Gladstone v. Bank of Am., N.A. (In re Vassau)

• Decision Date: 25 September 2013
• Docket Number: Bankruptcy No. 09–09536–PB7.,Adversary No. 11–90280–PB.
• Citation: 499 B.R. 864
• Parties: In re Paul Eugene VASSAU and Julie Ann Vassau, Debtors. Leslie T. Gladstone, Chapter 7 Trustee, Plaintiff, v. Bank of America, N.A., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of California

499 B.R. 864

In re Paul Eugene VASSAU and Julie Ann Vassau, Debtors.Leslie T. Gladstone, Chapter 7 Trustee, Plaintiff,

v.Bank of America, N.A., Defendant.

Bankruptcy No. 09–09536–PB7.

Adversary No. 11–90280–PB.

United States Bankruptcy Court, S.D. California.

Sept. 25, 2013.

Christin A. Batt, Financial Law Group, La Jolla, CA, for Plaintiff.

Tami Crosby, Miles, Bauer, Bergstrom & Winters LLP, Santa Ana, CA, for Defendant.

ORDER ON TRUSTEE'S MOTION FOR SUMMARY JUDGMENT

PETER W. BOWIE, Bankruptcy Judge.

The facts of this case are neither uncommon nor disputed. When this case was filed, and during the ninety days before, Debtors' residence was subject to two deeds of trust securing obligations to two creditors-the Senior Lienholder and Junior Lienholder. The property was worth more than the claim of the Senior Lienholder, but less than the claims of Senior Lienholder and Junior Lienholder combined. In other words, the Senior Lienholder was fully secured and the Junior Lienholder was partially secured.

Debtors fell behind on their payments to Senior Lienholder. Within the 90 days prior to the petition, the Debtors made ten payments to the Senior Lienholder.

Though the transfers were made to the Senior Lienholder, Trustee seeks to avoid the transfers on the theory that they were preferences as to the Junior Lienholder. The Trustee and the Junior Lienholder have both moved for summary judgment. This Order addresses the Trustee's motion.

BACKGROUND

Paul Eugene Vassau and Julie Ann Vassau (Debtors) filed their petition on July 1, 2009. Leslie Gladstone was appointed chapter 7 trustee (Trustee). Debtors scheduled the real property located at 7071 Rose Drive, Carlsbad, California 92001 (the “Property”). As of the petition date, the Property was worth approximately $1.1 million dollars.¹

At all times relevant to this matter, the Property was subject to a first priority lien in favor of Bank of America (as successor in interest of Countrywide Bank) (“Senior Lienholder”) under Loan No. –3720, and a second priority lien in favor of Bank of America (as successor in interest of Countrywide Bank) (“Junior Lienholder”) under Loan No. 3728.² Prior to the payments discussed below, the amount owed to the Senior Lienholder was approximately $987,920.00, and the amount owed to Junior Lienholder was approximately $264,717.21. Given the $1.1 million value of the Property, the claim of the Senior Lienholder was fully secured, while the claim of the Junior Lienholder was only partially secured.

During the 90 days before the date the petition was filed, the Debtors made ten payments to the Senior Lienholder totalling $41,716.45 (the “Transfers”). The Transfers were applied to interest charges, late charges, the negative escrow balance and miscellaneous charges, all of which would be secured under the senior deed of trust. Had the Transfers not been made, the fully secured claim of the Senior Lienholder would have been greater by $41,716.45.

DISCUSSION

The Transfers were all made to the Senior Lienholder—no transfers were made to the Junior Lienholder. Nevertheless, the Trustee seeks to avoid the Transfers on the theory that they were preferential transfers as to the Junior Lienholder. As the Trustee explains:

Defendant Junior Lienholder benefitted from the Transfers because the effect of the Transfers was to reduce the amount of the Senior Lienholder's secured claim on the Real Property and correspondingly increase the value of Defendant's security interest in the Real Property.

That is, had the Transfers not been made the amount of the fully secured claim of the Senior Lienholder would be $41,716.45 greater. That $41,716.45 would reduce the amount by which the claim of Junior Lienholder was secured dollar for dollar. The Transfers reduced Senior Lienholder's secured claim and correspondingly increased that of Junior Lienholder dollar for dollar.³

In order to avoid a transfer as a preference, a trustee must establish each of the requirements of Bankruptcy Code § 547(b), which provides:

(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that 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.

The Junior Lienholder concedes that a transfer of an interest of the Debtors in property was made and that elements (b)(2), (3) and (4) are established. The Junior Lienholder contests elements (b)(1) and (5). Junior Lienholder also asserts § 547(i) as a sort of defense.

Section 547(i)

Junior Lienholder's first argument is based upon a misunderstanding of § 547(i). That subsection provides:

(i) If the trustee avoids under subsection (b) a transfer made between 90 days and 1 year before the date of the filing of the petition, by the debtor to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be considered to be avoided under this section only with respect to the creditor that is an insider.

The Trustee's theory in this case, and that contemplated under § 547(i) are similar in that they both deal with a situation in which a transfer is preferential to one party, but not another. That, though, is where the similarity ends. Citing § 547(i), Junior Lienholder argues “Non-insiders who indirectly benefit from a payment by the debtor are not liable for a preference.” That is not what § 547(i) says.

First, the Transfers the Trustee seeks to avoid were not made “between 90 days and 1 year” before the petition, they were made within 90 days. Second, neither Senior Lienholder nor Junior Lienholder are insiders.

Subsection 547(i) applies to the situation where an transfer is made to a non-insider, but indirectly benefits an insider. The transfer may be a preference as to the insider, to whom the one-year look back period applies, but not the non-insider, who is protected by the 90–day look back period. That is not the situation we have in this case. Section 547(i) simply does not apply to the facts of our case.

(b)(1) to or for the benefit of a creditor;

Junior Lienholder concedes, as it must, that as of the date of the Transfers, it was a creditor of the Debtors. It denies, however, that the Transfers were made for its benefit. It is not entirely clear, but it appears Junior Lienholder's argument is that the Transfers do not satisfy § 547(b)(5), because the Debtors did not intend that the Transfers benefit it. This misunderstanding is understandable. In the absence of case law to the contrary, the word “for” in the phrase “for the benefit of a creditor,” could be read to require the debtor make the transfer with the intent of benefitting the creditor. However, there is in fact ample case law to the contrary. Indeed, it is well established that the intent of the parties is irrelevant to the preference analysis.

Professor Vern Countryman explained in his comprehensive article, “The Concept of a Voidable Preference in Bankruptcy,” that intent on the part of the debtor has not been an element of preference since 1910, and intent on the part of the transferee or beneficiary was removed as of 1978. 38 Vand.L.Rev. 713, 722–23; 726 (1985).

The court in In re Phelps Technologies, Inc., elaborated:

what the parties might have intended is immaterial. Because a preference “ ‘is an infraction of the rule of equal distribution among all creditors,’ ... neither the intent nor motive of the parties is relevant in consideration of an alleged preference under § 547(b).” Matter of Criswell, 102 F.3d 1411, 1414 (5th Cir.1997) (quoting 4 collier On Bankruptcy ¶ 547.01, at 547–12, 13 (15th ed. 1996)). “[I]t is the effect of the transaction, rather than the debtor's or creditor's intent, that is controlling.” 5 collier On Bankruptcy ¶ 547.01, at 547–14, 15 (15th ed. 1999)(emphasis in original). See also, Corporate Food Management, Inc. v. Suffolk Community College ( In re Corporate Food Management, Inc.), 223 B.R. 635, 641 (Bankr.E.D.N.Y.1998). Therefore, what the parties might have intended to accomplish in this instance is immaterial; the effect of what was done is controlling.

245 B.R. 858, 867 (Bankr.W.D.Mo.2000).

Thus, § 547(b)(1) cannot be read to require an intent to benefit. Rather, “for the benefit of a creditor,” merely requires that the transfer actually benefitted the creditor. In the case at hand it is clear the Junior Lienholder benefitted from the Transfers. The effect of the Transfers was to increase the equity in the Property available to secure the claim of Junior Lienholder. Due to the Transfers, Junior Lienholder has a larger secured claim, and a correspondingly smaller unsecured claim in this bankruptcy case. The impact of the Transfers is the same as if Debtors had pledged new collateral worth $41,716.45.

On facts very similar to the ones at hand the Seventh Circuit held that transfers to a senior lienholder benefitted the junior lienholder:

Gateway as junior lienholder benefitted from the improvement in Marine's position. The bankruptcy court found that as Marine's debt secured by the East Washington store inventory decreased, Gateway's security was thereby increased dollar for dollar. This, the court determined, resulted in an indirect preferential transfer to Gateway to the extent the amount transferred to Marine reduced the fund for payment to other creditors with unsecured...