MEMORANDUM DECISION

ANDREW B. ALTENBURG, Jr., United States Bankruptcy Judge.

INTRODUCTION

Before the court is an adversary proceeding of Andrew Sklar, Chapter 7 Trustee of the Bankruptcy Estate of Global Protection USA, Inc. (the "Trustee")1 against Susquehanna Bank (the "Bank"), seeking avoidance of certain transfers. After four days of trial, including testimony and admission of documentary evidence, an Updated Joint Stipulation of Undisputed Facts and Witness Lists ("JS") (Doc. No. 120)2 and post-trial memorandums from the parties, the proceeding is now ripe for consideration. The court concludes that all of the transfers may be avoided and recovered by the Trustee. The court denies the Trustee's request for attorney's fees and costs for this proceeding, but grants $2,000 as a sanction for the Bank's late production of its expert's report.

JURISDICTION AND VENUE

The court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. JS, ¶ 7. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (F), (H), and (O). Id., ¶ 9. Venue is proper in this Court pursuant to 28 U.S.C. § 1409. Id., ¶ 10. The statutory predicates for the relief sought herein are 11 U.S.C. §§ 547, 548, 549 and 550.

Pursuant to Federal Rule of Bankruptcy Procedure 7052, the court issues the following findings of fact and conclusions of law.

FINDINGS OF FACT3

A. The Parties

B. Procedural history

C. The Bank Line of Credit

D. The Bank's Proofs of Claim

E. The $500K Prepetition Transfer

The Guarinos have agreed to borrow money from Susquehanna Bank to help the cash crunch of Global until money from the state of California toward the service contract arrives. This is an emergency loan to prevent the Bank from permanently freezing the credit line. This is a short term bridge loan and in no way should be construed as a capital contribution or an obligation of the Guarinos, as shareholders, to rectify or remedy the problems of Global Protection. This money is to be viewed as an extended line of credit from Susquehanna and the Guarinos, [sic] require, [sic] that, [sic] because it is a credit extension over and above what Susquehanna is willing to extend, it should be treated [as] a priority. Once a sizeable payment from the service agreement with California is received Global is obligated to pay this note.

Global Protection USA Inc. absolutely and -unconditionally guarantees this note. Company Guarantees [sic] payment and there are no considerations or options for renewals or extensions. Global Protection USA Inc. pledges, as collateral for the loan, its rights to any and all assets, inventory, patents and possessions. All receivables from California state, county or municipal government agencies are included. . . .

Exs. T-4, D-8; JS, ¶ 180.

F. The Cash Collateral Order

Ex. T-13, pp. 2-3.

JS, ¶ 46; ex. T-13.

JS, ¶ 47; ex. T-13.

JS, ¶ 4 4; ex. T-13.

JS, ¶ 48; ex. T-13.

G. Amerinova

Tr-2, p. 56.

H. Discount Central

I. The $655K Postpetition Transfers9 to the Bank

1. May 1st $200k Debtor Transfer to the Bank

2. May 1st $205k Discount Central Transfer

3. May 1st $100k Amerinova Transfer

4. The June 11th Transfers

a. $100k Debtor Transfer

b. June 11th $50k Amerinova Transfer

CONCLUSIONS OF LAW

ANALYSIS

Before reviewing the various transfers, the court will address the Bank's argument that its secured status precludes any recovery of avoided transfers to it.

A. Effect of the Cash Collateral Order Carve Out on the Trustee's Claims

The Cash Collateral Order in paragraph 2(a) provides the Bank with a replacement lien on postpetition collateral as adequate protection. To the extent that this adequate protection is insufficient, it grants the Bank a superpriority administrative expense claim, subject only to the Carve Out Payments defined in paragraph 6. The Carve Out Payments consist of payments to the United States Trustee, court-approved fees and expenses for the Debtor and Creditors' Committee professionals, and payments to ILC Dover, LP in connection with the ILC purchase order. The Cash Collateral Order also recognized the Bank's existing, prepetition secured claim in the principal amount of $1,704,436.62. Recitals, ¶ C.

Section 502(h) provides that:

11 U.S.C. § 502(h). Therefore, when a trustee recovers funds pursuant to section 550, the entity recovered from can assert a claim in that amount, which the Bankruptcy Code deems a prepetition claim. A section 502(h) claim takes the character of the creditor's original claim, so if it was a secured claim prepetition, then this "replacement claim" for the avoided transfer will also be a secured claim. See Fleet Nat'l Bank v. Gray (In re Bankvest Capital Corp.), 375 F.3d 51, 67 (1st Cir.2004). "It is Fleet's status as a secured creditor at that time, not later, that determines the nature of its present 502(h) claim." Id., at 68.

Courts have held that where the section 502(h) claim is secured, it is "futile . . . to order recovery of an unauthorized post-petition transfer from a secured creditor since the creditor's lien would be revived by the avoidance." In Rushton v. Bank of Utah (In re C.W. Min. Co.), 477 B.R. 176, 186 (10th Cir. BAP 2012) (citing decisions from the Fourth Circuit Courts of Appeal, and the bankruptcy courts of Vermont, the Western District of Texas, and Massachusetts), aff'd, Jubber v. Bank of Utah (In re C.W. Mining Co.), 749 F.3d 895 (10th Cir. 2014).

But here, paragraph 2(i) of the Cash Collateral Order overrides the operation of section 502(h). It provides as follows:

JS, ¶ 44; ex. T-13 (emphasis added).

The Bank complains that paragraph 2(i) of the Cash Collateral Order was not discussed during negotiations. Defendant's Proposed Findings of Fact, Doc. No. 124, ¶¶ 54-55, 112-113. It also cites paragraph C of the recitals as preserving its section 502(h) rights. It asserts that therefore paragraph 2(i) must be read as applying only to avoidance actions against third parties, not the Bank. The Trustee disputes this contention.

When it comes to cash collateral orders, "[u]nless it conflicts with provisions of the Bankruptcy Code, a carve out is construed applying normal contract interpretation provisions." In re Residential Capital, LLC, 501 B.R. 549, 621 (Bankr. S.D.N.Y.2013). Thus, where terms of a contract are clear and unambiguous, the court is to understand them in their "plain, ordinary and popular sense." U.S. Fid. & Guar. Co. v. Guenther, 281 U.S. 34, 37, 50 S.Ct. 165, 74 L.Ed. 683 (1930) (quoting Imperial Fire Insurance Co. v. Coos County, 151 U.S. 452, 462, 14 S.Ct. 379, 38 L.Ed. 231 (1894)); Spano v. JP Morgan Chase Bank, NA, 521 Fed.Appx. 66, 70 (3d Cir.2013) ("`[W]here the terms of a contract are clear and unambiguous[,] there is no room for interpretation or construction and courts must enforce those terms as written.'") (quoting Impink ex rel. Baldi v. Reynes, 396 N.J.Super. 553, 935 A.2d 808, 812 (2007); Howard Johnson Int'l, Inc. v. MAC (USA) Trade, Inc., CIV 06-5588(WJM), 2008 WL 5046834, at *4 (D.N.J. Nov. 21, 2008) (where intent can be "cleanly extracted from the clear and unambiguous words that the parties have used, it is equally conventional wisdom that they are held to those words contained in the contract.'") (quoting Compass Tech. v. Tseng Lab., 71 F.3d 1125, 1131 (3d Cir.1995)). Accordingly, this court will invoke normal contract interpretation principles in analyzing the Cash Collateral Order.

The court rejects the Bank's argument that paragraph 2(i) only encompasses recovery of chapter 5 transfers from entities other than the Bank. The express language "any claim held by the Debtor's estate" and "proceeds recovered from any claim" is not limiting or unclear. The court notes that the same language is repeated in paragraph six regarding the carve out for ILC's superpriority claim. The Bank's averment that paragraph 2(i) was not discussed during the negotiations of the order is not grounds to invalidate it now. If the Bank had a problem with the entered order, it had plenty of time file a motion alleging that the order did not reflect the parties' understanding. The court will not consider such an objection now.

Moreover, while the Bank is correct that its claim will "spring back" by the same amount recovered (since those transfers paid down its prepetition claim), the clear and unambiguous language of paragraph 2(i) prevents that claim from encompassing the recovered funds. In other words, if the Trustee recovers the entire $655,000, he will pay claims with it in the order of priority but not the Bank's prepetition secured claim. Similarly, if the Trustee recovers $500,000 as a preference payment, the Bank's prepetition lien will not embrace these funds. Nor will the funds be used to pay the Bank's superpriority claim, if its collateral runs out. See Aalfs v. Wirum (In re Straightline Investments, Inc.), 525 F.3d 870, 884 (9th Cir.2008) (refusing recoupment where court order prohibited debtor from obtaining postpetition loans secured by its accounts receivable); Martino v. First Nat'l Bank (In re Garofalo's Finer Foods, Inc.), 164 B.R. 955, 968 (Bankr.N.D.Ill.1994) (granting trustee's section 549 claim against bank that accepted postpetition payment for overdrafts in violation of section 364, and rejecting bank's "net result" argument), aff'd in relevant part, rev'd in part on other grnds, 186 B.R. 414 (N.D.Ill.1995).

Accordingly, the Trustee's avoidance actions asserted in this complaint are not asserted in vain. If successful, he may recover the funds on behalf of the estate and distribute them according to the priorities of the Bankruptcy Code, subject to the limitations of paragraph 2(i) of the Cash Collateral Order.

