Memorandum of Decision Re: New Value Defense

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re NANCY OTT,                                                           No. 91-12312      Debtor. ___________________________/ JEFFRY G. LOCKE, Trustee,      Plaintiff,    v.                                                                              A.P. No. 93-1062 WESTAMERICA BANK,      Defendant. ______________________________/
Memorandum of Decision
     In 1987, debtor Nancy Ott borrowed $25,000.00 from defendant Westamerica Bank. As security for the loan, Ott's parents pledged a $25,000.00 certificate of deposit. In July, 1991, the debtor repaid the loan in full and the Bank released its security interest in the deposit. Less than 90 days later, Ott filed a Chapter 7 petition. In this adversary proceeding, the Chapter 7 trustee seeks to recover the payment to the Bank as a preference.      It is clear that the payment to the bank was a preference as to Ott's parents. 4 Collier on Bankruptcy (15th Ed.), section 547.04[1], citing Smith v. Tostevin, 247 F.2d 102 (2d Cir.1917). Pursuant to section 550(a)(1) of the Bankruptcy Code, the trustee may recover the transfer from the Bank as the initial transferee. The Bank argues, citing In re Church Buildings and Interiors, Inc., 14 B.R. 128 (Bkrtcy.W.D.Oka.1981), that the court should use its equitable powers to rule in its favor notwithstanding section 550(a)(1). However, the law in this circuit is that the court may not make equitable exceptions to the preference statutes. Enserv Co., Inc. v. Manpower, Inc./California Peninsula, 64 B.R. 519 (9th Cir.BAP 1986). Moreover, the rationale in Church Buildings is wholly inconsistent with In re Suffola, 2 F.3d 977 (9th Cir.1993).      The issue in this case is whether the Bank's release of its security interest in the certificate of deposit constitutes "new value to the debtor" under section 547(c)(1) or "new value to or for the benefit of the debtor under section 547(c)(4) of the Code. If it does, then the Bank has a defense to the action.      The release of a lien clearly is "new value" as defined in section 547(a)(2). However, the release was to the debtor's parents, not the debtor. Accordingly, section 547(c)(1) does not afford the Bank a defense because that section says that the new value must be given to the debtor.      Section 547(c)(4) is somewhat broader; the new value may be for the benefit of the debtor rather than just to the debtor. Several cases have held or suggested that payments to third parties can constitute new value under this section. In re Bellanca Aircraft Corp., 850 F.2d 1275, 1280n11. However, after considerable thought the court reaches the conclusion that Bellanca and the cases cited in it are distinguishable in that in those cases there was a clear benefit to the debtor. In this case, the court sees no benefit flowing to the debtor from the payment. The three benefits cited by the bank (release of the parents' contingent claim, release of the lien on the parents' certificate, and an argument regarding exemptions) do not seem to be the sort of benefits contemplated by Bellanca, nor do they fit within the statutory purpose of section 547(c)(4) to encourage creditors to deal with troubled businesses.      The court acknowledges that it seems at least a little unfair to force the Bank to repay the estate when it has already released the security for which it bargained. However, the courts have made it clear to lenders that there are risks inherent in dealing with insiders of the debtor. In any event, the debtor's estate was diminished by the payment and the Bank is liable for its return.      The court having resolved the sole factual issue in favor of the trustee, judgment shall be entered in favor of the trustee and against the Bank for $25,119.24. The trustee shall also recover his costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for trustee shall submit an appropriate form of judgment forthwith.
Dated: December 13, 1993                                                                          _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy