Sarachek v. Luana Sav. Bank (In re Agriprocessors, Inc.)

• Decision Date: 20 April 2015
• Docket Number: Adversary No. 10–9234,Bankruptcy No. 08–02751
• Citation: 546 B.R. 811
• Parties: In re: Agriprocessors, Inc., Debtor. Joseph E. Sarachek, In his capacity as Chapter 7 Trustee , Plaintiff, v. Luana Savings Bank, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Iowa

546 B.R. 811

In re: Agriprocessors, Inc., Debtor.Joseph E. Sarachek, In his capacity as Chapter 7 Trustee , Plaintiff,

v.Luana Savings Bank, Defendant.

Bankruptcy No. 08–02751

Adversary No. 10–9234

United States Bankruptcy Court, N.D. Iowa.

Signed April 20, 2015

Dan Childers, Paula L. Roby, Elderkin & Pirnie, PLC, Cedar Rapids, IA, Desiree A. Kilburg, Shuttleworth & Ingersoll, PLC, Cedar Rapids, IA, for Plaintiff.

Erik W. Fern, Dale L. Putnam, Decorah, IA, for Defendant.

MEMORANDUM AND ORDER

THAD J. COLLINS, CHIEF BANKRUPTCY JUDGE

Chapter 7 Trustee brought this case against Defendant, Luana Savings Bank ("the Bank"), alleging that the Bank received preferential transfers from Agriprocessors, Inc. ("Debtor") totaling $5,134,582.68. The matter came before the Court for trial. Dan Childers, Desiree Kilburg, and Paula Roby appeared on behalf of Plaintiff, Joseph E. Sarachek, Chapter 7 Trustee. Dale Putnam and Eric Fern appeared on behalf of the Bank. The Court took the matter under advisement.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(F).

STATEMENT OF THE CASE

Trustee seeks to recover preferential transfers under § 547(b). Trustee argues that Debtor overdrafted its account and when Debtor made deposits at the Bank that covered overdrafts, those payments were preferential transfers. The Bank asserts there is no recovery available under the facts or the law.

There were several issues for trial. The first involved how to correctly calculate the amount of overdrafts for determining the amount of antecedent debt or issue. Debtor and the Bank disagree about whether Debtor's second account at the Bank should be considered to determine when overdrafts occurred and their value. The parties also disagree about whether errors that the Bank made when processing Debtor's account ("posting errors") should be accounted for in the overdraft calculation.

The Bank argued even if Trustee could prove a prima facie case under § 547(b), the affirmative defenses to preference liability under § 547(c) apply. The Bank argues that all payments Trustee seeks to recover qualify as contemporaneous exchanges for new value under § 547(c)(1). The Bank argues that its continuing relationship with the Debtor was new value that Debtor received in exchange for repaying the overdrafts. The Bank argues that any preferential payments are protected by the ordinary course of business defense under § 547(c)(2). The Bank believes the record shows the repayments on overdrafts were made in the ordinary course.

The Bank also argues that any recovery of preferential transfers against the Bank would constitute an improper double recovery by Trustee of the preferences under § 550(d). The Bank argues that because Debtor wrote checks on its bank account that Trustee has already recovered as preferential transfers in other cases, an award of preference liability against the Bank in this action would result in double recovery for Plaintiff.

After a careful review of the trial record, the Court finds Trustee may recover $1,556,782.89 of preferential transfers from Debtor to the Bank. The Court also concludes the Bank's defenses are not supported by the record.

GENERAL BACKGROUND

Debtor owned and operated one of the nation's largest kosher meatpacking and food-processing facilities in Postville, Iowa. On November 4, 2008, Debtor filed a Chapter 11 petition in the Bankruptcy Court for the Eastern District of New York. Debtor's bankruptcy petition and accompanying documents recited that its financial difficulties resulted from a raid conducted by U.S. Immigration and Customs Enforcement. A total of 389 workers at the Postville facility were arrested. The raid led to numerous federal criminal charges, including a high-profile case against Debtor's President, Sholom Rubashkin.¹ Debtor's Petition also stated it had over 200 creditors and assets and liabilities in excess of $50,000,000.00.

The Bankruptcy Court for the Eastern District of New York eventually approved the appointment of Joseph E. Sarachek as the Chapter 11 trustee. The Court concluded that appointing a trustee was necessary in part "for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management" under § 1104(a)(1). After hearings in a later proceeding, the Court transferred the case to this Court on December 15, 2008. This Court eventually granted the Trustee's motion to convert the case to a Chapter 7 bankruptcy. The U.S. Trustee for this region retained Mr. Sarachek as the Chapter 7 Trustee.

