Brady v. United States of America, Small Business Administr

• Court: United States Bankruptcy Court, N.D. California
• Decided: February 2, 2022
• Docket: 20-04039
• Status: Unknown

Opinion

EDWARD J. EMMONS, CLERK “Sf we □□ □□ U.S. BANKRUPTCY COURT ci SCE NORTHERN DISTRICT OF CALIFORNIA re □□□ by, a wi My 1 Signed and Filed: February 2, 2022 > ISS STRICT 2 3 Be . V2, 4 5 Roger L. Efremsky U.S. Bankruptcy Judge 6 7 8 9 UNITED STATES BANKRUPTCY COURT 10 NORTHERN DISTRICT OF CALIFORNIA 1] In re . 12 || SPECIALTY’S CAFE AND BAKERY, INC., ) Case No. 20-40954 RLE ) 13 Debtor. ) Ch. 7 ) 14 ) ) 15 ) LOIS I. BRADY, Ch. 7 Trustee ) 16 || of Estate of Specialty’s Café ) & Bakery, Inc., ) 17 ) Adversary Proceeding Plaintiff, ) No. 20-4039 18 || v. ) ) 19 ) UNITED STATES, SMALL BUSINESS ) 20 |} ADMINISTRATION and ) CUSTOMERS BANK, ) 21 ) Defendants. ) 22 ) 23 MEMORANDUM DECISION RE MOTIONS FOR SUMMARY ADJUDICATION 24 Before the court are motions for summary adjudication by 25 |} plaintiff Lois I. Brady, chapter 7 trustee of the estate of 26 || Specialty’s Café and Bakery, Inc. (the “Trustee” and “Debtor”) 27 || and defendants Customers Bank (“Customers Bank”) and the United 28

1 States of America, Small Business Administration (the “SBA” and 2 collectively with Customers Bank, “Defendants”). As explained 3 below, the court now denies the Trustee’s motion and grants the 4 Defendants’ motions. 5 I. Procedural Background 6 On May 27, 2020, Debtor filed this chapter 7 case and the 7 Trustee was appointed. 8 In September 2020, the Trustee commenced this adversary 9 proceeding and on October 28, 2020, the Trustee filed the First 10 Amended Complaint against Customers Bank and the SBA alleging 11 that (1) on May 7, 2020, Debtor obtained a Paycheck Protection 12 Program loan of $8.1 million from Customers Bank which was 13 guaranteed by the SBA (the “PPP Loan” and the “Program”); (2) on 14 May 13, 2020, Debtor repaid the PPP Loan; (3) Debtor filed 15 bankruptcy two weeks later; and (4) the transfer of $8.1 million 16 to Customers Bank is an avoidable preference under Bankruptcy 17 Code §547 for which both Defendants are liable. Dkt. No. 8, First 18 Amended Complaint. 19 Defendants filed their Answers, denying the allegations of 20 the First Amended Complaint and asserting, inter alia, 21 affirmative defenses of new value under Bankruptcy Code 22 §547(c)(1), ordinary course of business under §547(c)(2), and new 23 value under §547(c)(4). Dkt. Nos. 22 and 25. 24 The Trustee moves for summary adjudication of certain 25 issues. Dkt. Nos. 51-56. Defendants oppose the Trustee’s motion. 26 Dkt. Nos. 63, 66. Defendants also filed their own motions for 27 summary judgment. Dkt. Nos. 57-59, 60-62. The Trustee opposes the 28 MSJ Dec. -2- 1 Defendants’ motions. Dkt. Nos. 64-65. Each party has also filed a 2 reply. Dkt. Nos. 67, 68, 69.1 3 II. Summary Judgment Standard 4 Motions for summary judgment are governed by Fed. R. Civ. P. 5 56, made applicable to bankruptcy proceedings pursuant to Fed. R. 6 Bankr. P. 7056. Rule 56 provides that the court shall grant 7 summary judgment if the movant shows that there is no genuine 8 dispute as to any material fact and the movant is entitled to 9 judgment as a matter of law. Fed. R. Civ. P. 56(a). The court 10 views the evidence in the light most favorable to the non-moving 11 party and draws all justifiable inferences in favor of the non- 12 moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 13 (1986). Here, the material facts are not in dispute; the legal 14 implications to be drawn from those facts are in dispute. 15 III. Undisputed Facts 16 The parties agree on the fundamental events relevant to 17 their respective arguments: 18 In March 2020, the Coronavirus Aid, Relief, and Economic 19 Stimulus Act (the “CARES Act”) was signed into law. Pub. L. 116- 20 136. Pursuant to the CARES Act, the SBA established within its 21 §7(a) loan program the Paycheck Protection Program to assist 22 small businesses adversely impacted by the pandemic. 15 U.S.C. 23 §636(a); Dkt. No. 56, MacConaghy Dec., Ex. 9, 4/15/20 Interim 24 Final Rule; Dkt. No. 60, SBA Motion, Ex. 1, SBA FAQs; In re 25 26 1 All references are to the court’s docket numbers and the 27 pagination in its footers. 28 MSJ Dec. -3- 1 Gateway Radiology Consultants, P.A., 983 F.3d 1239, 1247-50 (11th 2 Cir. 2020) (describing background re CARES Act and SBA rules and 3 procedures for implementing PPP loans). 