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In re Tenderloin Health

United States Court of Appeals, Ninth Circuit

March 7, 2017

In Re Tenderloin Health, FKA Continuum HIV Day Services, AKA Tenderloin Health Incorporated, Debtor, E. Lynn Schoenmann, Trustee, Plaintiff-Appellant,
v.
Bank of The West, Defendant-Appellee.

          Argued and Submitted October 18, 2016 San Francisco, California

         Appeal from the United States District Court No. 4:13-cv-03992-JSW for the Northern District of California Jeffrey S. White, District Judge, Presiding.

          Dennis Davis (argued), Goldberg Stinnett Davis & Linchey, Petaluma, California, for Plaintiff-Appellant.

          James A. Tiemstra (argued) and Lisa Lenherr, Tiemstra Law Group PC, Oakland, California, for Defendant-Appellee.

          Before: A. WALLACE TASHIMA and MILAN D. SMITH, JR., Circuit Judges, and EDWARD R. KORMAN, [*] District Judge.

         SUMMARY[**]

         Bankruptcy

         The panel reversed the district court's order affirming the bankruptcy court's summary judgment in favor of the defendant in an adversary proceeding brought by a chapter 7 bankruptcy trustee.

         The trustee sought to recover for the bankruptcy estate a $190, 595.50 loan payment debtor Tenderloin Health made to defendant Bank of the West within ninety days of the filing of the bankruptcy petition. The bankruptcy court concluded that the trustee failed to satisfy the "greater amount test, " pursuant to 11 U.S.C. § 547(b)(5), by demonstrating that by virtue of that payment, the Bank received more than it otherwise would have in a hypothetical chapter 7 liquidation where the challenged transfer had not been made. The bankruptcy court reasoned that the Bank had a right of setoff, and the debtor's account contained at least $190, 595.50 on the petition date.

         The trustee asserted that in the hypothetical liquidation, the trustee would avoid a $526, 402.05 deposit, leaving less than $190, 595.50 in the debtor's account, even allowing for the Bank's right of setoff.

         The panel held that courts may account for hypothetical preference actions within a hypothetical chapter 7 liquidation when such an inquiry is factually warranted, is supported by appropriate evidence, and the action would not contravene an independent statutory provision. The panel concluded that the $526, 402.05 deposit would constitute an avoidable preference in the hypothetical liquidation at issue. The panel therefore reversed the district court's judgment in favor of the Bank and directed that the action be remanded to the bankruptcy court further proceedings.

         District Judge Korman concurred in part and concurred in the judgment. He concurred in the decision to reverse and remand to the bankruptcy court and joined all but Part II of the majority opinion, addressing the hypothetical liquidation. Judge Korman agreed that, under the circumstances of this case, applying § 547(b)(5)'s "greater amount" test required the court to construct a hypothetical liquidation, and that in so doing, the court could consider whether a reasonable trustee would bring and win a preference action within the hypothetical chapter 7 proceedings. He wrote that he could not, however, join in the liquidation constructed by the majority because he could not agree that the entirety of the $526, 402.05 deposit was itself a preferential transfer subject to clawback under 11 U.S.C. § 547.

          OPINION

          MILAN D. SMITH, JR. JUDGE.

         In this preference action, plaintiff-appellant E. Lynn Schoenmann (Schoenmann), the trustee in bankruptcy, seeks to recover for the bankruptcy estate a $190, 595.50 loan payment debtor Tenderloin Health (Tenderloin) made to defendant-appellee Bank of the West (BOTW) within ninety days of the filing of Tenderloin's chapter 7 bankruptcy. To succeed, Schoenmann must demonstrate that by virtue of that payment BOTW received more than it otherwise would have in a hypothetical chapter 7 liquidation where the challenged transfer had not been made. This inquiry, required by 11 U.S.C. § 547(b)(5), is called the "greater amount test."

         The bankruptcy court granted BOTW's motion for summary judgment, finding Schoenmann could not satisfy section 547(b)(5), because BOTW had a right of setoff, and Tenderloin's account contained at least $190, 595.50 on the petition date. Schoenmann asserts that in the hypothetical liquidation, the trustee would avoid a $526, 402.05 deposit, leaving less than $190, 595.50 in Tenderloin's account, even allowing for BOTW's right of setoff.

         In order to resolve the issues presented in this case, we address whether courts may entertain hypothetical preference actions within section 547(b)(5)'s hypothetical chapter 7 liquidation, and if so, whether the $526, 402.05 deposited in this case would meet the definition of an avoidable preference.

