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

CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Northern District of Iowa
Citation490 B.R. 852
Docket NumberBankruptcy No. 08–02751.,Adversary No. 10–9234.
PartiesIn re AGRIPROCESSORS, INC., Debtor. Joseph E. Sarachek, In his capacity as Chapter 7 Trustee, Plaintiff, v. Luana Savings Bank, Defendant.
Decision Date15 April 2013

490 B.R. 852

Joseph E. Sarachek, In his capacity as Chapter 7 Trustee, Plaintiff,
Luana Savings Bank, Defendant.

Bankruptcy No. 08–02751.
Adversary No. 10–9234.

United States Bankruptcy Court,
N.D. Iowa.

April 15, 2013.

[490 B.R. 855]

Dan Childers, Desiree A. Kilburg, Keith J. Larson, Paula L. Roby, Elderkin & Pirnie, PLC, Cedar Rapids, IA, for Plaintiff.

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


THAD J. COLLINS, Chief Judge.

This matter came before the Court on Defendant Luana Savings Bank's Motion for Summary Judgment. The Court held a hearing on the matter. Dan Childers appeared on behalf of Plaintiff, Joseph E. Sarachek, Chapter 7 Trustee. Dale Putnam appeared on behalf of Defendant, Luana Savings Bank (the “Bank”). After hearing the arguments of counsel, the Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(F).


Trustee seeks to recover $5,134,582.68 in preferential transfers under § 547(b). Trustee argues that the Bank's allowance of very large overdrafts that the Debtor paid back shortly thereafter were short-term loans. Trustee argues repayment by Debtor of the short-term loans created a preference.

The Bank has moved for summary judgment. The Bank argues the undisputed facts show that under a proper understanding of banking law and customary banking practices the transfers were not loan repayments. The Bank argues because there was no loan or debt, Trustee cannot show any of the transfers were on account of an antecedent debt—a requirement for Trustee to avoid transfers under § 547(b). To the extent there is an antecedent debt and possibility of recovery under § 547(b), the Bank claims the undisputed facts also establish its affirmative defenses—that the transfers were in the ordinary course of business under § 547(c)(2)(A), were made according to ordinary business terms under § 547(c)(2)(B), and/or the Bank provided a contemporaneous exchange for new value under § 547(c)(1).1

The Bank also argues any claim by Trustee to recover a setoff under

[490 B.R. 856]

11 U.S.C. § 553 is barred by the statute of limitations. The Bank asserts it was not pled by the Trustee within “2 years after the entry of the order for relief.” 11 U.S.C. § 546(a)(1)(A).

The Trustee asserts there are genuine issues of material fact which prevent summary judgment for the Bank. In addition, the Trustee asserts his preference arguments are consistent with banking law. Trustee also claims his alternative § 553 claim is not time barred and relates back to his original Complaint.

While the Court agrees with the Bank on key questions of the law, the Court ultimately agrees with the Trustee that there are a number of material factual disputes which prevent summary judgment. The Court also agrees with Trustee that Trustee's § 553 claim relates back and is therefore not time barred. The Court denies summary judgment.

I. General Background

As the Court has noted numerous times, the general background of the 150–plus adversaries in this bankruptcy case is undisputed and identical. Here, in this adversary, the factual background is particularly intertwined with the procedural background and parties' arguments. The Court describes them together to better illustrate the issues for summary judgment and how they arose.

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.2 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.

II. Specific Factual Background for This Case

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 for at least a year before bankruptcy. Debtor maintained at least two separate checking accounts with the Bank. The Debtor used checking account no. 1430 (“account 1430”) for daily transactions. Account 1430 is the

[490 B.R. 857]

primary account at issue in this case. The second account, checking account no. 367788 (“account 367788”), was not used for daily transactions. However, at the times relevant to this case Debtor had between $1,150,000.00 and $1,400,000.00 on deposit in account 367788.

There appears to be a dispute about whether Debtor had access to the funds in account 367788. The Bank alleges that the balance in that account was inaccessible to the Debtor. The Bank claims it placed a hold on the account. The Bank claims account 367788 provided the Bank security if Debtor wrote checks that exceeded the amount on deposit in Debtor's primary account—1430. Thus, the funds deposited in account 367788 may have enabled Debtor's check writing privileges on account 1430. Less than a month before Debtor filed bankruptcy, the Bank transferred $1,400,000.00 from account 367788 to cover overdrafts in account 1430.

In the ninety days before bankruptcy, Debtor wrote hundreds of checks totaling multi-millions of dollars on account 1430. The vast majority of checks were processed through the standard check clearing process. When a check is not presented to the same bank on which it is drawn, the check is settled through a clearinghouse. After a check is presented by a payee to the payee's bank, the check is first “provisionally settled” through the check clearing process. On one side of the settlement, the clearinghouse credits the account of the payee bank at the clearinghouse. The payee bank then in turn credits the funds to the payee's individual account. On the other side of the transaction, the clearinghouse debits the account of the payor bank at the clearinghouse. When the payor bank receives notice of individual items processed by the clearinghouse, the payor bank then in turn debits a customer's individual checking account on which the check is drawn. This process is now highly automated.

There is no dispute that during the ninety days before bankruptcy the Bank allowed the Debtor to write hundreds of checks for which it had insufficient funds. The Bank had adopted a “pay all” policy for check clearing. When the Debtor's checks were presented by the payee's bank through the automated clearing process, the Bank's pay all policy resulted in a “provisional settlement” by the Debtor's Bank (Luana Savings Bank) on all those checks. The morning of the next banking day, the Bank would receive the details of what individual accounts were provisionally settled through the clearinghouse, under the pay all plan. Only after reviewing that report would the Bank learn which accounts had insufficient funds or were left with a negative balance from the provisional settlements. This negative balance is known as an “NSF” position (insufficient funds) or an intraday overdraft. 3

Each morning, Bank president and majority owner, David Schultz, would carefully review the report of which accounts were overdrawn or had a negative balance. He believed—and still believes—the decision to honor checks falls on a two-day cycle. He believed he had until the customary “midnight deadline”—midnight on the day after a provisional settlement—to decide what to do. He described several options he believed he had on that second day. He could have the Bank immediately dishonor and return the check for insufficient funds—i.e., bounce the check. He

[490 B.R. 858]

could decide to have the Bank immediately honor the check and create an overdraft in the account. He could also wait on the customer to provide funds by cash, check, or wire transfer to cover the intraday overdraft before the “midnight deadline.”

The process the Bank chose most of the time was the last one. A secretary at the Bank would call Debtor to make sure a covering payment was coming. If Debtor said money would come in to cover the checks, the Bank would wait for the funds before making a decision on honoring the check. Most days Debtor would make a wire transfer before the “midnight deadline” that satisfied the Bank, and thus the Bank honored most of the checks on Debtor's checking account. However, there also appear to be days when a wire did not come in to “cover.” On one of those occasions the Bank transferred the $1,400,000.00 in account 367788 to cover the negative balance. Other times, the Bank honored the checks without receiving covering funds or decided to dishonor and return them.

III. Trustee's Complaint and Theories of Recovery

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 alleges that the Debtor and the Bank had a special...

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