In re Ford, Bankruptcy No. 88-00168

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court —District of Vermont
Citation98 BR 669
Decision Date31 March 1989
Docket NumberAdv. No. 88-0043A.,Bankruptcy No. 88-00168
PartiesIn re John R. FORD, II and Sarah A. Ford, Debtors. Douglas J. WOLINSKY, Trustee of the Estate of John R. Ford, II and Sarah A. Ford, Plaintiff, v. CENTRAL VERMONT TEACHERS CREDIT UNION, Defendant.

98 B.R. 669 (1989)

In re John R. FORD, II and Sarah A. Ford, Debtors.
Douglas J. WOLINSKY, Trustee of the Estate of John R. Ford, II and Sarah A. Ford, Plaintiff,

Bankruptcy No. 88-00168, Adv. No. 88-0043A.

United States Bankruptcy Court, D. Vermont.

March 31, 1989.

98 BR 670

R. Brock, Cheney, Brock & Saudek, P.C., Montpelier, Vermont, for Cent. Vermont Teachers Credit Union (Credit Union).

G. Gebauer, Jr., Saxer, Anderson, Wolinsky & Sunshine, Burlington, Vermont, for trustee of the Estate of John R. Ford, II and Sarah A. Ford (trustee).

R. Obuchowski, Mayer, Berk & Obuchowski, South Royalton, Vt., for debtors.


FRANCIS G. CONRAD, Bankruptcy Judge.

The Trustee seeks to recover an alleged preferential transfer under 11 U.S.C. § 547(b)2 from the Debtors to the Credit Union. The Credit Union does not dispute that it received a preferential transfer. The Credit Union's concession satisfies the Trustee's burden under 11 U.S.C. § 547(g) "of proving the avoidability of a transfer under subsection (b) of this section," id., and establishes the elements of a preferential

98 BR 671
transfer under § 547(b) by the prerequisite preponderance of the evidence standard. See, In re Thayer, 38 B.R. 412, 421 (Bkrtcy.D.Vt.1984) ("The trustee bears the burden of establishing that a transfer constitutes a preference."); Meyers v. Vermont National Bank (In re Music House, Inc.), 11 B.R. 139, 140 (Bkrtcy.D.Vt.1980) ("The law places upon the trustee the unmistakable burden of proving by a fair preponderance of all the evidence every essential, controverted element resulting in the composite preference."). The Credit Union claims it is entitled to an off-set for "new value" under 11 U.S.C. § 547(c)(4)3 that might have arisen but for its admitted unilateral failure to discover the existence of a potential statutory lien under 8 Vt. Stat.Ann. § 2071(d)4 before deposit account sums were withdrawn post-petition by the Debtor and before the Trustee's § 547 preferential transfer complaint. We grant the Trustee's request for summary judgment on its § 547(b) preference action and deny the Credit Union's request for a § 547(c)(4) set-off


On December 6, 1988, the Trustee filed a "Complaint to Recover A Preferential Transfer" against the Credit Union and requested the return of $3,188.75 as a pre-petition transfer: made within 90 days before the filing of an "involuntary" (sic— voluntary) petition; to an unsecured creditor; on account of an antecedent debt; and, if the transfer had not been made, which enabled the Credit Union to receive more than it would have been entitled to under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 101, et seq.

On December 8, 1988, we issued a "Preliminary Pre-Trial Order With Instructions" (VLBR Form No. 15) and a "Summons and Notice of Pre-Trial Conference," which together with the complaint were served by the Trustee upon the Debtor and the Credit Union.

On January 30, 1989, the Trustee filed a copy of the "Stipulation As To Facts" signed by the Trustee and the Credit Union. The Stipulation provided in pertinent parts:

3. Prior to filing the bankruptcy, the bankrupts had a debt of $2,378.58 with Central Vermont Teachers\' Credit Union and a deposit account of $508.
4. On July 14, 1988, the debtor Sarah Ford appeared at the office of the Central Vermont Teachers\' Credit Union and paid the entire $2,378.58 debt due.
5. On July 15, 1988, the Petition for relief under Chapter 7 in this matter was filed.
6. On September 7, 1988 the debtors withdrew the $508 from the existing deposit account.
7. On November 15, 1988 the trustee advised the Central Vermont Teachers\' Credit Union of the potential problem and demanded return of the July 14, 1988 payment.

On January 30, 1989, Debtors' counsel filed a letter with the Court and represented the absence of an objection to the "Stipulation As To Facts," "Except for paragraph 7 which was outside of the Debtors' or their counsel's knowledge." Based on the representations of the parties that no further evidence or hearings were necessary,

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the matter was taken under advisement


On January 26, 1989, the Credit Union filed their "Memorandum." They conceded that a preferential payment under 11 U.S.C. § 547 was given by the Debtors to the Credit Union and that the Trustee is entitled to an order for the return of $1,870.58. The $1,870.58 amount, the Credit Union argues, is the appropriate preference amount rather than the $2,378.58 amount the Trustee claims. The difference of $508.00 represents the proverbial "bone of contention" among the parties.

