Circuit Split: Is a Deposit into a Debtor’s Bank Account a “Transfer” Under § 101(54)?

January 18, 2018

Section 101(54) defines “transfer” to mean “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with[] (i) property; or (ii) an interest in property.”[1] But is a deposit or wire transfer into a debtor’s bank account a “transfer” within the meaning of § 101(54)? The legislative history behind § 101(54) suggests that the answer is “Yes.” In passing the Bankruptcy Code, Congress sought to make the definition of transfer “as broad as possible,” even going so far as to state that “[a] deposit in a bank account or similar account is a transfer.”[2] However, as illustrated by two recent decisions from the Fourth and Ninth Circuits, respectively, the answer remains unclear.

In January, the Fourth Circuit in Ivey v. First Citizens Bank & Trust Company (In re Whitley) held that a Ponzi scheme operator’s deposits into his own bank account were not “transfers” within the meaning of § 101(54).[3] The debtor (who had already been convicted of wire fraud and money laundering) used a personal checking account “to deposit funds, receive wire transfers, and write checks as part of his fraudulent scheme.”[4] The chapter 7 trustee sued First Citizens Bank, seeking to avoid certain deposits and wire transfers into the debtor’s account.[5] Both the bankruptcy court and district court concluded that although the transactions were “transfers” under the Bankruptcy Code, the trustee’s claims failed because the transfers did not diminish the bankruptcy estate or place the funds beyond the creditors’ reach.[6]

On appeal, the parties’ briefs did not address whether the transactions satisfied the definition of “transfer” under § 101(54). Instead, the parties focused on whether a fraudulent-transfer claim required a showing that the transfer diminished the bankruptcy estate. At oral argument, however, the Fourth Circuit raised the question of whether the deposits were “transfers” under § 101(54).[7] In its opinion ruling against the trustee, the Fourth Circuit acknowledged the legislative history behind § 101(54)’s definition of “transfer,” but found significant the fact that the debtor’s account was “unrestricted” such that the deposited funds were “freely withdrawable at his will” and “at all times part of the bankruptcy estate.”[8] Adhering to its prior decisions under the Bankruptcy Act — which defined “transfer” more narrowly than the Bankruptcy Code — the Fourth Circuit concluded that “the better interpretation of ‘transfer’ does not include a debtor’s regular deposits into his own unrestricted checking account.”[9] The court, however, left open the possibility that other types of deposits could constitute transfers under § 101(54).[10]

A little over a month later, the Ninth Circuit seemingly reached the opposite conclusion.[11] As in Ivey, the defendant bank in Schoenmann v. Bank of the West (In re Tenderloin Health) argued that a deposit into a debtor’s own account is not a “transfer,” relying on a Supreme Court case decided under the Bankruptcy Act (and on which the Fourth Circuit’s pre-Bankruptcy Code decisions “relied heavily”[12]). Noting that “Congress elected to expand the [Bankruptcy] Code’s definition of the term ‘transfer,’” the Ninth Circuit concluded that the debtor’s deposit constituted a “transfer” because “a deposit ‘exchange[s] money for debt ... result[ing] in a “parting with” property’” under § 101(54).[13] Although the Ninth Circuit did not qualify its holding — which seems to encompass deposits into even unrestricted accounts like the one in Ivey and create a circuit split — the facts surrounding the deposit at issue in Schoenmann were quite different. Instead of funds that were “freely withdrawable at ... will” and “at all times part of the bankruptcy estate,”[14] the deposit in Schoenmann “subject[ed] the funds to [the bank’s] security interest,” against which the bank could exercise its setoff rights “and deplete the assets available for distribution to [the debtor’s] creditors.”[15]

Interestingly, this circuit split could have been averted. In Ivey, the Fourth Circuit considered whether the deposits were fraudulent transfers that could be avoided under § 548. A transfer may be avoided only if it was “made” within two years before the bankruptcy was filed.[16] Section 548(d)(1) provides that a transfer is “made” when it is perfected under applicable state law. But in Ivey, it was undisputed that First Citizens Bank did not have a security interest in the deposits that could have been perfected.[17] Given that no transfer was “made” in accordance with § 548(d)(1), the Fourth Circuit did not need to decide whether the deposits were “transfers” under § 101(54).

Which court of appeals got it right? The Fourth Circuit’s reluctance to allow parties to avoid deposits into unrestricted bank accounts strikes a chord, but the Ninth Circuit’s broad reading of “transfer” seems more faithful to the text of § 101(54) and Congress’s stated intent. Section 101(54)(D) defines “transfer” as “each mode” of “parting with” “property” or “an interest in property.” It is difficult to reconcile how depositing money into a bank account — in which an account-holder turns over money to a bank that can be reclaimed only by making a demand on the bank — does not satisfy the plain language of this definition. Distinguishing § 101(54)’s legislative history, including Congress’s unequivocal declaration that “[a] deposit in a bank account or similar account is a transfer,” proves to be an even harder exercise.

Unfortunately, it does not appear that the circuit split will be resolved anytime soon. The Supreme Court recently denied a petition for writ of certiorari filed by the trustee in Ivey. Until the Supreme Court considers the issue, expect to see additional divergent opinions from the circuit courts.

 

[1] 11 U.S.C. § 101(54)(D).

[2] S. Rep. No. 95-989, at 27 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5813.

[3] 848 F.3d 205, 210 (4th Cir. 2017).

[4] Id. at 206.

[5] Id. at 206-07.

[6] Id. at 207.

[7] Id.

[8] Id. at 208-10.

[9] Id. at 210; see also In re Prescott, 805 F.2d 719, 729 (7th Cir. 1986) (“[T]o the extent a deposit is made into an unrestricted checking account, in the regular course of business and withdrawable at the depositor’s will, it is not avoidable by the trustee.”).

[10] Ivey, 848 F.3d at 210.

[11] See Schoenmann v. Bank of the W. (In re Tenderloin Health), 849 F.3d 1231, 1243 (9th Cir. 2017).

[12] Ivey, 848 F.3d at 209.

[13] Id. at 1244 (quoting A & H Ins. Inc. v. Huff (In re Huff), No. 12-05001-BTB, 2014 WL 904537, at *6 (B.A.P. 9th Cir. Mar. 10, 2014)).

[14] Ivey, 848 F.3d at 210.

[15] Schoenmann, 849 F.3d at 1243.

[16] 11 U.S.C. § 548(a)(1).

[17] As acknowledged by First Citizens Bank, there was “no claim that the deposits subjected the funds to a security interest of First Citizens.” Brief in Opposition, Ivey v. First-Citizens Bank & Trust Co., 2017 WL 3327807 at *14 (U.S. 2017) (No. 16-1330).

 

 

This article was originally published in the January 2018 edition of the Commercial Fraud Committee Newsletter. Participation in ABI's committees is one of the many benefits of becoming a member.  Committees provide networking and leadership opportunities.  For additional information on how you could become involved in ABI and our Committees please visit membership.abi.org.

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