author: SESSIONS, District Judge:

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Rosario VAZQUEZ-HERNANDEZ, AKA Jose Alfredo Jimenez-Valdez, Defendant-Appellant.
    No. 15-10009
    United States Court of Appeals, Ninth Circuit.
    Argued and Submitted September 12, 2016, San Francisco, California
    Filed March 3, 2017

      Henry L. Jacobs (argued), Law Offices of Henry Jacobs PLLC, Tucson, Arizona, for Defendant-Appellant.
    Erica Anderson McCallum (argued) and Elizabeth Berenguer, Assistant United States Attorneys; Robert L. Miskell, Appellate Chief; John S. Leonardo, United States Attorney, United States Attorney’s Office, Tucson, Arizona; for Plaintiff-Ap-pellee.
    Before: RONALD M. GOULD and MARSHA S. BERZON, Circuit Judges, and WILLIAM K. SESSIONS, III, District Judge.

       The Honorable William K. Sessions III, United States District Judge for the District of Vermont, sitting by designation.

   OPINION

SESSIONS, District Judge:

Defendant-appellant Rosario Vazquez-Hernandez appeals his conviction for attempted illegal reentry under 8 U.S.C. § 1326 on the ground that there was insufficient evidence to support his conviction. Vazquez-Hernandez also notes that the district court’s instruction at trial failed to properly inform the jury of the essential elements of the offense.

The lack of an instruction to the jury that Vazquez-Hernandez had to have a conscious desire to reenter the United States free from official restraint to be found guilty of the crime of attempted illegal reentry was plain error. Moreover, we conclude that even if the jury applied the correct legal standard, the trial record provides insufficient evidence to allow any rational trier of fact to find the essential elements of attempted illegal reentry beyond a reasonable doubt. Therefore, we vacate Vázquez-Hernandez’s conviction and remand to the district court to enter a judgment of acquittal.

I. Background

Prior to his conviction, Vazquez-Hernandez, a citizen of Mexico, frequently earned money washing car windows at the Mari-posa port of entry into the United States in Nogales, Arizona. The U.S. inspection station at the Mariposa port of entry lies on U.S. territory, about 100 yards north of the border with Mexico. As a result, the United States invites foreign nationals and U.S. citizens traveling in vehicles to enter U.S. territory prior to their inspection by immigration officials. Pedestrians are invited to enter the pre-inspection area through a separate, designated lane, and are generally not permitted in the vehicle lanes for safety reasons. U.S. Border Patrol agents have on occasion, however, permitted individuals they presume to be U.S. citizens to enter the northbound vehicle lanes on foot. Although also not officially permitted, vendors and window washers commonly enter the pre-inspection area from Mexico on foot, touting their wares and services to stopped vehicles.

The pre-inspection area is walled off on all sides except at the U.S. border with Mexico and at the Mexican and U.S. inspection points, and is monitored by hundreds of U.S. government cameras. United States “outbound operations” officers, armed with automatic rifles, monitor southbound lanes north of the Mexican government’s inspection points. Law enforcement agents stationed at the border sometimes screen individuals entering the pre-inspection area for those who could pose a safety threat and prevent them from entering the pre-inspection area.

Subject to this intermittent screening and control, foreign nationals enter the pre-inspection area on U.S. territory on a daily basis, either in vehicles or on foot. Occasionally, U.S. Border Patrol agents attempt to arrest and detain individuals present on foot in the pre-inspection area who the agents believe, based on their behavior and appearance, do not “have legal status” in the United States, without inquiring about their intent to go past the port of entry. When approached by Border Patrol agents, vendors and other individuals who do not intend to enter the United States beyond the pre-inspection area often flee the pre-inspection area and return to the Mexican side of the border. Pedestrians attempting to enter the United States without inspection sometimes run up the southbound lanes, bypassing the U.S. inspection points.

Before his arrest and conviction in 2014, Vazquez-Hernandez was previously removed from the United States three times, and was once previously convicted of illegal reentry. He was first removed in 2005, before he began his window-washing work. Since he began working at the Mariposa port of entry, he has twice been arrested in the pre-inspection area and subsequently deported, in 2010 and 2013. After his 2010 arrest, he was charged with illegal reentry and pled guilty to the offense.

Around the time he was arrested in 2014, Vazquez-Hernandez entered the pre-inspection area at the Mariposa port of entry to wash windows almost every day, including on the weekends and in the afternoons and evenings. On April 5, 2014, two Border Patrol agents, Agent Adam Erfert and Joshua Thomas, saw Vazquez-Hernandez on surveillance cameras. The agents testified at trial that they became suspicious of Vazquez-Hernandez’s intentions because he appeared to be looking around and monitoring his environment, and because of his attentiveness and proximity to the southbound vehicle lanes. The two agents approached Vazquez-Hernandez and, despite Vazquez-Hernandez’s efforts to evade the agents’ grasp, arrested him. Vazquez-Hernandez was eventually charged with attempted illegal reentry in violation of 8 U.S.C. § 1326 in a superseding indictment returned on October 1, 2014. The case proceeded to trial.

At trial, the district court judge instructed the jury on the elements of the offense of illegal reentry in the following manner:

[T]he government must prove each of the following elements beyond a reasonable doubt: First, the defendant was removed and/or deported from the United States; second, the defendant had the conscious desire to reenter the United States without consent; third, the defendant was an alien at the time of his attempted reentry into the United States; fourth, the defendant had not obtained the consent of the Attorney General or the Secretary of the Department of Homeland Security to reapply for admission into the United States; and fifth, the defendant did something that was a substantial step toward committing the crime.

During the course of argument for a directed verdict, and outside the presence of the jury, the judge stated to counsel that the only question at issue was the defendant’s intent.

After receiving the instruction on the elements of attempted illegal reentry, the jurors expressed confusion about the intent requirement. The jurors asked, “Does, as a matter of [l]aw, illegal reentry into the United States include the element of intent to stay in the United States? Or is there no mention of such intent in the statute?” In response, the court referred the jurors to the instruction it had already given on the elements of the offense. Vazquez-Hernandez did not object to the instructions at trial.

On October 8, 2014, the jury convicted Vazquez-Hernandez of attempted illegal reentry, the sole count in the superseding indictment. On December 18, 2014, the district court sentenced Vazquez-Hernandez to 40 months of imprisonment followed by three years of supervised release and imposed a $100 special assessment. Vazquez-Hernandez filed this timely appeal.

II. Discussion

A. Improper jury instruction

Although this Court generally reviews a jury instruction that misstates the elements of a statutory crime de novo, we review an instruction for plain error in the absence of a timely objection to it below. United States v. Kilbride, 584 F.3d 1240, 1247 (9th Cir. 2009). In order to conclude that plain error exists, we must find “(1) an error that is (2) plain and (3) affects substantial rights.” Id. (quoting United States v. Peterson, 538 F.3d 1064, 1071 (9th Cir. 2008)). Where these conditions are met, “we may only exercise our discretion to correct the error if it seriously affects the fairness, integrity or public reputation of judicial proceedings.” Id. (quoting Peterson, 538 F.3d at 1072).

i. Plain error

The district court’s failure to include an instruction on freedom from official restraint at summation constituted plain error. The Fifth and Sixth Amendments require criminal convictions to rest upon a jury determination that the defendant is guilty of every element of the crime with which he is charged beyond a reasonable doubt. United States v. Gaudin, 515 U.S. 506, 509-10, 115 S.Ct. 2310, 132 L.Ed.2d 444 (1995). Jury instructions misstate the essential elements of an offense when they do not adequately link the intent element of a crime with the required object of that intent. See United States v. Montoya-Gaxiola, 796 F.3d 1118, 1122-24 (9th Cir. 2015) (finding plain error because jury instruction did not specify that, where defendant was charged with possession of an unregistered firearm, the jury must find that the defendant knew of the features of his weapon that brought it within the definition of a firearm under the criminal statute, rather than knowing that he had a weapon which happened to have such features, unbeknown to the defendant); United States v. Cherer, 513 F.3d 1150, 1155 (9th Cir. 2008) (finding error in jury instructions regarding the elements of a sex crime committed towards a minor where the instruction failed to appropriately connect the requisite state of mind, knowledge, with the statute’s object, a minor victim).

The crime of attempted illegal reentry under 8 U.S.C. § 1326 is a specific intent crime that requires proof beyond a reasonable doubt that the defendant had “the specific intent ‘to reenter without consent.’ ” United States v. Lombera-Valdovinos, 429 F.3d 927, 929 (9th Cir. 2005) (quoting United States v. Leos-Maldonado, 302 F.3d 1061, 1063 (9th Cir. 2002)). For the purposes of § 1326, “entry” has a distinct legal meaning: “[a]n alien has not entered the United States under § 1326 unless he does so ‘free from official restraint.’ ” Id. at 928 (quoting United States v. Gracidas-Ulibarry, 231 F.3d 1188, 1191 n.3 (9th Cir. 2000) (en banc)). Accordingly, to convict a defendant of attempted illegal reentry, the Government must “prove beyond a reasonable doubt that [the defendant] crossed into the United States with the specific ‘intent to enter the country free from official restraint.’ ” United States v. Argueta-Rosales, 819 F.3d 1149, 1156 (9th Cir. 2016) (quoting Lombera-Valdovinos, 429 F.3d at 928).

The jury instructions here omitted this element of attempted illegal reentry. The district court instructed the jury only that it must find that Vazquez-Hernandez “had the conscious desire to reenter the United States without consent,” making'no mention of the intent to be free from official restraint. This was plain error.

Gracidas-Ulibarry is not to the contrary. There, this Court held that “an explanation of the meaning of specific intent is necessary to give guidance as to the proper jury instruction for” attempted illegal reentry. Gracidas-Ulibarry, 231 F.3d at 1195. Although Gracidas-Ulibarry did not specifically explain that § 1326 requires proof that the defendant attempt to enter “free from official restraint,” there was no dispute concerning whether the defendant in that case was under official restraint, or whether he intended to proceed past the border checkpoint. See id. at 1191. Here, in contrast, greater elaboration on the specific intent requirement was necessary because the conditions of the pre-inspection area at the Mariposa port of entry, combined with Vazquez-Hernandez’s assertion that he did not intend to proceed beyond the inspection points, created ambiguity about Vazquez-Hernandez’s intent to reenter free from official restraint.