BACKGROUND FOR THIS CASE

On November 3, 2010, Trustee filed this adversary action against the Bank seeking to set aside preferential transfers under 11 U.S.C. § 547(b). The Trustee claimed that in allowing Debtor to make regular overdrafts, the Bank was in fact giving Debtor a series of short-term loans. The Trustee claimed that each time a check was presented for provisional settlement and the settlement resulted in a negative funds balance—an intraday overdraft—the Bank was in fact extending credit to Debtor.

The Trustee then concluded that each time Debtor made a deposit, wire transfer, or transfer from other accounts to cover the intraday overdrafts, Debtor paying on a short-term loan. Trustee argued repayment of these short-term loans was the repayment of an antecedent debt and therefore a preferential transfer to the Bank. The Trustee claimed he could recover the repayment of the day of the greatest overdraft, which totaled $5,134,582.68.

The Bank claimed that none of the transfers were made on account of an "antecedent debt" as a matter of law. The Bank argued that only a "true overdraft" can create an antecedent debt. It argued overdrafts occur only where sufficient covering funds are not deposited before the midnight deadline of the second day of the two-day banking transaction cycle. The Bank argued that the provisional or "intraday" overdrafts were almost always covered by the next day's deposits. The Bank argued that these intraday overdrafts—paid by close of the second day—could not be debts. The Bank argues that, without the antecedent debt, none of the transactions are avoidable as preferential transfers.

The parties brought this issue of whether intraday overdrafts were extension of credit giving rise to antecedent debt for preference purpose. The Court addressed the Bank's Motion for Summary Judgment on this issue in a lengthy ruling. Sarachek v. Luana Savings Bank (In re Agriprocessors, Inc.), 490 B.R. 852 (Bankr.N.D.Iowa 2013). The Court agreed with the Bank on the intraday overdraft issue. The Court found that only "true overdrafts"—overdrafts allowed to stand past the midnight deadline (when the Bank could no longer dishonor the checks)—are extensions of credit.² The Court did find in a rare case that a provisional overdraft may only be an extension of credit, like where the parties had a written agreement saying so. The Court incorporates by reference the entire summary judgment opinion to the extent it is not inconsistent with the Ruling herein.

The Court identified three main issues for trial: (1) whether there was a written agreement between the parties that would transform intraday overdrafts into extensions of credit; (2) whether there were true overdrafts, and if so, what the amount of the true overdrafts was; and (3) whether the Bank was entitled to any affirmative defenses. The parties agree there is no written agreement to make intraday overdrafts extensions of credit. Thus, issues (2) and (3) are the primary focus of this trial ruling.

FACTS

In this particular adversary case, there is little dispute about many of the important facts. The Bank is located in Luana, Iowa, a small town near Postville, Iowa where Debtor conducted its operations. Debtor banked with the Bank since at least 1999.

Debtor's Accounts at the Bank

Debtor first opened checking account no. 401102 ("account 401102") in 1999. Account 401102 was used entirely for deposits necessary under the Packers and Stockyard Act. In early 2000, Debtor opened a second checking account, no. 1430 ("account 1430"). (Def.Ex. B) The Debtor used account 1430 for daily transactions. Account 1430 is the primary account at issue here.

From at least November 2007 to mid-May 2008, Debtor regularly incurred intraday overdrafts on account 1430. These overdrafts never exceeded $400,000. During that period of time, the account would regularly reach a positive ledger balance.

Starting in mid-May 2008, however, the overdrafts steadily became much more significant. The account's ledger balance was never positive between May 2008 and November 2008, when the Debtor filed its bankruptcy petition. Thus, in the 90–day preference period, it is undisputed that account 1430 never had a positive daily ledger balance.

The amount of daily ledger overdrafts was very large. Account 1430 reached its largest negative ledger balance of $5,134,582.68 on September 3, 2008. As Debtor's ledger overdrafts increased and were becoming more significant, the Bank sought additional assurances of payment.

At about the same time, Debtor closed its original account 401102 that took care of the Packers and Stockyard Act concerns. In July 2008, Debtor opened a new replacement account with the number 367788 (account 367788). The Bank has noted two different explanations for the new account. One explanation was that it was a new account for the Packers and Stockyards funds. The other explanation was that the Bank needed a "cushion" account that provided additional assurances that overdrafts would get paid. At the end of the trial, counsel for the Bank stated that both explanations were correct—the account was initially for the Packers and Stockyard requirements, but then the account became the cushion of additional funds for "setoff" if needed.

Account 367788 was open with a zero balance in July 2008. On August 1, 2008, Debtor deposited $1,150,000.00 in that account at the Bank's request. On August 7, 2008 the Bank placed a hold on this...