4 PPP loans were funded by various financial institutions and 5 guaranteed by the SBA. In broad strokes, if a PPP loan was used 6 according to the Program’s terms - for payroll, rent, utilities, 7 mortgage interest - the loan may be fully forgiven. Dkt. No. 60, 8 SBA Motion, Ex. 1, SBA FAQs. 9 Debtor was wholly owned by FEMSA/FEMCO and operated 10 approximately 45 restaurants located in class A office buildings. 11 Debtor’s business was adversely - and precipitously - affected by 12 the pandemic as shelter-in-place orders were enacted in March 13 2020, offices closed, and remote work became the norm. Debtor’s 14 rental obligations were approximately $1 million per month and, 15 in this climate, its prospects for survival were uncertain. Dkt. 16 No. 56, MacConaghy Dec., Ex. 1, CFO Negrel Depo., p. 11-12. 17 On April 24, 2020, Debtor signed and then submitted an 18 application for its PPP Loan through loan broker Knight Capital 19 Funding. Dkt. No. 56, MacConaghy Dec., Ex. 7, Loan Application; 20 Ex. 3, Rivero Depo., p. 4. 21 The Loan Application contained certifications to be made in 22 good faith by Debtor, as borrower, as provided in 13 C.F.R. 23 §120.100-101. These certifications included the statement that 24 “current economic uncertainty makes the loan request necessary to 25 support ongoing operations” and an acknowledgment that “if funds 26 are knowingly used for unauthorized purposes the federal 27 government may hold me legally liable, such as for charges of 28 MSJ Dec. -4- 1 fraud.” It also included a warning that knowingly making a false 2 statement was punishable under the law with various prison terms. 3 Dkt. No. 56, MacConaghy Dec., Ex. 7, Loan Application. The 4 requirement that borrowers assess their “economic uncertainty” 5 included looking at their ability to “access other sources of 6 liquidity sufficient to support their ongoing operations.” Dkt. 7 No. 60, SBA Motion, Ex. 1, SBA FAQs. 8 Because of uncertainty regarding the terms of the Program, 9 and its own future viability, on April 29, 2020, Debtor’s CFO 10 asked the loan broker whether funding could be delayed until May 11 8, 2020 to give Debtor more time to understand the exact terms of 12 PPP loans. Dkt. No. 56, MacConaghy Dec., Ex. 1, Negrel Depo., p. 13 8:8-24. 14 On May 5, 2020, Debtor signed the Note evidencing the $8.1 15 million PPP Loan. Dkt. No. 56, MacConaghy Dec., Ex. 4, Promissory 16 Note. 17 On May 7, 2020, Debtor received $8.1 million by wire 18 transfer from Customers Bank. Dkt. No. 64, MacConaghy Dec., Ex. 19 1, p. 1, bank statement. 20 On May 7, 2020, Debtor’s CFO wrote to the loan broker Eric 21 Rivero stating “in light of recent evolution of the PPP 22 guidelines we may decide to return the funds we received this 23 morning ... please let us know asap how we should proceed should 24 we decide to do so.” Debtor’s CFO also asked for “the complete 25 banking information for the account we should return the funds 26 to.” Dkt. No. 56, MacConaghy Dec., Ex. 8, 5/7/20 Negrel-Rivero 27 email exchange. Later that same day, the loan broker advised 28 MSJ Dec. -5- 1 Debtor’s CFO “we haven’t had someone ask to cancel and return the 2 funds” and “by tomorrow early afternoon I’ll have an answer for 3 you ... for the correct refund process.” 4 On May 7, 2020, Debtor’s board of directors met. The board 5 meeting minutes show that the board discussed the PPP Loan and 6 Debtor’s eligibility, as well as other issues regarding Debtor’s 7 future viability, including a potential bankruptcy filing. An 8 “extraordinary board meeting” was set for May 12, 2020 to 9 continue the discussion of these topics. Dkt. No. 57, Angstreich 10 Dec., Ex. D, 5/7/20 board meeting minutes. 11 After receipt of the $8.1 million, Debtor maintained this 12 sum within its Wells Fargo bank account infrastructure until it 13 returned $8.1 million to Customers Bank. Dkt. No. 60, SBA Motion, 14 Ex. 6, Negrel Depo., p. 23:8-25:16; Dkt. No. 64, MacConaghy Dec., 15 Ex. 1, p. 1-2, bank statement; Ex. 2, part 2, p. 11-12, operating 16 account bank statement. 