Likewise, our cases finding no error in the omission of a jury instruction on freedom from official restraint when the defendant was “found in” the United States in violation of § 1326 do not govern here. See e.g., United States v. Castellanos-Garcia, 270 F.3d 773, 777 (9th Cir. 2001) (declining to require a trial judge to instruct a jury on the “free from official restraint” requirement for entry in a case alleging that the defendant was “found in” the United States in violation of § 1326, where the defendant did not point to evidence that would suggest that his entry was not free from official restraint). But see United States v. Bello-Bahena, 411 F.3d 1083, 1088-91 (9th Cir. 2005) (remanding for new trial where trial judge failed to offer the defendant’s jury instruction regarding “free from official restraint” at trial for being “found in” the United States in violation of § 1326, where defendant’s theory that he was not free from official restraint because he was subject to constant surveillance had a basis in the evidence). We have long recognized that “§ 1326 sets forth three distinct offenses: ‘enter,’ ‘attempt to enter,’ and ‘found in.’ ” United States v. Pacheco-Medina, 212 F.3d 1162, 1165 (9th Cir. 2000). Although “an entry, as defined legally, is required before a person is ‘found in’ the United States,” id. at 1166, “the Government does not need to charge or prove voluntary entry in a § 1326 ‘found in’ offense.” United States v. Rivera-Sillas, 417 F.3d 1014, 1018-19 (9th Cir. 2004), amended (9th Cir. 2005). Accordingly, because the elements that the government is required to prove in “found in” cases are not directly parallel to those required to prove attempted illegal reentry, our precedents finding no error where jury instructions did not describe the “free from official restraint” requirement in “found in” cases do not bear on the necessary instructions for attempted illegal reentry cases.

ii. The error affected Vazquez-Hernandez’s substantial rights

The lack of a jury instruction regarding freedom from official restraint affected Vazquez-Hernandez’s substantial rights. An error affects substantial rights if there is “a reasonable probability that the error affected the outcome of the trial.” United States v. Marcus, 560 U.S. 258, 262, 130 S.Ct. 2159, 176 L.Ed.2d 1012 (2010). In determining the likelihood that an erroneous instruction affected the outcome of a trial, “[w]e review the jury instructions as a whole, not only the erroneous instructions. We may also examine the arguments made by the parties.” United States v. Garrido, 713 F.3d 985, 995 (9th Cir. 2013) (internal quotation and citation omitted). Moreover, where a jury instruction permits a conviction on either of two alternative theories, one of which is later found to be unconstitutional, the error affects the defendant’s substantial rights if there is a reasonable probability that the jury convicted the defendant on the invalid theory. Id.

Here, the government advanced two theories of guilt at summation. The district court’s instructions permitted the jury to convict Vazquez-Hernandez on either of those theories. Specifically, the government argued that the jury- could convict Vazquez-Hernandez if it-found that “he had the purpose of illegally reentering the United States, whether it was to make a little money from his window washing business or to scout for traffickers or flee north in the southbound lanes.” Thus, the prosecution indicated that either entry into the pre-inspection area with the intent to wash windows and then return to Mexico, or entry with the intent to move into the United States past the points of inspection, would constitute an “entry” within the meaning of the intent element of the crime.

Our case law clearly does not support the first of those theories. First, the official restraint doctrine was intended to safeguard the presence of uninspected immigrants in precisely the type of area in to which Vazquez-Hernandez entered and where he remained. The freedom from official restraint requirement addresses the practical concern that failing to require such a finding would lead to the criminalization of individuals who arrive at a port of entry but have not yet had an opportunity to apply for inspection. See Argueta-Rosales, 819 F.3d at 1160 (“[T-]he official restraint doctrine is a practical necessity.... We doubt that Congress intended to make criminals out of persons who, for any number of reasons, approach immigration officials at the border.”); United States v. Vasilatos, 209 F.2d 195, 197 (3rd Cir. 1954) (explaining that because “in a literal and physical sense a person coming from abroad enters the United States whenever he reaches land, water or air space within the territorial limits of this nation,” “freedom from official restraint must be added to physical presence before entry is accomplished”) (cited with approval in Argueta-Rosales, 819 F.3d at 1160). The pre-inspection area at the Mariposa port of entry thus serves this function of allowing unin-, spected foreign nationals to assemble to accomplish a lawful entry.

Second, an alien is not free from official restraint when he is in an area that is subject to constant government surveillance. Pacheco-Medina, 212 F.3d at 1165; United States v. Aguilar, 883 F.2d 662, 681 (9th Cir. 1989), superseded by statute on other grounds, P.L. No. 99-603, 100 Stat. 3359, as stated in United States v. Gonzalez-Torres, 309 F.3d 594 (9th Cir. 2002) (“Continuous surveillance by immigration authorities can be sufficient to place an alien under official restraint” for the purposes of applying the definition of entry to the crime of illegally bringing an alien into the United States). Here, the government’s witnesses testified that the pre-inspection area was subject to surveillance by hundreds of cameras, with small blind spots, and was surrounded on all sides either by walls or law enforcement agents.

The only time that Vazquez-Hernandez was not under direct camera surveillance was when Border Patrol Agents Erfert and Thomas were approaching him, with knowledge of his location. Such a minor gap in surveillance is not sufficient to break an officer’s “continuous observation” necessary to establish official restraint. United States v. Gonzalez-Torres, 309 F.3d 594, 599 (9th Cir. 2002) (finding that where Border Patrol agent observed a defendant from the moment he crossed the border, knew the trail on which the defendant and others were walking, and only lost sight of him “for a number of seconds,” the defendant was under constant surveillance and therefore not free from official restraint). Moreover, Vazquez-Hernandez’s attempt to evade arrest by running from the agents is not sufficient to deem him free from official restraint, because he was either subject to camera surveillance or within the officer’s sight, or both, at the time he ran. See Pacheco-Medina, 212 F.3d at 1163-65 (finding no freedom from official restraint, and thus no entry under § 1326, when alien was subject to surveillance from the moment he crossed the border, even though he immediately ran away from an agent and “gave chase” rather than surrender to arrest).

Finally, the touchstone to determining whether a defendant is free from official restraint is whether the defendant was free to “go at large and at will within the United States.” Id. at 1164 (quoting Ex parte Chow Chok, 161 F. 627, 630 (N.D.N.Y.), aff'd, 163 F. 1021 (2d Cir. 1908)); see Gonzalez-Torres, 309 F.3d at 598. There is no doubt in this case that Vazquez-Hernandez was not free to travel at will beyond the points of inspection. The area was largely walled off from U.S. territory not subject to such surveillance and monitored by Border Patrol agents who attempted to stop individuals from proceeding into the United States without inspection. Therefore, given this evidence on the conditions of the pre-inspection area, no rational jury could have concluded beyond a reasonable doubt that Vazquez-Hernandez was free from official restraint in this area, or that he intended to be by entering it. Accordingly, the jury could not properly have sustained a conviction on this theory if it had been adequately instructed.

As we explain later, see pp. 1229-31, the evidence that Vazquez-Hernandez intended to flee northward rather than stay in the pre-inspection area was exceedingly weak. Also, the jury’s question to the judge indicated that its focus was on the first prosecution theory, concerning defendant’s simple presence in the pre-inspection area. If the jury was focusing on the second theory, that the defendant intended to jump the fence and run north across the border, it would not have asked about intent to stay in the United States. It is therefore reasonably likely that the jury found that Vazquez-Hernandez only intended to enter the pre-inspection area, and, in reaching its verdict, relied on the alternative theory advanced by the prosecution and permitted by the inadequate jury instruction that Vazquez-Hernandez could be convicted with this more limited intent. In fact, the evidence did not establish that by intending to enter the pre-inspection area, Vazquez-Hernandez intended to enter free from official restraint, as would be required to convict him on that theory. Accordingly, there is a reasonable probability the erroneous instruction, which permitted the jury to rely on a theory it should have discarded, impacted the outcome of the trial. Thus, the error affected Vazquez-Hernandez’s substantial rights.

iii. Miscarriage of justice

We .exercise our discretion to correct the error in this case because the jury’s possible reliance on a legally invalid theory constitutes a miscarriage of justice which would seriously affect “the fairness, integrity or public reputation of judicial proceedings.” Garrido, 713 F.3d at 998 (finding that upholding a conviction where “the indictment, the jury instructions and the closing arguments at trial were permeated with the prohibited ... theory” and where neither party argued their cases on a legally valid theory would constitute a miscarriage of justice) (internal quotations omitted). Permitting a conviction for attempted illegal reentry based on the intent to enter into only the pre-in-spection area would undermine the fairness of our nation’s inspection procedures and jeopardize the integrity of convictions sustained by courts presiding over border inspection areas. These pre-inspection areas have been established to facilitate our country’s inspection procedures. Allowing law enforcement discretion to initiate a criminal process against some foreign nationals for crossing the border into this area without enunciating the intent to evade official surveillance could undermine the purpose of the illegal reentry statute.

For these reasons, the omission of the freedom from official restraint requirement from the jury instruction constitutes plain error affecting Vazquez-Hernandez’s substantial rights. We reverse.

B. Insufficient evidence to support the jury’s verdict

Vazquez-Hernandez argues that there is insufficient evidence to support his conviction for attempted illegal reentry, a claim which, “if successful, would entitle him to a judgment of acquittal.” See United States v. Shetler, 665 F.3d 1150, 1161 (9th Cir. 2011) (citing United States v. Williams, 547 F.3d 1187, 1195 (9th Cir. 2008)). Claims of insufficient evidence to support a jury verdict are reviewed de novo. United States v. Antonakeas, 255 F.3d 714, 723 (9th Cir. 2001). Evidence supporting a conviction is sufficient if, “viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.” Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979) (emphasis in original). Vazquez-Hernandez’s claim that the district court erred in denying his motion for judgment of acquittal pursuant to Federal Rule of Criminal Procedure 29 is also reviewed de novo. Castellanos-Garcia, 270 F.3d at 775.

We conclude that no rational trier of fact properly instructed on the elements of the crime could have found that Vazquez-Hernandez possessed the required mens rea for attempted illegal reentry beyond a reasonable doubt. To be guilty, Vazquez-Hernandez must have intended to enter the United States free from official restraint and without the consent of the Attorney General.

