Opinion ID: 479412
Heading Depth: 1
Heading Rank: 4

Heading: Deposits as They Affected Marine and Gateway

Text: 56 After March 16, Prescott made deposits into his Marine Bank accounts apparently sufficient to clear his overdrafts and leave a positive balance of $18,353.59 that Marine offset against Prescott's debt on the loan. The bankruptcy court considered these deposits in assessing the liability of Marine and Gateway. The district court agreed that these deposits resulted in preferential transfers to Marine but partially reversed the bankruptcy court's holdings as to Gateway. The district court concluded that under 11 U.S.C. Sec. 553 the deposits offset by Marine could not be considered to have benefited Gateway. The court agreed, however, that the money from Prescott that merely erased the negative balances was in payment for an antecedent debt and thus resulted in an indirect preference to Gateway. Marine and Gateway both contend before this court that no money deposited into Prescott's bank accounts after the preference period began should be considered in determining whether defendants received a preferential transfer. They argue that any deposits made were merely deposits in the regular course of business which do not constitute transfers under the Bankruptcy Code. The trustee cross-appeals the district court's holding that a party may not be indirectly preferred by a setoff. As all parties before this court raise questions regarding these deposits, we consider their arguments together.
57 In order to establish that a creditor has received a preference, the trustee must establish that a transfer took place. Section 101(48) of the Bankruptcy Code defines transfer as follows: 58 transfer means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest.... 59 11 U.S.C. Sec. 101(48). Deposits into bank accounts clearly can be transfers under the new Bankruptcy Code. As the Senate Report stated, The definition of transfer is as broad as possible.... A deposit in a bank account or similar account is a transfer. S.Rep. No. 989. 95th Cong., 2d Sess. 27, reprinted in 1976 U.S. Code Cong. & Ad. News, 5787, 5813; Redmond v. Tuttle, 698 F.2d 414, 417 n. 8 (10th Cir.1983). However, under established caselaw, to the extent a deposit is made into an unrestricted checking account, in the regular course of business and withdrawable at the depositor's will, it is not avoidable by the trustee, Katz v. First National Bank of Glen Head, 568 F.2d 964, 969, (2d Cir.1977), cert. denied, 434 U.S. 1069, 98 S.Ct. 1250, 55 L.Ed.2d 771 (1978). This is because a deposit that is subject to withdrawal at the depositor's will does not deplete the bankruptcy estate. See 4 Collier on Bankruptcy p 547-16, at 547-59 (The reasoning has been that the ordinary deposit results in substituting for currency, bank notes, checks, drafts and other bankable items as corresponding credit with the bank which may be checked against or withdrawn, and which provide the depositor with the medium of exchange in the transaction of business); see also Citizens National Bank v. Lineburger, 45 F.2d 522 (4th Cir.1930). 60 The depositor does not have freedom to withdraw when the deposit is applied as payment for an antecedent debt. As the court said in Miller v. Wells Fargo Bank International Corp., 406 F.Supp. 452 (S.D.N.Y.1975): 61 If the deposit is accepted by the bank with an intent to apply it on a pre-existing claim against the depositor rather than to hold [it] subject to the depositor's checks in ordinary course, ... the deposit is viewed legally as a transfer in payment of the debt. As such, it may be recovered by the trustee where the elements of a voidable preference are otherwise satisfied. 62 Id. at 467, aff'd, 540 F.2d 548 (2d Cir.1976); see also Katz, 568 F.2d at 970. 63 Here, to the extent the deposits compensated for overdrafts, they were payments on an obligation. Prescott had no right to keep using the money deposited. Nor does it matter that the bank was tolerant of Prescott's overdrafts. That the bank had earlier allowed Prescott to maintain overdrafts does not mean that Prescott had a right to continue the practice. Therefore the trustee could avoid deposits that were applied against Prescott's March 16 overdrafts insofar as they preferred Marine and indirectly preferred Gateway over other creditors.
