Memorandum of Decision Re: Preference

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re JOSEPH RUSSO,                                                                             No. 1-87-00510      Debtor. _______________________/ JOSEPH RUSSO,      Plaintiff,    v. EUREKA FEDERAL SAVINGS & LOAN ASSN.,                                                                                  A.P. No. 1-87-0117      Defendant. ______________________/
Memorandum of Decision
     This is a simple preference action. Just prior to bankruptcy, defendant Eureka Federal Savings ("EFS") levied on the debtor's bank account and seized $28,886.52, which was still in the custody of the sheriff when the bankruptcy petition was filed. The parties stipulate that the only issues are insolvency (section 547(b)(3) of the Bankruptcy Code) and comparison to hypothetical distribution (section 547(b)(5)).      It is clear that neither side understands the application of section 547(b)(5), as that section is totally irrelevant. A preference action can be defended under section 547(b)(5) only when it can be shown that all creditors in the same class as the transferee would receive 100 cents on the dollar in Chapter 7. In re Lewis W. Shurtleff, Inc. (9th Cir.1985) 778 F.2d 1417, 1417; 4 Collier on Bankruptcy (15th ed.), sec.547.08. Since EFS is in the lowest class, the only real issue is solvency.      Although the court suspects that the transfer is an avoidable preference, the court must find based in the evidence that the debtor has not met the burden of proof necessary to sustain a judgment in his favor. EFS is therefore entitled to judgment.      The issue of solvency boils down to a valuation of the real property in Glen Ellen, California, and an obligation owed to the debtor by an entity known as Boardwalk Investors. If either asset has any substantial value, then the debtor is solvent and EFS must prevail.      At the time he filed his Chapter 11 petition, the debtor held a note for $450,000.00 secured by a second deed of trust to the Glen Ellen property. This court subsequently approved an agreement whereby the debtor obtained a deed to the property in lieu of foreclosure. At that time, the debtor produced an appraisal showing some $800,000.00 in equity over and above the first deed of trust. Aside from testimony that the first is now seeking to foreclose, the debtor introduced no evidence casting doubt upon its prior representations to the court.      Although the debtor testified that Boardwalk Investors is now in Chapter 11 proceedings, he introduced no competent testimony that his claim was worthless, nor can the court make such an assumption merely because a Chapter 11 petition has been filed. Even a recovery of twenty cents on the dollar would render the debtor's estate solvent even if he loses the Glen Ellen property.      In ruling in favor of EFS, the court is mindful that section 547(f) creates a presumption of insolvency during the period in question here. However, this section does not shift the burden of proof of insolvency from the debtor to EFS. Once EFS came forward with evidence of solvency, contained in both the schedules and the debtor's representations made in support of the real property agreement, the burden was on the debtor to prove insolvency. 4 Collier on Bankruptcy (15th ed.), sec. 547.06. This he did not do.      It should be noted that this ruling does not automatically result in turnover of the seized funds to EFS. This court has the power to order turnover to the debtor if the unavoidable interest of EFS is adequately protected. U.S. v. Whiting Pools, Inc. (1983) 462 U.S. 198, 211-12.      For the foregoing reasons, the debtor shall take nothing by his complaint and this matter shall be dismissed. EFS shall recover any cost of suit.      This memorandum shall constitute findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for EFS shall submit an appropriate form of judgment together with proof of its service upon counsel for the debtor.
Dated: October 26, 1987                                                                                  _______________________                                                                                                                            ALAN JAROSLOVSKY                                                                                                                            U.S. BANKRUPTCY