As discussed above, if properly instructed on the official restraint doctrine, no rational jury could have concluded beyond a reasonable doubt that Vazquez-Hernandez was free from official restraint in the pre-inspection area, or that he intended to be simply by entering that area.

Likewise, there is insufficient evidence in the.record to support Vazquez-Hernandez’s guilt on the theory that he intended to go beyond the pre-inspection area so as to be free to go at large and at will within the United States. The testimony of Agents Erfert and Thomas as to their observations and beliefs about Vazquez-Hernandez’s intentions is insufficient to prove beyond a reasonable doubt that Vazquez-Hernandez intended to proceed outside the pre-inspection area. In particular, Agent Erfert stated that Vazquez-Hernandez appeared to be “really worried about who was around him and what’s going on,” and Agent Thomas stated that Vazquez-Hernandez looked over the wall dividing the northbound and southbound-lanes once and that he looked distracted while washing windows.

Vazquez-Hernandez could have looked around cautiously to avoid arrest even if he did not intend to dart northward past the pre-inspection area on the southbound lanes. Vazquez-Hernandez had been arrested and convicted for washing windows in the pre-inspection area before, and it would be logical for him to want to avoid the possibility of another conviction.

Consistent with Vazquez-Hernandez’s experience, Agents Thomas and Erfert testified that they sometimes attempt to arrest pedestrian vendors and window-washers rather than warning them that they are not authorized in the area. When approached, pedestrian vendors typically try to avoid arrest by running back to the Mexican side of the border. In light of these customary law enforcement practices, Vazquez-Hernandez’s apparent cautiousness was not sufficiently probative of an intent to run north past the pre-inspection area.

Agent Erfert speculated that Vazquez-Hernandez was attempting to see if there were any Border Patrol Agents in the southbound lanes, and that individuals who attempt to enter the United States past the pre-inspection area often do so by running up the southbound lanes. However, Vazquez-Hernandez did not attempt to run northward past the inspection points after he saw that the southbound lanes were clear of law enforcement officers. Rather, he continued to wash windows after looking over the wall cautiously. Moreover, Agent Erfert testified that he never saw the appellant attempt to jump any of the fences surrounding the pre-inspection area that would lead into contiguous U.S. territory.

Circumstantial evidence also undermines the inference that Vazquez-Hernandez intended to proceed past the inspection points. On the day he was arrested, Vazquez-Hernandez carried with him only the supplies necessary to carry out window-washing activities. He had only a few coins in his possession. Although Vazquez-Hernandez entered the pre-inspection area around 7:30 p.m., when it was starting to get dark, he did not enter under the full cover of darkness. He also provided a plausible explanation for his arrival at the pre-inspection area late in the day: that he came to work after picking up his daughter from school. Although the agents testified that Vazquez-Hernandez was wearing a sweater or jacket, which one believed was unusual given the warm weather, the inference that he was dressed for a long journey is weak. The inference is similarly weak that, because an agent saw Vazquez-Hernandez set a water bottle down on the dividing wall on one occasion, Vazquez-Hernandez was not using any water, and was not really there to wash windows. We conclude, therefore, that no rational juror could find beyond a reasonable doubt that Vazquez-Hernandez intended to travel northward beyond the points of inspection.

III. Conclusion

In light of the foregoing analysis, we conclude that the district court’s instruction failed to properly state the essential elements of attempted illegal reentry and permitted the government to advance, and the jury to convict on, an invalid theory of guilt. This was plain error. Because we further hold that no properly instructed, rational trier of fact could find Vazquez-Hernandez guilty of the crime of attempted illegal reentry, we reverse the defendant’s conviction and remand to the district court to enter a judgment of acquittal.

REVERSED and REMANDED.

      . Crossing the United States border from Mexico is a substantial step towards the commission of attempted illegal reentry. United States v. Leos-Maldonado, 302 F.3d 1061, 1063-64 (9th Cir. 2002). Because Vazquez-Hernandez acknowledged that he had formally crossed the border to enter into the pre-inspection area, the district court instructed the parties not to focus on the "substantial step” element of the charged offense.

      . Although Vazquez-Hernandez did not independently challenge the jury instruction on appeal, he did maintain that the instruction was erroneous, as part of his argument that no jury could have determined that he entered the United States free from official restraint, as required by law. Whether the validity of the instruction was adequately raised on appeal is debatable. In any event, although we typically refrain from addressing issues that neither party properly raised on appeal, we may do so in cases of a plain error that affects substantial rights. See United States v. Olano, 507 U.S. 725, 732, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993); Fed. R. Crim. P. 52(b). We exercise our' discretion to address these types of errors if the error "seriously affect[s] the fairness, integrity or public reputation of judicial proceedings.” Olano, 507 U.S. at 736, 113 S.Ct. 1770 (quoting United States v. Atkinson, 297 U.S. 157, 160, 56 S.Ct. 391, 80 L.Ed. 555 (1936)). Since the standard by which we review this jury instruction on the merits aligns precisely with this preliminary question under Federal Rule of Criminal Procedure 52(b), we conclude that we have the power to review the instructions for the same reasons that we provide for correcting the instructions in this case. See infra, 1229 n.4.

      . This case does not involve a failure to define a term that was within the comprehension of the average juror. United States v. Tirouda, 394 F.3d 683, 688-89 (9th Cir. 2005), as amended on denial of reh’g and reh'g en banc (July 13, 2005) (“Whether a term in a jury instruction requires definition normally turns on whether it expresses a concept within the jury's ordinary experience. No prejudice results from a district court's failure to define a concept within the comprehension of the average juror.”) (internal quotation omitted). The particular definition of the term “entry” in the context of § 1326 evades a "general reading.” See United States v. Pacheco-Medina, 212 F.3d 1162, 1163 (9th Cir. 2000) ("[A] general reading would suggest that Pacheco did commit the crime because he surely left Mexico for the United States, and he just as surely was found on our soil after he came over the border fence. But as a matter of law it is not quite that easy because physical presence is not enough.”). It is improbable that an average juror could correctly understand and apply the term "entry” in this context without a specific instruction that illegal reentry requires intent to enter free from official restraint. Nor is this a case in which the judge need not have instructed the jury to determine a particular question regarding an element of the crime because the judge was entitled to determine it himself as a matter of law. See United States v. Mujahid, 799 F.3d 1228, 1236-37 (9th Cir. 2015).

      . For these same reasons, we exercise our discretion to review the jury instruction, notwithstanding that Vazquez-Hernandez did not directly raise the issue in his opening brief before this court. See Olano, 507 U.S. at 732, 736, 113 S.Ct. 1770; see supra, pp. 1224-25 n. 2.

      . In contrast, Agent Thomas testified that he did not know whether the appellant's intent was to go beyond the port of entry.


source: Caselaw Access Project

author: M. SMITH, Circuit Judge: KORMAN, District Judge,

license: Public Domain

text:
    IN RE TENDERLOIN HEALTH, FKA Continuum HIV Day Services, AKA Tenderloin Health Incorporated, Debtor, E. Lynn Schoenmann, Trustee, Plaintiff-Appellant, v. Bank of the West, Defendant-Appellee.
    No. 14-17090
    United States Court of Appeals, Ninth Circuit.
    Argued and Submitted October 18, 2016, San Francisco, California
    Filed March 7, 2017

      Dennis Davis (argued), Goldberg Stin-nett Davis & Linchey, Petaluma, California, for Plaintiff-Appellant.
    James A. Tiemstra (argued) and Lisa Lenherr, Tiemstra Law Group PC, Oakland, California, for Defendant-Appellee.
    Before: A. WALLACE TASHIMA and MILAN D. SMITH, JR., Circuit Judges, and EDWARD R. KORMAN, District Judge.

       The Honorable Edward R. Korman, United States District Judge for the Eastern District of New York, sitting by designation.

   Concurrence by Judge KORMAN

OPINION

M. SMITH, Circuit Judge:

In this preference action, plaintiff-appellant E. Lynn Schoenmann (Schoenmann), the trustee in bankruptcy, seeks to recover for the bankruptcy estate a $190,595.50 loan payment debtor Tenderloin Health (Tenderloin) made to defendant-appellee Bank of the West (BOTW) within ninety days of the filing of Tenderloin’s chapter 7 bankruptcy. To succeed, Schoenmann must demonstrate that by virtue of that payment BOTW received more than it otherwise would have in a hypothetical chapter 7 liquidation where the challenged transfer had not been made. This inquiry, required by 11 U.S.C. § 547(b)(5), is called the “greater amount test.”

The bankruptcy court granted BOTW’s motion for summary judgment, finding Schoenmann could not satisfy section 547(b)(5), because BOTW had a right of setoff, and Tenderloin’s account contained at least $190,595.50 on the petition date. Schoenmann asserts that in the hypothetical liquidation, the trustee would avoid a $526,402.05 deposit, leaving less than $190,595.50 in Tenderloin’s account, even allowing for BOTW’s right of setoff.

In order to resolve the issues presented in this case, we address whether courts may entertain hypothetical preference actions within section 547(b)(5)’s hypothetical chapter 7 liquidation, and if so, whether the $526,402.05 deposited in this case would meet the definition of an avoidable preference.

We conclude that courts may account for hypothetical preference actions within a hypothetical chapter 7 liquidation when such an inquiry is factually warranted, is supported by appropriate evidence, and the action would not contravene an independent statutory provision. We are also satisfied that the $526,402.05 deposit in this case would constitute an avoidable preference in the hypothetical liquidation at issue here.

We therefore reverse the district court’s judgment in favor of BOTW and direct that this action be remanded to the bankruptcy court for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

In May 2009, BOTW extended a $200,000 line of credit to Tenderloin, a waík-in clinic serving AIDS patients in San Francisco. BOTW loaned another $100,000 to Tenderloin two years later. The loans were secured by Tenderloin’s personal property, including its deposit accounts with BOTW.

In late 2011 or early 2012, Tenderloin elected to wind up its affairs. In carrying out that election, it sold its only real property for $1,295,000. The escrow on that sale closed on June 13, 2012. Tenderloin used the proceeds of that sale to execute two transactions that same day. First, it paid BOTW $190,595.50 from escrow to satisfy fully its outstanding loan obligations (debt payment). Next, it moved the rest of its net sale proceeds — $526,-402.05 — from escrow into its BOTW deposit account (the deposit).

