck s to be co m e fin al

,

ev en th ou gh th os e se tt le m en ts co nt rib ut ed to a tru e ov erd raft

, Lua na pa id ov erd raft s
fo r Agr ip ro ces so rs

. Lua na t h u s mad e an un se cu red lo an an d/ or ex te ns io n of cred it

to Agr ip ro ces so rs

. As a res ul t, Agr ip ro ces so rs was le ga ll y ob li ga te d to Lua na fo r th e

am ou nt of t he ov erd raft s. Th e tr ue ov erd raft s wer e d eb t.

B.

Lua na co nt en ds it was no t an in it ia l tra ns fere e li ab le un de r § 55 0, bu t rat he r a

no n- li ab le “ m ere co nd ui t.” “ [T]o be an in it ia l tra ns fere e, a pa rty m us t ha ve do m in io n

an d co nt ro l ov er th e tra ns ferr ed fu nd s.” In re Ree ves , 65 F.3 d at 67 6. Dom in io n ov er
fu nd s is “ le ga l tit le to th em an d th e ab il it y to us e th em as [th e pa rty] se es fit .” In re

In co m net

, Inc

. , 46 3 F .3d 10 64 , 10 71 (9t h C ir. 2 00 6)

. Co nt ro l is real co nt ro l of t he

fu nd s i n q ue st io n. Id

.

The di st ric t co ur t co rrec tl y fo un d Lua na ha d bo th do m in io n an d co nt ro l. W he n

L ua na al lo wed a tru e-o ve rd raft -cau si ng pr ov is io na l se tt lem en t to be co m e fi na l, L ua na
irr ev oc ab ly pa id a th ird pa rty in th e am ou nt of th e tru e ov e r dr aft

. Lua na was no t a

“ co nd ui t” be twee n Agr ip ro ces so rs an d th e th ird pa rty: Lua na it se lf pa id th e th ird

pa rty. I n ex ch an ge fo r Lua na pa y in g th e ov erd raft

, Agr ip ro ces so rs owe d Lua na a
de bt

. The ref

o r e, whe n Agr ip ro ces so rs m ad e de po si ts co ve rin g tru e ov erd raft s, Agr ip ro ces so rs m ad e pa y m en ts on d e b t t o Lu an a. Lua na ha d fu ll co nt ro l ov er th e

tru e-o ve rd raft -co ve rin g d ep os it s an d c ou ld us e th e fu nd s fo r an y pu rp os e.

-7

-Ch al le ng in g th is de te rm in at io n, Lua na sa y s Ag r ip ro ces so rs ’ acco un t was

“ flu id ” an d ov erd raft s are di ffer en t fro m “ tra di ti on al lo an s.” The se arg um en ts do no t

ad dr es s Lua na ’s do m in io n an d co nt ro l ov er th e tru e-o ve rd raft -co veri ng de posit s. The

di st ric t co ur t co rrec tl y fo un d t h a t S arac he k m ay reco ve r Agr ip ro ces so rs ’ tru eov erd raft -co ve rin g d ep os it s fr om Luan a.

VI.

A tru st ee can no t reco ve r an ot he rwis e av oi da bl e tra ns fer if th e cred it or pr ov es

a § 54 7( c) ex cep ti on

. Lua na arg ue s th at th e ba nk ru pt cy co ur t an d di st ric t co ur t erre d

in reject in g th ree ex cep ti on s: co nt em po ran eo us ex ch an ge s fo r ne w va lu e, de bt s an d

tra ns fers in th e or di na ry co ur se of bu si ne ss , an d tra ns fers crea ti ng se cu rit y in te res ts

.

A.

The fir st ex cep ti on : fo r a tra ns fer th at was “ (A) in te nd ed by th e de bt or an d th e
cred it or to or fo r wh o s e b e ne fit su ch tra ns fer was m ad e to be a co nt em po ran eo us

ex ch an ge fo r ne w v a lu e gi ve n to th e de bt or ; an d (B) in fact a su bs ta nt ia ll y

co nt em po ran eo us ex ch an ge .” § 54 7( c)(1 )

. Lua na as se rts th at it an d Agr ip ro ces so rs
in te nd ed th e ov erd raft -co ve rin g de po si ts to be in ex ch an ge fo r ne w pr ov is io na l cred it
(in th e fo rm

of o ve rd raft pro te ct io n)

.

