FOR THE NORTHERN DISTRICT OF CALIFORNIA
JOSEPH RUSSO, No. 1-87-00510
EUREKA FEDERAL SAVINGS
& LOAN ASSN., A.P. No. 1-87-0117
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
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 _______________________