On July 20, 2012, Tenderloin filed for chapter 7 bankruptcy. Ninety days prior to filing, its account contained approximately $173,015.00. That sum shrunk to $52,735.11 on the date of the two disputed transfers, but grew to $576,603.03 immediately after the deposit. Tenderloin then spent some of its funds in the days preceding its bankruptcy, so the account contained $564,115.92 on the petition date. If we subtract from that sum the. amount of the disputed deposit — $526,402.05—Ten-derloin’s account would have contained only $37,713.87 on the petition date.

Schoenmann sued BOTW on December 12, 2012, alleging that the debt payment was preferential, and subject to avoidance under 11 U.S.C. § 547(b). The bankruptcy court granted BOTW’s motion' for summary judgment on July 31, 2013, concluding that Schoenmann could not show that BOTW received more than it would have in a hypothetical liquidation where the debt payment had not been made. Schoen-mann appealed to the district court pursuant to 28 U.S.C. § 158(a)(1). The district court affirmed, and Schoenmann timely appealed to our court.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 158(d)(1). “We review de novo the district court’s judgment in the appeal from the bankruptcy court, and apply the same de novo standard of review the district court used to review the bankruptcy court’s summary judgment.” Suncrest Healthcare Ctr. LLC v. Omega Healthcare Inv’rs (In re Raintree Healthcare Corp.), 431 F.3d 685, 687 (9th Cir. 2005).

ANALYSIS

Section 547(b) permits a bankruptcy-trustee to recover for the benefit of the bankruptcy estate preferential payments from a debtor to a creditor made within the ninety days preceding the filing of a bankruptcy. 11 U.S.C. § 547(b). To “avoid” such a payment, the trustee must show, among other things:

(5) that [it] enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b)(5) (emphasis added).

This element — 11 U.S.C.' § 547(b)(5) — constitutes the so-called “greater amount test,” which “requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7” without the alleged preferential transfer. Alvarado v. Walsh (In re LCO Enters.), 12 F.3d 938, 941 (9th Cir. 1993) (LCO). Schoenmann challenges the $190,595.50 debt payment, claiming that section 547(b)(5) is satisfied in this case if BOTW “received a greater amount than it would have if the [debt payment] had not been made and there had been a hypothetical chapter 7 liquidation as of the petition date.” Batlan v. TransAmerica Commercial Fin. Corp. (In re Smith’s Home Furnishings, Inc.), 265 F.3d 959, 963 (9th Cir. 2001) (Smith).

The bankruptcy court determined that BOTW did not receive more than it would have in á hypothetical liquidation because it maintained a right of setoff that entitled it to full payment, and Tenderloin’s deposit account held the requisite amount of funds on the petition date. Schoenmann argues, however, that the trustee would avoid the $526,402.05 deposit in a hypothetical liquidation, such that the deposit account would contain only $37,713.87 on the petition date, a sum far less than the $190,595.50 ' BOTW actually received, even allowing for its right of setoff.

BOTW objects to Schoenmann’s analysis for two reasons. First, BOTW insists it is impermissible to entertain a hypothetical preference action within a hypothetical liquidation. Second, BOTW claims that the deposit made by Tenderloin into its deposit account would not meet the definition of an avoidable preference. We find neither argument persuasive.

I. Section 547(b)(5) Does Not Forbid Courts from Considering Hypothetical Preference Actions.

The text of the Bankruptcy Code, its legislative history, and current practice in the bankruptcy courts -all support the conclusion that courts may entertain hypothetical preference actions within hypothetical chapter 7 liquidations. Further, our holding in LCO does not pose an obstacle to this conclusion.

A. Text and Legislative History

Statutory interpretation begins with the. text. Pakootas v. Teck Cominco Metals, Ltd., 830 F.3d 975, 980 (9th Cir. 2016). “If the meaning of the text is unambiguous, the statute must be enforced according to its terms.” Id.

Here, section 547(b)(5) permits the trustee to avoid any transfer within ninety days of bankruptcy that enables the creditor “to receive more than such creditor .would receive if — (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.” 11 U.S.C. § 547(b)(5) (emphasis added). The phrase “provisions of this title” appears to refer to the totality of Title 11 of the Code, which includes the preference provisions appearing in section 547. Accordingly, the text clearly does not directly forbid courts from considering hypothetical preference actions within a hypothetical chapter 7 liquidation. However, since the statute treats the issue globally, our understanding will be refined by considering the legislative history of section 547(b)(5).

Section 547 was included in the Bankruptcy Reform Act of 1978. Pub. L. No. 95-598, 92 Stat. 2549 (1978). Describing element 547(b)(5), the Senate Committee Report states “the transfer must enable the creditor ... to receive a greater percentage of his claim than he would receive under the distributive provisions of the bankruptcy code.” S. Rep. No. 95-989, at 87 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5873 (emphasis added). The phrase “distributive provisions” might be thought to narrow the hypothetical liquidation to disbursement under chapter 7, but the very next sentence clarifies the meaning of the phrase: “Specifically, the creditor must receive more than he would if the case were a liquidation case, if the transfer had not been made, and if the creditor received payment of the debt to the extent provided by the provisions of the code.” Id. (emphasis added). The House Report echoes this language: “A preference is a transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankrupt estate.” H.R. Rep. No. 95-595, at 177 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6138. The phrase “participate[s] in the distribution” leaves room to assume the hypothetical chapter 7 trustee might initiate preference actions in conjunction with the “distribution” of the assets of the estate.

Evidence bearing more directly on this question appears in the paragraphs that follow the general overview of section 547(b)(5). The reports provide

The phrasing of the final element changes the application of the greater percentage test from that employed under current law. Under this language, the court must focus on the relative distribution between classes as well as the amount that will be received by the members of the class of which the pre-feree is a member. The language also requires the court to focus on the allow-ability of the claim, for which the preference was made. If the claim would have been entirely disallowed, for example, then the test of paragraph (5) will be met, because the creditor would have received nothing under the distributive provisions of the bankruptcy code.

H.R. Rep. No. 95-595 at 372 (emphasis added); accord S. Rep. No. 95-989 at 87. By invoking “allowability,” which refers generally to whether payment of a claim would violate some independent provision of the Bankruptcy Code, the report suggests it is appropriate to consider whether a hypothetical claim would be affected by the preference provisions. There are numerous cases that refer to the greater amount test as implicating the “distributive provisions” of the Code, but in light of this history, we cannot exclude section 547 from the hypothetical chapter 7 “distribution.”

B. Current Practice Under the Bankruptcy Code

The view that courts may consider hypothetical preference actions within hypothetical chapter 7 liquidations is bolstered by the fact that bankruptcy courts are doing precisely that under two other provisions of the code.

Section 1129(a)(7)(A)(ii) requires bankruptcy courts to determine what creditors would receive under a hypothetical chapter 7 liquidation, and then compare that amount to what the same creditors would receive under a chapter 11 reorganization. It provides that a bankruptcy court may confirm a chapter 11 plan only if each holder of an impaired claim “will receive or retain ... property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.” 11 U.S.C. § 1129(a)(7)(A)(ii). Although “[t]he hypothetical liquidation analysis must be based on evidence and not assumptions in order to meet the best interests of creditors test,” Collier on Bankruptcy ¶ 1129.02 n.98 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016) [hereinafter “Collier”] (citing In re MCorp Fin., Inc., 137 B.R. 219, 228-29 (Bankr. S.D. Tex. 1992)), “a trustee’s avoiding powers in a hypothetical chapter 7 case may [] affect the analysis,” id. ¶ 1129.02.

For instance, in In re Affiliated Foods, Inc., 249 B.R. 770 (Bankr. W.D. Mo. 2000), the court found the statute “requires an estimation of the value of all of the bankruptcy estate’s assets, including such hard to determine values as disputed and contingent claims, the potential disallowance of claims (under § 502(d)), the probability of success and value of causes of action held by the estate, and, in this case, potential preference actions.” Id. at 788 (internal citation omitted). Likewise, in In re Sierra-Cal, 210 B.R. 168 (Bankr. E.D. Cal. 1997), the court found “all provisions applicable in a chapter 7 liquidation are to be taken into account when the court determines what sums would be paid to whom in a hypothetical liquidation.” Id. at 174. It then applied two avoidance provisions in the hypothetical liquidation using the facts and testimony in the record. See id. at 174-75 (concluding “a competent chapter 7 trustee would be able to recover against [the creditor] under § 544 and § 549”).

Chapter 18 has a comparable “best interest of the creditors” test that requires the same comparison. Section 1325(a)(4) requires a bankruptcy court to confirm a chapter 13 plan if, among other things, “the value, as of the effective date of the plan, of property to be distributed under the plan ... is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.” When administering this provision, “eourt[s] must consider property that would be likely to be recovered by a chapter 7 trustee’s use of the avoiding powers.” Collier ¶ 1325.05; see also In re Larson, 245 B.R. 609, 614 (Bankr. D. Minn. 2000) (finding that in the hypothetical liquidation, the court “must look not only at the Debtor’s assets as listed on his schedules, but [it] must also consider the recovery of assets by the trustee through fraudulent transfer and preference actions”).

Lastly, we note that several courts have applied hypothetical setoff analyses under section 553 within hypothetical chapter 7 liquidations. See Durham v. SMI Indus. Corp., 882 F.2d 881, 884 (4th Cir. 1989) (“SMI would have been entitled to assert its right of setoff under section 553(a) post-petition if the check exchange had not been executed before Continental’s petition was filed since both debts were incurred pre-petition.”); Braniff Airways, Inc. v. Exxon Co., U.S.A, 814 F.2d 1030, 1040 n.11 (5th Cir. 1987) (“The fact that a setoff never actually took place does not affect the analysis. The issue is whether Exxon hypothetically had the right to a setoff, and because of this right it was secured and therefore the payment received from Braniff was not a voidable preference.”); Mason & Dixon Lines, Inc. v. St. Johnsbury Trucking Co. (In re Mason & Dixon Lines, Inc.), 65 B.R. 973, 976 (Bankr. M.D.N.C. 1986) (“In the case at bar, had the debtor not made the payment to the creditor carrier, the creditor could have offset the debt prepetition pursuant to section 553 or if the 30 days elapsed postpetition had the offset amount as a secured claim under section 506(a).”); Lingley v. Contractors Grp., Inc. (In re NEPSCO, Inc.), 55 B.R. 574, 576 (Bankr. D. Maine 1985) (“Had the debtor in this case not paid CGI the $6,221.56 prior to the filing of the Chapter 7 petition, CGI would have been entitled to a right of setoff under 11 U.S.C. § 553(a).”). True, hypothetical setoff analyses, unlike preference actions, do not require that we assume a party will initiate an adversary proceeding. That said, it would be odd to permit bankruptcy courts conducting hypothetical liquidations to look only to section 553, while ignoring other chapter 5 provisions, like section 547.

