The Eighth Circuit wrote an opinion covering a multitude of preference issues that arise when a bank pays a check creating an overdraft and later receives a transfer from the debtor covering the overdraft. The legal conclusions by the appeals court largely rest on findings of fact by the bankruptcy court that were not clearly erroneous.
Of perhaps most significance, the June 15 opinion by Circuit Judge Duane Benton concludes that the bank was not entitled to the “ordinary course” defense under Section 547(c)(2) because overdrafts occurred more frequently during the 90-day preference period than in the preceding nine months.
The debtor had two accounts: a checking account and a second account that carried a static $1.4 million balance. So long as the overdraft in the checking account was less than $1.4 million, the bank argued there was no preference because it was entitled to setoff under Section 553(a).
As a finding of fact, the bankruptcy judge determined that the bank and the debtor “treated the accounts as netted.” Because the fact finding was not clearly erroneous, Judge Benton upheld the bankruptcy court and ruled that there was no payment of antecedent debt and therefore no preference so long as an overdraft did not exceed $1.4 million.
However, the bankruptcy court had ruled that the setoff was improper. The district court reversed on that issue, concluding that the setoff was proper. Judge Benton did not decide the propriety of setoff in view of the parties’ agreement to treat the two accounts as netted, because the outcome would have been the same given the ruling on netting.
The more complex analysis dealt with “intraday overdrafts” and “true overdrafts” that were potentially preferential because they totaled more than $1.4 million. Judge Benton addressed each separately.
Under the Iowa Uniform Commercial Code, a provisional settlement, or “intraday overdraft,” did not become final and create a “true overdraft” until the so-called midnight deadline on midnight the next business day. The bankruptcy court decided that an “intraday overdraft” was not potentially preferential but that a “true overdraft” was.
The district court agreed with the bankruptcy court, saying that “intraday overdrafts” did not result in antecedent debt. Judge Benton cited In re Reeves, 65 F.3d 670, 676 (8th Cir. 1995), for the proposition that a “mere conduit” is not liable for a preference. Because the debtor’s trustee agreed that the bank was a “mere conduit” with regard to “intraday overdrafts,” Judge Benton said there was no preference and thus did not decide whether there was antecedent debt.
When a “true overdraft” occurred after the midnight deadline, Judge Benson said the result was an unsecured loan under Iowa law. Because the bank had both dominion and control, it was not a mere conduit since the bank itself paid the third party. Consequently, for “true overdrafts” exceeding $1.4 million, the bank would be liable for a preference absent one of the affirmative defenses.
Judge Benton ruled that the bank was not entitled to a “contemporaneous exchange” defense under Section 547(c)(1), based on the bankruptcy court’s findings of fact that were not clearly erroneous.
Under In re Genmar Holdings Inc., 776 F.3d 961, 964 (8th Cir. 2015), the parties must have intended that the exchange be contemporaneous. The bankruptcy court decided that the defense was inapplicable because the bank believed the debtor would cover the overdrafts, not because “it had agreed to do so in exchange for receiving past deposits,” Judge Benton said.
Likewise, the bank did not qualify for the “ordinary course” defense under Section 547(c)(2) given the history of overdrafts between the bank and the debtor.
In the nine months before the preference period, there were only four days of “true overdrafts.” In the 90-day preference period, there were nine days of “true overdrafts,” and they were larger in amount that during the prior nine months.
Because the findings of fact were not clearly erroneous, Judge Benton disallowed the ordinary course defense.
Judge Benton did not rule on Section 547(c)(3), the creation of a security interest for new value, because the bank did not raise the defense below.
Finally, Judge Benton concluded that the bank was entitled to benefit from its own mistakes.
There were several instances where the bank incorrectly calculated the overdraft by issuing statements showing that the overdrafts were smaller than they would have been absent the mistakes. The trustee wanted the court to calculate preferences based on the corrected and larger negative balances, not the smaller overdrafts shown in erroneous statements.
Judge Benton said the debtor owed nothing until the bank corrected the statements. Consequently, there was no debt within the meaning of Section 547 based on the erroneously low calculations of overdrafts. He rejected the trustee’s argument that there was a debt given the Bankruptcy Code’s broad definition of “claim.”
The Eighth Circuit wrote an opinion covering a multitude of preference issues that arise when a bank pays a check creating an overdraft and later receives a transfer from the debtor covering the overdraft. The legal conclusions by the appeals court largely rest on findings of fact by the bankruptcy court that were not clearly erroneous.