17 On May 12, 2020, Debtor’s board of directors held its 18 extraordinary meeting and decided to return the PPP Loan to 19 Customers Bank. Dkt. No. 56, MacConaghy Dec., Ex. 1, Negrel 20 Depo., p. 15:15-16. The minutes of the board meeting state: “In 21 light of the recent changes to PPP eligibility guidance and based 22 on the recommendations from both FEMSA and Specialty’s counsel, 23 the Board approved to return these funds to the SBA prior to the 24 May 14th deadline.” Dkt. No. 57, Angstreich Dec., Ex. F, 5/12/20 25 board minutes. Also on May 12, the loan broker finally provided 26 Debtor’s CFO Negrel with the instructions for returning the $8.1 27 million to Customers Bank. Dkt. No. 57, Angstreich Dec., Ex. E , 28 MSJ Dec. -6- 1 5/12/20 Rivero email to CFO Negrel. 2 On May 13, 2020, Debtor returned $8.1 million to Customers 3 Bank by wire transfer. Dkt. No. 56, MacConaghy Dec., Ex. 6, 4 outgoing wire confirmation; Dkt. No. 64, MacConaghy Dec., Ex. 2, 5 part 2, p.12, operating account bank statement. 6 At the time of this transaction, the Program had a “safe 7 harbor” deadline of May 14, 2020 under which a PPP loan could be 8 canceled by a borrower with no liability for false or misleading 9 certifications made in the loan application process and the 10 borrower would be deemed by the SBA to have made the required 11 certifications in good faith. Dkt. No. 60, SBA Motion, Ex. 1, SBA 12 FAQs. The safe harbor was “necessary and appropriate to ensure a 13 borrower’s prompt repayment of a loan obtained based on a 14 misunderstanding or misapplication of required certification 15 standard.” 85 Fed. Reg. 23451-23452. 16 Debtor’s CFO explained his understanding of this safe 17 harbor: “As far as I was aware, any money returned prior to the 18 expiration of the safe harbor period would allow any beneficiary 19 of a PPP loan to not be asked any questions about how they 20 applied for the loan, why they applied for it, and to avoid 21 having to answer any questions on that entire process.” Dkt. No. 22 60, SBA Motion, Ex. 6, Negrel Depo., p. 10:13-25. 23 He also testified about his misgivings regarding taking the 24 PPP Loan: “I always told people, ... this makes no sense. I don’t 25 understand how we can say that we don’t have access to liquidity. 26 Sometime in March or early April FEMSA voted the distribution of 27 ... several tens of millions of dollars of dividends.” As the CFO 28 MSJ Dec. -7- 1 described it, this prompted him to ask “how can we justify asking 2 for money from the federal government when our shareholder is 3 voting a dividend of that sum.” Dkt. No. 60, SBA Motion, Ex. 6, 4 Negrel Depo., p. 29:1-30:11. 5 Debtor’s CFO also testified that “If there hadn’t been any 6 safe harbor, I don’t think it would have changed any of the 7 decisions we made.” Dkt. No. 60, SBA Motion, Ex. 6, Negrel Depo., 8 p. 23:5-7. 9 On May 17, 2020, Debtor’s management announced its decision 10 to shut down as of May 19, 2020. Dkt. No. 56, MacConaghy Dec., 11 Ex. 10, p. 5, expert report timeline. 12 On May 27, 2020, Debtor filed this chapter 7 case. 13 IV. Discussion 14 The Trustee contends that she has established all the 15 elements of her preference case under Bankruptcy Code §547(b) 16 other than Debtor’s insolvency. She also contends that the 17 undisputed facts show that Defendants cannot establish their 18 affirmative defenses and cannot otherwise defeat her case under 19 Bankruptcy Code §547(b). Defendants disagree. 20 A. Avoidable Preference Elements 21 Bankruptcy Code §547(b) provides that a trustee may avoid 22 any transfer of an interest of the debtor in property - (1) to or 23 for the benefit of a creditor; (2) for or on account of an 24 antecedent debt owed by the debtor before such transfer was made; 25 (3) made while the debtor was insolvent; (4) made on or within 90 26 days before the date of the filing of the petition; (5) that 27 enables such creditor to receive more than such creditor would 28 MSJ Dec. -8- 1 receive if - (A) the case were a case under chapter 7 of this 2 title; (B) such transfer had not been made, and (C) such creditor 3 received payment of such debt to the extent provided by the 4 provisions of this title. 5 The Trustee has the burden of proving the avoidability of a 6 transfer under §547(b) and Defendants have the burden of proving 7 the nonavoidability of a transfer under §547(c). Bankruptcy Code 8 §547(g). All of these elements must be proven by a preponderance 9 of the evidence. Arrow Elecs., Inc. v. Justus (In re Kaypro), 218 10 F.3d 1070, 1073 (9th Cir. 2000). 11 There are several elements that are not in dispute. 