C. Our Prior Holding in LCO poses no bar.

In response, BOTW relies on our decision in LCO, which held “the hypothetical chapter 7 analysis required by § 547(b)(5) must be based on the actual facts of the case.” 12 F.3d at 940. Since Schoenmann has not challenged the deposit in Tenderloin’s actual liquidation, BOTW asserts we may not permit such a challenge in a hypothetical liquidation. A close reading of LCO reveals that this argument is misguided because it improperly relies on the decision’s broad language divorced from the context of the case.

In LCO, the debtor, LCO Enterprises, leased commercial space from a company named Lincoln. Id. LCO fell behind in paying rent and filed for chapter 11 bankruptcy, leading LCO and Lincoln to restructure their relationship. Id. Specifically, they changed the terms of the lease agreement, and LCO disclosed the terms of the revised agreement in its chapter 11 plan. Id. LCO then faced the decision of whether it would assume or reject the lease in bankruptcy. Id. Importantly, under chapter 11, the debtor-in-possession (LCO) stands in the shoes of the trustee. 11 U.S.C. § 1107. Additionally, if the debt- or was in default on an unexpired lease before filing for bankruptcy, the léase may not be assumed “unless, at the time of assumption,” the trustee cures the default and provides adequate assurance of future performance. 11 U.S.C. § 365(b)(l)(A)-(C). LCO, as trustee, assumed the revised lease and cured the default, in compliance with section 365(b). LCO, 12 F.3d at 942. The reorganization plan was eventually confirmed by the bankruptcy court. Id. at 940.

Two months after confirmation, a chapter 11 trustee was appointed to pursue any preferential payments. Id. The trustee sued to recover several rent payments LCO transmitted to Lincoln in the ninety days preceding the filing of its bankruptcy. Id. The action turned on the “greater amount test”; i.e., whether Lincoln received more than it otherwise would have in a hypothetical chapter 7 liquidation as of the petition date where the prepetition rent payment had not been made. Id. at 941.

The trustee argued that in a hypothetical liquidation, “a hypothetical chapter 7 trustee might have rejected the lease,” giving Lincoln an unsecured claim for its shortfall in rent, rather than the full payment it received when the lease was assumed and the default was cured. Id. at 942. The trustee also said the court “should exercise its own independent judgment as to whether, if the court were administering the estate under chapter 7, it would have assumed or rejected the lease” at the time of. the chapter 11 bankruptcy. Id. We rejected these arguments, holding “[t]he phrase ‘hypothetical chapter T ... does not mean that the bankruptcy court can construct its own hypothetical from whole cloth or from only some of the facts.” Id. at 944. Rather, “the hypothetical chapter 7 analysis required by § 547(b)(5) must be based on the actual facts of the case.” Id. at 940. Since the lease had been assumed, “the [bankruptcy] court could neither speculate that there was no lease nor assume that the lease was rejected.” Id. at 944. Those assumptions simply did not “reflect[ ] the facts at any time.” Id, Moreover, under section 365(b), once the lease was assumed, the requirement to cure any default was mandated. This gave; Lincoln a secured claim for all outstanding prepetition rent in the hypothetical liquidation, so it did not receive more than it otherwise would, precluding satisfaction of the greater amount test.

Importantly, we also noted that if we deviated from the actual facts in the case, and assumed that the hypothetical chapter 7 trustee had rejected the lease, the trustee would be allowed to recover payments it was obligated to make to Lincoln to cure the default pursuant to section 365(b). Id. at 943. In other words, straying from the actual facts would permit “§ 547(b) to circumvent the requirements of § 365(b).” Id. To avoid such a statutory collision, we held “[t]he [t]rustee cannot have his leased property and his rent payments, too.” Id. at 943-44.

Mindful of this context, it is apparent that LCO required fidelity to the actual facts in the case because to hold otherwise under those circumstances would have violated an independent statutory provision of the Bankruptcy Code. Section 365(b) requires the trustee to pay the landlord all outstanding rent when a lease is assumed, but a preference action would permit the trustee to recover the very prepetition rent payments it owes the landlord under that provision. In light of this conflict, we conclude that LCO must be narrowly construed. To that end, courts that have followed LCO’s holding have done so when presented with the same statutory collision scenario. See In re Kiwi Int’l Air Lines, Inc., 344 F.3d at 314 (“[T]he assumption of a contract under 11 U.S.C. § 365 bars a preference claim by a trustee.”); In re Superior Toy & Mfg. Co., 78 F.3d 1169, 1174 (7th Cir. 1996) (“Section 547 and § 365 are mutually exclusive avenues for a trustee. A trustee may not prevail under both. Nor may a subsequent trustee pursue one course, when her predecessor has pursued another.”).

Adding further support for the interpretation that LCO requires fidelity to the actual facts only when doing otherwise would violate an independent statutory provision, the opinion explicitly relies on the Eleventh Circuit’s decision in Seidle v. GATX Leasing Corporation, 778 F.2d 659 (11th Cir. 1985). See LCO, 12 F.3d at 943. There, a creditor held a chattel mortgage on a debtor’s aircraft which secured payments due under a note. Seidle, 778 F.2d at 660. The debtor made partial payments on the note within the ninety day period preceding its chapter 11 bankruptcy. Id. Once in bankruptcy, the debtor and creditor entered into a court-approved stipulation under 11 U.S.C. § 1110, obligating the debtor to cure its default in exchange for the debtor’s continued use of the aircraft. Id. at 661. The trustee later sued to recover as preferential The prepetition payments made on the note. Id. The court rejected the preference action because the trustee was seeking to recover payments it was obligated to make under the court-approved stipulation. See id. at 665 (“Pursuant to the section 1110 stipulation, a creditor is entitled to unpaid pre-petition payments, as defaults; a trustee may not later thwart the effect of the statute by challenging the validity of these transfers as preferences.”). As in LCO, if the court assumed a hypothetical trustee would have rejected the stipulation, it would be permitting a preference action that would undermine an independent statutory provision — section 1110.

In sum, LCO does not bar us in this case from assuming in a hypothetical liquidation that the hypothetical trustee would sue to recover the $526,402.05 deposit. Unlike in LCO, permitting such an action would not violate any other statutory provision, and it is consistent with the text and legislative history recited above. Having established that section 547(b)(5) does not forbid courts from entertaining hypothetical preference actions, we next must determine if the deposit in this case would meet the definition of an avoidable preference.

II. In the Hypothetical Liquidation, the Trustee Would Avoid the Deposit as a Preference.

Schoenmann concedes BOTW would have a right of setoff in the hypothetical liquidation. BOTW asserts it would exercise, that right sometime after the bankruptcy petition was filed. In that scenario, if we permit the hypothetical preference action, BOTW will have received more as a result of the debt payment than it would have received in a hypothetical chapter 7 liquidation.

Hypothetical Post-Petition Setoff

“Where a creditor fails to exercise its right of setoff prior to the filing of the petition it does not lose the right, but must proceed in the bankruptcy court by means of a complaint to lift the automatic stay so as to be allowed to exercise its already existing right to offset.” Durham v. SMI Indus. Corp., 882 F.2d 881, 884 (4th Cir. 1989) (internal quotation marks omitted). In accordance with that procedure, in the post-petition scenario BOTW would move to lift the stay, submit a proof of claim, and then argue its right of setoff entitles it to receive $190,595.50. “Mandatory claim disallowance under .§ 502(d),” however, “is one Bankruptcy Code provision that applies in chapter 7 liquidations.” In re Sierra-Cal, 210 B.R. at 173. “It requires that the court disallow ‘any claim’ of any entity from which property is recoverable by a trustee, or that is the transferee of an avoidable transfer, unless and until the property is turned over and the transfer is paid.” Id. Pursuant to this provision, the bankruptcy court likely would decide the trustee’s hypothetical preference action before allowing BOTW’s claim. It therefore would consider whether the deposit satisfies the elements of section 547(b).

The Section 547(b) Elements.

As previously noted, section 547(b) requires that the “transfer” be (1) to or for the benefit of a creditor, (2) for or on account of an antecedent debt, (3) made while the debtor was insolvent, (4) made within 90 days of the bankruptcy, and (5) one which permits the creditor to receive more than it would in a hypothetical liquidation where the challenged payment had not been made. 11 U.S.C. § 547(b)(1) — (5). BOTW argues that in the hypothetical preference action it would no longer be a “creditor,” the deposit would not be “for or on account of an antecedent debt,” and the deposit would not constitute a “transfer.” We disagree.

In the hypothetical liquidation where the debt payment had-not been made, BOTW would still be a creditor because it would be owed the $190,595.50 it loaned to Tenderloin. Though it is a closer question, the deposit also would be “for or on account of an antecedent debt.” True, Tenderloin transferred the $526,402.05 in proceeds having already satisfied its preexisting debt, but the 1978 revision to the bankruptcy statute defined preferences “solely with respect to a payment’s effect on the size of the debtor’s estate.” Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1566 (11th Cir. 1986); see also Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand. L. Rev. 713, 748 (1985) (“The function of the preference concept is to avoid pre-bankruptcy transfers that distort . the bankruptcy policy of distribution. Transfers that do distort this policy do so without regard to the state of mind of either the debtor or the preferred creditor.”). By that measure, in the hypothetical liquidation, the deposit would have the effect of diminishing the funds available to Tenderloin’s creditors because it would increase the size of BOTW’s secured claim against the bankruptcy estate. The deposit would also constitute a “transfer” under the terms of the Bankruptcy Code. It would subject the funds to BOTW’s security interest, give BOTW title to the funds, and deplete the assets available for distribution to Tenderloin’s creditors. Tenderloin therefore would be “disposing of or parting with ... an interest in property.” 11 U.S.C. § 101(54)(D); see also Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1282 (9th Cir. 1996) (finding that “depositing money into a bank account is a transfer” and correspondingly concluding that withdrawing money from a bank account is a transfer).

