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In re AgriProcessors, Inc.

United States Court of Appeals, Eighth Circuit

June 15, 2017

In re: AgriProcessors, Inc. Debtor
v.
Luana Savings Bank Appellant Joseph E. Sarachek, in his capacity as Chapter 7 Trustee Appellee American Bankers Association; Iowa Bankers Association Amid on Behalf of Appellant(s) In re: AgriProcessors, Inc. Debtor Joseph E. Sarachek, in his capacity as Chapter 7 Trustee Appellant
v.
Luana Savings Bank Appellee American Bankers Association; Iowa Bankers Association Amid on Behalf of Appellee(s)

          Submitted: January 12, 2017

         Appeals from United States District Court for the Northern District of Iowa - Dubuque

          Before LOKEN, BEAM, and BENTON, Circuit Judges.

          BENTON, Circuit Judge.

         In the 90 days before filing for bankruptcy, Agriprocessors, Inc., wired funds covering overdrafts at Luana Savings Bank. The bankruptcy trustee, Joseph E. Sarachek, argues those overdraft-covering deposits are avoidable transfers recoverable from Luana. The bankruptcy court[1] found Sarachek could recover some deposits but not others. Sarachek and Luana cross-appealed. The district court[2]affirmed. The parties again cross-appeal. Having jurisdiction under 28 U.S.C. §§ 158(d)(1) and 1291, this court affirms.

         I.

         Agriprocessors had two accounts with Luana relevant here-account 1430 (a checking account) and account 367788 (whose purpose the parties dispute). This appeal is about overdrafts of these accounts. Luana's policy was to provisionally settle all checks on Agriprocessors' checking account and debit that account. When provisional settlement/debiting caused or contributed to a negative account balance, an "intraday overdraft" occurred. By Iowa law, [3] Luana's provisional settlement did not become final until midnight the next business day. Iowa Code §§ 554.4104(1)(j), 554.4301. Luana generally let provisional settlements become final at the midnight deadline, even if they caused or contributed to a negative balance. When Luana allowed provisional settlements causing or contributing to a negative balance to become final at the midnight deadline, a "true overdraft" occurred. Throughout the 90 days before Agriprocessors petitioned for bankruptcy, it deposited funds to cover both intraday and true overdrafts.

         During the 90-day preference period-August 6, 2008, to November 4, 2008-the checking account's balance fluctuated but was always negative. For most of the period, account 367788 had $1.4 million in it. Luana says it "netted" the two accounts, considering the 367788 funds when determining whether the checking account was overdrawn. Put another way, Luana says that so long as the checking account had more than negative $1.4 million, it treated Agriprocessors as having a positive balance (and thus treated Agriprocessors as if no overdrafts occurred). Sarachek disputes that Luana properly "netted" the two accounts.

         Near the end of the preference period, Luana transferred the $1.4 million from account 367788 to the checking account.

         Agriprocessors petitioned for Chapter 7 bankruptcy. Sarachek filed to recover deposits covering both intraday and true overdrafts, as well as the $1.4 million Luana transferred the checking account. Luana argued none of the deposits were recoverable, raised affirmative defenses, and contended the $1.4 million was not recoverable because it was a protected setoff. The bankruptcy court found Sarachek could recover the true overdrafts but not the intraday overdrafts. It rejected Luana's affirmative defenses. And it found that setoff was improper but did not affect Sarachek's recovery. On cross-appeals, the district court affirmed the bankruptcy court. It held that the bankruptcy court erred in finding the setoff improper, but concluded that error did not affect Sarachek's recovery. The parties again cross-appeal.

         II.

         "This court sits as a second court of review in bankruptcy matters, reviewing interpretations of law de novo and factual findings for clear error." In re Peet, 819 F.3d 1067, 1069 (8th Cir. 2016) (internal quotation marks omitted). Under clear error review, this court will "overturn a factual finding only if it is not supported by substantial evidence in the record, if it is based on an erroneous view of the law, or if we are left with the definite and firm conviction that an error was made." Lincoln Provision, Inc. v. Puretz, 775 F.3d 1011, 1014 (8th Cir. 2015).

         III.

         A bankruptcy trustee may "avoid" a debtor's transfer of a property interest (1) "to or for the benefit of a creditor"; (2) "for or on account of an antecedent debt owed by the debtor before such transfer was made"; (3) "made while the debtor was insolvent"; (4) "made . . . within 90 days before the date of the filing of the petition"; and (5) "that enables [the] creditor to receive more" than it would receive under Chapter 7 if the transfer had not been made. 11 U.S.C. § 547(b). The trustee has the burden to prove a transfer is avoidable. § 547(g). The trustee may not avoid a transfer if a creditor proves an exception applies. § 547(c), (g).

         If a transfer is avoidable, the trustee may recover it from "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." § 550(a). The trustee may not recover from a "mere conduit for an avoidable transfer." In re Reeves, 65 F.3d 670, 676 (8th Cir. 1995).

         IV.

         The district court found Sarachek could not recover Agriprocessors' intraday-overdraft-covering deposits from Luana for two independent reasons. First, it found that Agriprocessors' "intraday overdrafts do not give rise to antecedent debt." See § 547(b)(2); Laws v. United Mo. Bank of Kansas City, N.A., 98 F.3d 1047, 1051 (8th Cir. 1996) ("[R]outine advances against uncollected deposits do not create a 'debt' to the bank."). Second, "with respect to the intraday overdrafts, the Bank . . . was functioning as a mere conduit." See § 550(a); In re Reeves, 65 F.3d at 676. On appeal, Sarachek argues the intraday overdrafts are antecedent debt. But he does not argue that Luana was more than a "mere conduit" when it received intraday-overdraft-covering deposits. Even if this court decided that the intraday overdrafts were antecedent debts, the district court's "mere conduit" finding would stand, preventing Sarachek from recovering intraday-overdraft-covering deposits from Luana. This court declines to consider Sarachek's antecedent-debt argument because it would not affect the outcome of this case. See In re Railworks Corp., 760 F.3d 398, 403 (4th Cir. 2014) ("Of course, if the funds are not recoverable under § 550, then it matters not whether they are avoidable under § 547."). See also In re Willaert, 944 F.2d 463, 464 (8th Cir. 1991) ("The fundamental purpose of section 547(b)'s avoidable preference provision is to restore the bankruptcy estate to its pre-preferential transfer condition. Section 550(a) is the vehicle that allows the trustee to accomplish this.").[4]

         V.

         The district court found Sarachek could recover Agriprocessors' true-overdraft-covering deposits from Luana. Luana argues the district court erred because (A) true overdrafts did not create debts, see§ 547(b)(2), and (B) even ...


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