Tenderloin Health v. Bank of the West
849 F.3d 1231
9th Cir.2017Background
- Schoenmann, trustee in bankruptcy, seeks to recover a $190,595.50 payment Tenderloin made to BOTW within 90 days of Tenderloin’s Chapter 7 filing.
- Tenderloin sold its real property for $1,295,000 and transferred $526,402.05 into BOTW deposit account after paying the debt with escrow proceeds.
- On the petition date (July 20, 2012) Tenderloin’s account balance fluctuated (roughly $564,115.92), with the disputed deposit affecting available estate assets.
- Bankruptcy court granted BOTW summary judgment, holding BOTW would not receive more in a hypothetical Chapter 7 liquidation due to a setoff right and existing deposit.
- Schoenmann challenged the deposit under §547(b)(5)’s greater-amount test and argued a hypothetical liquidation would avoid the deposit, reducing the estate available to creditors.
- The majority reverses, holding that hypothetical preference actions can be entertained within §547(b)(5) when warranted and that the $526,402.05 deposit would be avoidable in the hypothetical liquidation, remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May §547(b)(5) entertain a hypothetical liquidation analysis? | Schoenmann—hypothetical liquidation allowed per §547(b)(5). | BOTW—cannot introduce hypothetical liquidation analysis into jurisdiction. | Yes; hypothetical preference actions are permissible when factually warranted. |
| Would the $526,402.05 deposit be an avoidable preference in the hypothetical liquidation? | Deposit would be avoided, leaving Tenderloin’s petition-date balance under the hypothetical, reducing BOTW’s recovery. | Deposit constitutes a mere transfer that does not improve BOTW’s position under the Code. | Yes; deposit would be avoidable as a preference in the hypothetical liquidation. |
| Does BOTW's right of setoff defeat the greater-amount test in a hypothetical context? | Hypothetical test shows BOTW would receive more due to the deposit, despite setoff. | Setoff rights are protective and could defeat preference liability. | The analysis considers hypothetical-setoff and deposits; the trustee may prove preference under §547(b)(5). |
Key Cases Cited
- LCO Enters., Inc. v. Walsh, 12 F.3d 938 (9th Cir. 1993) (defines the broader scope of the §547(b)(5) hypothetical analysis within the case facts)
- In re Smith’s Home Furnishings, Inc., 265 F.3d 959 (9th Cir. 2001) (illustrates the greater-amount test in the Ninth Circuit)
- Bernard v. Sheaffer, 96 F.3d 1279 (9th Cir. 1996) (confirms that deposits can be transfers; importance of statutory structure with setoff)
- New York County Nat’l Bank v. Massey, 192 U.S. 138 (1904) (deposits create setoff rights; Massey as controlling in Massey-type reasoning under pre-1978 Act)
- In re Kiwi Int’l Air Lines, Inc., 344 F.3d 311 (3d Cir. 2003) (discussion of setoff and preference under different circuits)
- In re Sierra-Cal, 210 B.R. 168 (Bankr. E.D. Cal. 1997) (context on how all provisions applicable in a chapter 7 liquidation are considered)