B. First Count—Avoidance of Preferential Transfer

The Trustee seeks to recover as a preferential transfer from the Bank the $500,000 Prepetition Transfer that the Debtor paid to the Guarinos on December 13, 2011. Section 547 provides:

11 U.S.C. § 547(b).

Section 550 permits the trustee to seek to recover the transfer from an initial transferee, an entity for whose benefit the transfer is made, or any immediate or mediate transferee of the initial transferee. 11 U.S.C. § 550(a).

"Congress' intent in enacting section 547(b) was to promote equal distribution among a bankrupt's creditors. In re Del Grosso, 89 B 06606, 1992 WL 280788, at *5 (Bankr.N.D.Ill. Sept. 21, 1992) (citing H.R.Rep. No. 95-959, 95th Cong., 1st Sess. 178 (1977), reprinted in 5 U.S. Code Cong. & Admin. News 6138 (1978)).

The plaintiff has the burden of proving the avoidability of a preference, and the defendant has the burden of proving any defenses, each by a preponderance of the evidence. 11 U.S.C. § 547(g); United States Trus tee v. First Jersey Sec., Inc. (In re First Jersey Sec., Inc.), 180 F.3d 504, 512 (3d Cir.1999); Wilen v. Pamparo Sav. Bank, S.L.A. (In re Bayonne Med. Ctr.), 429 B.R. 152, 174 (Bankr. D.N.J.2010).

At trial, the Bank conceded that all elements of a preferential transfer were satisfied except for whether the Debtor was insolvent at the time of the transfer. See Tr. 10/15/15, 68:25-69:2. Should the court determine that the Debtor was insolvent, then the Bank asserts the defenses that the payment was made in the ordinary course of business, that the Trustee had to first avoid the payment as to the Guarinos, and that the Trustee cannot recover the payment from the Bank because it was a fully secured creditor. Doc. No. 124, p. 15. Additionally, it argued that it was an immediate or mediate transferee that took for value, in good faith, and without knowledge of the voidability of the transfer avoided. Doc. No. 124, pp. 20-21.

1. Presumption of Insolvency

The Bankruptcy Code defines insolvent, in relevant part, as follows:

11 U.S.C. § 101(32).

The solvency or insolvency of the debtor must be determined as of the date of the transfer. 11 U.S.C. § 547(b)(3). See Travellers Int'l AG v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 134 F.3d 188, 193 (3d Cir.1998); Lids Corp. v. Marathon Investment Partners, L.P. (In re Lids Corp.), 281 B.R. 535, 540 (Bankr.D.Del.2002).

However, Congress enacted a presumption of the debtor's insolvency within the 90 days preceding the filing of the petition, 11 U.S.C. § 547(c), in response to the "problems engendered by requiring proof of insolvency." In re Camp Rockhill, Inc., 12 B.R. 829, 833 (Bankr.E.D.Pa.1981). As one court explained:

In re Butler, 3 B.R. 182, 185 (Bankr. E.D.Tenn.1980). See Matter of Emerald Oil Co., 695 F.2d 833, 838 (5th Cir.1983) (citing Butler). As a consequence, here, a presumption of insolvency exists as the transfer took place on December 13, 2011, 89 days prior to the petition date of March 12, 2011.

2. Bank's Evidence to Rebut Presumption of Insolvency

The legislative history to section 547 directs that the presumption analysis be "governed by the federal rules of evidence, which state that the presumption merely requires the party against whom it is directed (in this case, the transferee of the preference) to go forward to present some evidence to overcome the presumption. Once he does, the ultimate burden of proof remains with the bankruptcy trustee." H.R. Rep. 95-595, 178-79, 1978 U.S.C.C.A.N. 5963, 6139 (footnote omitted).

Accordingly, here the Bank must rebut the presumption with some evidence that the Debtor was solvent. Zeta Consumer Prods. Corp. v. Equistar Chem. L.P. (In re Zeta Consumer Products Corp.), 291 B.R. 336, 347 (Bankr.D.N.J. 2003). The evidence must be "more than mere allegation" and must be sufficient for the court "to conclude that the debtor was indeed solvent at the time of the transfer." Id. (internal quotation omitted); In re Showtime Enterprises, Inc., 05-11089 JHW, 2007 WL 4264516, at *2 (Bankr. D.N.J. Dec. 3, 2007) (evidence must be "nonspeculative."). If the Bank provides some evidence of solvency, then the Trustee must prove insolvency by a preponderance of the evidence. In re Zeta Consumer Products Corp., 291 B.R. at 347. On the other hand, if a defendant does not come forward with any evidence to rebut the presumption, the plaintiff has no obligation to introduce any evidence of solvency. Scharffenberger v. United Creditors Alliance Corp. (In re Alleg hen y Health, Educ. & Research Found.), 292 B.R. 68, 77 (Bankr.W.D.Pa.2003).

The Bank relies solely on a Balance Sheet, ironically introduced at trial and admitted into evidence not by it but by the Trustee, and the testimony of Mr. Guarino, to rebut the presumption of insolvency. The Balance Sheet estimates that as of September 30, 2011 assets exceeded liabilities by approximately $1.5 million.

While a balance sheet test is indeed what section 101(32)'s definition of insolvent calls for, In re Showtime Enterprises, Inc., 05-11089 JHW, 2007 WL 4264516, at *2; 5-547 Collier on Bankruptcy ¶ 547.03 (Matthew Bender 16th ed.) ("A rough `balance sheet' test determines insolvency[.]"), that is an oversimplification, as balance sheet numbers do not necessarily reflect the fair value of assets. TWA v. Travellers Int'l AG. (In re Trans World Airlines, Inc.), 180 B.R. 389, 405 (Bankr. D.Del.1994), aff'd in part, rev'd in part on other grnds, 203 B.R. 890 (D.Del.1996), rev'd, 134 F.3d 188 (3d Cir.1998). Rather, it is a starting point from which the parties can then make adjustments based on the testimony of their expert appraisers and accountants. Id. As explained in the Trans World case:

Id., at 405 n. 22.

But the Bank did not offer any testimony to explain the figures in the Balance Sheet. Instead, after the Trustee introduced it with testimony of its expert, Allen Wilen,10 the Bank crossexamined Mr. Wilen regarding his criticisms.

On direct, Mr. Wilen had expressed reasons for doubting the veracity of the Balance Sheet. First, rather than being compiled by an accountant, he stated that a balance sheet merely restates the information provided by the company. Tr. 11/15/16, pp. 116-17. This seemed out of the ordinary for the Debtor because all of the other financial statements Mr. Wilen had seen had been accountant reviewed statements. Tr. 11/15/16, p. 116. In addition, the balance sheet was not signed by Mr. Hanlon, the accountant purportedly providing the report. Tr. 11/15/16, p. 117. Mr. Wilen also objected to the "odd period compilation," stating that the only financials of the Debtor that he had seen were year-end statements, not quarterly or semi-annually. Tr. 11/15/16, pp. 117,119. He pointed out a mathematical error (albeit of only $600). Tr. 11/15/16, pp. 117-18. And finally, the valuation method changed from prior financial statements, moving from a weighted average cost of inventory to the FIFO method. Tr. 11/15/16, p. 118. Mr. Wilen additionally testified that this resulted in the inventory being overvalued, as compared to a fair market value. Tr. 11/15/16, p. 118.

This court agrees that some aspects of the Balance Sheet make its genuineness suspect. Though on cross, Mr. Wilen conceded that an end of September report could represent a quarterly report, Tr. 10/16/15, p. 173, and that the Bank may have requested it, id., p. 174, the Bank did not put on any evidence that it had requested a quarterly report, evidence which certainly would be in its possession. In addition, Mr. Wilen testified that he had found no other quarterly reports for this Debtor. Tr. 10/16/15, p. 174.11

The court is less concerned about the amount of the mathematical error, resulting in the total of assets being $600 lower than sum of the itemized assets, and repeated in the liabilities total, than that it also supports some untrustworthiness of the document. Also, the court does not find Mr. Wilen's objections to the valuation method and the lack of GAAP as critical except to the extent that they highlight that the Bank did not provide any support for the methods used to come up with the Balance Sheet figures.

Mr. Wilen is correct that use of a FIFO method can result in an overestimate of value. See D.H. Baldwin Co. v. U.S. (Matter of Baldwin United Corp.), 48 B.R. 57, 62 (Bankr.S.D.Ohio 1985) ("In a period of rising prices of inventory, use of LIFO [last in-first out] rather than FIFO will increase reported cost of goods sold and reduce reported taxable profits."). See also Comm. Of Unsecured Creditors of Interstate Cigar Co. v. Interstate Distrib., Inc. (In re Interstate Cigar Co., Inc.), 278 B.R. 8, 22 (Bankr.E.D.N.Y.2002) (noting that had the inventories been costed under the FIFO method rather than by LIFO, they would have been approximately $4,839,000 higher in value). But the Balance Sheet notes also stated that, while using the FIFO method, the company applied the lower of cost or market value ("LCM"). The latter represents the cost of replacement. Knapp King-Size Corp. v. United States, 527 F.2d 1392, 1399 (Ct. Cl.1975) (quoting D. Loveman & Son Export Corp. v. Commissioner, 34 T.C. 776, 796 (1960)) (stating LCM does not mean the price at which merchandise is sold or offered for sale).