12 Bankruptcy Code §101(54)(D)’s broad definition of “transfer” 13 covers the wire transfer to Customers Bank. Also, there is no 14 dispute that this transfer took place within 90 days of the 15 petition date as required by §547(b)(4)(A). The Trustee also 16 states that she holds approximately $2.5 million in cash and she 17 estimates that the allowed claims will be in excess of $10 18 million. As such, this is not a case in which unsecured creditors 19 will receive 100% on their claims as Defendants have. Dkt. No. 20 55, Brady Dec. Based on this, the Trustee argues she has met the 21 requirements of Bankruptcy Code §547(b)(5) to show that 22 Defendants received more than other similarly situated creditors. 23 Defendants do not quarrel with this statement but their arguments 24 make this issue irrelevant. 25 B. Elements in Dispute 26 1. Interest of the Debtor in Property 27 The first point of contention is whether the Trustee has 28 MSJ Dec. -9- 1 established that the $8.1 million was an “interest of the debtor 2 in property” at the time it was transferred to Customers Bank. 3 According to the Trustee, because the $8.1 million was deposited 4 into Debtor’s bank account it was presumptively Debtor’s property 5 for the purposes of preference recovery and Defendants are unable 6 to rebut this presumption. 7 Defendants counter that Debtor rescinded the PPP Loan, in 8 effect terminating it, and the $8.1 million was then impressed 9 with a resulting or constructive trust. Because property held in 10 trust is not property of the estate, the $8.1 million was not an 11 interest of the debtor in property when it was returned to 12 Customers Bank. 13 Bankruptcy Code §541(a)(1) broadly defines property of a 14 debtor’s estate as including “all legal or equitable interests of 15 the debtor in property.” State law determines the extent of an 16 interest in property absent an overriding federal policy. Butner 17 v. U.S., 440 U.S. 48, 55 (1979). Bankruptcy Code §541(b)(1), 18 provides that property of the estate does not include “any power 19 that the debtor may exercise solely for the benefit” of another. 20 Further, §541(d) also excludes property “in which the debtor 21 holds, as of the commencement of the case, only legal title and 22 not an equitable interest.” 23 Property held in trust by a debtor for another is neither 24 property of the bankruptcy estate under §541(d), nor property of 25 the debtor for purposes of §547(b). Begier v. IRS, 496 U.S. 53, 26 59 (1990); In re Unicom Computer Corp., 13 F.3d 321, 324 (9th 27 Cir. 1994) (creditor established that funds debtor received by 28 MSJ Dec. -10- 1 mistake were impressed with a constructive trust and debtor had 2 only bare legal title; burden of proof shifted to debtor to show 3 it would be inequitable under bankruptcy law to impose a 4 constructive trust and debtor failed to do so). 5 Under California law, a contract may be rescinded by mutual 6 consent. Cal. Civ. Code §1689(a). A contract may also be 7 rescinded unilaterally if the rescinding party’s consent was 8 given by, inter alia, mistake. Cal. Civ. Code §1689(b). Cal. Civ. 9 Code §1688 says “a contract is extinguished by its rescission.” A 10 rescinded contract ceases to exist for all purposes. Boomer v. 11 Muir, 24 P.2d. 570, 577 (1933). 12 To effectuate a rescission, a party must, promptly upon 13 discovering the facts which entitle him to rescind, give notice 14 of intent to rescind, and “restore to the other party everything 15 of value which he has received” or “offer to restore the same.” 16 Cal. Civ. Code §1691(b). 17 Defendants argue that once Debtor rescinded the PPP Loan, 18 the transaction was deemed void ab initio. Little v. Pullman, 219 19 Cal. App. 4th 558, 568 (2013). Once Debtor completed the steps in 20 the rescission process, the parties were restored to their former 21 positions. Mulhall v. Wells Fargo Bank, N.A., 241 F. Supp. 3d 22 1046, 1050 (N.D. Cal. 2017). 23 The undisputed facts show that on April 29, 2020, Debtor’s 24 CFO asked the loan broker if funding could be delayed, and on May 25 7, the day the PPP Loan funded, he told the loan broker that 26 Debtor was considering canceling the transaction and needed to 27 know how to return the funds. Debtor’s board met on May 7 and 28 MSJ Dec. -11- 1 discussed the issues surrounding the PPP Loan, and met again on 2 May 12 at which point the board confirmed Debtor’s decision to 3 rescind the PPP Loan. On May 13, 2020, Debtor performed the law’s 4 implied promise to return the $8.1 million to Customers Bank. The 5 undisputed facts in this record show that Debtor rescinded the 6 PPP Loan on May 12 and Debtor then performed as required by 7 transferring - that is, restoring - the $8.1 million to Customers 8 Bank. 9 The question becomes what is the effect of that rescission. 