Bakersfield Westar Ambulance, Inc., In re, 96-16287
| Decision Date | 22 August 1997 |
| Docket Number | No. 96-16287,96-16287 |
| Citation | 123 F.3d 1243 |
| Parties | , 33 UCC Rep.Serv.2d 615, 97 Cal. Daily Op. Serv. 6725, 97 Daily Journal D.A.R. 10,937 In re BAKERSFIELD WESTAR AMBULANCE, INC., Debtor. Randell PARKER, Appellant, v. COMMUNITY FIRST BANK, Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
T. Scott Belden, Klein, DeNatale, Goldner, Cooper, Rosenlieb & Kimball, LLP, Bakersfield, CA (Michael S. Abril, on the brief), for appellant.
Ray T. Mullen, Law Office of Ray T. Mullen, Bakersfield, CA, for appellee.
Appeal from the United States District Court for the Eastern District of California; Robert E. Coyle, Chief Judge, Presiding. D.C. No. CV-95-05942-REC.
Before: FARRIS and TASHIMA, Circuit Judges, and STAGG, Senior District Judge. *
Randell Parker, Chapter 7 Trustee for Bakersfield Westar, Inc., initiated this proceeding against Community First Bank to recover monies set off by the Bank within ninety days of Westar's petition in bankruptcy. The bankruptcy court entered summary judgment in favor of Parker. The district court reversed, and Parker appeals. We have jurisdiction under 28 U.S.C. § 158(d). We reverse.
On July 13, 1992, Community First Bank loaned $103,189.26 to Bakersfield Westar, Inc. The loan was secured by two ambulances, "[a]ll personal property of any kind which is delivered to or in the possession or control of [the] Bank or its agents," and proceeds from the described collateral. The loan was also guaranteed by Craig and Jodee Saunders and Craig Saunders, M.D., Inc. In October 1992, the parties revised and extended the loan, leaving all security instruments in place. The Bank extended Westar a "Mastercard" line of credit.
On December 4, 1993, Westar owed the Bank $20,064.00 on the line of credit and $87,219.41 on the loan. On that date, Westar maintained $37,807.86 in a deposit account at the Bank.
Westar became delinquent on the line of credit. On January 18, 1994, the Bank set off $20,164.40 from Westar's deposit account to satisfy Westar's credit obligation. On January 20, Westar defaulted on the loan, and the Bank set off an additional $57,466.43 from the Westar account in partial satisfaction of the loan obligation.
On March 4, 1994, the Chapter 7 Trustee for Craig and Jodee Saunders' bankruptcy estate, Patrick Kavanagh, filed a Chapter 7 petition for Bakersfield Westar Ambulance, Inc. 1 On October 14, 1994, Parker filed the present action against the Bank, contending that the January 18 and 20 setoffs were partially avoidable under 11 U.S.C. § 553(b).
The parties filed cross motions for summary judgment. The bankruptcy court granted Parker's motion and denied the Bank's. The court ruled that (1) section 553(b) applied regardless of whether the The district court reversed, holding that (1) section 553(b) does not apply to setoffs against secured claims; (2) the Bank could maintain a security interest in Westar's deposit account under California law; and (3) the Bank held a security interest in Westar's deposit account. Parker appeals.
Bank's claim against Westar was secured; and (2) the Security Agreement between Westar and the Bank did not grant the Bank a security interest in Westar's deposit account.
The roles of this Court and the district court are essentially the same in the bankruptcy appellate process. In re DAK Industries, 66 F.3d 1091, 1094 (9th Cir.1995). We therefore review the bankruptcy court's decision directly. Id.
We review the bankruptcy court's grant of summary judgment de novo. Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir.1996). Viewing the evidence in the light most favorable to the nonmoving party, we must determine whether there are any genuine issues of material fact and whether the bankruptcy court correctly applied the substantive law. Id.
"The right of setoff (also called 'offset') allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding 'the absurdity of making A pay B when B owes A.' " Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, ----, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995)(quoting Studley v. Boylston Nat. Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913)). While the Bankruptcy Code creates no federal right of setoff, section 553(a) of the Code preserves in bankruptcy rights of setoff which otherwise exist, subject to certain limitations. Id.; 11 U.S.C. § 553(a).