With the LCM method, if market/replacement values are greater than the inventory's cost, a company would still record the value of the items at the cost. If market values dropped since the purchase, then the company would record the lower market value. Either way, the total either equals or underestimates the replacement value. See, e.g, Fedders Corp. v. C.I.R., 39 T.C.M. (CCH) 1 (1979) Tax Ct. Memo LEXIS 175, *60 (T.C.1979) (stating that book value determined at lower of cost or market value "is, by definition, equal to or less than [the purchaser's] investment and we think it is not unreasonable to infer that a buyer would be willing to pay this amount for the inventory as part of a going-concern."), aff'd without opinion, Fedders Corp. v. Commissioner, 659 F.2d 1066 (3d Cir.1981); F. & D. Rentals, Inc. v. C.I.R., 365 F.2d 34, 41-42 (7th Cir.1966) (dissent) (stating that since the inventory was valued at the lower of cost or market value, there was some evidence of the fair market value of the inventory).

As for GAAP-reviewed reports, the case law on proving insolvency in preference actions does not require this, but, like with the balance sheet test, sees it as a starting point. Shubert v. Lucent Techs. Inc. (In re Winstar Commc'ns, Inc.), 348 B.R. 234, 274 (Bankr.D.Del.2005) (stating that though GAAP is relevant, it is not determinative), aff'd, 2007 WL 1232185 (D.Del. Apr. 26, 2007), aff'd in part, modified in part, 554 F.3d 382 (3d Cir.2009); Heilig-Meyers Co. v. Wachovia Bank, N.A. (In re Heilig-Meyers Co.), 319 B.R. 447, 456 (Bankr.E.D.Va.2004) (GAAP value may be correct book value, but not necessarily close to the fair value).

Thus while both objections do not necessarily invalidate the Balance Sheet, they do serve to point out that the court was provided no information from the Bank supporting the Balance Sheet's valuations. This lack of support exists despite the Bank putting its own expert on the stand later in the trial, but not questioning him regarding the Balance Sheet. The court wonders where were Mr. Hanlon, who created the Balance Sheet, or Mr. Schiliro, who allegedly oversaw two inventory valuations during the preference period. The Bank neither presented any direct testimony on the market for this inventory, nor any rebuttal evidence after the Trustee's expert criticized the FIFO method, despite the inventory constituting nearly half of the Debtor's total assets. See Katz v. Wells (In re Wallace's Bookstores, Inc.), 316 B.R. 254, 260 (Bankr.E.D.Ky.2004) (finding presumption not rebutted by internal unaudited financial statements, that "may not be valued in accordance with the Bankruptcy Code's definition of `insolvency,'" against evidence of debtor's downward spiral into insolvency); Maloney-Crawford, Inc. v. Huntco Steel, Inc. (In re MaloneyCrawford, Inc.), 144 B.R. 531, 535 (Bankr.N.D.Okla.1992) (citing failure of defendant to offer testimony regarding how asset and liability amounts were determined in finding presumption not rebutted). Finally, the Debtor had included with its Amended Schedule B an itemized list of inventory and accounts receivable, the type of list the court doubts did not exist earlier in the Debtor's existence. Thus much evidence appeared available.

Even if the court accepted the Balance Sheet as supporting solvency, the Bank did not put on any evidence supporting that solvency continued from September 30, 2011 until the transfer date of December 13, 2011, a gap of 10 1/2 weeks. See In re DOLA Int'l Corp., 88 B.R. 950, 956 (Bankr. D.Minn.1988) ("It is insolvency at the date of preferential transfer which is important[.]"). The court notes that the Balance Sheet also showed a net income for the nine months ending September 30, 2011 of only $10,965, and a negative "Net Cash Provided (Used) By Operating Activities" for the nine months ending September 30, 2011 of $1,044,339, thus solvency could have been wavering at this point.

On the petition date, the Debtor's schedules estimated that the Debtor's liabilities exceeded its assets by more than $3.5 million. At some point between September 30, 2011 (10 1/2 weeks before the transfer) and March 12, 2012 (14 weeks after), the Debtor became insolvent. The Bank would have the court merely assume that the Debtor's financial condition did not change until after December 13, 2011. But see Washington Bancorporation v. Hodges (In re Washington Bancorporation), 180 B.R. 330, 334-35 (Bankr.D.D.C. 1995) (finding no evidence to reasonably infer that debtor, "grossly" insolvent on petition date, was also insolvent six months before the petition date, where evidence was also presented that the debtor was solvent one month and two days prior to the transfer).

Though some courts accept a "retrojection" theory, a determination that if a debtor was solvent on two dates then it was solvent on all dates in between, see In re Winstar Commc'ns, Inc., 348 B.R. 234, 276 (Bankr.D.Del.2005), aff'd, 01 01063 KJC, 2007 WL 1232185 (D.Del. Apr. 26, 2007), aff'd in part, modified in part, 554 F.3d 382 (3d Cir.2009), the Bank did not present other evidence of solvency at any time after December 13, 2011, and the only other evidence supports that the Debtor was insolvent on the petition date. See Washington Bancorporation, 180 B.R. at 334 ("The courts will only consider retrojection if the evidence of insolvency on the certain date is accompanied by evidence that the debtor[`]s financial condition did not change during the pendency period between the time of the payment and the date of proven insolvency."); In re Kaylor Equip. & Rental, Inc., 56 B.R. 58, 62 (Bankr.E.D.Tenn.1985) (finding that trustee did not sustain burden of proving insolvency where presented evidence that the debtor was insolvent on the petition date but "did not show that there had been no substantial change in the financial condition of the debtor in the period from the transfer to the debtor's bankruptcy filing.").

The Bank also cited Mr. Guarino's testimony in support of a finding of solvency. He had testified that on the date of the transfer:

Tr-2. 10/26/15 (Guarino), p. 35.

But while the evidence shows that on December 14, 2011, the day after the alleged preferential transfer, the Debtor wired ILC Dover $487,298 from its operating account, see ex. T12, p. 3, on that same day it also drew $487,300 from the Bank Line and deposited it into the operating account. See exs. D-1, p. 9; T-12, p. 2. Thus it appears that it borrowed the money to pay ILC Dover. In addition, Mr. Guarino's optimism about future funds coming in, while possibly supporting solvency if the deals were achieved, does not support solvency on the day of the transfer. The Bank did not even present evidence on whether the hoped-for purchase orders were obtained.12

In addition, Mr. Guarino further testified that "As thrilled as I was about the prospects in December, in the middle of January it—everything turned sideways." Tr-2, p. 56. Mr. Guarino testified that at this time, the CDPH was not paying rent to Amerinova, which in turn prevented Amerinova from paying rent to the Debtor. Id., pp. 55-56.

In any case, in arguing that Mr. Guarino claimed the company was doing well, the Bank confuses factors used to support that a debtor was a going concern with those supporting solvency. See Jones Truck Lines, Inc. v. Full Serv. Leasing Corp., 83 F.3d 253, 258 (8th Cir.1996) (suggesting that whether the company was operating, the officers were optimistic, and the managers and lenders continued to invest in the business, were factors to consider whether a debtor was a going concern). That distinction is important in determining whether to value a debtor as a going concern or at a liquidation value. See Travellers Int'l AG v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 134 F.3d 188, 193 (3d Cir.1998); Am. Classic Voyages v. JP Morgan Chase Bank (In re Am. Classic Voyages Co.), 367 B.R. 500, 508 (Bankr.D.Del.2007). It does not prove that it was solvent. For example, though the Debtor was operating on the petition date, its schedules support that it was insolvent then. See Matter of Dempster, 59 B.R. 453, 457 (Bankr. M.D.Ga.1984) (finding presumption not rebutted by evidence of no overdrafts in bank account and that debtor was doing business regularly at the time, because neither spoke to the debtor's assets and liabilities).

Accordingly, the court finds that the Bank did not rebut the presumption of insolvency. It did not present any evidence explaining the Balance Sheet, or showing that its alleged solvency continued to the preference period and the transfer date. As the Bank conceded all of the other elements of a preference, this court finds that the $500K Prepetition Transfer was a preference. See Matter of Emerald Oil Co., 695 F.2d 833, 838-39 (5th Cir. 1983):

Id. Nevertheless, before judgment can be granted in the Trustee's favor, this court must consider the Bank's defenses to the preference.

3. Bank's Defenses

a. Ordinary Course of Business

The Bank argues that the $500K Prepetition Transfer was simply a repayment of a loan that the Guarinos made to the Debtor on September 22, 2011 to provide working capital during a period that the Bank had suspended advances on the Bank Line. Doc. No. 124, p. 17, ¶ 26. As related above, on September 22nd, Mr. Guarino had arranged for a transfer of $500,000 from the Guarino's HELOC account to the Debtor's bank account at the Bank, and then reversed that transaction on December 13, 2011.

