Schoenmann v. Bank of the W. (In re Tenderloin Health)

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Citation849 F.3d 1231
Docket NumberNo. 14-17090,14-17090
Parties IN RE TENDERLOIN HEALTH, FKA Continuum HIV Day Services, AKA Tenderloin Health Incorporated, Debtor, E. Lynn Schoenmann, Trustee, Plaintiff-Appellant, v. Bank of the West, Defendant-Appellee.
Decision Date07 March 2017

Dennis Davis (argued), Goldberg Stinnett Davis & Linchey, Petaluma, California, for Plaintiff-Appellant.

James A. Tiemstra (argued) and Lisa Lenherr, Tiemstra Law Group PC, Oakland, California, for Defendant-Appellee.

Before: A. WALLACE TASHIMA and MILAN D. SMITH, JR., Circuit Judges, and EDWARD R. KORMAN,* District Judge.

Concurrence by Judge Korman

OPINION

M. SMITH, Circuit Judge:

In this preference action, plaintiff-appellant E. Lynn Schoenmann (Schoenmann), the trustee in bankruptcy, seeks to recover for the bankruptcy estate a $190,595.50 loan payment debtor Tenderloin Health (Tenderloin) made to defendant-appellee Bank of the West (BOTW) within ninety days of the filing of Tenderloin's chapter 7 bankruptcy. To succeed, Schoenmann must demonstrate that by virtue of that payment BOTW received more than it otherwise would have in a hypothetical chapter 7 liquidation where the challenged transfer had not been made. This inquiry, required by 11 U.S.C. § 547(b)(5), is called the "greater amount test."

The bankruptcy court granted BOTW's motion for summary judgment, finding Schoenmann could not satisfy section 547(b)(5), because BOTW had a right of setoff, and Tenderloin's account contained at least $190,595.50 on the petition date. Schoenmann asserts that in the hypothetical liquidation, the trustee would avoid a $526,402.05 deposit, leaving less than $190,595.50 in Tenderloin's account, even allowing for BOTW's right of setoff.

In order to resolve the issues presented in this case, we address whether courts may entertain hypothetical preference actions within section 547(b)(5)'s hypothetical chapter 7 liquidation, and if so, whether the $526,402.05 deposited in this case would meet the definition of an avoidable preference.

We conclude that courts may account for hypothetical preference actions within a hypothetical chapter 7 liquidation when such an inquiry is factually warranted, is supported by appropriate evidence, and the action would not contravene an independent statutory provision. We are also satisfied that the $526,402.05 deposit in this case would constitute an avoidable preference in the hypothetical liquidation at issue here.

We therefore reverse the district court's judgment in favor of BOTW and direct that this action be remanded to the bankruptcy court for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

In May 2009, BOTW extended a $200,000 line of credit to Tenderloin, a walk-in clinic serving AIDS patients in San Francisco. BOTW loaned another $100,000 to Tenderloin two years later. The loans were secured by Tenderloin's personal property, including its deposit accounts with BOTW.

In late 2011 or early 2012, Tenderloin elected to wind up its affairs. In carrying out that election, it sold its only real property for $1,295,000. The escrow on that sale closed on June 13, 2012. Tenderloin used the proceeds of that sale to execute two transactions that same day. First, it paid BOTW $190,595.50 from escrow to satisfy fully its outstanding loan obligations (debt payment). Next, it moved the rest of its net sale proceeds—$526,402.05—from escrow into its BOTW deposit account (the deposit).

On July 20, 2012, Tenderloin filed for chapter 7 bankruptcy. Ninety days prior to filing, its account contained approximately $173,015.00.1 That sum shrunk to $52,735.11 on the date of the two disputed transfers, but grew to $576,603.03 immediately after the deposit. Tenderloin then spent some of its funds in the days preceding its bankruptcy, so the account contained $564,115.92 on the petition date. If we subtract from that sum the amount of the disputed deposit—$526,402.05—Tenderloin's account would have contained only $37,713.87 on the petition date.

Schoenmann sued BOTW on December 12, 2012, alleging that the debt payment was preferential, and subject to avoidance under 11 U.S.C. § 547(b). The bankruptcy court granted BOTW's motion for summary judgment on July 31, 2013, concluding that Schoenmann could not show that BOTW received more than it would have in a hypothetical liquidation where the debt payment had not been made. Schoenmann appealed to the district court pursuant to 28 U.S.C. § 158(a)(1). The district court affirmed, and Schoenmann timely appealed to our court.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 158(d)(1). "We review de novo the district court's judgment in the appeal from the bankruptcy court, and apply the same de novo standard of review the district court used to review the bankruptcy court's summary judgment."

Suncrest Healthcare Ctr. LLC v. Omega Healthcare Inv'rs (In re Raintree Healthcare Corp.) , 431 F.3d 685, 687 (9th Cir. 2005).

ANALYSIS

Section 547(b) permits a bankruptcy trustee to recover for the benefit of the bankruptcy estate preferential payments from a debtor to a creditor made within the ninety days preceding the filing of a bankruptcy. 11 U.S.C. § 547(b). To "avoid" such a payment, the trustee must show, among other things:

(5) that [it] enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b)(5) (emphasis added).

This element—11 U.S.C. § 547(b)(5) —constitutes the so-called "greater amount test," which "requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7" without the alleged preferential transfer.2 Alvarado v. Walsh (In re LCO Enters.) , 12 F.3d 938, 941 (9th Cir. 1993) (LCO ). Schoenmann challenges the $190,595.50 debt payment, claiming that section 547(b)(5) is satisfied in this case if BOTW "received a greater amount than it would have if the [debt payment] had not been made and there had been a hypothetical chapter 7 liquidation as of the petition date." Batlan v. TransAmerica Commercial Fin. Corp. (In re Smith's Home Furnishings, Inc.) , 265 F.3d 959, 963 (9th Cir. 2001) (Smith ).

The bankruptcy court determined that BOTW did not receive more than it would have in a hypothetical liquidation because it maintained a right of setoff that entitled it to full payment, and Tenderloin's deposit account held the requisite amount of funds on the petition date. Schoenmann argues, however, that the trustee would avoid the $526,402.05 deposit in a hypothetical liquidation, such that the deposit account would contain only $37,713.87 on the petition date, a sum far less than the $190,595.50 BOTW actually received, even allowing for its right of setoff.

BOTW objects to Schoenmann's analysis for two reasons. First, BOTW insists it is impermissible to entertain a hypothetical preference action within a hypothetical liquidation. Second, BOTW claims that the deposit made by Tenderloin into its deposit account would not meet the definition of an avoidable preference. We find neither argument persuasive.

I. Section 547(b)(5) Does Not Forbid Courts from Considering Hypothetical Preference Actions.

The text of the Bankruptcy Code, its legislative history, and current practice in the bankruptcy courts all support the conclusion that courts may entertain hypothetical preference actions within hypothetical chapter 7 liquidations. Further, our holding in LCO does not pose an obstacle to this conclusion.

A. Text and Legislative History

Statutory interpretation begins with the text. Pakootas v. Teck Cominco Metals, Ltd. , 830 F.3d 975, 980 (9th Cir. 2016). "If the meaning of the text is unambiguous, the statute must be enforced according to its terms." Id.

Here, section 547(b)(5) permits the trustee to avoid any transfer within ninety days of bankruptcy that enables the creditor "to receive more than such creditor would receive if—(A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title ." 11 U.S.C. § 547(b)(5) (emphasis added). The phrase "provisions of this title" appears to refer to the totality of Title 11 of the Code, which includes the preference provisions appearing in section 547. Accordingly, the text clearly does not directly forbid courts from considering hypothetical preference actions within a hypothetical chapter 7 liquidation. However, since the statute treats the issue globally, our understanding will be refined by considering the legislative history of section 547(b)(5).

Section 547 was included in the Bankruptcy Reform Act of 1978.3 Pub. L. No. 95-598, 92 Stat. 2549 (1978). Describing element 547(b)(5), the Senate Committee Report states "the transfer must enable the creditor ... to receive a greater percentage of his claim than he would receive under the distributive provisions of the bankruptcy code." S. Rep. No. 95-989, at 87 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5873 (emphasis added). The phrase "distributive provisions" might be thought to narrow the hypothetical liquidation to disbursement under chapter 7, but the very next sentence clarifies the meaning of the phrase: "Specifically, the creditor must receive more than he would if the case were a liquidation case, if the transfer had not been made, and if the creditor received payment of the debt to the extent provided by the provisions of the code ." Id. (emphasis added). The House Report echoes this language: "A preference is a transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer...

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