Opinion ID: 812961
Heading Depth: 2
Heading Rank: 1

Heading: The Bank’s Setoff Defense as to the Money

Text: in the Account Before the Preference Period At the start of the preference period, the Debtor had on deposit with Defendant Bank the sum of $13,579.98. Those funds were included in the total received by the Bank along with other proceeds from liquidation of its collateral. The Bankruptcy Court held that the $13,579.98 was subject to the Bank’s setoff rights under § 553(a), and that therefore the receipt of such funds was not a preference. Section 553(a) 13 Kroh Bros. Development Co. v. Commerce Bank of Kansas City, N.A., 86 B.R. 186, 191-192 (Bankr. W.D. Mo. 1988) (citations and internal quotation marks omitted). 12 preserves, with certain exceptions, the right of setoff of mutual debts owed prepetition between a debtor and a creditor. The Trustee argues in his cross-appeal that since the Bank did not actually exercise any setoff rights against the Debtor’s account on the 90th day prior to the bankruptcy filing, the benefit of § 553 is not available to it. However, the issue here is not whether the Bank set off the funds on the 90th day; rather, the proper focus should be that the Bank held a security interest in such funds at the start of the preference period, by virtue of its setoff rights under the loan documents and state law, and maintained that security interest until the funds were paid to it. The Trustee does not dispute that the Bank held a duly perfected security interest in the Debtor’s funds on deposit at the Bank and, therefore, held setoff rights against those funds.14 Instead, the Trustee relies on Formtech Industries, LLC15 for the proposition that any setoff rights must actually be exercised to be effective under § 553. However, even if § 553 were applicable, it contains an exception for sales under § 363, and Formtech involved such a sale. He also relies on Baker v. National City Bank of Cleveland,16 which dealt with the steps a bank must take to effectuate a setoff of a customer’s account. That case is not relevant here because the issue is not whether the Bank actually effectuated a setoff; instead, since the Bank held a security interest in those funds, it did not receive a preference by receipt of such funds. For these reasons, payment to the bank of funds which were held in Debtor’s account at 14 The Bank’s loan and security agreement clearly provides the Bank a security interest in all such funds on deposit, which security interest is automatically perfected by virtue of the depository bank having control over the account. See Minn. Stat. Ann. §§ 336.9-314(a) and 336.9-104(a). 15 439 B.R. 352, 361-62 (Bankr. D. Del. 2010). 16 511 F.2d 1016 (6th Cir. 1975). 13 the Bank at the start of the liquidation period was not a preferential transfer or an improper setoff.