“ The cri ti cal in qu iry in de te rm in in g whe th er th ere ha s be en a co nt em po ran eo us

ex ch an ge fo r ne w va lu e is whe th er th e pa rti es in te nd e d s u c h a n ex ch an ge .” In re

Genm ar Ho ld

in gs , In c. , 77 6 F.3 d 96 1, 96 4 (8 th Ci r. 2 0 1 5 )

. The ba nk ru pt cy co ur t

fo un d t hi s i nt en t m is si ng :

The Ban k en ti rel y fai ls to sh ow, ho wev er, th at th e pa rti es in tend ed th is

t o b e ne w va lu e an d th at th ey in te nd ed it to be li nk ed to pa y in g ‘tru e

ov erd raft s’ c on te m

po ran eo us ly. Qui te to th e co nt rary, th e Ban k n ev er

co m m un ic at ed su ch an in te nt to Deb to r an d Deb to r ne ve r in di cat ed an y

-8

-su ch un de rs ta nd in g. The Ban k so ug ht to a v o id in tra da y ov erd raft s

whe ne ve r it co ul d an d t o a v oi d m or e tru e ov erd raft s en ti rel y

. All
‘ove rd raft s’—i n th e wor ds of [Lua na ’s pr es id en t]—were ‘une xp ect ed ’

or ‘u np la nn ed .’ The Ban k en ti rel y fai ls to de m on st rat e it to ok th e
pa ym en ts on th e ‘true ov erd raft s’ in ex ch an ge fo r an ag reem en t to

pr ov id e an y th in g n ew at all —l et alo ne pro vi de it co nt em po ran eo us ly.

(em ph as is in or ig in al ). Si nc e in te nt is a qu es ti on of fact

, rev ie w is fo r cl ear erro r. In

re Gat ewa y Pac . Cor

p. , 15 3 F .3d 91 5, 9 18 (8t h C ir. 1 99 8)

.

Lua na arg ue s it di d sh ow th at th e pa rti es in te nd ed Agr ip ro ces so rs ’ de po si ts to

be in ex ch an ge fo r ne w pr ov is io na l c r e d i t

. It po in ts to ev id en ce th at it waiv ed

ov erd raft ch arg es on Agr ip ro ces so rs ’ acco un ts

, ha d d is cret io n to co ve r ov erd raft s,

an d reg ul arl y co ve red th em

. Thi s ev id en ce do es no t sh ow a c l e a r e r r o r. Lua na ’s

ev id en ce do es no t sp eak d i r e ct ly to th e pa rti es ’ in te nt

. It is co m pa ti bl e wit h th e
ba nk ru pt cy co ur t’s fin di ng th at Lua na al lo wed ov erd raft s be cau se it be li ev ed
Agr ip ro ces so rs wou ld co ve r th em , no t be cau se it ha d ag reed to do so in ex ch an ge fo r

r e c e i vi ng pa st de po si ts

. The ba nk ru pt cy co ur t di d no t cl earl y err in reject i n g t h i s

ex cep ti on

.

B.

The se co nd ex cep ti on : for a t ran sf er m ad e “ in pa y m en t of a de bt in cu rred by

th e de bt or in th e or di na ry co ur se of bu si ne ss or fin an ci al affa irs of th e de bt or an d th e

tra ns fere e,” an d ei th er “ (A) m ad e i n th e or di na ry co ur se of bu si ne ss or fin an ci al

affa irs of th e d eb to r an d th e tra ns fere e; or (B) m ad e acco rd in g to or di na ry bu si ne ss

te rm s.” § 54 7( c)(2 )

. The ba nk ru pt cy co ur t fo un d t ha t Agri pr oc es so rs di d no t in cu r
th e d eb ts —t he tru e o ve rd raft s— in th e o rd in ary co ur se of b us in es s wi th Luan a.

Thi s co ur t ha s rare ly ad dr es se d whe th er a de bt was “ in cu rred by th e de bt or in

th e or di na ry co ur se of bu si ne ss or fin an ci al affa irs of th e de bt or an d th e tra ns fere e.”

Thi s co ur t ha s sa id th at “n o p r e c i se le ga l te st ” ap pl ie s to an y of th e § 54 7( c)(2 )

-9

-el em en ts

, req ui rin g th e ba nk ru pt cy co ur t to “ en ga ge in a pe cu li arl y fact ua l an al y si s.”

In re Ar m st

ro ng , 29 1 F.3 d 51 7, 52 7 (8 th Ci r. 20 02 ) (in te rn al qu ot at io n m ark s

om it te d)

. The co ur t’s “ an al y si s tu rn s up on whe th er” th e de bt s were in cu rred in th e

or di na ry co ur se of b us in es s o f Lua na an d Ag rip ro ces so rs

. Se e id

.

Man y of th is co ur t’s p r e c e d en ts ad dr es s whe th er a tr an sf er was m ad e in th e

o r d i n ary co ur se of bu si ne ss

. “ [T]he co rn ers to ne of th e in qu iry is th at th e cred i t o r

m us t de m on st rat e s o me co ns is te nc y wit h ot he r bu si ne ss tra ns act io ns be twee n th e
de bt or an d th e cred it or .” In re Affi li at ed Fo od s Sw. In c. , 75 0 F.3 d 71 4, 71 9 (8 th Ci r.

20 14 ) (in te rn al qu ot at io n m ark s om it te d)

. “ Oth er fact or s m ay be rel ev an t in a

pa rti cu la r cas e, su ch as whe th er th e pr efer en ti al tra ns fer in vo lv ed an un us ua l pa y m en t

m et ho d or res ul te d fro m at y pi cal pr es su r e t o p a y.” Id

. Bec au se of th e si m il ar

wor di ng of § 54 7( c)(2 )(A)’s tra ns fer req ui rem en t (“ m a d e i n th e or di na ry co ur se of

bu si ne ss or fin an ci al affa irs of th e de bt or an d th e tra ns fere e”) an d § 54 7( c)(2 )’s de bt

r eq ui rem en t (“ de bt in cu rred by th e de bt or in th e or di na ry co ur se of bu si ne ss or
fin an ci al affa irs of th e de bt or an d th e tra ns fere e”), an al og ou s st an da rd s sh ou ld ap pl y
whe n an al y zi ng whe th er a de b t oc cu rred in th e or di na ry co ur se of bu si ne ss

. The

co rn ers to ne of de bt in qu iry is “ th e cred it or m us t de m on st rat e so m e co ns is te nc y wit h

ot he r bu si ne ss tra ns act io ns be twee n th e de bt or an d th e cred it or .” Oth er fact or s m ay
be rel ev an t

, s u c h a s whe th er th e de bt was crea te d by “ un us ua l” m ean s or res ul te d

fro m “ at y pi cal ” pr es su re. Se e In re Ar m st ro ng , 29 1 F.3 d at 52 7 (d ecl in in g “ to ho ld

th at a de sp erat e de bt or ’s irr es po ns ib le accu m ul at io n of ga m

bl in g de bt s in an il l-f

at ed

at te m pt to co ve r frau d an d em

be zzl em en t lo ss es qu al ifi es as th e or di na ry co ur se of

hi s b us in es s o r fi na nc ia l af fai rs ”).

The ba nk ru pt cy co ur t co m pa red Agr ip ro ces so rs ’ tru e ov erd raft s du rin g th e 90

- da y pr efer en ce pe rio d to th e ni ne m on th s be fo re th e pr efer en ce pe rio d. I n th e

pr eced in g ni ne m on th s, Agr i p r o ces so rs ha d fo ur da y s of tru e ov erd raft s: jus t on e
du rin g th e fir st se ve n m on th s (a $3 1

, 6 8 0 o v e rd raft ), th en th ree in th e two m on th s

pr eced in g th e pr efer en ce pe rio d. The freq ue nc y of o v e r dr aft s th en in crea se d, wit h

ni ne da y s of tru e ov erd raft s du rin g th e pr efer en ce pe rio d. Th e a mo un t of th e

-1 0-ov erd raft s du rin g th e earl ie r ni ne -m on th pe rio d were lo wer— bo th on av erag e an d in

to ta l— th an th e ov erd raft s du rin g th e pr efer en ce pe rio d, whi ch to ta le d $1 ,55 6,7 82 .89

. Lua na arg ue s th es e nu m

be rs ov ers ta te t h e i n c r eas e in ov erd raft s be cau se it be cam e Agr ip ro ces so rs ’ pr ima r y b an k on e m on th be fo re th e pr efer en ce pe rio d, an d
Agr ip ro ces so rs wro te m or e (an d hi gh er val ue ) ch eck s du rin g t he pr efer en ce peri od

