Donald Katz, trustee in bankruptcy of the Oakland Foundry Company of Belleville, Illinois, Inc. (Oakland), sued The First National Bank of Glen Head (the Bank) in the Eastern District of New York to recover $108,732.07 which the trustee alleged constituted a voidable preference under § 60 of the Bankruptcy Act, 11 U.S.C. § 96 (1970).1 The district court, George C. Pratt, District Judge, in an opinion filed October 19, 1976 granted the bank's motion for summary judgment and dismissed the trustee's complaint. From the judgment entered accordingly on October 22, 1976, the trustee has appealed.

The district court, in granting the bank's motion for summary judgment, assumed for purposes of the motion that the depositor in fact was insolvent at the time of the deposits and later set-offs, and that the bank had reasonable cause to believe it to be insolvent. Thus the narrow holding of the court below was that, since the bank had obtained the funds of the bankrupt by setting off money on deposit with the bank in the bankrupt's checking account, in conformity with § 68(a), 11 U.S.C. § 108(a),2 there was no "transfer" and, absent a transfer, no preference that could be avoided by the trustee.

We reverse and remand for trial in order to resolve certain issues of fact which we shall discuss more fully below. In reversing and remanding we are mindful of the traditional rule that in order to prove a voidable preference the trustee must show complicity or understanding on the part of the bank. This is in accordance with a long line of authority that a bank is entitled to set off deposits which were accepted in good faith and in the regular course of the bank's business. This rule in turn is premised on practical commercial considerations; it has survived the test of time; and, absent compelling reasons for doing so, it should not be disturbed. Within this framework, we hold that the district court misinterpreted the law and erroneously applied its interpretation to the allegations of the complaint, thus foreclosing a jury's resolution of such critical issues of fact as whether, in view of the build-up and real nature of the Glen Head account, the bank acted in good faith in accepting the deposits or whether the account in fact was a general deposit account. To resolve these and other issues of fact we reverse and remand.

The course of events which lead to the bank's exercise of its asserted right of set-off began on January 16, 1969 when the bank made a $125,000 loan to Oakland. This loan was obtained for Oakland by its president and chief executive officer, Herman Brede. Oakland was a wholly-owned subsidiary of Electronic Cabinets, Inc., all of whose stock was owned by Brede and his wife. Oakland's indebtedness to the bank was guaranteed personally by the Bredes, as required by the bank, and was secured by a pledge of all the Bredes' stock in Electronic Cabinets, Inc. and all of their stock in another company wholly owned by the Bredes. When Oakland's indebtedness to the bank later was converted to a demand note in June 1970, the Bredes gave the bank additional security in the form of a second mortgage on their home. Pursuant to the bank's usual practice, Oakland opened a general checking account with the bank when the loan was first made.

Oakland had been having financial difficulties even before it obtained the loan from the bank. Its financial condition deteriorated until it virtually ceased doing business in March 1971. By June 1971 Oakland had either ceased making or reduced significantly office and factory payroll.

In the district court proceedings the trustee sought to show that Oakland's deposits in its Glen Head account constituted preferences by comparing the activity in that checking account with the activity in Oakland's checking accounts in an Illinois bank. The trustee also sought to prove that practically all of Oakland's banking activity was carried on through two accounts in the Illinois bank, while the Glen Head account remained substantially inactive from July 1970 until March 1971. During this period Oakland made only a few deposits in and withdrawals from the Glen Head account and the balance never rose above $5,800. Beginning April 20, 1971 this pattern changed markedly. From April 20 to June 30 Oakland built up the balance in its Glen Head account from $865.09 to over $100,000. During this period no withdrawals were made. The first reduction in the balance occurred on June 30 when the bank set off the sum of $108,783.91 against the $125,000 which Oakland owed on the loan.

The trustee also sought to prove that Anthony D. Famighetti, the bank's president and the officer primarily concerned with the Oakland loan, was aware of Oakland's worsening financial condition and that he was aware that the Glen Head account was being built up in anticipation of Oakland's impending bankruptcy, thus to be available for a set-off by the bank. On June 29, 1971 Brede called Famighetti to apprise him of Oakland's difficulties. Brede told Famighetti that he would try to work something out with Oakland's creditors. Famighetti immediately placed a freeze on Oakland's account. On June 30 the bank executed the set-off and applied it against the outstanding $125,000 loan. On July 15 an involuntary petition in bankruptcy was filed in the Eastern District of Illinois against Oakland which was adjudicated a bankrupt on August 18.