Arguing to the contrary, BOTW invokes New York County National Bank v. Massey, 192 U.S. 138, 24 S.Ct. 199, 48 L.Ed. 380 (1904). There, the Supreme Court observed 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. It is not a transfer of property as a payment, pledge, mortgage, gift or security.

Id. at 147, 24 S.Ct. 199 (emphasis added). For several reasons, we are not persuaded by BOTW’s invocation of Massey. As previously noted, “[i]n 1978, Congress fundamentally restructured bankruptcy law by passing the new Bankruptcy Code.” Begier v. Internal Revenue Service, 496 U.S. 53, 63, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). Among other changes, Congress elected to expand the Code’s definition of the term “transfer.” S. Rep. No. 95-989 at 27; accord H.R. Rep. No. 95-595 at 314. Pursuant to the revision, “any transfer of an interest in property is a transfer, including a transfer of possession, custody, or control even if there is no transfer of title, because possession, custody, and control are interests in property.” Id. Applying that definition, the committee reports state squarely that “[a] deposit in a bank account or similar account is a transfer.” Id. The Massey court had no occasion to contemplate these amendments; it considered only the Bankruptcy Code’s former and narrower definition of “transfer.”

We, however, had occasion to consider the revised definition of “transfer” in Bernard v. Sheaffer, 96 F.3d at 1282. There, the debtors withdrew money from an account and placed it in a safe. Id. at 1281. They argued that withdrawals did not constitute transfers because the assets “merely changed form.” Id. at 1282. We held, that the debtors’ argument “fail[ed] to take proper account of the Bankruptcy Code’s definition of ‘transfer,’ which is extremely; broad.” Id. (emphasis in original). Recognizing that title passes to the bank when funds are deposited, we said the debtors owned only “claims against their bank.” Id. at 1283. “When they withdrew from their accounts,” however, “they exchanged debt for money” and thus “parted with property, satisfying the Code’s definition of transfer.” Id. “Under the holding in Bernard, there is no ambiguity around the definition of a transfer; withdrawals and deposits into bank accounts clearly qualify.” A & H Ins., Inc. v. Huff (In re Huff), No. 12-05001-BTB, 2014 WL 904537, at *6 (9th Cir. BAP Mar. 10, 2014). As' is the case here, a deposit “exchanged] money for debt ... resulting] in a ‘parting with’ property under the holding in Bernard, as a matter of law.” Id.-, see also Batlan v. Bledsoe (In re Bledsoe), 569 F.3d 1106, 1113 (9th Cir. 2009) (invoking Bernard’s, interpretation of “transfer” in the context of another section of the Bankruptcy Code).

Next, even though “[a] debtor’s bank deposit ordinarily constitutes a transfer of the debtor’s property to the title and possession of the bank,” some courts nonetheless have asked “whether this ‘transfer’ is of a kind [that] section 547 invalidates.” Collier ¶ 547.03[l][b] (emphasis added) (citing New Jersey Nat’l Bank v. Gutter-man (In re Applied Logic Corp.), 576 F.2d 952 (2d Cir. 1978); Katz v. First Nat’l Bank of Glen Head, 568 F.2d 964 (2d Cir. 1977)). Though we doubt such an inquiry is warranted when deciding whether a transaction constitutes a transfer, even assuming it is, the asserted standard is met here.

The pertinent question is whether the deposit depletes the assets of the estate available for distribution to creditors. See Begier, 496 U.S. at 58, 110 S.Ct. 2258 (stating that the preference provision is designed to “preserve the property includable within the bankruptcy estate”). On the specific facts of this case, as noted before, the deposit would have that effect. No bankruptcy creditor had an interest as far as we are aware in Tenderloin’s real property. Moreover, if the deposited funds had not been transferred — and therefore remained in escrow — they would have passed to the estate and thus to other creditors. Through the deposit, however, one creditor — BOTW—gained a beneficial interest in the funds. BOTW also became indebted to Tenderloin for $564,115.92, and correspondingly increased its right to exercise a setoff for the full amount of its loan. The deposit therefore represents the kind of pre-petition “transfer” that the preference provisions target. See, e.g., Meoli v. The Huntington Nat’l Bank (In re Teleservices Grp., Inc.), 469 B.R. 713, 744-47 (W.D. Mich. 2012) (stating that “Massey has become an anachronism” and finding that a deposit in a bank account pledged as collateral for a loan fits the definition of an avoidable transfer); Ivey v. First Citizens Bank & Trust Co., 539 B.R. 77, 87 n.14 (M.D.N.C. 2015) (noting that in Teleservices “a part of the transfers were deposits into bank accounts that themselves served as security for the line of credit that the defendant bank extended to debtor. Therefore, whether or not the bank actually exercised its rights against the accounts, the deposits themselves created an actual or potential diminution of the estate by subjecting the funds to the bank’s power under this credit agreement” (citation omitted)).

The implication of the above is that if BOTW sought to exercise its right of setoff after the petition was filed, the hypothetical preference challenge to the deposit would still be successful. As a consequence, Tenderloin’s account functionally would contain $37,713.87 on the petition date, a sum far less than the $190,595.50 BOTW received, even allowing for its right of setoff. Under the hypothetical facts, the trustee could demonstrate that the elements of section 547(b)(5) would be met.

CONCLUSION

We hold that courts may entertain hypothetical preference actions within section 547(b)(5)’s hypothetical liquidation when such an inquiry is factually warranted, supported by appropriate evidence, and so long as the hypothetical preference action would not result in a direct conflict with another section of the Bankruptcy Code.

Here, the undisputed facts demonstrate that BOTW received two transfers simultaneously within ninety days of Tenderloin’s bankruptcy. We are also satisfied that in a hypothetical liquidation where the debt payment had not been made, the hypothetical bankruptcy trustee would challenge as preferential the $526,402.05 deposit, as would any reasonable bankruptcy trustee. Once we permit such a hypothetical preference action, Schoen-mann can demonstrate that BOTW received more as a result of the debt payment than it would in a hypothetical chapter 7 liquidation. As a consequence, the trustee can prove each required element of his claim, and BOTW has not shown it is entitled to judgment as a matter of law.

We REVERSE the district court’s judgment in favor of BOTW. BOTW’s summary judgment motion is therefore DENIED, and the matter is REMANDED to the district court with directions to remand the matter to the bankruptcy court for further proceedings consistent with this opinion. Appellee shall bear costs on appeal. Fed. R. App. P. 39(a)(3).

REVERSED and REMANDED.

KORMAN, District Judge,

concurring in part and concurring in the judgment:

I concur in the decision to reverse and remand to the bankruptcy court, and join all but Part II of the majority opinion. I agree that, under the circumstances of this case, applying 11 U.S.C. § 547(b)(5)’s “greater amount” test requires us to construct a hypothetical liquidation, and that in so doing, we may consider whether a reasonable trustee would bring and win a preference action within the hypothetical Chapter 7 proceedings. I cannot, however, join in the liquidation that the majority constructs in this case, because I cannot agree that the entirety of the $526,402.05 deposit was itself a preferential transfer subject to clawback under 11 U.S.C. § 547.

The majority is correct that Bernard v. Sheaffer, 96 F.3d 1279 (9th Cir. 1996), binds us to begin with the premise that a bank deposit is a “transfer” under the modern Bankruptcy Code, see also Maj. Op. at 1242-44. But the ultimate issue is not merely whether Tenderloin’s deposit was a transfer, but whether it was a preferential one. On the latter question, the majority’s position runs headlong into Justice Brandeis’s seminal opinion in New York County National Bank v. Massey, 192 U.S. 138, 147, 24 S.Ct. 199, 48 L.Ed. 380 (1904). The majority does not ignore Massey, nevertheless, its treatment of that ease almost totally elides what Massey has to say about the central question presented here.

Instead of engaging Massey’s analysis of what makes a preference, the majority opinion focuses at length on whether, in light of the expanded definition of “transfer” that Congress adopted in 1978, Massey still means that deposits are not transfers. The trouble is that Massey never meant that at all. The Massey Court “never said that customer deposits were not transfers.” Meoli v. The Huntington Nat’l Bank (In re Teleservices Grp., Inc.), 469 B.R. 713, 745 (Bankr. W.D. Mich. 2012) (emphasis added), cited at Maj. Op. at 1244-45. Rather, it said that such deposits were not preferential within the meaning of the bankruptcy laws solely because they create a right of setoff in a creditor. Massey, 192 U.S. at 147, 24 S.Ct. 199 (“[A] deposit of money ... in a bank does not operate to diminish the estate of the depositor.” (emphasis added)).

The question is whether Massey’s, holding, that the creation of a setoff right does not suffice to make a preference, has survived Congress’s creation of the contemporary scheme governing preferences and setoff. In that respect, the Massey Court faced a similar statutory landscape to the one we do now. The 1898 Act provided that an insolvent debtor’s transfer was preferential only if it “enable[d] any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.” § 60(a), 30 Stat. 544, 562. Nevertheless, it expressly authorized the setoff of mutually owing debts without providing an exception, applicable when a setoff would improve the bank’s position. Id. § 68(a), 30 Stat. at 565. The Court held that the preservation of setoff indicated Congress’s intent that the creation and exercise of a setoff right exist as an exception to the Act’s definition of a preferential transfer. Massey, 192 U.S. at 147, 24 S.Ct. 199. After all, setoff (and the creation of a setoff right) always favors offsetting creditors, who “reeeive[] a preference in the fact that, to the extent of the set-off [right], . [they are] paid in full.” Id. As Justice Brandéis explained, to “enlarge the scope of the statute defining preferences so as to prevent setoff in cases coming within the terms of [the provision authorizing setoff]” would “defeat” Congress’s choice to preserve setoff under those terms. Id.

