In In re C.W. Mining Co., 749 F. 3d 895 (10th Cir. 2014), the Tenth Circuit Court of Appeals held that a fully secured creditor’s post-petition transfer will not be avoided as an unauthorized transfer of estate property under § 549 of the Bankruptcy Code (the “Code”) or as a violation of the automatic stay under § 362(a) of the Code if the transfer caused no harm to the estate and avoidance would not benefit the estate.
In 2007, C.W. Mining Company (“C.W. Mining”), the operator of a coal mine, deposited $362,000 with the Bank of Utah (the “Bank”) in exchange for a certificate of deposit evidencing such amount. In 2008, C.W. Mining’s creditors filed an involuntary Chapter 11 petition against the company, which was ultimately converted to a Chapter 7 liquidation. After the case had been converted to a liquidation, the Bank proceeded to exercise its common law right of setoff and apply the proceeds of the certificate of deposit, now totaling $383,099, toward the repayment of several outstanding promissory notes issued by C.W. Mining in favor of the Bank. Though the Bank had knowledge of the bankruptcy proceeding, it did not notify the Chapter 7 Trustee (the “Trustee”) of its setoff.
Upon learning of the Bank’s actions, the Trustee sought to avoid the setoff of the $383,099 on the grounds that (i) the act constituted an unauthorized post-petition transfer under § 549 and the proceeds were recoverable pursuant to § 550 of the Code or (ii) in the alternative, the setoff was void as a violation of the automatic stay under § 362(a) and merited an order for turnover pursuant to § 542 of the Code. The bankruptcy court granted summary judgment in favor of the Bank. In respect of the § 549 claim, the bankruptcy court, relying on the First Circuit’s ruling in In re Bankvest Capital Corp., 375 F. 3d 51 (1st Cir. 2004), held that avoiding the transfer would result in reviving the Bank’s lien as it was a fully secured creditor pre-petition, thus rendering the avoidance pointless. Regarding the § 362(a) claim, the bankruptcy court held that the Trustee failed to show that the estate had been harmed by the transfer in violation of the automatic stay and that avoiding the transaction would yield any benefit to the estate. The Bankruptcy Appellate Panel (the “BAP”) upheld the bankruptcy court’s opinion on similar grounds, noting that granting the Trustee its desired relief would be a “tacit endorsement of fee churning” because the only party to gain from avoidance of the transfer and channeling the value of the certificate of deposit through the estate would be the Trustee itself through increased administrative costs.
The Tenth Circuit, reviewing the bankruptcy court’s grant of summary judgment, affirmed the court’s decision. Like the bankruptcy court and the BAP, the Tenth Circuit agreed that upon avoidance, a fully secured creditor’s lien is revived pursuant to § 502(h) of the Code, which calls for a creditor’s claim arising after the return of property to be allowed or disallowed “the same as if such claim had arisen before the date of the filing of petition” (see 11 U.S.C. § 502(h)). Thus, the Tenth Circuit held that avoiding the transfer pursuant to § 549 and recovering the monies under § 550 would be futile because the estate would still be required to pay the Bank’s secured claim of $383,099.
Turning to the § 362(a) claim, the Tenth Circuit held that because a transfer in violation of the automatic stay is void and, as a result, the parties are returned to their pre-transfer positions, the practical effect of enforcing that provision in this case was that the Bank would regain its status as a secured creditor. Thus, because the position of the Trustee and the Bank would be the same whether or not the transfer was avoided, the Trustee failed to show that it had been harmed by the transfer or that the Bank had benefited from it. Finally, the Tenth Circuit agreed with the bankruptcy court that turnover was not warranted under § 542(a). Citing the language of § 542(a) that turnover is not appropriate if “the property is of inconsequential value or benefit to the estate”, the Tenth Circuit held that because the estate would be required to pay the Bank the $383,099, returning the funds to the estate would yield it no benefit (see 11 U.S.C. § 542(a)).