For purposes of the bank's motion for summary judgment the district court correctly accepted as undisputed the essential facts summarized above to the extent that they were asserted by the bank in support of its motion and admitted by the trustee in his answering papers. On the basis of the undisputed facts the court concluded that Oakland's Glen Head deposits were not made in the regular course of Oakland's business. The court nevertheless dismissed the complaint on the ground that "(t)he test (for determining whether a 'deposit' really is a 'transfer') is not whether the deposits were made in the depositor's regular course of business, but instead, whether they were accepted by the bank in its regular course of business."

We hold that the legal standard articulated by the district court was erroneous. We further hold that, whether under the standard articulated by the district court or under the correct standard, the bank's motion for summary judgment should have been denied because there remained triable issues of fact, including whether the bank was aware of Oakland's intentional build-up of its account as reflected in the bank's acceptance of the deposits other than in the bank's regular course of business.II.

Section 60(a) defines a preference in terms of six key elements.3 Only one is of concern here. The district court assumed that elements (2)-(6) of § 60(a) were present. We likewise assume that the trustee, if afforded the opportunity at trial, could prove elements (2)-(6) in Oakland's series of deposits in its Glen Head account. The only remaining issue is the requirement of element (1) that there be a "transfer"4 of the debtor's property.5

The district court concluded that there had been no transfer because Oakland deposited its funds in an ordinary checking account from which it could make withdrawals, until the bank imposed the freeze on June 29, 1971. In view of this factor, and because the court concluded that the trustee could not prove any agreement or complicity between Oakland (Brede) and the bank with regard to building up the account, the court concluded that the relationship between Oakland and the bank did not differ from an ordinary debtor-creditor relationship. This was the predicate for its conclusion that Oakland's deposits were not transfers within the meaning of § 60.6

It is well settled that deposits in an unrestricted checking account, made in the regular course of business, do not constitute transfers within the meaning of the Bankruptcy Act. New York County Bank v. Massey,192 U.S. 138, 145 (1904); Jensen v. State Bank of Allison, 518 F.2d 1, 4 (8 Cir. 1975); Farmers Bank v. Julian, 383 F.2d 314, 324 (8 Cir.), cert. denied, 389 U.S. 1021 (1967); Joseph F. Hughes & Co. v. Machen, 164 F.2d 983 (4 Cir. 1947), cert. denied, 333 U.S. 881 (1948); Cusick v. Second National Bank, 115 F.2d 150, 151-52 (D.C.Cir.1940); Frankford Trust Co. v. Comber, 68 F.2d 471, 472 (3 Cir. 1933); Citizens' National Bank of Gastonia v. Lineberger, 45 F.2d 522, 526-27 (4 Cir. 1930). The theory of these cases is that a deposit creates a debt owed to the depositor by the bank and does not constitute a parting with property by the depositor. As the court said in Lineberger, supra, 45 F.2d at 527:

"A deposit in a bank . . . does not deplete the estate of the depositor, but results in substituting for currency, bank notes, checks, drafts, and other bankable items a corresponding credit with the bank, which may be checked against . . . . A deposit of funds differs from a payment in the essential particular that it is withdrawable at the will of the depositor."

All of the courts that have relied on a debtor-creditor relationship between bank and depositor to preclude a finding of a transfer have emphasized not only the requirement that the funds be withdrawable at the will of the depositor but also the requirement that the deposits be made in the regular course of business. See, e. g., Mayo v. Pioneer Bank & Trust Co.,supra, 270 F.2d at 836. Various irregularities might defeat the presumption that deposits ordinarily do not have the effect of diminishing the bankrupt's estate and therefore are not transfers. Certainly when withdrawals are not permitted the deposits constitute payment, for they cannot be said to be in the regular course of business or to establish a mere debtor-creditor relationship between the bank and the depositor. E. g., Mechanics' and Metals National Bank v. Ernst, 231 U.S. 60, 67 (1913). But the fact that withdrawals are permitted does not make mandatory the opposite conclusion that the deposits cannot be considered transfers. See Merrimack National Bank v. Bailey, 289 F. 468, 470 (1 Cir.), cert. denied, 263 U.S. 704 (1923).7

In deciding whether a bank's set-off is a "transfer", a court must determine from all the circumstances whether the deposits were made in the regular course of business. In view of the purpose of the inquiry, it does not make sense to consider only the bank's course of business. If the deposits somehow are out of the regular course of the depositor's business, the bank's normal procedures, or the usual course of dealings between the depositor and the bank, then an inference can be drawn that the deposits were not ordinary deposits but served to transfer the depositor's property to the bank. By limiting its inquiry to the regular course of the bank's business, the district court below failed to take into account that "a deposit may be made the cloak for some other transaction, such as payment or the giving of security; and in such case equity, which looks through form to substance, will treat the transaction according to its real nature." Citizens' National Bank of Gastonia v. Lineberger, supra, 45 F.2d at 527-28.

