A deposit into a checking or savings account seems like a pretty straightforward and innocuous transaction–unless the customer files for bankruptcy, and the bankruptcy trustee starts looking for assets to recover. Bankruptcy trustees will seek to recover money that once belonged to the borrower under various theories including fraudulent conveyance, particularly if the debtor-bank customer was running some sort of Ponzi or investment fraud scheme. Bankruptcy trustees will even pursue money deposited into the debtor's bank account from the depositary bank that was subsequently transferred elsewhere.
Holding the depository bank liable for the transfer of such funds by virtue of its depository bank function alone seems inequitable, yet bankruptcy trustees have pursued them. 11 U.S.C. § 548(a)(1)(A) allows the trustee to “avoid any transfer . . . of an interest of the debtor in property . . . that was made or incurred within 2 years before the date of the filing of the petition if the debtor . . . made such transfer . . . with the actual intent to hinder, delay or defraud any” creditor. 11 U.S.C. § 548(a)(1)(A). The threshold issue is whether such deposits are “transfers” under 11 U.S.C. § 548(a)(1)(A). 11 U.S.C. § 101(54) broadly defines transfer as any “dispos[al] of or parting with property.” 11 U.S.C. § 101(54).
Some courts have held that deposits into unrestricted bank accounts are transfers within the meaning of § 101(54). Redmond v. Tuttle, 698 F.2d 414, 417 n. 8 (10th Cir. 1983); In re Schafer, 294 B.R. 126 (N.D. Cal. 2003).
Two recent cases from the Fourth Circuit Court of Appeals and the Sixth Circuit Court of Appeals have held that deposits by a debtor into his own unrestricted checking account in the regular course of business do not constitute “transfers” within the meaning of § 101(54). Ivey v. First Citizens Bank & Trust Co (In re Whitley), United States Court of Appeals for the Fourth Circuit, No. 15-2209 (January 31, 2017); Meoli v Huntington Nat’l Bank, Sixth Circuit Court of Appeals, Nos. 15-2308/2362 (February 8, 2017).
In Ivey, the Court held that “while recognizing that some courts read § 101(54) more broadly, we are persuaded by the precedent in this Circuit and our sister circuits that the better interpretation of “transfer” does not include the debtor’s regular deposits into his own unrestricted checking account. P. 11. The Court found that when the debtor made the deposits “he continued to possess, control and have custody over those funds . . . which were at all times part of the bankruptcy estate.” Id. The Court found that a “transfer” had not occurred because the “debtor is still free to access those funds at will.” P. 12. The Ivey Court clarified, “We express no opinion on whether other types of deposits, such as those made to restricted checking accounts would constitute transfers under § 101(54).” Id.
In Meoli, the Sixth Circuit reached the same conclusion but held that the deposit was not a “transfer” because the bank did not “gain dominion and control” over the debtor’s deposits. P. 10. In reaching this conclusion, the Meoli Court cited decisions from the Court of Appeals for the Seventh, Ninth and Eleventh Circuits. Bonded Fin. Servs. V. European Am. Bank, 838 F.2d 890, 891 (7th Cir. 1988); Universal Serv. Admin. Co. v . Post-Confirmation Comm. of Unsecured Creditors of Inconnect (In re Inconnect, Inc.), 463 F.3d 1064, 1074 (9th Cir. 2006); Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848 F.2d 1196, 1200 (11th Cir. 1988).
In Meoli, the Trustee argued that Huntington asserted dominion and control over the debtor’s deposits because it held the bank account was collateral for a loan from Huntington pursuant to security agreement. However, the Court found that the plain statements in the loan agreements stated that the borrower owned the deposits and was entitled to use and dispose of the collateral in the ordinary course. P. 13-14.
Both the Meoli and Ivey decisions are limited to regular and unrestricted deposit accounts. Thus, banks can anticipate that Trustees may still attempt to pursue funds that were deposited into savings or checking accounts if there is any evidence that the bank exercised control over the funds in the account or restricted the depositor’s right to access such funds. However, to the extent that a deposit account is an unrestricted account, the Meoli and Ivey decisions provide banks with a strong defense to avoidance actions merely premised on the deposit of funds into such accounts.