. Bu t, ev en co ns id eri ng Agr ip ro ces so rs ’ in c r e a s e d act iv it y , t he nu m be r of ov erd raft s
in crea se d si gn ifi can tl y co m pa red to th e pr ev io us ni ne m on th s. The re was an ex tre m e
in crea se co m

pa red to th e fir st se ve n m on th s. The ba nk ru pt cy co ur t fo un d t ha t “ th e

ov erd raft s were ve ry un us ua l, no t ord in ary co ur se de bt s, and st art ed to ha pp en on ly

as [Agr ip ro ces so rs ] sl id to ward ba nk ru pt cy .”

The ba nk ru pt cy co ur t ap pr op ria te ly co m pa red th e tra ns act io ns du r in g th e

pr efer en ce p e rio d to tra ns act io ns du rin g an earl ie r “ lo ok -b ack ” pe rio d. In re Affi li at ed Fo od s Sw. In c. , 75 0 F.3d at 72 0. The ap pr op ria te pe rio d for com pa ris on
de pe nd s on th e fact s of th e cas e. “ To m ak e a so un d co m pa ris on , nu m ero us de ci si on s

su pp or t th e vi ew th at th e hi st o r i c a l b a s e l in e sh ou ld be ba se d on a ti m e fram e whe n
th e de bt or was fin an ci al ly he al th y .” Id

. (in te rn al qu ot at io n m ark s om it te d)

. Here, th e
ba nk ru pt cy co ur t no te d th e in crea se in ov erd raft s rel at iv e to th e p r e c e d i ng ni ne

m on th s an d th e fir st se v e n o f th os e ni ne m on th s. It fo un d ov erd raft s “ st art ed to

ha pp en on ly as [Ag rip ro ces so rs ] sl id to ward ba nk ru pt cy .” Und er th e fact s fo un d by

th e di st ric t co ur t, Agr ip ro ces so rs ’ ov e r d r aft s du rin g th e pr efer en ce pe rio d were no t

co ns is te nt wit h i ts act iv it y when fin an ci al ly heal th y

.

The ba nk ru pt cy co ur t al so fo un d th at th e ov erd raft s were “ un pl an ne d” an d th at

Lua na “ di sc ou rag ed ” th em

. Lua na an d Agr ip ro ces so rs , it de te rm in ed

, “ de si gn ed ” a

“ syste m ” to “ av oi d” tru e ov erd raft s. I t c o n cl ud ed “ tru e ov erd raft s were si m pl y no t

no rm al or an or di na ry pa rt of th ei r rel at io ns hi p.” Lua na arg ue s th at i n t r a da y

ov er d r a f ts were co m

m on be fo re th e pr efer en ce pe rio d an d th e ba nk ru pt cy co ur t

sh ou ld no t ha ve di st in g u i s h e d be twee n in tra da y an d tru e ov erd raft s. Bu t th e
ba nk ru pt cy co ur t fo un d th at th e pa rti es tr e a t e d in tra da y an d tru e ov erd raft s

-1 1-di ffer en tl y : “ The or di na ry syste m be twee n th e pa rti es al lo wed fo r in tra da y ov erd raft s

wit h a ful l co ve rin g wi re t ran sf er fro m [Lua na ] be fo re th e en d of th e ba nk in g da y .”

Lua na as se rts th at th e pa rti es di d no t di st in gu is h be twee n in tra da y an d tru e ov erdraf ts

, bu t it cit es no su pp or ti ng ev id en ce. Lua na fur th er em ph as iz es co ns is te nc ie s du rin g
th e ni ne -m on th an d pre fere nc e pe rio ds : Lua na al way s op erat ed a ch eck in g acco un t

fo r Agr ip ro ces so rs , al way s al lo wed in tra da y ov erd raft in g, an d al lo wed so m e tru e

ov erd raft s; Agr ip ro ces so rs al way s cu red th e tru e ov erd raft s wit h wire tra ns fers

. Bu t

th e e x is te nc e of “ ot he r co ns is te nc ie s wit hi n th e rel at io ns hi p” do es no t m ean th at Agr ip ro ces so rs in cu rred th e $1 ,55 6,7 82 .89 o f tru e-o ve rd raft de bt in th e or di na ry

co ur se of b us in es s. Se e In re Ga te wa y Pac . Cor

p. , 15 3 F .3d at 9 18

.