Section 547(c) provides that a trustee may not avoid a transfer under section 547:

11 U.S.C. 547(c)(2).

The Third Circuit has explained that the preference rule "aims to ensure that creditors are treated equitably," while also to encourage creditors to continue to deal with distressed debtors. Fiber Lite Corp. v. Molded Acoustical Prods. (In re Molded Acoustical Products, Inc.), 18 F.3d 217, 219 (3d Cir.1994). "The preference statute, by allowing the estate to recover in full—for the benefit of all the unsecured creditors—assets which a pushy unsecured creditor unilaterally plucked for itself or which a fawning debtor used in an irregular transaction to advantage a favored creditor, seeks to foreclose these tragedy-of the-common type responses to a struggling business." Id. at 223. "The preference provisions are designed not to disturb normal debtor-creditor relationships, but to derail unusual ones which threaten to heighten the likelihood of the debtor filing for bankruptcy at all and, should that contingency materialize, to then disrupt the paramount bankruptcy policy of the equitable treatment of creditors." Id. at 224.

Although there was only the one transaction, the Bank argues that a first-time transaction can qualify for the preference defense, citing Jubber v. SMC Elec. Prods. (In re C.W. Min. Co.), 798 F.3d 983, 993 (10th Cir.2015); In re Ahaza Sys., Inc., 482 F.3d 1118, 1125 (9th Cir.2007); Kleven v. Household Bank F.S.B., 334 F.3d 638, 642 (7th Cir.2003); and Gosch v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir.1990). Doc. No. 124, p. 18, ¶ 29.

These courts reason that a payment that is not "common" may still be in the ordinary course if it did not favor certain creditors or encourage a race to the courthouse In re C.W. Min. Co., 798 F.3d at 988. The C.W. Min. Co. court stated that the debt and the payment must be in the ordinary course of business of both the debtor and the transferee, as opposed to as between the debtor and the transferee, thereby allowing first-time transfers to be in the ordinary course. Id., 988-989. "[A] first-time debt must be ordinary in relation to this debtor's and this creditor's past practices when dealing with other, similarly situated parties." In re C.W. Min. Co., at 990 (quoting In re Ahaza Sys., Inc., 482 F.3d at 1126). This interpretation comports with the purpose of the exception by "leav[ing] undisturbed normal financial relations, because [the exception] does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor's slide into bankruptcy." In re Ahaza Sys., Inc., 482 F.3d 1118, 1125 (9th Cir.2007) (citing Union Bank v. Wolas, 502 U.S. 151, 160, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991)). It also encourages a potential creditor to enter into a transaction with an entity knowing that it could raise the ordinary course of business defense. C.W. Min. Co., at 989.

Here there was no evidence presented by the Bank that the Guarinos were in the business of lending money. According to Mr. Guarino, the HELOC was set up for his wife to purchase property in Florida. Thus the HELOC was not a business account. It was not established for the purpose of providing bridge loans to businesses that the Guarinos were associated with. The court in Shubert v. Mull (In re Frey Mech. Grp., Inc.), 446 B.R. 208 (Bankr.E.D.Pa.2011), explains the problem aptly.

In re Frey Mech. Grp., Inc., 446 B.R. at 216. In Frey, the court found fatal to the defense that the transferee admitted that it was not in the business of making loans to companies such as his sonin-law's, and had not loaned money to other companies. In re Frey Mech. Grp., Inc., 446 B.R. 208, 215 (Bankr.E.D.Pa.2011) ("This Court finds that this admission necessarily precludes the Defendants from availing themselves of the § 547(c)(2) ordinary course exemption.").

Neither was this transaction carried out according to ordinary business terms, despite the Bank's production of the Promissory Note. See Wilen v. Pamparo Sav. Bank, S.L.A. (In re Bayonne Med. Ctr.), 429 B.R. 152, 174-75 (Bankr.D.N.J.2010) (noting that BAPCPA amended section 547(c)(2) to allow a transferee to prove "either that the payment of debt was incurred according to ordinary business terms or in the ordinary course of business or financial affairs of the debtor and transferee. Before the 2005 amendment both standards had to be met.").

The note appears drafted internally, possibly in haste and without attorney review, as many inconsistencies abound. First, it is not clear whether the note is due when the "payable" is received, on December 15, 2011, or "[o]nce a sizeable payment from the service agreement with California is received." Business people would have drafted this with "whichever comes first" (or last) language. The payable from California is not defined, but rather described as "a sizeable payment." Sentences such as "This money is to be viewed as an extended line of credit from Susquehanna and the Guarinos, [sic] require, [sic] that, [sic] because it is a credit extension over and above what Susquehanna is willing to extend, it should be treated a[sic] priority" are rife with typos.

The court also wonders about the security pledged by the Debtor of "its rights to any and all assets, inventory, patents and possessions. All receivables from California state, county or municipal government agencies are included," considering the Bank's pre-existing security interest on the same assets. There was no evidence that a UCC-1 financing statement was filed, something that business people would be sure to do.

Finally, the Debtor did not even fully comply with the note, as it repaid $500,000 rather than $500,000 with interest of 10%, and paid it to the Guarinos' HELOC account rather than "to the order of Stephen and Kathleen Guarino[.]"

That Mr. Guarino is the sole shareholder and a business person does not transform the transaction into an ordinary business transaction. As shareholder he had invested in the company, but this transaction was entered into by both him and his wife, and was a loan, not a capital contribution. See In re Epic Cycle Interactive, Inc., ADV 11-90111-CL, 2014 WL 2567170, at *14 (Bankr.S.D.Cal. June 6, 2014) (stating that the defense is meant to protect trade creditors in the ordinary course of the debtor's and creditor's business affairs, not stockholders for short-term loans to maintain operations during capitalization problems); In re Pioneer Tech., Inc., 107 B.R. 698, 702 (9th Cir. BAP 1988):

See also Lee's Place v. Hawbaker, 92-4006, 1992 WL 164443, at *7 (C.D.Ill. June 26, 1992) (rejecting defense where short term emergency loans made and repaid by general manager without any documentation). The Note even makes clear that it is not intended as a capital contribution. The transaction was not made at arm's length considering Mr. Guarino's insider status, and Thomas Guarino, one of the signators of the note, did not recall who prepared it, any negotiations, or even signing it. Tr. 10/15/15, pp. 206-207. There was no evidence proffered that the terms of the note were ordinary.

Accordingly, this court rejects the Bank's defense of the preference on the basis of ordinary course of business.

b. The Trustee Must First Avoid the Payment as to the Guarinos

The Bank next argues that the Trustee had to first bring a successful preference action against the Guarinos before seeking recovery from the Bank. Doc. No. 124, p. 18, ¶ 31. The Trustee responds that, as the Bank is the initial transferee, this was not necessary. Doc. No. 125, p. 57, n. 28.13 The court will first address the Bank's argument.

Bankruptcy Code Section 550(a) permits a plaintiff to recover a preferential transfer from "(1) the initial transferee of such transfer or the entity to whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." The Bank contends that before the Trustee can recover, he must separately prove against the initial transferee that an avoidable preference exists. Since the Trustee did not, in this action, sue the Guarinos, the Bank argues that the Trustee cannot recover against the Bank.

In support, the Bank cited a number of cases. In In re Slack-Horner Foundries Co., 971 F.2d 577 (10th Cir.1992), the court held that where trustee attempted to avoid a transfer and recover property from a tax lien foreclosure purchaser, it instead had to first avoid transfer of the property to the state. Id., at 580. "The trustee may not bypass the interest of the state in the property by characterizing the transaction as a transfer of the debtor's interest to Simons." Id., at 581. But see Image Masters, Inc. v. Chase Home Fin., 489 B.R. 375, 398 (E.D.Pa.2013) (citing Slack-Horner, and stating "We find persuasive those cases that have held that § 550 does not render recovery from a subsequent transferee dependent on a prior action or recovery against the initial transferee.").

The Bank also cited Enron Corp. v. Int'l Fin. Corp. (In re Enron Corp.), 343 B.R. 75 (Bankr.S.D.N.Y.2006), rev'd and remanded sub nom. In re Enron Creditors Recovery Corp., 388 B.R. 489 (S.D.N.Y. 2008), but while that case required avoidance of the initial transfer prior to recovery, it did allow the two actions to be brought simultaneously. Id., at 82.14 See also In re Furs by Albert & Marc Kaufman, Inc., 03-41301 SMB, 2006 WL 3735621, at *8 (Bankr.S.D.N.Y. Dec. 14, 2006) (following Enron Corp. v. Int'l Fin. Corp., 343 B.R. 75). The Enron court required actual avoidance, rather than avoidability, stating that else the statute of limitations under section 546(a) would be "rendered nugatory." Enron Corp. v. Int'l Fin. Corp., 343 B.R. at 82.

Section 546(a) sets a limitation of the later of two years after the entry of the order for relief or one year after the appointment of the first trustee, or the time the case is closed, to bring an avoidance action. 11 U.S.C. § 546(a). Section 550 provides that recovery of a transfer is limited to the earlier of one year after the avoidance of the transfer or the time the case is closed. 11 U.S.C. § 550(f). Courts holding that two actions must be commenced—one for avoidance, then one for recovery—cite these statutes of limitations as support that Congress intended two actions. See Williams v. Mortillaro (In re Res., Recycling & Remediation, Inc.), 314 B.R. 62, 69 (Bankr.W.D.Pa.2004). See Atkins v. Gelt Props., LLC (In re Atkins), 525 B.R. 594, 604 (Bankr.E.D.Pa.2015) (following Williams v. Mortillaro). That is, section 550(a) requires recovery of fraudulent transfer only after a transfer is avoided, else the separate statutes of limitations in sections 546 and 550 would be meaningless. Greenwald v. Latham & Watkins (In re Trans-End Tech, Inc.), 230 B.R. 101, 104 (Bankr.N.D.Ohio 1998).