10 Defendants contend that rescission extinguished the contract such 11 that, at least as of the May 12 decision, the $8.1 million was 12 impressed with a resulting trust or a constructive trust and 13 Debtor then had bare legal title, and no equitable interest in 14 the $8.1 million. 15 A resulting trust is imposed to carry out the parties’ 16 intentions. In re Sale Guar. Corp., 220 B.R. 660, 664 (9th Cir. 17 B.A.P. 1998), aff'd, 199 F.3d 1375 (9th Cir. 2000). A 18 constructive trust is an equitable remedy imposed to prevent 19 unjust enrichment regardless of the parties’ intentions. Cal. 20 Civ. Code §2223, §2224; In re Moeller, 466 B.R. 525, 535 (Bankr. 21 S.D. Cal. 2012) (discussing resulting and constructive trusts, 22 explaining California law defines a trust as a fiduciary 23 relationship with respect to property, title holder has equitable 24 duty to deal with property for benefit of another which arises as 25 result of manifestation of intent to create trust). Clear and 26 convincing evidence is required to rebut the presumption that an 27 owner of legal title also owns full beneficial title. Cal. Ev. 28 MSJ Dec. -12- 1 Code §662. 2 The Trustee argues that a constructive trust may only arise 3 where a thing is wrongfully detained or wrongfully acquired and 4 the PPP Loan does not fit this paradigm because there was no 5 wrongful conduct by Debtor in obtaining the PPP Loan, and it was 6 not obtained by accident, mistake or other wrongful act. 7 The record shows the PPP Loan was not obtained by accident, 8 mistake, or other wrongful act. Defendants’ point is that after 9 Debtor rescinded the PPP Loan, the funds were impressed with a 10 trust until they were returned to Customers Bank on May 13. If 11 the $8.1 million had not been returned to Customers Bank, it 12 would then have been wrongfully detained - that is, impressed 13 with a constructive trust, or held in contradiction to Debtor’s 14 expressed intent to cancel - that is, impressed with a resulting 15 trust. 16 The Trustee next argues that the constructive trust theory 17 fails here because a constructive trust is merely an inchoate 18 remedy and there must be a prepetition ruling by a court that it 19 exists before this court may recognize it. In re Advent 20 Management, 178 B.R. 480, 488 (9th Cir. B.A.P. 1995) (describing 21 need for court determination of constructive trust’s existence; 22 but noting that in Unicom, the act of litigating the defense 23 established the existence of the constructive trust). 24 Assuming without deciding that a constructive trust is 25 merely an inchoate remedy that the court may not apply here, 26 under the resulting trust theory the court reaches the same 27 conclusion regarding property of the estate. As explained in In 28 MSJ Dec. -13- 1 re Golden Triangle Cap., Inc., 171 B.R. 79 (9th Cir. B.A.P. 2 1994), cases have at times used the terms resulting trust and 3 constructive trust interchangeably, but determination of “whether 4 bankruptcy’s policy of ratable distribution outweighs imposition 5 of a trust depends on whether the trust arises out of intended 6 ownership rights in the property or whether it is to be imposed 7 as a remedy to correct a wrong.” 171 B.R. at 82. 8 On this record, Defendants have shown that a resulting trust 9 arose to carry out the intention of the parties - the return of 10 the PPP Loan to Customers Bank because the transaction had been 11 rescinded and Customers Bank was then the rightful owner of the 12 PPP Loan funds. It is undisputed that Debtor intended to rescind 13 the PPP Loan, did in fact rescind it, and fully performed its 14 obligation to restore ownership of the PPP Loan funds to 15 Customers Bank. The $8.1 million was impressed with a resulting 16 trust as of May 12, 2020. Debtor then held only bare legal title 17 and not an equitable interest in the $8.1 million under 18 Bankruptcy Code §541(d). 