One such limitation is section 553(b), which provides in pertinent part:
(b)(1) ... 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 later of--
(A) 90 days before the date of the filing of the petition; and
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency
(2) In this subsection, "insufficiency" means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
11 U.S.C. 553(b). This section permits a trustee to recover a prepetition setoff by a creditor to the extent the creditor "improved its position" relative to other creditors by setting off within ninety days of the filing of the petition. See Smith v. Mark Twain Nat. Bank, 805 F.2d 278, 289-90 (8th Cir.1986)(section 553(b) applies an "improvement in position test"). 2
It is undisputed here that the Bank had the right to set off Westar's funds under California law. See Gonsalves v. Bank of America Nat. Trust & Sav. Ass'n, 16 Cal.2d 169, 173-74, 105 P.2d 118 (1940). It is also undisputed that the Bank improved its position State law governs whether and to what extent the Bank held security interests in Westar's property. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). The Bank claims that its claim was secured under California law in two ways. Its primary argument is that it retained a security interest in Westar's deposit account itself by means of the Security Agreement. By setting off the funds, the Bank argues, it was in essence foreclosing on its security interest and thus did not improve its position relative to other creditors. The Bank's secondary argument is that its claim was fully secured by the ambulances, and thus it did not improve its position relative to other creditors by setting off the funds. We address each argument in turn.
by means of the setoffs on January 18 and 20. The Bank argues, however, that section 553(b) does not apply where the offsetting creditor's claim is fully secured because a creditor with a fully secured claim cannot improve its position relative to other creditors. The factual predicate for this argument is, of course, that the Bank's claim was fully secured.
Resolving this question involves two distinct inquiries: (1) whether the Bank could obtain a security interest in Westar's deposit account under California law and (2) whether the Bank did in fact obtain a security interest in the account by means of the Security Agreement.
Could the Bank obtain a Security Interest in Westar's
Division 9 of the California Commercial Code governs consensual security interests in personal property and fixtures. It applies "to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper, or accounts." Cal. Comm.Code § 9102(1)(a).
A prerequisite to the creation of a valid security interest under Division 9 is that "[t]he debtor has rights in the collateral." Cal Comm.Code § 9203(1)(c). Parker argues that a bank cannot obtain a valid security interest in one of its own deposit accounts because such a security interest would conflict with section 9203(1)(c). When funds are deposited at a bank, Parker argues, the money becomes the property of the bank, and the bank cannot retain a security interest in its own property.
This argument misidentifies the property right to which a bank's security interest in a deposit account attaches. Permitting a bank to hold a security interest in a deposit account does not permit the bank to hold a security interest in its own property because the security interest retained by the bank is not in the deposited funds. By depositing money into a bank account, the depositor enters a debtor-creditor relationship with the bank. In re Bernard, 96 F.3d 1279, 1282 (9th Cir.1996)(citing Chang v. Redding Bank of Commerce, 29 Cal.App.4th 673, 681, 35 Cal.Rptr.2d 64 (1994)). Title to the funds passes to the bank, and the depositor receives a contract claim against the bank for an amount equal to the account balance. Id. (citations omitted). It is to this intangible chose in action, rather than the deposited funds, that the bank's security interest attaches. See In re Mycro-Tek, Inc., 191 B.R. 188, 193 (Bkrtcy.D.Kan.1996). In other words, the bank's interest attaches to an intangible personal property right, a "general intangible" 3 of the depositor, not the bank's own property.
Further, it is clear that the California Legislature intended a bank to be able to obtain a Division 9 security interest in a depositor's chose in action against the bank.
See Johanson Transportation Service v. Rich Pik'd Rite, Inc., 164 Cal.App.3d 583, 210 Cal.Rptr. 433 (1985)(recognizing bank's security interest in restricted deposit account under California Commercial Code); see also In re Mycro-Tek, Inc., 191 B.R. at 193 (...
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