         We conclude that courts may account for hypothetical preference actions within a hypothetical chapter 7 liquidation when such an inquiry is factually warranted, is supported by appropriate evidence, and the action would not contravene an independent statutory provision. We are also satisfied that the $526, 402.05 deposit in this case would constitute an avoidable preference in the hypothetical liquidation at issue here.

         We therefore reverse the district court's judgment in favor of BOTW and direct that this action be remanded to the bankruptcy court for further proceedings.

         FACTUAL AND PROCEDURAL BACKGROUND

         In May 2009, BOTW extended a $200, 000 line of credit to Tenderloin, a walk-in clinic serving AIDS patients in San Francisco. BOTW loaned another $100, 000 to Tenderloin two years later. The loans were secured by Tenderloin's personal property, including its deposit accounts with BOTW.

         In late 2011 or early 2012, Tenderloin elected to wind up its affairs. In carrying out that election, it sold its only real property for $1, 295, 000. The escrow on that sale closed on June 13, 2012. Tenderloin used the proceeds of that sale to execute two transactions that same day. First, it paid BOTW $190, 595.50 from escrow to satisfy fully its outstanding loan obligations (debt payment). Next, it moved the rest of its net sale proceeds-$526, 402.05-from escrow into its BOTW deposit account (the deposit).

         On July 20, 2012, Tenderloin filed for chapter 7 bankruptcy. Ninety days prior to filing, its account contained approximately $173, 015.00.[1] That sum shrunk to $52, 735.11 on the date of the two disputed transfers, but grew to $576, 603.03 immediately after the deposit. Tenderloin then spent some of its funds in the days preceding its bankruptcy, so the account contained $564, 115.92 on the petition date. If we subtract from that sum the amount of the disputed deposit-$526, 402.05-Tenderloin's account would have contained only $37, 713.87 on the petition date.

         Schoenmann sued BOTW on December 12, 2012, alleging that the debt payment was preferential, and subject to avoidance under 11 U.S.C. § 547(b). The bankruptcy court granted BOTW's motion for summary judgment on July 31, 2013, concluding that Schoenmann could not show that BOTW received more than it would have in a hypothetical liquidation where the debt payment had not been made. Schoenmann appealed to the district court pursuant to 28 U.S.C. § 158(a)(1). The district court affirmed, and Schoenmann timely appealed to our court.

         JURISDICTION AND STANDARD OF REVIEW

         We have jurisdiction pursuant to 28 U.S.C. § 158(d)(1). "We review de novo the district court's judgment in the appeal from the bankruptcy court, and apply the same de novo standard of review the district court used to review the bankruptcy court's summary judgment." Suncrest Healthcare Ctr. LLC v. Omega Healthcare Inv'rs (In re Raintree Healthcare Corp.), 431 F.3d 685, 687 (9th Cir. 2005).

         ANALYSIS

         Section 547(b) permits a bankruptcy trustee to recover for the benefit of the bankruptcy estate preferential payments from a debtor to a creditor made within the ninety days preceding the filing of a bankruptcy. 11 U.S.C. § 547(b). To "avoid" such a payment, the trustee must show, among other things:

(5) that [it] 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)(5) (emphasis added).

         This element-11 U.S.C. § 547(b)(5)-constitutes the so-called "greater amount test, " which "requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7" without the alleged preferential transfer.[2]Alvarado v. Walsh (In re LCO Enters.), 12 F.3d 938, 941 (9th Cir. 1993) (LCO). Schoenmann challenges the $190, 595.50 debt payment, claiming that section 547(b)(5) is satisfied in this case if BOTW "received a greater amount than it would have if the [debt payment] had not been made and there had been a hypothetical chapter 7 liquidation as of the petition date." Batlan v. TransAmerica Commercial Fin. Corp. (In re Smith's Home Furnishings, Inc.), 265 F.3d 959, 963 (9th Cir. 2001) (Smith).

         The bankruptcy court determined that BOTW did not receive more than it would have in a hypothetical liquidation because it maintained a right of setoff that entitled it to full payment, and Tenderloin's deposit account held the requisite amount of funds on the petition date. Schoenmann argues, however, that the trustee would avoid the $526, 402.05 deposit in a hypothetical liquidation, such that the deposit account would contain only $37, 713.87 on the petition date, a sum far less than the $190, 595.50 BOTW actually received, even allowing for its right of setoff.

         BOTW objects to Schoenmann's analysis for two reasons. First, BOTW insists it is impermissible to entertain a hypothetical preference action within a hypothetical liquidation. Second, BOTW claims that the deposit made by Tenderloin into its deposit account would not ...


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