But the majority of courts hold that "a transfer may be found avoidable and a recovery may be had from a subsequent transferee without suing the initial transferee." Collier on Bankruptcy, ¶ 550.02[1] (Matthew Bender 16th ed.) (citing Securities Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC, 501 B.R. 26, 34 (S.D.N.Y.2013); Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 734 (9th Cir. BAP 2008); IBT Int'l Inc. v. Northern (In re Int'l Admin. Servs., Inc.), 408 F.3d 689, 706 (11th Cir.2005); Official Comm. of Unsecured Creditors of M. Fabrikant & Sons, Inc. v. JP Morgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.), 394 B.R. 721, 745 (Bankr.S.D.N.Y 2008); Leonard v. Optimal Payments Ltd. (In re National Audit Def. Network), 332 B.R. 896, 915 (Bankr.D.Nev.2005); Kendall v. Sorani (In re Richmond Produce Co., Inc.), 195 B.R. 455 (N.D.Cal.1996)). See also Bash v. Textron Fin. Corp., 524 B.R. 745, 755 (N.D.Ohio 2015) (rejecting Greenwald as widely criticized, and noting that the majority of courts have held otherwise). "In an action against the subsequent transferee, the estate has the burden of proving that the transfer to the initial transferee is avoidable and the subsequent transferee is not collaterally estopped from litigating that question merely because it is a subsequent transferee." Collier on Bankruptcy, ¶ 550.02[1].

The Third Circuit has not weighed in on the issue, but this court finds persuasive the analysis of the majority view. For example, the Eleventh Circuit reasoned that "[n]othing in the language of Section 550 requires a plaintiff in a fraudulent transfer adversary proceeding to avoid the transfer received by the initial transferee before continuing with avoidance actions down the line of transfers." IBT Int'l, Inc. v. Northern, 408 F.3d at 706 (quoting lower court's decision agreeing with In re Richmond Produce Co., Inc., 195 B.R. 455 (N.D.Cal.1996)). "Avoidability `is an attribute of the transfer rather than that of the creditor,'" thus the original transferee did not have to be sued prior to pursuing a mediate transferee. In re Richmond Produce, 195 B.R. at 463 (internal quotation omitted). The Eleventh Circuit believed that "Congress contemplated `to the extent that a transfer is avoided' to be a simultaneous as well as successive process." IBT Int'l, Inc. v. Northern, 408 F.3d at 708. Accordingly, it held that the trustee there did not have to first sue the initial transferee to successfully avoid a transfer of assets to immediate and mediate transferees. Id.

Accordingly, the court rejects the Bank's defense on this basis.

c. The Bank Took for Value and in Good Faith

Once a transfer is found avoidable, a plaintiff may recover the property transferred pursuant to section 550, which provides:

11 U.S.C. § 550(a).

A plaintiff's ability to recover is limited by section 550(b), however.

11 U.S.C. § 550(b). In other words, while section 550(a) provides for the recovery of a transfer, section 550(b) creates a "safe harbor" for immediate and mediate transferees who took for value, in good faith, and without knowledge of the voidability of the transfer avoided, or who were transferees of such an immediate or mediate transferee. Burtch v. Hydraquip (In re Mushroom Transp. Co., Inc.), 227 B.R. 244, 259 (Bankr.E.D.Pa.1998). Thus, it is important to determine whether the entity from which a plaintiff seeks to recover is an initial transferee or an entity for whose benefit such transfer was made, versus an immediate or mediate transferee, as only the latter may assert the section 550(b) defense. In re Walldesign, Inc., 8:12-BK-10105-CB, 2015 WL 4399843, at *3 (C.D.Cal. July 17, 2015).

The Bank argues that Mr. Guarino, not it, was the initial transferee. Doc. No. 124, p. 20. Rather, it was an immediate transferee that took in good faith, as Mr. Guarino controlled the entire transaction without advising or consulting the Bank before or after the transfer. Id. The Trustee counters that because the funds were seamlessly transferred from the Debtor's account to the Guarinos' HELOC account at the same bank, the Bank is the initial transferee. Doc. No. 125, pp. 57-60. Alternatively, the Trustee argues that because the Bank paid down the Guarinos' loan from it, the Bank was a party for whose benefit the transfer was made. Doc. No. 125, p. 60, n. 31. Given these arguments of the Trustee, he does not address whether the safe harbor provision of section 550(b), i.e., whether the Bank took in good faith and without knowledge of the avoidability of the transfer, applies. See id., p. 57, n. 28.

The leading case on determining whether an entity is a transferee is Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir.1988). There, European American Bank ("EAB") received a check from Bonded Financial Services, a currency exchange controlled by Michael Ryan, to be deposited to Ryan's account. Bonded Fin. Servs., 838 F.2d at 891. Ten days later, Ryan instructed EAB to transfer that same amount of money to the account at EAB of Shamrock Hill Farm, a horse farm Ryan owned, to pay down a loan of this business from EAB. Id. Bonded's trustee argued that EAB was either an initial transferee or an entity for whose benefit the transfer was made, or, if a subsequent transferee, it did not take for value or in bad faith. Id. EAB argued, and the District Court agreed, that it was a "mere conduit" of Bonded's transfer to it, and a subsequent transferee of Ryan's transfer to it, which it took for value and in good faith. Id., at 891-92.

Bonded first tackled what a transferee is, and decided that the "minimum requirement" was that the entity had "dominion over the money or other asset, the right to put the money to one's own purposes." Id., at 893. It distinguished this from an entity that is merely a "`possessor' or `holder' or `agent'." Id., at 894. The transfer from Bonded to EAB fit this second definition, as EAB could not use the money in Ryan's account for its own purposes. Id., at 893-894.

As for "an entity for whose benefit the transfer was made," the court decided when Ryan transferred the funds from his checking account to the loan account, that EAB could not be this beneficiary, because it was a subsequent transferee of the initial transfer. See id., at 895. Section 550(a)(1) separates initial transferees and entities for whose benefit the transfer was made from section 550(a)(2)'s immediate and mediate transferees. Id. Accordingly, an entity must fall under one subsection or the other: a subsequent transferee cannot also be an entity for whose benefit the transfer was made. Id., at 895-896. See In re Glob. Outreach, S.A., CIV.A. 11-620 JLL, 2011 WL 2294168, at *11 (D.N.J. June 6, 2011) (unpublished) (holding that the categories in subsections (a)(1) and (a)(2) are "mutually exclusive.").

In determining that EAB was a subsequent transferee, the Bonded court distinguished "onestep" from "two-step" transactions. Id., at 893-94. In Bonded, the funds were transferred twice: once from Bonded to EAB, then from Ryan's bank account to EAB's loan account. In the first transfer, Bonded was only a holder of the funds, because it could not put the money to its own uses. But the second transfer paid Ryan's debt to it, so Bonded then became a transferee, then having a right to put the money to its own purposes. But it was a subsequent transferee, because it was not the recipient of the first transfer. The court explained:

Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 892 (7th Cir.1988).15

Because in Bonded the funds first went to Ryan's account at EAB, Ryan was the first to have the dominion over the funds, the right to use the money for his own purposes. Bonded, at 892. In the interim, Ryan could have done anything with the money, or, as famously stated by the court, was "free to invest the whole $200,000 in lottery tickets or uranium stocks." Id., at 894. Thus Ryan was the initial transferee and, when the funds were transferred again, EAB became a subsequent transferee.

While the Third Circuit has not written on this issue, Bonded has been followed by several New Jersey courts. See In re Rocco Co., Inc., 10-18799 DHS, 2014 WL 7404566, at *9 (D.N.J. Dec. 29, 2014) (unpublished); In re Allen, 13-14348(GMB), 2014 WL 1246292, at *6 (Bankr.D.N.J. Mar. 26, 2014) (unpublished); Bond v. Vining Sparks (In re U.S. Mortgage Corp.), 492 B.R. 784, 813-14 (Bankr.D.N.J.2013); In re Parcel Consultants, Inc., 287 B.R. 41, 46 (Bankr.D.N.J.2002). In addition, a majority of circuits have followed Bonded. See Taunt v. Hurtado (In re Hurtado), 342 F.3d 528, 533 (6th Cir.2003) ("The test Bonded created has come to be known as the dominion-and-control test, and has been "`widely adopted.'"); Abele v. Modern Fin. Plans Servs., Inc. (In re Cohen), 300 F.3d 1097, 1102 (9th Cir.2002); Christy v. Alexander & Alexander of N.Y. Inc. (In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52, 58 (2nd Cir.1997); Bowers v. Atlanta Motor Speedway, Inc. (In re Southeast Hotel Props. Ltd. P'ship), 99 F.3d 151, 156 (4th Cir.1996); Luker v. Reeves (In re Reeves), 65 F.3d 670, 676 (8th Cir.1995); Malloy v. Citizens Bank of Sapulpa (In re First Sec. Mortg. Co.), 33 F.3d 42, 44 (10th Cir.1994) ("We find the reasoning of the Bonded court to be persuasive in deciding the case before us."); Sec. First Nat'l Bank v. Brunson (In re Coutee), 984 F.2d 138, 141 (5th Cir.1993).