Lua na do es no t sh ow th at th e ba nk ru pt cy co ur t cl earl y erre d in fin di ng th at th e

tru e ov erd raft s were no t de bt s in cu rred in th e or di na ry co ur se of bu si ne ss

. The

ba nk ru pt cy co ur t’s fin di ng th at th e tru e ov erd raft s la ck ed co ns is te nc y wit h earl ie r

t r a ns act io ns was su pp or te d by su bs ta nt ia l ev id en ce of Lua na an d Agr ip ro ces s o r s ’

pr act ic e. Its de te rm in at io n was bo ls te red by it s fin di ng s th at th e pa rti es to ok st ep s to

a v o i d tru e ov erd raft s an d th at tru e ov erd raft s were no t a no rm al pa rt of t h e i r
rel at io ns hi p. Th e b an kr up tc y co ur t d id no t cl earl y

err i n re jecti ng th is ex cep ti on

.

C.

The th ird ex cep ti on : fo r t r a n s f e r s th at crea te cert ai n se cu rit y in te res ts

. Se e § 54 7( c)(3 )

. Neit he r th e ba nk ru pt cy co ur t n o r t he di st ric t co ur t ad dr es se d th is

ex cep ti on

. The ba nk ru pt cy co ur t di d fo ot no te th at Lua na m ad e “ a pa ss in g arg um en t

th at it ha d a n a ut om at ic pe rfec te d s ecu rit y in te res t,” b ut it sai d s o d is cu ss in g s et of f.

In it s di st ric t co ur t rep ly br ie f, Lua na st at ed it ha d a se cu rit y in te res t i n a c c o u nt

36 77 88

, ag ai n di sc us si ng se to ff. Its di st ric t co ur t br ie fs di d no t di sc us s th e se cu rit y

in te res t ex cep ti on or ci te § 54 7( c)(3 ). Bec au s e Lua na di d no t rai se th is ex cep ti on
be lo w an d gi ve s no reas on to ad dr es s it fo r th e fir st ti m e on ap pe al

, th is co ur t de cl in es

to co ns id er it

. Se e Gap
, In c. v. GK Dev., In c. , 84 3 F.3 d 74 4, 74 8- 49 (8 th Ci r. 20 16 ).

-1 2-VII.

Sara ch ek ch al le ng es th e ba nk ru pt cy co ur t’s ca lc ul at io n o f th e tra ns fers it can

reco ve r fro m

Luan a.

A.

Lua na m ad e se ve ral po st in g erro rs in Agr ip ro ces so rs ’ c h e c ki ng acco un t,

m ak in g th e b a l a n ce ap pe ar hi gh er th an it real ly was du rin g th e pr efer en ce pe rio d.

Afte r Agr ip ro ces so rs fil ed it s ba nk ru pt cy pe ti ti on , Lua na is su ed an acco un t st at em en t

co rrec ti ng th os e erro rs , in di cat in g al m os t $8 00 ,00 0 owi ng

. The ba nk ru pt cy co ur t

cal cu la te d Lua na ’s li ab il it y us in g th e un co rrec te d ba la nc es

. Sara ch ek arg ue s Lua na ’s

li ab il i t y sh ou ld be ba se d on th e co rrec te d ba la nc es

. Und er Sara ch ek ’s pr op os al

, Agr ip ro ces so rs wou ld ha ve m or e tru e ov erd raft s, m ean in g m or e of it s de po si ts wou ld

ha ve co ve red tru e ov erd raft s an d, th eref or e, m or e of it s tra ns fers wou ld be av oi da bl e.

The ba nk ru pt cy co ur t ga ve two reas on s fo r us in g un co rrec te d ba la nc es

. Fi rs t,

it de te rm in ed it wou ld be in eq ui ta bl e to us e th e co rrec te d ba la nc es

. Seco nd

, Lua na ’s

cl ai m to th e de bt refl ect ed in th e co rrec te d st at em en ts di d no t ari se un ti l it co rrec te d

th e st at em en ts (aft er Ag rip ro ces so rs fil ed for ba nk ru pt cy ).