19 The Trustee also argues that Defendants’ trust theories fail 20 because they have not, and can not, trace the PPP Loan funds. On 21 May 7, 2020, Customers Bank wired $8.1 million into Debtor’s bank 22 account. Dkt. No. 64, MacConaghy Dec., Ex. 1, p. 2. On May 8, 23 2020, Debtor transferred $8.1 million to its other bank account. 24 Dkt. No. 64, MacConaghy Dec., Ex. 2, part 2, p. 11, “online 25 transfer PPP segregation transfer.” On May 13, 2020, Debtor wired 26 $8.1 million from this account to Customers Bank. Dkt. No. 64, 27 MacConaghy Dec., Ex. 2, part 1, p. 52. The Trustee argues that 28 MSJ Dec. -14- 1 even though Debtor received $8.1 million on May 7, it transferred 2 only $8,049,000 to the other account on May 8 which shows that 3 Debtor did not segregate the PPP Loan funds and spent some of it 4 thus defeating Defendants’ tracing requirement. Defendants 5 respond that this is a misunderstanding of the relevant bank 6 statements and Debtor in fact segregated the $8.1 million and at 7 all times maintained it. See Dkt. No. 69, SBA Reply, p. 8-9. The 8 court finds Defendants’ analysis of this issue convincing and 9 concludes that Defendants have met their obligation to trace the 10 PPP Loan funds. As such, the $8.1 million was held in trust and 11 was not an interest of the debtor in property when it was 12 returned to Customers Bank on May 13, 2020. This is a fatal flaw 13 in the Trustee’s §547(b) case. 14 2. For or on Account of Antecedent Debt 15 The Trustee argues that the PPP Loan created a debt, as that 16 term is defined in the Bankruptcy Code, which arose when Debtor 17 signed the Note on May 5, 2020; Debtor paid this debt on May 13, 18 2020 - making it the payment of an antecedent debt to or for a 19 creditor for purposes of satisfying §547(b)(1) and (b)(2). 20 Bankruptcy Code §101(12) defines a debt as “liability on a 21 claim.” Bankruptcy Code §101(5), in turn, defines a claim as “a 22 right to payment whether or not it is reduced to judgment, 23 liquidated, unliquidated, fixed, contingent, matured, unmatured, 24 disputed, undisputed, secured, or unsecured.” 25 Customers Bank tries mightily to avoid this straightforward 26 analysis but fails in this endeavor. The fact that the Note 27 provided a six month delay for payment to begin or that the PPP 28 MSJ Dec. -15- 1 loan may ultimately have been fully forgiven is irrelevant. Ninth 2 Circuit authority defines antecedent debt as the Trustee 3 contends. In re Futoran, 76 F.3d 265 (9th Cir. 1996) (payment of 4 future spousal support obligation was payment of antecedent 5 debt). 6 However, none of this matters. The court agrees with the SBA 7 that there is, in fact, no debt here. By the terms of the 8 Paycheck Protection Program, Debtor had the right to terminate 9 its PPP Loan and return the borrowed funds to the lender in the 10 safe harbor period - no questions asked. Debtor took advantage of 11 this as permitted by the rules then in place. As a matter of 12 contract law, Debtor did not pay a debt when it wired $8.1 13 million to Customers Bank on its terminated PPP Loan. The $8.1 14 million was returned because, at that point, it was the property 15 of Customers Bank. The PPP guidelines permitted Debtor to 16 terminate the transaction. It did so and performed as permitted 17 under the applicable PPP guidelines. 18 The Trustee argues that Debtor had an obligation to make 19 restitution once it rescinded the PPP Loan. See Cal. Civ. Code 20 §1692 (a claim for damages is not inconsistent with a claim for 21 relief based upon rescission; the aggrieved party shall be 22 awarded complete relief, including restitution of benefits...) 23 The Trustee asserts that, conceptually, the obligation to make 24 restitution is itself within the Bankruptcy Code’s definition of 25 a debt. This argument is not convincing in the context of this 26 case. Outside of bankruptcy, if Debtor had not performed as it 27 did, and had then been sued, a claim for restitution may have 28 MSJ Dec. -16- 1 been stated in order to provide “complete relief.” However, 2 Debtor’s rescission extinguished the PPP Loan and Debtor then 3 fully performed within three business days by returning the $8.1 4 million to Customers Bank. 5 The Trustee has failed to prove there was a payment to a 6 creditor for or on account of an antecedent debt as required 7 under Bankruptcy Code §547(b)(1) and (b)(2). For this additional 8 reason, her motion must be denied. 