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In re WEB2B Payment Solutions, Inc.

United States Bankruptcy Appellate Panel of the Eight Circuit

March 25, 2013

In re: WEB2B Payment Solutions, Inc., Debtor.
v.
Brian F. Leonard, Trustee, Defendant - Appellee North American Banking Company, Plaintiff - Appellant

Submitted February 21, 2013.

Page 388

Appeal from United States Bankruptcy Court for the District of Minnesota - Minneapolis.

For North American Banking Company, Plaintiff - Appellant: Donald G. Heeman, Jacob C. Hendricks, Richard C. Salmen, FELHABER & LARSON, Minneapolis, MN.

For Brian F. Leonard, Trustee, Defendant - Appellee: Andrea M. Hauser, Brian Francis Leonard, LEONARD & O'BRIEN, Minneapolis, MN.

Before FEDERMAN, Chief Judge, SCHERMER, and NAIL, Bankruptcy Judges.

OPINION

Page 389

FEDERMAN, Chief Judge

North American Banking Company (NABC) appeals from the Order of the Bankruptcy Court[1] granting summary judgment in favor of the Chapter 7 Trustee and ruling that NABC relinquished its possessory lien in account funds when it turned the funds over to the Trustee without requesting adequate protection of its possessory lien in such funds. For the reasons that follow, the Order of the Bankruptcy Court is AFFIRMED.

Factual Background

Debtor WEB2B Payment Solutions, Inc., was in the business of providing check clearing and payment processing services under contracts with third parties. The Debtor and NABC were parties to a Remote Deposit Capture Service Agreement (" Agreement" ), under which the Debtor submitted to NABC electronic deposits of funds captured from checks received by the Debtor and its affiliates. NABC processed the check transactions on the Debtor's behalf and immediately credited the Debtor's account. Throughout the term of the Agreement, NABC says it routinely received claims from third parties associated with the Debtor's check cashing transactions which were rejected for various reasons. Some of these chargeback claims were made by the United States Treasury for fraudulent, counterfeit, or forged Treasury checks. Pursuant to the Agreement, when an item was rejected, NABC was entitled to recover the funds from the Debtor's accounts at NABC.

Under the terms of the Agreement, the Debtor assigned " all of its deposit accounts with [NABC] and any affiliate of [NABC] to [NABC] to secure its obligations to [NABC] under this Agreement," and authorized " [NABC] to debit any account maintained by [the Debtor] with [NABC] or any affiliate of [NABC] and/or set off any of [the Debtor's] obligations to [NABC] under this Agreement against any amount it owes to [the Debtor], in order to obtain payment of [the Debtor's] obligations under this Agreement." NABC asserts that these contractual provisions granted it both a security interest in the Debtors' funds deposited with NABC and rights of setoff.

The Debtor filed a Chapter 11 voluntary petition on April 4, 2011. As of the petition date, the Debtor had over $933,000 on deposit in its accounts with NABC. At the request of the United States Trustee, except for a $27,180.54[2] postpetition setoff to cover an overdraft in an another of the Debtor's accounts, NABC froze the account shortly after the bankruptcy filing. The case was converted to Chapter 7 on April 20, 2011, at which point Brian Leonard was appointed as Trustee. He immediately requested NABC to turn over the funds in the Debtor's accounts. NABC responded by proposing that it retain $50,000 of the funds (the " Holdback Funds" ) to cover potential future reclamation requests. NABC arrived at the $50,000 amount by reviewing the Debtor's history of reclamation claims and determining that this amount would be sufficient. On April 21, 2011, prior to NABC's turnover of any of the funds from the account, the ...


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