Hayes et al v. Bank of America

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 08-30978DM
MAURICE M. HAYES and MARITES R. 	)
HAYES aka TESS HAYES dba THESSMAHAL) Chapter 7
aka THESS HAYES, 	)
)
Debtors. 	)
___________________________________)
MAURICE M. HAYES and MARITES R. 	) Adversary Proceeding
HAYES, 	) No. 08-3093DM
)
Plaintiffs, )
)
v. 	)
)
BANK OF AMERICA, 	)
)
Defendant. 	)
___________________________________)
MEMORANDUM DECISION REGARDING DEFENDANT’S MOTION TO DISMISS
Defendant Bank of America (“Defendant”) filed a motion to
dismiss the complaint of debtors Maurice and Marites Hayes
(“Plaintiffs”). 	Plaintiffs’ complaint asserts a claim (presumably
under section 547 of the Bankruptcy Code) to avoid as preferential
a prepetition setoff by Defendant against funds in Plaintiffs’
checking accounts. 	In its motion to dismiss, Defendant asserts
that the offset cannot be avoided as “it is the subject of a
statutory lien, which may not be avoided” under section 547(c)(6).
Signed and Filed: November 10, 2008
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 12, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-03093 Doc# 10 Filed: 11/10/08 Entered: 11/12/08 15:24:56 Page 1 of 4

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1As noted in Nationsbank, N.A. v. Ames Sav. & Loan Assn. (In
re First American Mortg. Co., Inc.), 212 B.R. 479, 485 (Bankr. D.
Md. 1997), prepetition setoffs are generally not voidable
transfers:
The Bank’s prepetition setoff was neither a voidable
preference nor a fraudulent transfer. “In general, a
prepetition setoff is not avoidable as a preference
under section 547, or as a fraudulent transfer under
section 548 or 544.” 	5 Collier on Bankruptcy ¶
553.09[1] (15th ed. 1996). “[A] valid setoff executed
within 90 days of the date of the filing of a bankruptcy
petition is nonetheless protected from avoidance under
section 547, except for any insufficiency. . . . Only if
the court finds the setoff invalid, and further
concludes that no right of setoff exists in bankruptcy,
is section 547 applied.” 	Durham v. SMI Industries
Corp., 882 F.2d 881 (4th Cir. 1989). See also Petersen
v. State Employees Credit Union (In re Kittrell), 115
B.R. 873 (Bankr. M.D. N.C. 1990)[.]
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While Defendant may have other defenses 1 to Plaintiffs’
action, the exception of section 547(c)(6) is inapplicable here.
Section 547(c)(6) excepts from avoidance the “fixing” of a
statutory lien. 	The court agrees with Defendant that California
Civil Code section 3054 grants banks a general possessory lien
upon a customer’s funds in a deposit account for amounts owed to
the bank by the customer. 	That lien, however, is fixed when the
funds come into the possession of the bank (i.e., when the funds
are deposited into the account). 	It is not “fixed” when a bank
satisfies its lien by exercising its equitable right of setoff.
See In re Cleveland Graphic Reprod., Inc., 78 B.R. 819, 823
(Bankr. N.D. Ohio 1987) (section 547(c)(6) applies to the fixing
of a statutory lien, not to the satisfaction of it). 	Moreover, as
noted by the California Supreme Court in Kruger v. Wells Fargo
Bank, 11 Cal.3d 352, 521 P.2d 441 (1974) and Security Pac. Nat’l
Bank v. Wozab, 51 Cal.3d 991, 800 P.2d 557, 560 n.3 (1991), a
Case: 08-03093 Doc# 10 Filed: 11/10/08 Entered: 11/12/08 15:24:56 Page 2 of 4

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2In any event, Defendant has not established that any lien
created by Civil Code section 3054 is a statutory lien for the
purposes of sections 101(53) and 547(c); a question exists as to
whether Debtors consented to a lien on their accounts, thereby
creating a security right outside the parameters of section
101(53).
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distinction exists between the imposition of the lien by statute
and the exercise of the equitable right of setoff. 2 Since the
complaint alleges a setoff on exempt funds, not the enforcement of
a lien, the setoff may have improperly applied to exempt funds in
violation of Kruger; those funds may have been protected in the
subsequent bankruptcy had the setoff not occurred.
For the foregoing reason, the court will deny Defendant’s
motion to dismiss. 	Counsel for Plaintiffs should upload an order
denying the motion for the reasons set forth in this memorandum
decision and directing Defendant to respond to the complaint
within twenty days of service of the signed order. 	The court will
hold an adversary proceeding status conference on January 30,
2009, at 1:30 p.m.
**END OF MEMORANDUM DECISION**
Case: 08-03093 Doc# 10 Filed: 11/10/08 Entered: 11/12/08 15:24:56 Page 3 of 4

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COURT SERVICE LIST
Peter N. Hadiaris, Esq.
Law Offices of Peter N. Hadiaris
600 Harrison St., Ste. 120
San Francisco, CA 94107
Robert S. Lampl, Esq.
Law Offices of Robert S. Lampl
21031 Ventura Blvd., Ste. 1025
Woodland Hills, CA 91364-2203
Case: 08-03093 Doc# 10 Filed: 11/10/08 Entered: 11/12/08 15:24:56 Page 4 of 4