Applying Bonded's "dominion" test to the facts here, the court finds that this is a one-step transaction. Mr. Guarino never possessed the funds, as they were transferred directly from the Debtor's bank account to the Guarinos' at the same bank. This makes the Bank the initial transferee.

In a case similarly involving a principal directing corporate funds to pay an individual debt, there to the Hilton casino, the court held that Hilton was the initial transferee.

Schafer v. Law Vegas Hilton (In re Video Depot, Ltd.), 186 B.R. 126, 133 (Bankr. W.D.Wash.1995), aff'd, 127 F.3d 1195 (9th Cir.1997). In Video Depot, because the cashier's check was construed as a direct transfer, the principal who directed the transfer did not have the right to use the money for any other purpose than to give it to Hilton. Video Depot, at 1198. See Richardson v. FDIC (In re M. Blackburn Mitchell Inc.), 164 B.R. 117, 125 (Bankr. N.D.Cal.1994) (rejecting the argument that the principal was the initial transferee because she exercised dominion over the funds by directing the corporation to pay her personal debt).

The decision in Ray v. City Bank and Trust Co. (In re C-L Cartage Co., Inc.), 899 F.2d 1490 (6th Cir.1990), also involving a corporation paying an insider's debt, though not citing Bonded or any other "transferee" tests, nevertheless supports this "one-step" analysis. There, when a bank would not loan money to a corporation, the president of the corporation borrowed the money but transferred the proceeds to the corporation. Id., at 1491. The corporation then made the monthly payments directly to the bank on the president's behalf. Id.16

The Sixth Circuit held that the corporation paid its debt to the corporation's president by paying the president's debt to the bank. C-L Cartage Co., Inc., 899 F.2d at 1493. Because the payments went directly from the corporation to the bank, the bank was the initial transferee. Id., at 1495.

Similarly here, the Debtor paid the $500,000 it owed the Guarinos by paying the Bank directly on the Guarinos' debt to the Bank. The money never passed through Mr. Guarino's hands. See Rupp v. Markgraf 95 F.3d 936, 941 (10th Cir. 1996):

One of our sister bankruptcy courts in the Third Circuit breaks ranks with this conclusion, holding instead that the person directing the corporation to make the transfer is the initial transferee. See Liebersohn v. IRS (In re C.F. Foods, L.P.), 265 B.R. 71 (Bankr.E.D.Pa.2001). Citing Genova v. Gottlieb (In re Orange County Sanitation, Inc.), 221 B.R. 323, 328 (Bankr.S.D.N.Y.1997), the C.F. Foods court stated that "the requisite dominion or control [to be deemed the initial transferee] is present when a corporate officer or shareholder causes the corporation to make payments on his personal debts or for his personal benefit." C.F. Foods, at 81.

The Orange County Sanitation, Inc. court had cited In re Nordic Vill., Inc., 915 F.2d 1049, 1055 (6th Cir.1990). The Nordic Village court distinguished between a transferor who acted for the debtor and one acting for himself. There, Josef Lah, an officer and shareholder of a debtor corporation, drew a corporate check to a bank that in turn issued several cashier's checks. Lah took one of those checks to the IRS with instructions to credit it against his personal tax liability. The court explained that the identity of the initial transferee depended upon Lah's authority to take this action.

In re Nordic Vill., Inc., at 1055. Notably, the Nordic Village court relied on two cases that pre-date Bonded: Ross v. United States (In re Auto-Pak, Inc.), 73 B.R. 52, 54 (D.D.C.1987), and Still v. American Nat'l Bank & Trust Co. (In re Jorges Carpet Mills, Inc.), 50 B.R. 84 (Bankr. E.D.Tenn.1985). Bonded is only cited in a dissent. In re Nordic Vill., Inc., at 1062.

Confronting the issue again later the same year, the Eastern District of Pennsylvania Bankruptcy Court relied on District of Delaware and Western District of Pennsylvania cases.

Finkel v. Polichuk (In re Polichuk), 506 B.R. 405, 450-51 (Bankr.E.D.Pa.2014).

While it is tempting to follow these cases, as they result in the "bad guy" being the initial transferee, the test under Bonded focuses on entities that actually receive funds, and then consider whether they can or cannot put the money to one's purposes. C.F. Foods and Polichuk overlooks that section 550(a) makes a transferee liable for recovery, not a transferor, i.e., the mere conduit. "[I]n order to be a `transferee' of the debtor's funds, one must (1) actually receive the funds, and (2) have full dominion and control over them for one's own account, as opposed to receiving them in trust or as agent for someone else." Bond v. Vining Sparks, 492 B.R. at 813 (quoting Official Comm, of Unsecured Creditors v. Guardian Ins. 401 (In re Parcel Consultants, Inc.), 287 B.R. 41, 46 (Bankr.D.N.J.2002)).

Furthermore, including in strict liability the entity for whose benefit the transfer was made allows for recovery from the "bad guy" in this scenario. As explained in General Elec. Capital Auto Lease v. Broach (In re Lucas Dallas, Inc.), 185 B.R. 801, 809-10 (9th Cir. BAP 1995):

As for whether the "good guy," the initial transferee of a principal's transfer of corporate funds for his or own personal benefit, should also be liable, that is what Congress decided should happen.

In re M. Blackburn Mitchell Inc., 164 B.R. 117, 125 (Bankr.N.D.Cal.1994). Possibly, Congress decided that recovery from the embezzling principal would be difficult, thus it also made the first recipient of those funds liable to returning them.

In re Se. Hotel Properties Ltd. P'ship, 99 F.3d 151, 157-58 (4th Cir.1996) (quoting Lake v. New York Life Ins. Co., 218 F.2d 394, 399 (4th Cir.1955)).

Bonded's step approach gives purpose to section 550(a)'s language by focusing on the receipt of funds. Who directs the transfers is not relevant—it is who receives the funds and what they can do with them that determines who is a transferee as opposed to a mere conduit. The solution when a person misdirects corporate funds, may be a breach of duty action against them. Rupp, at 941.

Because Mr. Guarino never received the money, he cannot be the initial transferee, and the Bank is. Accordingly, this court need not determine whether the Bank took the transfer for value, in good faith, and without knowledge of its avoidability. The Trustee may recover the $500,000 Prepetition Transfer from the Bank.17

As a result of this finding, the court need not consider the Trustee's Second Count, seeking to avoid the $500,000 Prepetition Transfer as fraudulent under section 548(a)(1)(A).18

C. Fourth Count—Violation of the Cash Collateral Order

In the Fourth Count the Trustee seeks to avoid the postpetition transfers that he alleges were made without court authority to the Bank on its prepetition claim. The transfers can be divided into two categories by date.

Tabular or Graphical Material not displayable at this time

May 1, 2012                    June 11, 2012

$200,000 by the Debtor         $100,000 by the Debtor

$100,000 by Amerinova          $50,000 by Amerinova

$205,000 by Discount Central

The Trustee seeks to avoid the transfers pursuant to section 549(a) of the Bankruptcy Code, which provides:

11 U.S.C. § 549(a). Once a plaintiff proves that a postpetition transfer was not authorized, Federal Rule of Bankruptcy Procedure 6001 places the burden of proving the validity of the transfer on the entity asserting that validity.

As discussed above, the Debtor's use of the Bank's cash collateral was limited by a Cash Collateral Order19 covering the period of April 9, 2012 through June 30, 2012. Through this order, the Debtor was permitted to use cash collateral only for items on an attached budget (not to exceed 10%), and for certain payments deemed the Carve-Out Payments. Regarding the Bank, the budget included only interest payments to the Bank. The Carve Out Payments included a payment to it not to exceed $188,000 to be paid after the Debtor received payment in full of the proceeds of its sale of the good identified in the ILC Purchase Order, and to the extent that the Debtor maintained at least $275,000 in available cash after receiving the ILC payment and making or accruing for undisputed items approved for payment in the budget.

In return, the Bank received a lien on all of the Debtor's postpetition assets and proceeds thereof, the same as its lien on the Debtor's prepetition assets. To the extent that the lien was insufficient, the Bank would also receive a superpriority administrative expense claim, subject only to the Carve-Out Payments. The Debtor was to provide the Bank with bi-weekly accountings, and the Bank was granted a right of inspection and audit.

The court agrees that the Cash Collateral Order limited the Debtor to using cash collateral for specified purposes only, with "no expenses . . . paid or incurred by Debtor except for the expenditures set forth in the Budget and Carve Out Payments[.]" Ex. T-13, pp. 5-6. The Bank in fact stipulated that it had acknowledged that the June 11th $100,000 Debtor Transfer went beyond what was contemplated in the Cash Collateral Order because the Bank understood only "a" payment would be allowed. JS, ¶ 149. Therefore the Bank is wrong that the Debtor was free to make other payments to the Bank. The Bank was only entitled to receive the interest payments provided for in the budget, and the Carve Out Payment of not more than $188,000, provided the Debtor then had at least $275,000 in available cash after receiving the ILC payment, paying or accruing for undisputed items in the budget, and making the payment to the Bank. The latter could not be paid until after the Debtor had received payment in full of the proceeds of its sale of the goods identified in the ILC Purchase Order, which did not occur until May 25th. Thus no payments made prior to that date were authorized, and payments made after that date were acceptable only if the Debtor had at least $275,000 in cash.

