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

• Decision Date: 15 March 2016
• Docket Number: No. 15-CV-1015-LRR,15-CV-1015-LRR
• Citation: 547 B.R. 292
• Parties: In re: Agriprocessors, Inc., Debtor. Joseph E. Sarachek, in his capacity as Chapter 7 Trustee, Appellant/Cross-Appellee, v. Luana Savings Bank, Appellee/Cross-Appellant.
• Court: U.S. District Court — Northern District of Iowa

547 B.R. 292

In re: Agriprocessors, Inc., Debtor.Joseph E. Sarachek, in his capacity as Chapter 7 Trustee, Appellant/Cross-Appellee,

v.Luana Savings Bank, Appellee/Cross-Appellant.

No. 15-CV-1015-LRR

United States District Court, N.D. Iowa, Eastern Division.

Signed March 15, 2016

Dan Childers, Paula Lynn Roby, Nicholas J. Kilburg, Elderkin & Pirnie Law Firm, Cedar Rapids, IA, for Appellant/Cross-Appellee.

Dale Lee Putnam, Putnam Law Office, Decorah, IA, Erik W. Fern, Putnam Law Office, Davenport, IA, for Appellee/Cross-Appellant.

ORDER

LINDA R. READE, CHIEF JUDGE, U.S. DISTRICT COURT, NORTHERN DISTRICT OF IOWA

TABLE OF CONTENTS

I. INTRODUCTION ...298

II. JURISDICTION AND STANDARD OF REVIEW ...298

III. FACTUAL AND PROCEDURAL BACKGROUND ...299

A. Debtor Enters Bankruptcy ...299

B. Debtor's Relationship With The Bank ...299

C. Sarachek v. Luana Savings Bank ?...301

D. The Appeal ...302

IV. ANALYSIS ...302

A. Antecedent Debt ...303

1. Intraday and true overdrafts ...304

2. The Bank's conduit theory ...309

a. The dominion test ...310

b. The control test ...311

B. The Bank's Affirmative Defenses ...312

1. Contemporaneous exchange for new value ...313

2. Ordinary course of business ...315

C. Damages Calculation ...318

1. The 367788 Account ...318

2. The posting errors ...320

3. Double recovery ...322

4. The Bank's "darkest day" theory ...323

5. Setoff ...325

V. CONCLUSION ...329

I. INTRODUCTION

This matter comes before the court on appeal from the United States Bankruptcy Court for the Northern District of Iowa ("Bankruptcy Court"). See Sarachek v. Luana Savings Bank (In re Agriprocessors, Inc.) , 546 B.R. 811(Bankr.N.D.Iowa 2015)

.¹ This action stems from application of the Bankruptcy Code's preference law. Generally, the Bankruptcy Code authorizes a bankruptcy trustee to recover, or "avoid," certain transfers made in the ninety days leading up to a debtor's filing for bankruptcy. See ?11 U.S.C. § 547. The Bankruptcy Court ruled that the Appellant/Cross-Appellee and Trustee Joseph E. Sarachek ("Trustee") was entitled to recover $1,556,782.89 of preferential transfers that the Chapter 7 Debtor Agriprocessors, Inc. ("Debtor") made to the Appellee/Cross-Appellant Luana Savings Bank ("Bank") during the ninety-day preference period. The Trustee appeals. The Bank cross-appeals.

II. JURISDICTION AND STANDARD OF REVIEW

A district court has jurisdiction to hear appeals from final judgments, orders and decrees of bankruptcy judges. See ?28 U.S.C. § 158(a)

("The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees ...." (formatting omitted)). The Bank elected to have the court, rather than the Bankruptcy Appellate Panel for the Eighth Circuit Court of Appeals, hear this appeal pursuant to 28 U.S.C. § 158(c)(1)(A).

On appeal from a decision of a bankruptcy court, the court sits as an appellate court and reviews the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. See ?In re Bowles Sub Parcel A, LLC , 792 F.3d 897, 901 (8th Cir.2015)

(quoting Tri – State Fin., LLC v. First Dakota Nat'l Bank , 538 F.3d 920, 922 (8th Cir.2008) ). "A factual finding is clearly erroneous if, after examining the entire record, [the court is] ... left with a definite and firm conviction that the bankruptcy court has made a mistake." Bruess v. Dietz (In re Bruess ), 539 B.R. 560, 564 (8th Cir. BAP 2015) (citing Anderson v. City of Bessemer City , 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ). For matters committed to the bankruptcy court's discretion, the court reviews such matters for an abuse of discretion. See Lovald v. Tennyson (In re Wolk ), 686 F.3d 938, 940 (8th Cir.2012)

. "The bankruptcy court abuses its discretion when it fails to apply the proper legal standard or bases its order on findings of fact that are clearly erroneous." Id.

