Opinion
Case No. 09-14088 Adversary Case No. 11-1101
05-18-2012
In Re ALLEN G. ZARING Debtor GEORGE LEICHT, TRUSTEE Plaintiff v. FIFTH THIRD BANK Defendant
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
___________________________
Jeffery P. Hopkins
United States Bankruptcy Judge
Chapter 7
Judge Hopkins
MEMORANDUM OF DECISION
ON ORDER GRANTING DEFENDANT'S SUMMARY JUDGMENT MOTION
This is a preference action filed by the chapter 7 trustee ("Trustee") pursuant to 11 U.S.C. § 547(b). Presently before the Court is a summary judgment motion ("Motion")(Doc. 18) filed by the Defendant, Fifth Third Bank ("Fifth Third").
FACTS
Fifth Third is the holder of two notes and a guaranty executed by the Debtor, Allen G. Zaring III. Within ninety days prior to the filing of his bankruptcy petition, Mr. Zaring made seven payments to Fifth Third totaling $553.875.30. Mr. Zaring made the payments from his Fifth Third bank account.
ISSUE
The Trustee must prove, among other things, that the transfers enabled Fifth Third to receive more than it would have received if:
(A) the case were a case under chapter 7 of this title; (B) the transfer[s] had not been made; and (C) [Fifth Third] received payment of such debt to the extent provided by the provisions of this title.11 U.S.C. § 547(b)(5). According to the Motion, the Trustee cannot satisfy § 547(b)(5). Specifically, Fifth Third believes it could have set off the $553,875.30 in bankruptcy if the transfers had not been made. According to the Trustee, Fifth Third's argument fails because Fifth Third never effectuated a setoff.
ANALYSIS
1. Actual Setoff Not Required
The Trustee believes he prevails under § 547(b)(5) unless Fifth Third possessed a security interest in the transferred funds. Because Fifth Third never set off the funds, reasons the Trustee, Fifth Third did not possess a security interest in the same. The Trustee's argument is misplaced. See R.M. Taylor, Inc. v. H.M. White, Inc. (In re R.M. Taylor, Inc.), 257 B.R. 289 (Bankr. W.D. Mo. 2000); Lingley v. Contractors Group, Inc. (In re Nepsco, Inc.), 55 B.R. 574 (Bankr. D. Me. 1985).
R.M. Taylor and Lingley are preference actions. In both cases, the transferee argued that § 547(b)(5) could not be satisfied because of the transferee's hypothetical setoff rights if the transfers had not been made. Neither transferee had, in reality, effectuated a setoff. Both courts ruled in favor of the transferee, finding it irrelevant whether a setoff actually occurred. See R.M. Taylor, 257 B.R. at 294 ("the fact that White did not actually set off its debt prepetition does not affect the analysis"); Lingley, 55 B.R. at 576 ("the fact that CGI . . . failed to affirmatively exercise . . . any right of setoff . . . is of no consequence"). The sole issue is whether the transferee could have, hypothetically, set off the transfer amount in bankruptcy if the transfer had not been made. If so, the transfer is not preferential under § 547(b)(5). 2. Fifth Third's Hypothetical Setoff Rights
The Bankruptcy Code does not create a right of setoff. Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995). Instead, 11 U.S.C. § 553(a) provides that non-bankruptcy rights of setoff are preserved in bankruptcy, with limited exceptions not raised by the Trustee. See Strumpf, 516 U.S. at 18. Fifth Third claims a right to setoff under Ohio law.
According to Ohio law, setoff is a "right which exists between two parties, each of whom under an independent contract owes a definite amount to the other, to set off their respective debts by way of mutual deduction." Walter v. Nat'l City Bank of Cleveland, 42 Ohio St. 2d 524, 525 (1975). In the banking context, "[i]t allows a bank to apply general deposits of a depositor against a depositor's matured debt." Daugherty v. Central Trust Co. of Northeastern Ohio, N.A., 28 Ohio St. 3d 441, 446 (1986).
If the Debtor had not transferred $553.875.30 to Fifth Third during the preference period, upon the Debtor's bankruptcy filing Fifth Third could have set off the $553.875.30 against its bankruptcy claim. Therefore, the Trustee cannot sustain his burden of proof under § 547(b)(5).
Setoff is subject to the automatic stay. See 11 U.S.C. § 362(a)(7). However, a right to setoff is "cause" for relief from stay under 11 U.S.C. § 362(d)(1). See In re Ealy, 392 B.R. 408 (Bankr. E.D. Ark. 2008); In re Garden Ridge Corp., 338 B.R. 627 (Bankr. D. Del. 2006); In re Cullen, 329 B.R. 52 (Bankr. N.D. Iowa 2005).
CONCLUSION
For the foregoing reasons, the Motion will be GRANTED and the Trustee's complaint (Doc. 1) will be DISMISSED. An order to this effect will be entered separately.
Copies to:
E. Hanlin Bavely
ehbavely@zoomtown.com
William B. Fecher
wbfecjer@statmanharris.com