The parties agreed that the Debtor received the final portion of payment for the goods identified in the ILC Purchase Order on or about May 25, 2012, and that the Debtor did not have $275,000 available on June 11, 2012.

The court will now review the various postpetition transfers for avoidability.

1. The Debtor's Transfers

It is undisputed that the Debtor transferred $200,000 on May 1st and $100,000 on June 11th to the Bank. These were postpetition transfers, and as the Cash Collateral Order only allowed the Debtor to pay the Bank interest payments and one payment after the ILC Dover payment, these transfers were not authorized by court order. The court will address, below, the Bank's late argument that the transfers were authorized under title 11.

2. The Amerinova Transfers

Again, there is no dispute that Amerinova made two transfers to the Bank postpetition. The Trustee argues that, although Amerinova was a co-borrower on the Line of Credit, the payments at issue were clearly made on the Debtor's behalf, as the checks included the handwritten notes of "for Global Protection" and "line paydown." Doc. No. 125, pp. 51-52, ¶ 66. Neither payment was authorized by the court. Id., ¶ 67. Both should be considered part of the Debtor's cash collateral and thus governed by the terms of that order, which did not authorize these payments. Id. The only payments other than the one described in paragraph six of the Cash Collateral order that the Bank was entitled to postpetition were the interest payments included in the budget. Id., ¶ 50. In addition, the May 1st payment was not authorized because it occurred prior to the May 25th payment from ILC Dover, Id., ¶ 51.

The Trustee further argues that regardless of Amerinova not being the Debtor, the funds transferred were property of the estate. Id., ¶ 68. The money paid by Amerinova was owed to the Debtor as an account receivable of rent. Id. Amerinova was obligated to pay the Debtor $56,850 per month in rent in 2012, an item included in the budget attached to the Cash Collateral order. Id., ¶¶ 71-72. Amerinova did not make any rent payments to the Debtor after its March 27, 2012 payment. Id., ¶ 73. Because the Bank received property of the estate without a specific court order authorizing the transactions, the Amerinova transfers must be avoided under section 549. Id. ¶ 76.

The Bank counters that Amerinova made the payments to the Bank because Mr. Guarino had instructed it to pay over the rent payments directly to the Bank in the event of Global's insolvency or inability to pay its California lease obligations. Doc. No. 124, p. 11, ¶ 81. It also made the two payment to the Bank because it was obligated on the line of credit. Id., ¶ 85. "In addition, any monies owed by Amerinova would be accounts receivable covered by the Bank's security interest." Id., ¶ 86.

The Bank argues that, since these payments were made by a third party, not Global, the transfers cannot be avoided. Doc. No. 124, pp. 24-25, 84-88. The transferred assets were not property of the estate of the Debtor. Id., ¶ 88. In addition, the Bank had a security interest in all of the assets of the Debtor and Amerinova, including all accounts receivable, and Amerinova was independently liable to the Bank on the Line of Credit. Id., ¶¶ 89, 91. "That Amerinova may have also been indebted to Global at the time Amerinova made payments to the Bank does not make those payments avoidable." Id., ¶ 92.

The court agrees with the Trustee that the transfers represented funds owed to the Debtor. First and foremost, Mr. Guarino testified "that any payments that are owed on the rent should go directly to Susquehanna Bank." Tr-2, p. 56. The budget included income to the Debtor from payment of this rent. The $100,000 check to the Bank from Amerinova bore the instruction "for Global Protection" supporting that Amerinova was not paying down the Line of Credit for its own account. While Amerinova was a named borrower on the line of credit, the parties stipulated that it otherwise did not owe the Bank any money, and there was no evidence of it ever drawing down on the line, and why would it when its only function was to facilitate the warehouse contract. Thus the court concludes that the payment was the rent account receivable owed to the Debtor that Mr. Guarino improperly directed to be paid to the line of credit. The Bank presented no contrary evidence. Accounts receivable are property of the estate. Moore v. Brewer (In re HMH Motor Servs., Inc.), 259 B.R. 440, 452 (Bankr. S.D.Ga.2000) (holding that postpetition "payments on accounts receivable . . . are unquestionably property of the estate since they constitute proceeds of an estate asset—accounts receivable[,]" citing U.S.C. Section 541(a)(6)); Ackerman v. Schultz (In re Schultz), 250 B.R. 22, 31 (Bankr. E.D.N.Y.2000) ("well settled" that accounts receivable of a debtor are property of the estate); In re AIC Indus., Inc., 83 B.R. 774, 777 (Bankr.D.Colo.1988). Thus this court concludes that Amerinova's transfers to the Bank constituted rent payments owed to the Debtor.

The Bank cites two cases in support of a third party's payment to a debtor's creditor not being recoverable by a trustee, Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351 (5th Cir. 1986), and In re Hartley, 825 F.2d 1067 (6th Cir.1987). But both cases instead concerned the doctrine of earmarking. The latter is described as where a third party loans the debtor funds to enable the debtor to pay the claim of another creditor. Coral Petroleum, 797 F.2d at 1356. If the lender pays the creditor's claim directly, the debtor still owes the same amount, except to the lender instead of the creditor. The loan "proceeds never become part of the debtor's assets, and therefore no preference is created." Id. (quoting 4 Collier on Bankruptcy ¶ 547.25 at 547 (15th ed.1986)); see In re Hartley, 825 F.2d at 1070 ("When a third person loans money to a debtor specifically to enable him to satisfy the claim of a designated creditor, the general rule is that the proceeds are not the property of the debtor, and therefore the transfer of the proceeds to the creditor is not preferential."). The key is whether "`the debtor ha[d] an interest in the property transferred so that the estate is thereby diminished.'" Coral Petroleum, 797 F.2d at 1355-56 (quoting Genova v. Rivera Funeral Home (In re Castillo), 39 Bankr. 45, 46 (Bankr.D.Colo. 1984)).

But here, the Debtor did not borrow money from Amerinova to pay the Bank. Moreover, it had an interest in the funds Amerinova paid to the Bank instead of to the Debtor, as it was an account receivable. Amerinova's payment to the Bank did not give rise to an obligation of the Debtor to repay Amerinova, as in the Coral and Hartley cases. Because Amerinova owed the Debtor rent, the estate was diminished.

The Bank argues that it had a security interest in all of the assets of the Debtor, including the accounts receivable. Doc. No. 124, p. 25, 89-90. This is true, but does not overcome the fact that the transfer of this account receivable proceed was not authorized by the cash collateral order, and that any unauthorized transfer recoverable under chapter 5 would not be part of the Bank's postpetition lien. These transfers were neither part of the budgeted items approved for transfer, nor part of any of the Carve-Out Payments.

Accordingly, the May 1st $100,000 transfer and June 11th $50,000 transfer of Amerinova are avoidable as unauthorized transfers and recoverable by the Trustee.

3. May 1st $205,000 Transfer by Discount Central

The postpetition transfer by Discount Central also represents an account receivable of the Debtor. The $205,000 was a refund generated by Mr. Guarino's cancellation of an order of tablets from Discount Central. He again improperly directed that Discount Central pay the refund to the Bank rather than to the Debtor. Discount Central did so, with a note "for Global Protection." Discount Central did not owe the Bank any money.

As with the account receivable of Amerinova, that the Bank had a security interest in the receivable does not change that the transfer was not authorized by the Cash Collateral Order. In addition, the Cash Collateral Order provides that unauthorized transfers would not be subject to the Bank's postpetition lien.

Accordingly, the May 1st $205,000 transfer by Discount Central to the Bank is avoidable and recoverable.

4. Bank's Arguments as to All of the Postpetition Transfers

The burden now shifts to the Bank to show the validity of the transfers. Fed. R. Bank. P. 6001. The Bank makes several "omnibus" arguments in defense of avoidance of these payments. First, it argues that the spirit of the Cash Collateral Order was met, in that the Debtor had enough funds to pay certain expenses and administrative fees. Doc. No. 124, p. 24, 74-75. Therefore, "[a]t no point in time during active phase of the bankruptcy did Global lack money to pay bills." Doc No. 124, p. 14, ¶ 113. Whether the Debtor had $275,000 cash available on June 11, 2012 is not relevant, it argues, as that condition of the Cash Collateral Order was premised on the Debtor needing money to continue operating, but the Debtor had ceased operating in May 2012. Id. It further asserts that it did not agree to the $275,000 cash cushion, and did not waive any rights to it. Id., ¶ 77. Thus, the Bank argues, the only issue is whether any of the Debtor's undisputed budget items went unpaid. Id., ¶ 78. The only item not paid was the California rent, but since it was disputed, it did not need to be paid. Id., ¶¶ 79-83.20

Second, the Bank argues that the Cash Collateral Order did not specifically prohibit other payments. Doc. No. 124, p. 23, ¶ 72.

Third, the Bank argues that since section 549 does not prohibit transfers authorized by the court or by the Bankruptcy Code, and section 363(c)(2) allows for cash collateral to be used with the secured creditor's consent, its post hac consent to its use of cash collateral to pay down its prepetition claim prevents avoidance.