III. FACTUAL AND PROCEDURAL BACKGROUND

A. Debtor Enters Bankruptcy

The events precipitating Debtor's slide into bankruptcy have been well-publicized. Debtor owned and operated a kosher meatpacking and food processing facility in Postville, Iowa. At one point, Debtor employed over a thousand people, including a large population of undocumented workers. Sholom Rubashkin, one of Debtor's high-ranking corporate officers, engaged in a massive financial fraud through several of Debtor's bank accounts. In May 2008, Immigration and Customs Enforcement ("ICE") conducted a raid at Debtor's facility. ICE arrested almost 400 of Debtor's employees for immigration violations, most of whom were criminally charged. In November 2008, Rubashkin was arrested and ultimately convicted of multiple counts of financial fraud. See ?United States v. Rubashkin , 655 F.3d 849 (8th Cir.2011)

, cert. denied , ––– U.S. ––––, 133 S.Ct. 106, 184 L.Ed.2d 233 (2012).

On November 4, 2008, Debtor voluntarily filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of New York. Debtor's petition stated that it had over 200 creditors with assets and liabilities in excess of $50,000,000.00. On November 20, 2008, the Bankruptcy Court for the Eastern District of New York approved the appointment of the Trustee as trustee in the Chapter 11 proceedings. On December 15, 2008, the case was transferred to the Bankruptcy Court. On October 8, 2009, the Bankruptcy Court granted the Trustee's motion to convert the case to a Chapter 7 bankruptcy. The United States Trustee for the region retained the Trustee as trustee for the Chapter 7 proceedings.

B. Debtor's Relationship With The Bank

The Bank is a banking institution organized and existing under the laws of the State of Iowa, with its principal place of business in Luana, Iowa. Debtor maintained three relevant accounts with the Bank. The first, bearing the account number 401102 ("401102 Account"), was maintained pursuant to the Packers and Stockyard Act of 1921, 7 U.S.C. § 181

, and opened in 1999. The second, bearing the account number 1430 ("1430 Account"), was Debtor's primary banking account with the Bank and was used for daily transactions. Debtor opened the 1430 Account in early 2000. The third, bearing the account number 367788 ("367788 Account"), was not opened until July 2008. The 367788 Account was opened with a zero balance after Debtor closed the 401102 Account. On August 1, 2008, Debtor deposited $1,150,000 into the 367788 Account at the Bank's request. Less than a week later, on August 7, 2008, the Bank placed a hold on the 367788 Account. Two weeks after that, Debtor deposited a further $250,000 in the 367788 Account at the Bank's request. The Bank offers two different purposes for the 367788 Account. The first is that it was intended simply to replace the 401102 Account and hold Packers and Stockyard Act funds. The second is that it was intended to be a "cushion" account, to ensure the repayment of daily overdrafts on the 1430 Account. According to the Bankruptcy Court, the Bank maintained that both explanations were correct—that the 367788 Account was originally opened to replace the 401102 Account, but then it became a cushion account to provide the Bank assurances on the 1430 Account's fluctuating balance.

Prior to the ninety-day preference period,² Debtor regularly incurred so-called "intraday overdrafts" in the 1430 Account. Intraday overdrafts are a function of the Uniform Commercial Code ("U.C.C.") and the two-day check clearinghouse process. Intraday overdrafts occur because of the U.C.C.'s deferred posting procedure. See ?U.C.C. § 4–301(a)

(allowing banks to utilize a deferred posting procedure); see also ?Iowa Code § 554.4301(1) (allowing banks in Iowa to utilize a deferred posting procedure). This procedure generally authorizes a bank to provisionally settle a check presented to it but then gives it the option to revoke the settlement prior to the bank's "midnight deadline." See ?U.C.C. § 4–301 cmt. 1 (" '[D]eferred posting' merely allows a payor bank that has settled for an item on the day of receipt to return a dishonored item on the next day before its midnight deadline, without regard to when the item was actually posted."). The "midnight deadline" is midnight on the next banking day after a customer presents a check for settlement. See ?U.C.C. § 4–104(10) (defining the "midnight deadline" as "midnight on [a bank's] next banking day following the banking day on which it receives the relevant item"); see also ?Iowa Code § 554.4104(j) (adopting the U.C.C.'s definition of "midnight deadline").

Functionally, this procedure allows banks to provisionally settle a presented check and create a negative charge on the account holder's account balance. Under the U.C.C. and Iowa law, a check processing through the clearinghouse procedure will generally result in a provisional settlement. If the account holder has less money in the account than the value of the check, the provisional settlement places the account into an overdraft position—creating an intraday overdraft. If the customer deposits funds sufficient to cover the intraday overdraft by the midnight deadline, say on the next business day, the payment on the check becomes final and the customer's account will not show an overdraft. On the second day, the bank has three options: it can (1) dishonor, or "bounce," the check; (2) immediately honor it and allow the provisional overdraft to become final, or a "true" overdraft; or (3) do nothing and wait for covering funds, potentially carrying the negative account balance past the midnight deadline and creating a true overdraft on the account.

Prior to July 2008, Debtor's primary bank had been Citizen's Bank. But, after Citizen's Bank informed Debtor that it would no longer allow Debtor to bank there because of the significant overdrafts Debtor was running with it, Debtor switched its primary business account to Luana Savings Bank and the 1430 Account. After this switch, overdrafts in the 1430 Account increased significantly. Debtor incurred significant intraday overdrafts...