The bank insists here that a deposit will constitute a transfer under § 60(a) (1), only if the trustee can prove the bank's complicity in, agreement to, or conscious awareness of, the build-up in the account in anticipation of a set-off. That is not the law. If it were, equity would be precluded from looking through form to substance even in a case of as blatant a preferential transfer as that alleged by the trustee here.

In many cases a bank has been held to be privy to the building up of a depositor-debtor's account and therefore not to have accepted or received the deposits in the regular course of business. E. g., Mayo v. Pioneer Bank & Trust Co., supra, 270 F.2d at 834; Bank of Commerce v. Hatcher, 50 F.2d 719 (4 Cir. 1931); Blue v. Herkimer National Bank, 30 F.2d 256 (2 Cir. 1929), cert. denied, 281 U.S. 750 (1930); Elliotte v. American Savings Bank & Trust Co., 18 F.2d 460, 462 (6 Cir. 1927); Bank of California v. Brainard, 3 F.2d 3, 4 (9 Cir. 1925); In re Almond-Jones Co., 13 F.2d 152, 156 (D.Md.1926), aff'd sub nom. Union Trust Co. v. Peck, 16 F.2d 986 (4 Cir.), cert. denied, 273 U.S. 767 (1927); cf. Goldstein v. Franklin Square National Bank, 107 F.2d 393 (2 Cir. 1939) (case remanded for factfinding as to the bank's intent in accepting deposits and its knowledge of the depositor's insolvency), on remand, 31 F. Supp. 66 (E.D.N.Y.1940) (findings of no intent to set off deposits against debt and no reasonable cause to believe depositor was insolvent). A bank's participation in the build-up, however, is not a prerequisite to a finding that there has been a transfer. The question has been posed as whether the account of the bankrupt was built up "with the understanding of the Bank". Farmers Bank of Clinton v. Julian, 383 F.2d 314, 324 (8 Cir.), cert. denied, 389 U.S. 1021 (1967); see Jensen v. State Bank of Allison, 518 F.2d 1, 4 (8 Cir. 1975). The query in each of those cases amounted to dictum because there was no evidence that the funds were accepted by the bank or deposited by the bankrupt other than in the regular course of business of either. In both Julian and Jensen, upon which the district court relied, the bank accounts were long- standing, active accounts; in each case the Eighth Circuit emphasized that there was no intent on the part of the depositor or the bank, let alone an agreement between them, to use the deposits as a cloak for payment of a debt. We find those cases to be distinguishable from and therefore not controlling on the issue presented by the instant case.

Here the trustee alleged facts from which it could be inferred that the bankrupt did not make the deposits in its Glen Head account in good faith; that the deposits were not made in the regular course of its business, which already had practically ceased functioning, see Merrimack National Bank v. Bailey, supra, 289 F. at 470; Cardozo v. Brooklyn Trust Co., 228 F. 333, 334 (2 Cir. 1915); that the deposits were unusual in the course of dealings between Oakland and the bank; and that Brede intended the deposits to serve as payment of his company's indebtedness to the bank. The bank's contention that the intent of the depositor is irrelevant misses the point.8 If all six elements of a preference under § 60(a) exist, a preference will be found despite lack of intent on the part of the bankrupt to effect a preference. Here, the intent of the depositor is relevant in proving one element of a § 60(a) preference that the deposits were transfers by showing that Brede never intended to withdraw the funds. If a depositor fully intends to leave the deposits in the account, available for set-off, they constitute payments on account of an antecedent debt whether or not at the time the deposits are made the bank knows it.9III.

We have considered the bank's other arguments and find them to be without merit.10

Nothing in this opinion is intended to express or imply any views on the part of the Court with respect to the result to be reached by the district court on remand. All we hold is that the trustee is entitled to his day in court and an opportunity to prove, if he can, a preferential transfer under § 60 of the Bankruptcy Act in accordance with the correct legal standard as stated in this opinion.