In enacting the 1978 Act, or any of the numerous subsequent amendments to the Bankruptcy Code, Congress could have included the creation or exercise of a setoff right in the roster of transactions that are avoidable under § 547, but it did not. Instead, it preserved the basic feature of the 1898 Act on which Massey relied — the treatment of preferential transfers and setoff rights in separate provisions subject to different rules. Like § 68(a) of the 1898 Act, § 553 of the post-1978 Code is an entirely separate provision that subjects setoffs, exclusively, to different rules than those applicable to the recovery of preferences generally. See, e.g., Woodrum v. Ford Motor Credit Co. (In re Dillard Ford, Inc.), 940 F.2d 1507, 1512 (11th Cir. 1991).

Because that structure is unchanged, to hold that the creation of a setoff right that the Code preserves under the terms of § 553 may be preferential under § 547 would, as in Massey, “operate to enlarge the scope of the statute defining preferences so as to prevent [the exercise of] set-off in cases coming within the terms of [§ 553].” As in Massey, a preference is still defined as a transfer that leaves the receiving creditor better off than it otherwise would have been. See 11 U.S.C. § 547(b)(5), see also Maj. Op. at 1244 (“The pertinent question is whether the deposit depletes the assets of the estate available for distribution to creditors.”). Setoff rights are still preserved, subject to more forgiving limitations than transfers generally. Compare 11 U.S.C. § 553(b) with § 547(b). And as a matter of economic reality, the creation and exercise of those rights still advantage some creditors in a way that would — but for Massey’s limiting construction — meet the hornbook definition of a preference.

Concededly, Massey interpreted the text of a different statute than the one before us today. Nevertheless, the ultimate question in any statutory interpretation case is the intent of Congress, and the Supreme Court has instructed that “Congress is presumed to be aware of a[ ] ... judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change.” Lorillard v. Pons, 434 U.S. 575, 580, 98 S.Ct. 866, 55 L.Ed.2d 40 (1978). There is no indication that Congress meant to disrupt Massey’s bedrock holding when it enacted a new bankruptcy law, but preserved the structure that formed the essential basis for the Supreme Court’s analysis. In such circumstances, we should be mindful not only of Congress’s intent, but of the fact that “only [the Supreme] Court may overrule one of its precedents.” See Thurston Motor Lines, Inc. v. Jordan K. Rand, Ltd., 460 U.S. 533, 535, 103 S.Ct. 1343, 75 L.Ed.2d 260 (1983) (per curiam).

In a footnote, the majority opinion also argues1 that this ease is distinguishable from Massey because “the accounts were pledged as security on an antecedent loan, and the deposit itself would render BOTW fully secure.” Maj. Op. at 1244 n.13. Certainly, the creation of a new lien would have made a preferential transfer. Nevertheless, the fact that Tenderloin took the funds out of escrow and deposited the money made no difference to the bank’s security position. All of Tenderloin’s personal property was subject to the same floating lien, including its general intangibles. Those included Tenderloin’s contractual right to be paid the funds out of escrow. See In re Merten, 164 B.R. 641, 643 (Bankr. S.D. Cal. 1994). Tenderloin’s interest in those funds would have been identically encumbered, and BOTW identically secured, if the money had stayed in escrow indefinitely, or transferred out of escrow and into a safe in Tenderloin’s offices.

Because Massey’s reasoning applies with the same force today as it did in 1904, I cannot join in the majority’s holding that the $526,402.05' deposit was a preference subject to attack under § 547. I would have the hypothetical bankruptcy court treat Tenderloin’s account as containing the full $564,115.92 as of the petition date, and proceed to apply 11 U.S.C. § 553 to determine what portion of that amount BOTW could set off against Tenderloin’s $190,595.50 debt.

Section 553 does not preserve setoff rights without limitation. Rather, creditors may only set off subject to the strictures imposed by § 553(b), a “miniature preference provision akin to [§ 547].” Eckles v. Petco Inc., Interstate (In re Balducci Oil Co., Inc.), 33 B.R. 847, 852 (Bankr. D. Colo. 1983). Much like § 547(b) does for transfers, § 553(b) directs us to apply an improvement-of-position test — it disallows setoff to the extent that the creditor was better secured on the date of setoff than it was on the first day it became underse-cured (or 90 days before bankruptcy, if an insufficiency existed at the start of the preference period).

To be sure, there is some question whether § 553(b) applies to limit actual post-petition setoffs. See Collier on Bankruptcy ¶ 553.09[2][c] (noting division of authority). But as the Fifth Circuit has noted, the safeguards of § 553(b) are unnecessary post-petition in an actual liquidation, where the need to proceed by application to lift the automatic stay gives the bankruptcy judge an opportunity to weigh the equities of allowing or denying the creditor’s claim. Braniff Airways, Inc. v. Exxon Co., U.S.A, 814 F.2d 1030, 1041 n.13 (5th Cir. 1987).

By contrast, in a hypothetical liquidation, there is no such gatekeeper to protect other claimants. There is of course no actual bankruptcy judge available to exercise discretion in such a case, and it would push the already somewhat strained boundaries of our hypothetical analysis too far to exercise our own discretion, sitting as a three-headed hypothetical bankruptcy judge, weighing the imaginary equities of a fantasy liquidation. The majority asserts that this adds a new variable to what is supposed to be a controlled experiment, Maj. Op. at 1245 n.16, but so would exercising our own discretion — by substituting our judgment for that of the real bankruptcy judge.

We cannot construct a hypothetical. bankruptcy judge to review a hypothetical application to lift the stay. So to analyze a hypothetical post-petition setoff without applying § 553(b) would allow preference defendants to “have it both ways” by avoiding both the statutory improvement-in-position test and the bankruptcy court’s equitable oversight. Braniff Airways, 814 F.2d at 1041 n.13. Like the Fifth Circuit, I would “decline to let [BOTW] have it both ways,” and hold that if it wants to defend a preference action by relying “on a pre-petition right to setoff pursuant to [§ ] 553, it must comply with ... [§ ] 553(b).” Id.

The ensuing analysis is straightforward. Section 553(b) directs that an offsetting creditor cannot improve its secured position relative to where it stood on the date of the first insufficiency. At all relevant times, Tenderloin owed BOTW $190,595.50. Adopting the majority’s working assumption that on the 90th day before the petition, Tenderloin’s bank balance was $173,015.00, this left an insufficiency of $17,580.50 relative to its debt. Assuming that Tenderloin’s debt balance remained unchanged through the petition date, § 553(b) would allow BOTW to recover at most $173,015.00 in a hypothetical post-petition setoff. I assume that, like any diligent creditor, the bank would take as much as it could, claiming that amount in full.

Since BOTW received $190,595.50 during the 90 days before bankruptcy, but only would have received $173,015.00 in a hypothetical liquidation, the trustee has made out a prima facie case that the $17,580.50 difference is voidable as a preference. So like the majority, I would reverse the judgment below and send the case back to the bankruptcy court for further proceedings. I would further instruct the bankruptcy court to limit further proceedings to considering BOTW’s affirmative defenses, and then — to the extent that those do not carry the day on remand, and after resolving any factual dispute as to the amount of Tenderloin’s account balances on the relevant dates — to enter judgment for the trustee in the amount given by applying the foregoing analysis.

      . There appears to be a factual dispute concerning the amount in Tenderloin's deposit accounts on the date ninety days preceding the filing of its bankruptcy. We need not resolve this dispute because the difference in the amounts is not material to the outcome.

      . It may at first blush seem incongruous to ask what the creditor would have received if "the case were a case under chapter 7,” given that this matter is in fact a chapter 7 liquidation. The reference to chapter 7, however, defines the character of the hypothetical bankruptcy, which is then used as a point of comparison to see if the pre-petition payments rendered the preferred creditor better off. We have previously recognized that a preference action is permissible under section 547(b), even when filed in conjunction with a chapter 7 liquidation. See, e.g., USAA Fed. Savings Bank v. Thacker (In re Taylor), 599 F.3d 880, 885-88 (9th Cir. 2010) (affirming decision" concerning a preference action brought in the course of a chapter 7 liquidation); Busseto Foods, Inc. v. Charles Laizure (In re Laizure), 548 F.3d 693, 695 (9th Cir. 2008) (chapter 7 trustee brought preference action); Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys., Inc.), 482 F.3d 1118, 1122 (9th Cir. 2007) (same).

      . The preference provisions first appeared as sections 60a and 60b of the Bankruptcy Act of 1898. See The Bankruptcy Act of 1898 § 60, Ch. 541, 30 Stat. 544, 562 (1898). The Bankruptcy Reform Act of 1978 superseded those provisions but retained the same basic elements.

      . See, e.g., Guttman v. Constr. Program Grp. (In re Railworks Corp.), 760 F.3d 398, 402 (4th Cir. 2014) (stating that under section 547(b)(5), a transfer "must enable the creditor to receive a greater percentage of its claim than it would under the normal distributive provisions in a liquidation case under the Bankruptcy Code”); Kimmelman v. Port Auth. of N.Y. & N.J. (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311, 321 (3rd Cir. 2003) (observing a “trustee could not satisfy § 547(b)(5) because the pre-petition payments did not improve the creditor's position under the distributive provisions of the Bankruptcy Code”).

      . “If a creditor is fully secured, a prepetition transfer to him is not preferential because the secured creditor is entitled to 100% of his claim.” LCO, 12 F.3d at 941.

      . Additionally, though BOTW is correct that we are permitting the hypothetical trustee to do something the actual trustee did not do, the actual trustee had no incentive to challenge tire deposit when the bankruptcy was filed. BOTW turned over the $564,276.83 in Tenderloin’s accounts on November 12, 2012. The trustee then brought this action in the bankruptcy court roughly one month later. These facts are significant because the voluntary turnover to the trustee of the property subject to a creditor’s right of setoff generally precludes any subsequent claim of setoff by the creditor. See Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 20, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (noting that requiring a creditor immediately to turnover funds on account "would divest the creditor of the very thing that supports the right of setoff”); In re Mauch Chunk Brewing Co., 131 F.2d 48, 49 (3d Cir. 1942) (finding that when trustee withdrew funds from account with bank’s knowledge of bankruptcy filing, bank's acquiescence was "tantamount to renunciation of its privilege of setoff”). If BOTW loses this preference action, it might be able revive its right of setoff given "court[s] may remedy the effect of an inadvertent, involuntary or improper dissipation of the creditor’s interest.” Collier ¶ 553.07; see also In re Archer, 34 B.R. 28, 31 (Bankr. N.D. Tex. 1983) (finding where bank had mistakenly turned over property it did not intentionally waive its right of setoff). Still, even allowing for that possibility, it would not be reasonable to assume the trustee had an incentive to challenge the deposit from the outset of this proceeding. BOTW had turned over the funds that supported the right of setoff, so there was little reason for the trustee to fear BOTW would later assert such a right if the preference action was successful and the bank disgorged the debt payment.