The Credit Union claims:

8 VSA § 2071(d) gives the credit union a lien in any deposits for unpaid debts. When the debtors withdrew that money ($508.00), the credit union did not realize that there was any `unpaid debt\' because of the payment which had been made on July 14th ($2,378.58). Had the credit union realized that the ($2,378.58) payment was preferential and would have to be returned, the credit union would not have allowed the withdrawal of the $508. Had they sought my (Credit Union\'s attorney) advice at that time, I would have recommended that they file a petition in reclamation to retain possession of the $508. Since they were unaware of the problem, however, they knew of no reason why they should not comply with the debtors\' request for the money and they in fact released the money to the debtor (sic).
Offset of the $508 against the preference return is dictated by § 547(c)(4). . . . To the extent that the credit union released the $508 which it would not have released had it known it would have to return the July 14, 1988 payment, the transfer cannot be avoided. . . .

Credit Union's "Memorandum," pages 2-3 (parentheticals supplied for clarity).

In addition to the facts contained in the parties' "Stipulation As To Facts," the Trustee's "Memorandum In Support Of Trustee's Complaint To Recover A Preferential Transfer," filed January 30, 1989, requests that we take judicial notice of the following facts on record:

(b) On Schedule A-3 of said Petition (Debtors\' Bankruptcy Petition filed July 15, 1988), the defendant (Credit Union) was listed as an unsecured creditor, with a claim in the amount of $3,188.75.
(c) All creditors listed on the Debtors\' Petition, including the Defendant in this matter, were given notice of the filing by the Bankruptcy Court, said notice dated July 18, 1989 . . .

Id., at pages 1-2 (parentheticals supplied for clarity).

The Trustee asserts that the Credit Union's statutory lien requires some form of possession. The Debtors' withdrawal of the funds from their deposit account destroyed any possession the Credit Union had, and thus terminated whatever lien the Credit Union may have had. As to the Credit Union's asserted ignorance, the Trustee argues that not only is causation of the lien's termination irrelevant, "this proposition ignores the fact that Defendant (Credit Union) knew that the payment to it occurred prior to the petition date, thus (it) was clearly a preference." Id., at page 3 (parenthetical supplied for clarity).

As to the Credit Union's "new value" argument, the Trustee responds that this "is an inaccurate reading of the statute" and that:

In the case at bar, the Defendant (Credit Union) did not give new value to the Debtors estate. Rather, it allowed the Debtors access to funds which they already owned. The statute (11 U.S.C. § 547(c)(4)), then, will not benefit the defendant in this situation.

Id., at page 3 (parenthetical supplied for clarity).

The Debtors' attorney adds by its letter filed January 31, 1989:

The credit union had been listed as a creditor had been listed in the Debtors\' schedules as originally filed on July 15, 1988. As such, the credit union had received notice of the bankruptcy filing, having been listed as creditor, and that their failure to recognize that the payment
98 BR 673
on July 14, 1988 was in the nature of a preference, was to their own dilemma. That same dilemma occurred upon the withdrawal and closing out of the account by the debtors on September 7, 1988.

Id., page 1.


Given the circumstance of a creditor's undisputed receipt of notice of a Chapter 7 filing, and its subsequent unilateral failure to assert a post-petition statutory possessory lien on a debtor's deposit account funds prior to its release of these funds to a debtor's possession, may a creditor's negligent forbearance from asserting such a lien constitute "new value" under 11 U.S.C. § 547(c)(4), which, in turn, would entitle the creditor to an offset against the receipt of an admitted pre-petition preferential transfer from the debtor?


A. Credit Union's Statutory Lien.

The Credit Union correctly acknowledges that it does not have a valid statutory lien on sums it had previously consented to be withdrawn by a depositor under 8 Vt.Stat. Ann. § 2071(d) (footnote 4 supra).

The operative language of 8 Vt.Stat.Ann. § 2071(d) is: "The credit union shall have a lien on . . . deposits5 . . . of a member6 in his individual or joint account,7 for any sum past due the credit union from said member or for any loan8 endorsed9 by him. The credit union shall also have a right of immediate set-off with respect to every such account." Id., (emphasis and footnotes ours).

In Goodwin v. Barre Savings Bank & Trust, 91 Vt. 228, 235-36, 100 A. 34, 37 (1917), a bankruptcy case, the Vermont Supreme Court held a banker had a common law merchant's lien on securities or funds which came into its possession in the regular course of business, and has the right to set off any matured debt against funds deposited without direction from its debtor and over the objections of a trustee in...

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