Reversed and remanded for trial.

VAN GRAAFEILAND, Circuit Judge, concurring in part and dissenting in part:

I concur with the majority that the granting of summary judgment was error and that this matter must be remanded for a full development of the facts on trial. However, I cannot agree with the majority's exposition of the law to be applied by the district court on remand.

The issue in this case is a simple one: viz., were the deposits by Oakland in its checking account "transfers" within the meaning of § 1(30) of the Bankruptcy Act? 11 U.S.C. § 1(30). The majority holds that a unilateral decision by a depositor not to exercise his right to draw checks against his account transforms the bank, without its knowledge, from a debtor to a transferee.1 This does not accord with the "traditional rule" which is correctly set forth at the outset of the majority opinion; i. e., "that in order to prove a voidable preference the trustee must show complicity or understanding on the part of the bank."

In the leading case of New York County National Bank v. Massey, 192 U.S. 138, 147, 24 S. Ct. 199, 201, 48 L. Ed. 380 (1904), the Court held that "a deposit of money to one's credit in a bank does not operate to diminish the estate of the depositor, for when he parts with the money he creates at the same time, on the part of the bank, an obligation to pay the amount of the deposit as soon as the depositor may see fit to draw a check against it." Until the bank acts to restrict the right of the depositor to write checks against the account, the money on deposit remains the property of the depositor and he may draw against it. United States v. Sterling National Bank & Trust Co., 494 F.2d 919, 922 (2d Cir. 1974).

The Massey court held that in the absence of a showing of fraud or collusion between the bankrupt and the bank aimed at creating a preferential transfer of the bankrupt's property, the deposits which he makes create an indebtedness on the part of the bank and do not diminish the bankrupt's estate. This holding requires, at the least, that there be some participation or understanding on the part of the bank before an ordinary deposit can be considered a transfer, and this is the generally accepted rule. 4 Collier on Bankruptcy, § 68.16 at 919-21; 3 Remington on Bankruptcy § 1474.4 at 472 (J. Henderson rev. 1957). We have accordingly stated that where a bank accepts a deposit with the intention of applying it on a preexisting claim against the depositor rather than holding it subject to his right of withdrawal, there may be a voidable preference. See Miller v. Wells Fargo Bank International Corp., 540 F.2d 548, 557 (2d Cir. 1976) (citing Goldstein v. Franklin Square National Bank, 107 F.2d 393, 394 (2d Cir. 1939)). The test, as set forth in Goldstein, is whether the bank, in receiving the deposits, intends to apply them in payment or setoff of an outstanding indebtedness of the depositor. Expressed another way, the test is "(w)as the account of the bankrupt built up, with the understanding of the Bank, for the purpose of allowing the Bank to use it as an offset and thereby obtain a preference?" Farmers Bank v. Julian, 383 F.2d 314, 324 (8th Cir.), cert. denied, 389 U.S. 1021, 88 S. Ct. 593, 19 L. Ed. 2d 662 (1967).

Although the majority's attempt to do equity will penalize only the bank in the instant case, the burden of the rule which we now lay down will fall in the long run upon the depositor. A bank is not simply a repository of funds; it is a source of credit. The facts of financial life are such, however, that the businessman seeking credit is most likely to secure it at the bank where he is a depositor. H. Justman, Comments on the Bank's Right of Setoff under the Proposed Bankruptcy Act of 1973, 31 Bus.Law. 1607, 1611, & 1616 n. 54 (1976). This bank not only has the use of the deposited funds; it also has the right of setoff. Jenson v. State Bank, 518 F.2d 1, 4 n. 6 (8th Cir. 1975). The maintenance of an adequate balance in his demand account benefits the depositor as well as the bank, because the bank's right of setoff encourages it to continue credit when it might be induced otherwise to call its loans. If a businessman's efforts to create and maintain an adequate balance are, standing alone, to be construed as transfers of the funds involved, an inducement for the bank to work along with the financially troubled entrepreneur is removed. It was to encourage such cooperation that the bank's right of setoff was preserved when the Bankruptcy Law was amended by the Chandler Act in 1938. See 4 Collier on Bankruptcy, § 68.01(3). A right which Congress has refused to eliminate should not be eliminated by this Court in its stead.

I see no reason why the district court should be directed to depart from the rule laid down by this Court in Goldstein, supra, and approved only last year in Miller, supra.