64 On April 4, 1983, Marine froze Prescott's bank accounts containing a positive balance of $18,353.59. Marine's security agreements provided that Prescott's bank accounts constituted additional security for the note. Therefore, the bankruptcy court interpreted Marine's action as a seizure of its collateral under Wisconsin Statute Sec. 409.305. 4 To the extent these funds helped to fully secure Marine, the bankruptcy court found them to be an avoidable preference whether viewed as a transfer under section 547(b) or an improper setoff under section 553(b). To the extent Marine acquired funds in excess of the amount owed on the note, the bankruptcy court ruled they could be recovered from Gateway as an indirect preference. 65 The district court reversed the bankruptcy court's finding as to Gateway. It ruled that the seizure of funds could only be viewed as a setoff under 11 U.S.C. Sec. 553. Since setoffs were purposely excluded from the definition of transfer in 11 U.S.C. Sec. 101(40), the court held, they could not be avoided as an improper transfer under section 547(b) or pursuant to the trustee's power to recover from indirect beneficiaries under the version of section 550(a) that applied at the time. While section 553(b) contained its own preference provision, this only provided for recovery from a creditor [who] offsets a mutual debt and made no mention of recovery from any third party who may have indirectly benefited by the setoff. Therefore, the court concluded, Gateway could not be said to have benefited from the positive balances in Prescott's accounts. 66 Even noting that it was Marine's action which directly effected the setoff, we disagree with the district court's finding with respect to the indirect benefit to Gateway. Under the Bankruptcy Act of 1898, setoffs were generally not avoidable as preferences. See Jensen v. State Bank of Allison, 518 F.2d 1 (8th Cir.1975). However, this created certain problems. The setoff upset the scheme of equitable distribution and bankruptcy policy with respect to recovery of preferences. In re Balducci Oil Co., 33 B.R. 847, 852 (Bankr.D.Colo.1983). When drafting the new Bankruptcy Code, therefore, Congress decided to impose certain limitations on the right of setoff. One possible limitation proposed in the original House Resolution was to include setoff in the general definition of transfer, thus enabling its consideration under section 547(b). The Senate rejected this approach of treating setoffs as transfers, however, and chose instead to subject them to special rules. See Statement by Senator DeConcini, Senate Debate on the Compromise Bill to H.R. 8200, 124 Cong. Rec. at 33,993 (95th Cong.2d Sess. October 5, 1978). 67 Section 553(b) was the special rule adopted by Congress to govern preferential setoffs. This rule provides: 68 (b)(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 365(h)(2), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the latter of-- 69 (A) 90 days before the date of the filing of the petition; and 70 (B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency. 71 The function of this provision was explained in In re Schmidt, 26 B.R. 89, 92 (Bankr.D.Minn.1982): 72 The effect of this Subsection [553(b) ] is to allow the Trustee to recover the setoffs which advance the position of one creditor at the expense of all other creditors during the ninety day period before bankruptcy. It works hand-in-hand with the philosophy of Section 547. 73 This miniature preference provision was designed to close former loopholes. See 4 Collier p 553.02 at 553-9 ([W]hat is evident on comparison of Section 553 to its predecessor, Section 68 of the Chandler Act, is that the earlier setoff provision is now considered to have been too broad. The result was that in too many cases, certain creditors received a preference to the detriment of other creditors and the debtor's estate. Consequently, Section 553 has restricted the right of setoff beyond what was done in earlier acts, and contains restrictions somewhat similar to those found in the preference section.) (footnote omitted). 74 The purposes of closing loopholes and promoting evenhandedness should be kept in mind in deciphering Congress's intent regarding the treatment of parties that indirectly benefit from setoffs. While it is true that the language of section 553(b) makes no mention of indirect beneficiaries, neither does the statute or its history evince an intent that indirect beneficiaries are to be exempt from the trustee's avoiding power. The question of how indirect beneficiaries should fare does not appear to have been directly answered in the Code. 75 Perhaps one reason why section 553 does not expressly address indirect beneficiaries is that these parties do not actually engage in any process of setoff and thus need not be subject to the specifics of the setoff statute. As seen in the instant case, Gateway has no mutual obligation to Prescott. It was not custodian of any accounts that could be applied against Prescott's debts. Rather, Gateway merely realized an appreciation in the value of its collateral when Marine--the party that did have access to such accounts--exercised its own power of setoff. What Gateway received may be characterized as a transfer that may be considered under section 547(b) and the 1978 version of section 550(a) even though this transfer flowed from another creditor's action under section 553. 76 Any doubt that Congress intended for the trustee to be able to reach benefits that indirect beneficiaries realize through other creditors' setoffs was resolved when Congress in 1984 amended section 550(a) to include section 553(b). While this version of section 550(a) does not apply in this case, it is useful in illuminating Congress's aims. Nothing suggests that this amendment was intended to broaden the trustee's avoiding power or reach new parties that were beyond the 1978 statute's grasp. Rather, this amendment made only minor technical changes, see Herzog & King, Bankruptcy Code, 1986 Collier Pamphlet Edition at 366, designed to clarify Congress's meaning. What was implicit before is now clear: the trustee may reach any party that inequitably benefits from a setoff during the preference period. 77 To conclude that indirect beneficiaries are beyond the trustee's reach would undermine the purpose of the preference provision that general unsecured creditors share evenly in the bankruptcy estate. The district court's decision would allow Gateway's security interest to grow to the detriment of other general creditors. Such a result cannot stand.