In re Trade Finance Bank, Bankruptcy No. 89-40119. Adv. No. 92-4056.

CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of South Dakota
Writing for the CourtPEDER K. ECKER
Citation163 BR 558
PartiesIn re TRADE FINANCE BANK, a corporation, Tax ID: XX-XXXXXXX, Debtor. A. Thomas POKELA, Interim Trustee, Plaintiff, v. Arieh GILDOR, James Cope, Al Kurtenbach, Rick O. Johnson, Galen Hadley, Dale Clement, Ted Muenster, Sean O'Neill, and Bonnie London, Defendants.
Docket NumberBankruptcy No. 89-40119. Adv. No. 92-4056.
Decision Date10 February 1994

163 B.R. 558 (1994)

In re TRADE FINANCE BANK, a corporation, Tax ID: XX-XXXXXXX, Debtor.
A. Thomas POKELA, Interim Trustee, Plaintiff,
Arieh GILDOR, James Cope, Al Kurtenbach, Rick O. Johnson, Galen Hadley, Dale Clement, Ted Muenster, Sean O'Neill, and Bonnie London, Defendants.

Bankruptcy No. 89-40119. Adv. No. 92-4056.

United States Bankruptcy Court, D. South Dakota, S.D.

February 10, 1994.

A. Thomas Pokela, Sioux Falls, SD, plaintiff interim trustee.

Robert M. Ronayne, Aberdeen, SD, for plaintiff Interim Trustee A. Thomas Pokela.

Vance R.C. Goldammer, Sioux Falls, SD, for defendants James Cope, Al Kurtenbach, Rick O. Johnson, Galen Hadley, Dale Clement and Ted Muenster.

Arieh Gildor, defendant, pro se.

PEDER K. ECKER, Bankruptcy Judge.

A jurisdictional challenge is made to Trade Finance Bank's hereinafter "Debtor's" eligibility

163 BR 559
as a Chapter 7 debtor based on the following provision
A person may be a debtor under chapter 7 of this title only if such person is not a domestic insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, credit union, or industrial bank or similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)). . . .

11 U.S.C. § 109(b)(2). The Court must determine if Debtor, a state-chartered "merchant bank," is a "bank" under Section 109(b)(2). The issue is raised in a Motion to Dismiss of Defendants James Cope, Al Kurtenbach, Rick O. Johnson, Galen Hadley, Dale Clement, and Ted Muenster hereinafter "Motion to Dismiss" filed by Sioux Falls Attorney Vance R.C. Goldammer on behalf of these defendants hereinafter "Movants" and objected to by Aberdeen Attorney Robert M. Ronayne on behalf of Plaintiff A. Thomas Pokela, Interim Trustee hereinafter "Interim Trustee", and by Pro Se Defendant Arieh Gildor. Following an evidentiary hearing, the Court took the matter under advisement and issued a scheduling order for submitting written argument and authority. This letter decision constitutes Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rule 7052.


Debtor filed a voluntary Chapter 11 bankruptcy petition March 13, 1989. The case was converted to a Chapter 7 liquidation proceeding August 29, 1989, and, on December 2, 1992, the Interim Trustee named the members of the board of directors of Debtor's corporation as defendants in a three-count adversary complaint requesting they be held jointly and severally liable for damages resulting from negligently operating the bank in a unsafe, unsound manner.1 The complaint is based on violations of state lending statutes, alleging defendants extended loans or credit exceeding more than 20% of Debtor's capital stock and surplus and more than 10% of its undivided profits and granted insider loans or credit to the directors, executive officers, and/or significant shareholders which exceeded 50% of the capital stock and surplus.2 On April 22, 1993, the complaint was amended to add a fourth cause of action for breach of fiduciary duty, along with a prayer that the defendants be held jointly and severally liable for uncollectible loans made as a proximate result of their negligence. In total, the complaint requests damages of $3,418,518.89.

Following a pre-trial conference and extended period of discovery, the Motion to Dismiss was filed August 25, 1993, stating that, as a bank, Debtor is not eligible for bankruptcy relief. Debtor was chartered as a merchant bank pursuant to South Dakota's "Banks and Banking" title (Title 51), a title which provides for Debtor's regulation by the State Banking Commission and which sets forth a liquidation scheme in the event of Debtor's insolvency.3 According to a "state classification test" adopted by the Eighth Circuit Court of Appeals in First AM. Bank & Trust Co. v. George, 540 F.2d 343 (8th Cir.1976), as the proper method of determining eligibility under Section 109(b)(2), Debtor satisfies the elements of this test, since Debtor is:

1) extensively regulated by the state Division of Banking;
2) subject to express state statutory procedures for liquidation; and is
3) a business public or quasi-public in nature, since Debtor solicits customers from the general public and issues letters of credit into the stream of commerce throughout the United States and internationally.