Befo re th e di st r i c t co ur t, Sara ch ek ch al le ng ed th e eq ui ta bl e ba si s fo r th e
ba nk ru pt cy co ur t’s de ci si on

. The di st ric t co ur t affi rm ed in so far as th e de ci si on res te d

on eq ui ta bl e gr ou nd s. Bu t th e le g a l g r o un d fo r th e ba nk ru pt cy co ur t’s de ci si on

st an ds

. If Agr ip ro c e s s o r s di d no t owe th e po st in g- erro r am ou nt s un ti l Lua na

co rrec te d th e st at em en ts

, th en no de bt aro se wit hi n th e m ean in g of § 54 7. Se e Law s , 98 F.3 d at 10 51 (“ The te st fo r whe n a de bt is in cu rred is whe th er th e de bt or is le ga ll y
ob li ga te d to pa y .”). Sara ch ek ’s o nl y arg um en t ag ai ns t th e b an kr up tc y co ur t’s l eg al

de te rm in at io n is th at “ cl ai m ” ha s a br o a d de fin it io n in th e Ban kr up tc y Co de

. Tha t

do es no t ad dr es s wh et he r th e b an kr up tc y co ur t erred in fin di ng Luan a h ad no cla im

-1 3-gi vi ng ris e to a de bt

. Bec au se th e ba nk ru pt cy co ur t’s le ga l c o n c l u s i o n st an ds

, th is

co ur t de cl in es to ad dr es s Sara ch ek ’s ch al le ng e to th e eq ui ta bl e gr ou nd

. The

ba nk ru pt cy co ur t’s deci si on to ba se Lua na ’s li ab il it y on th e un co rrec te d bal an ces is

affi rm ed

.

B.

The ba nk ru pt cy co ur t fo un d th at Lua na an d Agr ip ro ces so rs ag reed to “ ne t” th e
ch eck in g acco un t an d acco un t 36 77 88 whe n de te rm in in g w h e th er Agr ip ro ces so rs

ov erd rew. As fo un d by th e ba nk ru pt cy co ur t, th is ne tt in g ag reem en t m ean t th at if th e
ch eck in g acco un t ha d a ba la nc e of ne ga ti ve $1 ,39 9,9 99 an d acco un t 36 77 88 ha d

ba la nc e of $1 ,40 0,0 00

, Agr ip ro ces so r s d i d no t ov erd raw. The ba nk ru pt cy co ur t

cal cu la te d Lu an a’s li ab il it y ba se d o n t he ne tt ed acco un ts

.

Sara ch ek sa y s th e ba nk ru pt cy co ur t erre d th ree way s. F i rs t, he sa y s, th e
ba nk ru pt cy co ur t erre d in fin di ng a ne tt in g ag reem en t. The pa rti es ag ree th e ex is te nc e
of th e ag reem en t is a qu es ti on of fact rev ie wed fo r cl ear erro r. The ba nk ru pt cy co ur t

ba se d it s fin di ng on te st im on y fro m Agr ip r o ces so rs ’ co nt ro ll er, Lua na ’s pr es id en t,

an d Lua na ’s ch ie f fin an ci al of fic er. Sara ch ek sa y s th e ba nk ru pt cy co ur t cl earl y erre d

be cau se (a) it st ru ck pa rt of th e CFO’s te st im on y an d (b ) ex pe rts te st ifi ed th at a

ne tt in g arra ng em en t wou ld be im pr op er an d th ere was n o w r i t t e n ag reem en t. The

ba nk ru pt cy co ur t di d no t cl earl y err be cau se it s fin di ng was su pp or te d by

te st im on y —fr om th e co nt ro ll er, pr es id en t, an d CFO— th at Lua na an d Agr ip ro ces so rs

tre at ed th e acco un ts as ne tt ed

. Exp ert s’ vi ews of th e pr op rie ty of th e arra ng em en t an d

th e la ck of writ te n ag reem en t do no t sh ow th at th e ba nk ru pt cy co ur t erre d in fin di ng

an ag reem en t.