None of these arguments persuade the court. The Cash Collateral Order tightly controlled what transfers the Debtor could make: the budgeted items, and the Carve-Out Payments. This is belied by the language "the Cash Collateral may not be used for any other purpose, expense of administration of Debtor's estate or otherwise, and no expenses shall be paid or incurred by Debtor except for the expenditures set forth in the Budget and Carve Out Payments[.]" Ex. T-13, pp. 5-6. The Cash Collateral Order also clearly warned the Bank that proceeds from any actions under chapter 5—which of course includes section 549—would not be included in its security interest in postpetition assets or paid on its superpriority claim. Thus strict adherence to the provisions of the Cash Collateral Order was required, else the Bank might lost some of the collateral encompassed by its postpetition lien. Whether the Bank participated in negotiation of these terms, disagreed with them, or did not waive its rights to those monies, is immaterial in the face of the Cash Collateral Order entered by the court. If the Bank had issues with the terms of the order, it should have objected at the hearing held on approval of the interim order. It had an additional opportunity to object to the final order, and the extension, yet its only objection concerned the Debtor's compliance with the budget, not the chapter 5 provisions.

Moreover as an initial transferee, the Bank's knowledge or intent regarding unauthorized postpetition transfers is irrelevant, as the liability is strict. In re M. Blackburn Mitchell Inc., 164 B.R. 117, 123 (Bankr.N.D.Cal.1994) ("[T]he Code makes knowledge or culpability on the part of the initial transferee irrelevant to whether the transferee will be liable for returning transferred property to the estate.").

The Bank's attempt to retroactively consent to use of its cash collateral under section 363(c)(2) is inventive. However, the Cash Collateral Order did not provide for any other optional use of cash collateral by the Debtor. In making this argument, the Bank disregards that the Cash Collateral Order bound the Debtor, regardless of what the Bank might later want. In addition, the Creditors' Committee negotiated for the carve out from the Bank's cash collateral any claims or proceeds recovered from claims under Chapter 5. To allow the Bank this section 363 argument would circumvent the intent of that provision, which likely was to restrict the Debtor's spending for the benefit of the estate.

Where a debtor-in-possession made an agreement with a bank regarding the extension of credit postpetition, with court approval, but the bank later additionally required crop insurance, and that any insurance benefits be paid to it on its claim, which requirements the debtors complied with, the court granted avoidance of the transfer pursuant to section 549, stating:

Matter of Carlson, 55 B.R. 124, 125 (Bankr.W.D.Mo.1985) (footnotes omitted). See In re Tom McCormick Enterprises, Inc., 26 B.R. 437, 440 (Bankr.M.D.Tenn. 1983) ("The court recognizes that the bank claims a security interest in the proceeds of its collateral deposited to the account. Nonetheless, the bank is not entitled to unilaterally appropriate the proceeds to partially satisfy its prepetition debt.") (footnote omitted). In other words, any deviation from the terms of the Cash Collateral Order could result in funds being recovered for the benefit of the estate rather than the benefit of the Debtor or the Bank.

The court also notes that the Bank did not make this section 363 argument in its pretrial brief or in closing, thus there was no notice to the Trustee.

The Bank also argued that it did not demand the payments made to it, was not consulted or notified in advance of the payments, and only learned about them after the fact. Doc. No. 124, p. 10, ¶¶ 75-77. If the Bank intended here to raise the section 550(b) good faith defense of an immediate or mediate transferee, it fails, as the court has already determined that the Bank was the initial transferee of these transfers. The court also notes that, though the Bank did not learn about the transfers until after they were accomplished, at least as to the May 1 st transfers, that knowledge was gained very quickly, as Mr. Guarino sent Bank counsel an email on May 3rd alerting him to the transfers, and Debtor's counsel mentioned them at the May 10, 2012 hearing, including that the transfers might be outside of the language of the Cash Collateral Order.

Accordingly, this court holds that the $655,000 in unauthorized transfers are avoidable from the Bank and recoverable by the Trustee.

D. Request For Attorney's Fees

1. Fees and Expenses for Late-Filed Expert Report

The Trustee seeks fees in connection with its motion filed earlier in this case seeking to exclude the Bank's expert report and testimony. Doc. No. 124, p. 78, ¶ 118. Though the court denied the motion, it did order that, as a sanction against the Bank for filing the report late, it would "consider awarding the Trustee its reasonable fees and expenses relating to that portion of the Motion" seeking to exclude the report and testimony. Doc. No. 57.

The Trustee submitted an expense report totaling $12,497.50 for 28.90 hours of work. Doc. No. 68-1. In response to an objection filed by the Bank, the Trustee states that estimating time was difficult because he needed to only include that time working on the motion that related to his argument about timeliness of the report. Accordingly, a total of 51.8 hours was reduced to 28.9 hours. In addition, he did not include the time appearing at the June 30, 2014 hearing on the matter.

The court previously determined that sanctions would be appropriate under 11 U.S.C. § 105. Sanctions pursuant to that section include actual damages incurred and reasonable attorney's fees. In re Nowlin, 04-08147, 2009 WL 2872916, at *5 (Bankr.M.D.Tenn. Aug. 27, 2009). A party seeking civil contempt must show by clear and convincing evidence that the offending party violated an order of the court. Id. In determining an appropriate sanction, the court should consider the goals of "compensation to the injured party, punishment and deterrence." In re A.H Robins Co., Inc., 133 F.3d 913 (4th Cir.1998). The sanction "should be tailored to fit the particular wrong." Topalian v. Ehrman, 3 F.3d 931, 936 (5th Cir. 1993). Some courts apply the "reasonable and necessary" standard from section 330 to awards of attorney's fees pursuant to section 105. See In re Plummer, 513 B.R. 135, 148 (Bankr.M.D.Fla.2014); In re Zepecki, 224 B.R. 907, 911 (Bankr.E.D.Ark. 1998). Overall, "reasonableness" in attorney's fees guides the sanction power. See In re Montgomery, CIV.A. 12 C 9328, 2013 WL 1943293, at *6 (N.D.Ill. May 7, 2013) (stating that will affirm sanctions unless they are contrary to law or reach an unreasonable result); In re Ford, 522 B.R. 842, 848 (Bankr.D.S.C.2015) (awarding reasonable attorney's fees and costs in the amount of $8,500 for creditor's bad faith conduct in filing motion for stay relief five days after deadline); In re Rosebar, 505 B.R. 82, 89 (Bankr.D.D.C.2014) (awarding reasonable fees for attorney's advising debtor to not appear at Rule 2004 examination); In re Cutting, 14-60309-7, 2015 WL 4331152, at *3 (Bankr.D.Mont. July 15, 2015) (awarding half the requested fees as reasonable, where attorney failed to file a billing statement with the court).

This court finds $12,497.50 excessive and unreasonable for the five pages of the Trustee's 24 page certification based on the lateness of the report. In addition, the Trustee counsel's time records include conferring with co-counsel and an excessive amount of time on research. Accordingly, the court will award reasonable fees to the Trustee in the amount of $2,000.

2. Fees and Expenses for Violation of the Cash Collateral Order and the Bankruptcy Code, Abuse of the Bankruptcy System, and Bad Faith

The Trustee seeks attorneys' fees and expenses for the Bank's "overt violation" of the Cash Collateral Order, proceeding under Bankruptcy Code section 105(a), Federal Rule of Bankruptcy Procedure 7054, and equitable exceptions to the American Rule. The Bank responds that the Trustee failed to properly allege this request in his complaint pursuant to Federal Rule of Bankruptcy Procedure 7008, and is not entitled to fees as a matter of law, citing the American Rule.

First, the court notes that Rule 7008 does not apply to requests for attorney fees or costs. Rule 7054 incorporates portions of Federal Rule of Civil Procedure 54 providing for award of costs and fees.

The American Rule provides that parties pay their own attorney's fees, unless a statute or contract provides otherwise. Baker Botts L.L.P. v. ASARCO LLC, ___ U.S. ___, 135 S.Ct. 2158, 2164, 192 L.Ed.2d 208 (2015). However, the Supreme Court has stated that "a court may assess attorneys' fees for the `willful disobedience of a court order . . . as part of the fine to be levied on the defendant(,). . . or when the losing party has `acted in bad faith, vexatiously, wantonly, or for oppressive reasons." Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 258-59, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975).

The Trustee argues that the Bank acted in bad faith, vexatiously, wantonly, or for oppressive reasons by refusing to investigate whether the Cash Collateral Order was complied with, "forc[ing] a protracted litigation at the expense of the estate." Doc. No. 124, pp. 80-81, ¶ 122. But the Trustee's only argument is that the Bank did not voluntarily return the various transfers upon request. Though the court acknowledges that the Bank could have suspected that the transfers might be avoidable, the issues of initial versus immediate transferee determining the recoverability of the $500,000 preference, and the issues of property of the estate and interpretation of the Cash Collateral Order, show that there were some valid legal arguments to be made in defense. In addition, that the trial covered four days is as much the responsibility of the Trustee as of the Bank.

Accordingly, the court denies the Trustee's request for attorney fees and costs for this proceeding.

CONCLUSION

Based on the foregoing, the court grants judgment in favor of the Trustee on the First and Fourth Counts. It denies the Trustee's request for attorney's fees and costs for this proceeding, but grants $2,000 as a sanction for the Bank's late production of its expert's report.

An appropriate judgment has been entered consistent with this decision.

The court reserves the right to revise its findings of fact and conclusions of law.