Other details support the motion, like the fact that the South Dakota Division of Banking acknowledged Debtor's status as a bank when it filed several documents in these

163 BR 560
bankruptcy proceedings4 and the fact that the Interim Trustee admitted Debtor was a bank in answer to interrogatories.5 In response to the filed objections, Movants assert Debtor's classification as a bank is not affected by its inability to receive bank deposits: the South Dakota banking statutes, as they existed between 1986 and 1990,6 classify Debtor as a bank, which means Debtor is ineligible for bankruptcy relief under Section 109(b)(2) and the case should be dismissed

On October 13, 1993, the Interim Trustee objected to the motion as improperly grounded in fact or in law, postulating Debtor is merely a hybrid bank, prohibited from engaging in actual "banking" activity. As a hybrid, Debtor was never authorized to receive bank deposits, therefore, Debtor cannot be deemed a bank for purposes of Section 109(b)(2). A synthesis of case authorities, including In re Cash Currency Exchange, Inc., 762 F.2d 542 (7th Cir.1985); First AM. Bank & Trust Co. v. George, 540 F.2d 343 (8th Cir.1976); Gamble v. Daniel, 39 F.2d 447 (8th Cir.1930); and In re Morris Plan Co. of Iowa, 62 B.R. 348 (Bankr.N.D.Iowa 1986), is offered to assert one central focus of the "state classification test": an assessment of the entity's actual operation, which leads to the touchstone of the test — whether the entity has the ability to accept deposits — for no matter how many other bank attributes may exist, the critical attribute, at least for purposes of Section 109(b)(2), is whether the entity may accept deposits. This fundamental ability is the distinguishing mark which separates entities permitted to seek bankruptcy protection and entities excluded from bankruptcy; and since Debtor was never endowed with this critical mark, Debtor is a bank for purposes of state law only; it is simply not the deposit-taking bank intended to be excluded by Section 109(b)(2).

The Interim Trustee also argues Movants misapply the "state classification test" by using the wrong elements. The three criteria cited by Movants are not elements, but, rather, the Eighth Circuit Court of Appeal's own observations of common attributes shared by entities actually rendered ineligible for bankruptcy relief by virtue of the "state classification test."7 The correct statement and application follows:

163 BR 561
1. Is Debtor classified as a bank under state law? At first blush, perhaps, but, in reality, no. All entities created under South Dakota\'s banking title are "banks," but the real question is whether the entity is permitted to engage in "banking." Here, Debtor was only authorized to perform nondeposit banking, therefore, it was a "bank," but it was prohibited from engaging in "banking."
2. What powers were granted to Debtor? As a merchant bank, Debtor was authorized to engage in nondeposit banking, i.e., to make loans or issue letters of credit. Debtor was never authorized to receive deposits, a clear indication Debtor was not granted banking powers.
3. If Debtor is allowed to perform banking activities, is Debtor actually engaging in those activities? Debtor was specifically prohibited from engaging in "banking" — its performance powers were limited to "merchant banking."

On November 10, 1993, Pro Se Defendant Arieh Gildor filed an objection to the Motion to Dismiss, echoing the Interim Trustee's overall position:

• South Dakota\'s liquidation statutes were designed with deposit-taking banks in mind, illustrated by the fact that the Federal Deposit Insurance Corporation FDIC may be appointed as receiver. This creates a practical problem since Debtor has no FDIC insurance or depositors, which means there is no public interest in using the state\'s liquidation provisions;
• South Dakota defines banks as entities which are authorized to accept deposits. Since Debtor does not accept deposits, it is not a bank;
• South Dakota recognizes the validity of this Court\'s jurisdiction since the State Banking Division filed a motion with this Court to appoint a trustee;
• Admitting that Debtor is a bank for liability purposes pursuant to South Dakota\'s lending statutes is not the same as admitting that it is a bank for eligibility purposes under the Bankruptcy Code;
• The State Banking Division formally suspended Debtor\'s activities by letter dated August 30, 1989, therefore, any status it may have had as a bank terminated years ago; and
• Debtor has been in bankruptcy for quite some time, therefore, it is improper, at this point, to seek a ruling under Section 109(b)(2).


An interpretation of Section 109(b)(2) requires the Court to first consider the statutory language, and, where it is plain, the sole function of the court is to enforce it by its terms. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). The language of Section 109(b)(2) makes certain financial institutions expressly ineligible for bankruptcy relief; namely, banks, savings banks, cooperative banks, savings and loan associations, credit unions, industrial banks, or any "similar institution" which is an insured bank. Merchant banks are not expressly named, but neither is "bank" defined. Despite the long historical development of banking, no satisfactory legal definition of a "bank" has evolved. Norton & Whitley, Banking Law Manual § 1.02, at 1-5 (1990). The definition of a "bank" is really a function of the...

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