Memorandum of Decision Re: Cash Collateral

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re DARRYL BELLACH'S INTERNATIONAL                                                                              No. 1-90-00777 LEATHER DISTRIBUTORS, INC.,        Debtor. ___________________________/ NATIONAL BANK OF THE REDWOODS,        Plaintiff,    v.                                                                                                                                             A.P. No. 91-1120 RAYMOND CAREY, Trustee,        Defendant. ______________________________/
Memorandum After Hearing
     On the date that the involuntary petition was filed against the debtor, it had some $50,000.00 on deposit with plaintiff National Bank of the Redwoods and owed a larger sum to the bank. It appears that in addition to its common-law right of setoff the bank also had an express security interest in the funds.      After the order for relief under Chapter 11 was entered, the debtor never sought permission to use cash collateral. It transferred all funds to a debtor in possession account at the same bank and in fact used some of the funds. When the case was converted to Chapter 7, there was about $120,000.00 in two debtor in possession accounts at the bank.      This adversary proceeding is a dispute between the bank and the Chapter 7 trustee. The Trustee claims that he is entitled to turnover of all funds, while the bank maintains that it may withhold the $50,000.00 in the account when the petition was filed.      When this matter came before the court for trial, it seemed to the court that while the Trustee was probably technically correct there was no real need to decide the issue. If, as the bank alleged, the $50,000.00 on deposit when the case was filed was its cash collateral, then it would remain its cash collateral even when transferred to a new account. If the cash collateral was used without the permission of the bank or a court order, then the bank is entitled to a replacement lien or a priority claim. In re Aerosmith Denton Corp., 36 B.R. 116 (Bkrtcy.N.D.Tex.1983). Therefore, there seemed to be no practical reason for the court to sort out the issues, since the result was the same under all legal theories. The only real difference seemed to be whether all of the funds would be deemed to have been administered by the Trustee for purposes of computing his maximum commission; the court had no real problem with so deeming.      Upon reflection, however, the matter is not quite so simple as the court first believed. While the bank is entitled, one way or another, to be made whole for the transfer or use of its cash collateral, its rights are subject to avoidance, under either section 547(b) or section 553(b) of the Bankruptcy Code, to the extent that it improved its position during the 90 days before bankruptcy, assuming that the debtor was insolvent during that period. In other words, if the debtor had a zero bank balance sixty days before the petition was filed, and thereafter deposited the $50,000.00 as proceeds from the sale of assets which were not the bank's collateral, then the bank's interest in the funds would be avoidable. The trustee would then be entitled to the funds even though the bank had a valid security interest in them on the date of filing. The court sees that it was wrong in determining that all possible scenarios lead to retention of $50,000.00 by the bank. Accordingly, the Trustee may request an expedited trial if he so desires, and may amend his counterclaim if it is appropriate.
Dated: September 21, 1991                                                                          _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy