In Re Tenderloin Health, FKA Continuum HIV Day Services, AKA Tenderloin Health Incorporated, Debtor, E. Lynn Schoenmann, Trustee, Plaintiff-Appellant,
Bank of The West, Defendant-Appellee.
and Submitted October 18, 2016 San Francisco, California
from the United States District Court No. 4:13-cv-03992-JSW
for the Northern District of California Jeffrey S. White,
District Judge, Presiding.
Davis (argued), Goldberg Stinnett Davis & Linchey,
Petaluma, California, for Plaintiff-Appellant.
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.
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
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.
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.
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.
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.
D. SMITH, JR. JUDGE.
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."
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
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
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
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.
AND PROCEDURAL BACKGROUND
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.
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).
20, 2012, Tenderloin filed for chapter 7 bankruptcy. Ninety
days prior to filing, its account contained approximately
$173, 015.00. 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.
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
AND STANDARD OF REVIEW
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.
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).
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.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).
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.
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 ...