      . “The right of setoff (also called offset’) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding -the absurdity of making A pay B when B owes A.” Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1398 (9th Cir. 1996) (quotation marks omitted). There is no federal right of setoff, but “11 U.S.C. § 553(a) provides that, with certain exceptions, whatever right of setoff otherwise exists is preserved in bankruptcy.” Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). California law recognizes a bank's right to setoff against a depositor’s account. Kruger v. Wells Fargo Bank, 11 Cal.3d 352, 357-58, 113 Cal.Rptr. 449, 521 P.2d 441 (1974). Accordingly, BOTW’s right of setoff is preserved in the hypothetical liquidation if it meets the requirements of section 553. Three conditions must be shown: "(1) the debtor owes the creditor a prepetition debt; (2) the creditor owes the debtor a prepetition debt; and (3) the debts are mutual.” United States v. Carey (In re Wade Cook Fin. Corp.), 375 B.R. 580, 594 (9th Cir. BAP 2007). In a hypothetical liquidation as of the petition date, these requirements are met. Tenderloin, the debtor, would owe BOTW, the creditor, a prepetition debt because the alleged preferential transfer would not have taken place, meaning the loan balance ($190,595.50) would be outstanding. BOTW would owe Tenderloin a prepetition debt arising from the deposit of the property sale proceeds. See Strumpf, 516 U.S. at 21, 116 S.Ct. 286 (explaining banks obtain title to deposited funds subject to a promise to pay the depositor); Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966) ("The relationship of bank and depositor is that of debtor and creditor, founded upon contract.”). Finally, the debts are mutual because they involve obligations owed between the same parties.

      . The result would not be different even if BOTW were to argue that it would exercise its hypothetical setoff right prior to the filing of the petition. Prepetition setoffs aré generally challenged in three ways, only one of which would apply here. Section 553(b) provides that if a creditor exercises a setoff within ninety days of the bankruptcy, the trustee may recover the amount by which the creditor improved its position between the ninetieth day before the filing and the date of the bankruptcy. See 11 U.S.C. § 553(b). Ninety days before filing, Tenderloin’s accounts contained approximately $173,015.00. We also must assume that BOTW would elect to setoff the full $190,595.50. BOTW would thus improve its position by $17,580.50 under this scenario. The trustee would be able to recover that amount from BOTW. At bottom, if BOTW exercised its hypothetical setoff right prior to the filing of the petition, it still received more in reality than it would in the hypothetical liquidation because it actually received $190,595.50, but would receive only $173,015.00 in the hypothetical.

      . "The § 502(d) disallowance is in the nature of an affirmative defense to a proof of claim and does not provide independent authority for affirmative relief against the creditor." In re Sierra-Cal, 210 B.R. at 173.

      . BOTW does not dispute the other section 547(b) elements, and they appear to be satisfied. The deposit was made on June 13, 2012, so it occurred within ninety days of the filing ' of the petition. 11 U.S.C. § 547(b)(4)(A). In the absence of the deposit, BOTW would not have been able to setoff the full $190,595.50, so the trustee could satisfy the "greater amount test.” Id. § 547(b)(5).

      .Notably, a debtor’s subjective intent may be relevant in determining the applicability of an affirmative defense. See, e.g., 11 U.S.C. § 547(c)(2) (providing there is no preference where a payment was made according to ordinary business terms); In re Craig Oil Co., 785 F.2d at 1566 ("[A] creditor’s state of mind is now immaterial in finding a preference. ... It does not follow from the above that a debtor's state of mind or motivation is likewise immaterial in applying the preference exception of § 547(c)(2).”).

      . In 1904, a transfer was defined "to include the sale and every other and different method of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security.” Massey, 192 U.S. at 146, 24 S.Ct. 199; see also The Bankruptcy Act of 1898 § 1, Ch. 541, 30 Stat. 544, 545 (1898). Today, the parting may be with a mere "interest in property” and need not be done "as a payment, pledge, mortgage, gift, or security.” See 11 U.S.C. § 101(54); Smiley v. First Nat’l Bank of Belleville (Matter of Smiley), 864 F.2d 562, 565 (7th Cir. 1989) (“[W]e find that the narrow definition of ‘transfer’ ... can no longer be the law since the Bankruptcy Reform Act took effect.”).

        . Massey is also factually distinguishable. Here, unlike in Massey, the accounts were pledged as security on an antecedent loan, and the deposit itself would render BOTW fully secure. Cf. Smith, 265 F.3d at 964 ("[PJayments that change the status of a creditor from partially unsecured to fully secured at the time of petition may be preferential.”); Porter v. Yukon Nat’l Bank, 866 F.2d 355, 359 (10th Cir. 1989) (finding transfer preferential where "the effect of the transfer was to change the status of the Bank from that of a partially unsecured creditor to that of a fully secured creditor”). It is also worth noting that the Supreme Court instructs us to look to the "actual effect” of the deposit in bankruptcy, Palmer Clay Prods. Co. v. Brown, 297 U.S. 227, 229, 56 S.Ct. 450, 80 L.Ed. 655 (1936), and as explained further below, the deposit would deplete the estate's assets. The concurrence is simply incorrect in stating that the deposit "made no difference to the bank's security position.” BOTW’s security interest only attached because the deposited funds were transferred out of escrow.

      . Both of the cited decisions were decided prior to the 1978 amendments to the Bankruptcy Code. In addition, the "diminution of estate” doctrine is used “to determine whether property that is transferred belongs to the debtor,” not whether a transaction constitutes a transfer. See Adams v. Anderson (In re Superior Stamp & Coin Co.), 223 F.3d 1004, 1007 (9th Cir. 2000). To the extent that BOTW insists the deposit was not a transfer "of an interest of the debtor in property,” see id. that argument has been waived, Officers for Justice v. Civil Serv. Comm’n, 979 F.2d 721, 726 (9th Cir. 1982). Finally, the concurrence concedes that the deposit is a "transfer,” but insists it is not the right kind of transfer because Massey allegedly controls when determining “what makes a preference.” We are convinced that satisfying the elements of § 547(b) "makes” a transfer "a preference,” and the concurrence does not disagree that those elements would be satisfied here.

      .The key aspect of this investigation is not whether the exercise of a setoff right depletes the estate's assets, see Concurrence at 3, as that' necessarily is true in every case. The question is whether the deposit depletes the estate’s assets because deposits do not always afford the bank a right of setoff, nor are deposit accounts always pledged as security for a loan.

      . We decline to adopt the post-petition setoff analysis suggested by the concurrence. First, though there is no question that setoffs are governed by section 553, the trustee has never argued that it would challenge a hypothetical post-petition setoff. Instead, Schoenmann asserts only that the hypothetical trustee would challenge the deposit as an avoidable preference. Next, while the exercise of a setoff results in a permissible preference because it does not constitute a transfer under the Bankruptcy Code, Collier ¶ 553.09[l][a], here we have a pre-petition transfer that renders a creditor fully secure, and thus it is not immune from preference liability. See supra at 1244 n.13. Lastly, though the concurrence applies section 553(b) to a hypothetical post-petition setoff, the plain language of the statute indicates that section 553(b) applies only to pre-petition setoffs. See 11 U.S.C. § 553(b)(1) (stating that "if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such a creditor the amount so offset” subject to certain conditions (emphasis added)); see also Collier ¶ 553.09[2][c] ("The better result is to limit section 553(b) to setoffs actually taken prepet-ition. In addition to remaining true to the language of the text, that result is consistent with the underlying purpose of section 553, which it to encourage creditors not to take setoffs by generally preserving their setoff rights.”).

      . BOTW mentions in passing one hypothetical affirmative defense — that the bank "would not be liable pursuant to 11 U.S.C. § 550.” Since BOTW does not develop the argument, however, we decline to reach it. See W. Watersheds Project v. Kraayenbrink, 632 F.3d 472, 499 (9th Cir. 2010); Int’l Healthcare Mgmt. v. Hawaii Coalition for Health, 332 F.3d 600, 609 (9th Cir. 2003).

      . The circuits are divided on this question. See Ivey v. First Citizens Bank & Trust Co. (In re Whitley), 848 F.3d 205, 208-10 (4th Cir. 2017) (noting the split and reaffirming the Fourth Circuit's pre-1978 position that deposits into one’s own bank account ordinarily are not "transfers”).

      . Indeed, the bankruptcy judge in Meoli v. The Huntington Nat'l Bank (In re Teleservices Grp., Inc.), 469 B.R. 713 (Bankr. W.D. Mich. 2012), quoted by the majority, was discussing § 553(b)'s effect on the treatment of setoffs when it labeled Massey an “anachronism.” Id. at 746, quoted at Maj. Op. at 1244-45. Its point was not that Congress no longer intended the law governing setoffs to function as an exception to the law governing preferences generally, but that the enactment of § 553(b) had “addressed preferential setoffs,” by providing special terms on which they, although not subject to § 547, could be clawed back. Id. at 745-46. In any case, the court in Meoli had no cause to consider whether the creation or exercise of a setoff right could render a transfer preferential — the transfers at issue in Meoli were voidable not because they were preferential, but because they were fraudulent. See id. at 747.

      . The majority opinion faults me for analyzing the permissibility of a post-petition setoff when the trustee has not raised the issue (having relied whole-hog on its argument that the deposit itself was a preference). Maj. Op. at 1245 n.16. This case raises the important question of how to measure the preferential impact of commonplace bank deposits, which will often turn on the permissible extent of a hypothetical post-petition setoff. "It is important that we address the proper legal standards” for bankruptcy courts to apply in addressing the ultimate issue presented here, and we may reach questions "intimately bound up with” that issue, though not raised by the parties, in order to do so. See Kolstad v. Am. Dental. Ass’n, 527 U.S. 526, 540, 119 S.Ct. 2118 (1999).