9 C. Affirmative Defenses 10 1. Ordinary Course of Business 11 Even though the court has found that the Trustee has not 12 established certain required elements of her §547(b) case, the 13 court will briefly address the Defendants’ ordinary course of 14 business defense under §547(c)(2) to explain why it concludes 15 that this transaction meets the Bankruptcy Code §547(c)(2) 16 ordinary course of business defense. 17 This defense requires Defendants to prove that the transfer 18 of the $8.1 million was to pay a debt incurred by Debtor in the 19 ordinary course of business or financial affairs of Debtor and 20 Defendants, and the transfer was either (A) made in the ordinary 21 course of business or financial affairs of Debtor and Defendants, 22 or (B) made according to ordinary business terms. Bankruptcy Code 23 §547(c)(2). 24 The Trustee argues that Defendants cannot meet the first 25 step of showing that this was a debt incurred in the ordinary 26 course of business or financial affairs for Debtor and the 27 Defendants simply because it was a PPP Loan and this Program was 28 MSJ Dec. -17- 1 only established in response to the pandemic caused by Covid-19 - 2 an extraordinary event. That is true as far as it goes. However, 3 the Program was part of the SBA’s well-established §7(a) lending 4 program and was subject to a defined set of rules and guidelines 5 for both borrowers and lenders. As such, the Program was based on 6 overarching “ordinary” terms and conditions even though it was 7 implemented in response to the major disruption caused by the 8 Covid-19 pandemic. The court agrees with Defendants that this PPP 9 Loan was obtained in the ordinary course of business or financial 10 affairs of Debtor and Defendants. There were no extraordinary or 11 aberrational aspects to this short-lived relationship between 12 Debtor and Defendants. 13 The Trustee next argues that Defendants have not met 14 §547(c)(2)(A)’s requirement that they establish - with competent 15 evidence - that the challenged transfer to Customers Bank was 16 made in the ordinary course of business or financial affairs of 17 Debtor and Customers Bank. 18 This element of the defense traditionally involves an 19 analysis of the payment history between a debtor and a creditor 20 but if the case involves a one-time transaction between them, the 21 task differs. The court is to look to transactions between 22 similarly situated parties not sliding into bankruptcy. In re 23 Ahaza Systems, Inc., 482 F.3d 1118, 1125 (9th Cir. 2007). The 24 Trustee argues that the loan broker Eric Rivero’s testimony 25 establishes her point because his email to Debtor’s CFO said 26 Debtor was the first to ask for instructions on how to return a 27 PPP loan, and, in his experience, canceling this sort of loan was 28 MSJ Dec. -18- 1 rare. This is not convincing in light of the safe harbor rules 2 that permitted Debtor to do exactly what it did. Any similarly 3 situated party could have done the same thing. This made the 4 transfer one that fits the definition of one made in the ordinary 5 course of business or financial affairs of Debtor and Defendants. 6 The Trustee also argues Defendants have not met 7 §547(c)(2)(B)’s requirement that they prove this transfer was 8 made according to ordinary business terms. “Ordinary business 9 terms” means terms employed by similarly situated debtors and 10 creditors facing the same or similar problems. In In re Jan 11 Weilert RV, Inc., 315 F.3d 1192, 1195 (9th Cir. 2003), the Ninth 12 Circuit held that “ordinary” means terms that are ordinary for 13 companies in financial distress, and terms that are not an 14 “aberration” in the relevant industry. 15 The Trustee argues that Defendants can not prove this 16 transaction is within ordinary business terms because (1) 17 Defendants have failed to provide expert testimony regarding the 18 relevant industry; (2) the record shows that this transfer was an 19 aberration because it was the pre-payment of the PPP Loan; and 20 (3) the transfer was made in response to threats of civil or 21 criminal liability because Debtor’s CFO expressed concern 22 regarding his risk exposure for making the certifications in the 23 loan application. 