Seco nd

, Sara ch ek co nt en ds th at ev ery ov erd r a f t o f th e ch eck in g acco un t

crea te d a de bt

, ev en if Lua na an d Agr ip ro ces so rs ag reed to ne t th e acco un ts an d th ere

were en ou gh 36 77 88 fu nd s to co ve r t h e c h e ck in g- acco un t ov erd raft

. He sa y s th e

-1 4-ba nk ru pt cy co ur t m ad e a le ga l erro r whe n it fai le d to reco gn iz e th is

, ci t in g ex pe rt

te st im on y th at Lua na co ul d su e Agr ip ro ces so rs to reco ve r ch eck in g ov erd raft s ev en
if acco un t 36 77 88 ha d a su ffi ci en tl y po si ti ve ba la nc e. Thi s th eo ry co nt rad ic ts th e
fact s fo un d by th e ba nk ru pt cy co ur t: Lua na an d Agr ip ro ces so rs “ act ua ll y di d ne t th e

acco un ts or co ns id er th em as on e.” Agr ip ro ces so rs di d no t in cu r de bt to Lua na un le ss
th e “ on e” ac co un t was ov erd rawn

.

Thi rd

, Sara ch ek arg ue s th at ev en if ne tt in g was pr op er, a $2 50 ,00 0 de po si t th at Agr ip ro ces so rs m ad e in to acco un t 36 77 88 du rin g th e pr efer en ce pe rio d was a

pr efer en ti al tra ns fer. The di st ric t co ur t di d no t ad d res s th is arg um en t, no r do es it

ap pe ar in Sara ch ek ’s br ie fs in th e di st ric t co ur t. Sara ch ek waiv ed th is arg um en t. Thi s

co ur t d ecl in es to co ns id er i t.

VIII.

On Octo be r 24

, 20 08

, Lua na tra ns ferr ed th e $1 .4 m il li on fro m acco un t 36 77 88

in t o t h e ch eck in g acco un t. Sara ch ek arg ue s th is is an av oi da bl e tra ns fer. Lua na

arg ue s th at it is no t an av oi da bl e tra ns fer be cau se it is was a va li d se to ff pr ot ect ed by

11 U.S.C. § 5 53 (a).

The ba nk ru pt cy co ur t fo un d th at it s ne tt in g- ag r e em en t fin di ng de te rm in ed

whe th er th e $1 .4 m il li on tra ns fer was av oi da bl e. Bec au se Lua na an d Agr ip ro ces so rs

ag reed to tre at th e acco un ts as on e, Agr ip ro ces so rs in cu rred de bt to Lua na on ly whe n

tr u e o v e r d r aft s of th e “ on e” acco un t oc cu rred

. So lo ng as Agr ip ro ces so rs ha d $1 .4

m il li on in acco un t 36 77 88

, it di d no t in cu r a d e b t t o Lu a n a un ti l th e ba la nc e of th e
ch eck in g acco un t fel l be lo w neg at iv e $ 1.4 m il li on . The b an kr up tc y co ur t co rrec tl y
fo un d th at th e ne ga ti ve ba la nc e wip ed ou t by th e $1 .4 m il li on tra ns fer was no t a de bt

at al l. The tra ns fer was no t “ fo r or on acco un t of an an te ced en t de bt owe d by th e
de bt or be fo re s uc h t ran sf er was m ad e,” an d t hu s n ot av oi da bl e. Se e § 5 47 (b)( 2)

.

-1 5-The ba nk ru pt cy co ur t st at ed th at if it were wro ng ab ou t th e ne tt in g ag reem en t,

it wou ld ne ed to ad dr es s th e se to ff, an d wou ld de te rm in e it was im pr op er. On ap pe al

, th e di st ric t co ur t co ns id ered whe th er th e ba nk ru pt cy co ur t erre d in fin di ng th e se to ff

im pr op er. The di st ric t cou rt con cl ud ed th at th e ba nk ru pt cy co ur t was inc or rect th at

th e se to ff was im

pr op er, bu t affi rm ed be cau se th e ba nk ru pt cy co ur t di d no t

in co rp or at e th e $ 1.4 m il li on in cal cu la ti ng da m ag es

.

B o t h S a r a c h ek an d Lua na ur ge th is co ur t to ru le on th e m eri ts of th e se to ff.

Thi s co ur t de cl in es to do so be cau se th e ba nk ru pt cy co ur t co rrec tl y fo un d th at se to ff

do es no t ap pl y

to th is tra ns fer o f fu nd s b et ween th e two “ ne tt ed ” acc ou nt s.

* * * * * * *

The di st ric t co ur t i s af

fir m ed

.

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __

-1 6-