24 First, expert testimony regarding industry standards is not 25 required here. In Weilert, the debtor had refunded a creditor’s 26 mistaken double payment within three days. The Ninth Circuit 27 dismissed the argument that an industry expert was needed on 28 MSJ Dec. -19- 1 ordinary business terms in this context, explaining that more 2 evidence of ordinariness was not required because no industry 3 standard could be more stringent than this debtor’s performance 4 in three business days. The Ninth Circuit recognized that the law 5 does not inflexibly demand form over substance. Weilert, 315 F.3d 6 at 1200. 7 This court is bound to follow this approach. Debtor wired 8 $8.1 million to Customers Bank within three business days of 9 receipt. This was done according to the safe harbor deadline then 10 in place based on Debtor’s recognition that it did not make sense 11 to keep this loan. The Rivero testimony does not take this 12 transfer outside ordinary business terms and does not support a 13 finding that it was an aberration. No additional evidence is 14 needed here. 15 The Trustee’s other arguments also lack merit. This transfer 16 was not a pre-payment as in In re Schick, 234 B.R. 337 (Bankr. 17 S.D.N.Y. 1999) which the Trustee cites. Nor was this transfer 18 made in response to threats made by a creditor to cut off a 19 commercial relationship - a pattern in many preference cases. 20 Debtor’s CFO was justifiably concerned about the accuracy and 21 ambiguities in the required certifications as well as the 22 soundness of the business reasons to enter into this transaction. 23 But this is a far cry from a creditor threatening a debtor to 24 extract payment resulting in a departure from their previous 25 business terms. 26 2. New Value 27 Both Defendants asserted affirmative defenses based on new 28 MSJ Dec. -20- 1 value under Bankruptcy Code §547(c)(1) and (c)(4) in their 2 Answers. Dkt. No. 22, 2nd and 4th affirmative defenses; Dkt. No. 3 25, 3rd and 5th affirmative defenses. The Trustee seeks summary 4 adjudication on these affirmative defenses. Defendants’ describe 5 this theoretical new value as the value conferred by the safe 6 harbor - that is, the waiver of any investigation into the loan 7 application process and the release from any civil or criminal 8 liability. 9 In relevant part, Bankruptcy Code §547(a)(2) defines new 10 value as “money or moneys worth in goods, services, or new 11 credit.” The court need not reach this issue but the Trustee is 12 correct that these affirmative defenses most likely fail. 13 3. Policy Arguments 14 Both Defendants argue that there are policy reasons 15 regarding PPP loans and the CARES Act that should defeat 16 preference recovery under Bankruptcy Code §547 and warrant a 17 ruling in their favor. Dkt. Nos. 57, 60, 63, 66, 69. The Trustee 18 disputes each of the Defendants’ arguments and points out that 19 the policies underlying Bankruptcy Code §547 mandate a ruling in 20 her favor. Dkt. Nos. 53, 65, 67. The Bankruptcy Code’s policy in 21 favor of ratable distribution is fundamental. The CARES Act 22 policy to support ongoing businesses struggling to survive in the 23 pandemic is equally fundamental. However, the court need not pit 24 these two policies against each other. This Debtor chose not to 25 continue to operate and recognized that the PPP Loan did not make 26 sense for it and acted appropriately. It is difficult to 27 criticize the decision to apply for the PPP Loan and the decision 28 MSJ Dec. -21- 1 to change course. It is also difficult to criticize the Trustee 2 for bringing this adversary proceeding. The court’s decision was 3 not an easy one. 4 V. Conclusion 5 Defendants have established that Debtor rescinded the $8.1 6 million PPP Loan. The $8.1 million was then impressed with a 7 resulting trust. As such, under Bankruptcy Code §541(d), Debtor 8 held only legal title and not an equitable interest in the $8.1 9 million when it was transferred to Customers Bank. The $8.1 10 million would have been excluded from property of the estate 11 under Bankruptcy Code §541 if it had not been transferred 12 prepetition. Therefore, it is not an interest of the debtor in 13 property for purposes of Bankruptcy Code §547(b). Defendants have 14 also established their ordinary course of business defense under 15 Bankruptcy Code §547(c)(2). For these reasons, the Trustee’s 16 motion is denied and Defendants’ motions are granted. An order 17 will follow. 18 19 * * * End of Decision * * * 20 21 22 23 24 25 26 27 28 MSJ Dec. -22- 1 Court service list: 2 all parties by ecf 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 MSJ Dec. -23-