The opinion of the court was delivered by: Siragusa, J.
This is an appeal from an Order of the Bankruptcy Court for the Western District of New York entered on July 21, 2009, granting summary judgment to Trustee Kenneth W. Gordon ("Trustee") and denying a cross-motion for summary judgment against the Trustee on the complaint filed by Kathleen M. Gallagher ("Debtor") in an adversary proceeding (No. 2-09-02014-JCN) before the Bankruptcy Court. The complaint sought recovery of funds paid by the County of Monroe ("Monroe County") to the Trustee upon the latter's demand. For the reasons stated below, the Bankruptcy Court's Order is reversed, and the case is remanded to that Court for further proceedings.
On September 30, 2007, Debtor paid $6,600.79 to the Monroe County treasurer for real estate taxes on her home. On October 30, 2007, Debtor filed for a Chapter 7 bankruptcy, and at the creditors' meeting held on November 27, 2007, the Trustee questioned the Monroe County payment, listed on Debtor's schedule. The Trustee said he would investigate the payment as a possible preference. Debtor's counsel, though, objected, maintaining that since the payment was to a fully secured creditor, it was not a preference. (Transcript (Nov. 27, 2007) at 8--9.)
On November 28, 2007, the Trustee sent a letter to Monroe County demanding that it remit to him the $6,600.79 tax payment, based his contention that the payment amounted to a preference under the Bankruptcy law. The letter stated, in pertinent part:
I am the Chapter 7 Trustee who has been appointed administer assets above-referenced bankruptcy estate. The above-referenced debtor filed for Chapter 7 Bankruptcy on October 30, 2007. At the debtor's 341 Meeting I was advised that the debtor made payment to you on September 30, 2007 for Delinquent Taxes in the of $6,600.79. This payment by debtor for prior services rendered constitutes a preferential transfer, as payment was made within 90 days prior to when she filed for bankruptcy. It is my responsibility to recover these funds from you for distribution to all creditors of the debtor on a pro rata basis. Please have your office remit $6,600.79 to me as Chapter 7 Trustee no later than December 21, 2007. (Letter from Kenneth W. Gordon, Chapter 7 Trustee, to Monroe County Treasury (Nov. 28, 2007) 1. (emphasis added).) Monroe County, without protest, or notice to Debtor, paid the amount demanded and, consequently, debited Debtor's real property tax account in the sum of $6,600.79. This created a deficiency and a negative escrow balance for Debtor's mortgage account.
Debtor filed a complaint against the Trustee and Monroe County in an adversary proceeding before the Bankruptcy Court alleging three causes of action: (1) that Monroe County's payment to the Trustee was based on an "invalid claim of preference, was entirely improper, and resulted in unjust enrichment to the Chapter 7 estate"; (2) Monroe County is estopped from recovering penalties and interest for nonpayment and Debtor is entitled to a credit of $1,073.03 as a result; and (3) Debtor is entitled to recover sanctions against the Trustee as a result of his invalid claim of preference. (Compl. ¶¶ 10--32.)
In his motion before Bankruptcy Court , the Trustee sought to dismiss the complaint on the ground that it was without legal basis, since the Debtor sought to overturn a voluntary settlement payment made by Monroe County to the Trustee. Moreover, the Trustee sought dismissal contending that, in any event, the complaint against Monroe County for making the payment would need to be pursued in state court. Finally, the Trustee maintained that no grounds existed for the Bankruptcy Court to direct the Trustee to return the settlement payment to Monroe County, or pay it to Debtor. (Gordon Aff. ¶¶ 6--8.) In opposing the Trustee's motion, and in support of her own cross-motion for summary judgment, Debtor argued that:
It is axiomatic that a payment made an over-secured creditor within 90 days of a bankruptcy filing cannot be recovered by the Trustee as a preference pursuant to 11 U.S.C. § 547. In re Southern Air Transport, Inc., 511 F.3d 526, 533 (6th Cir. 2007); In re C-L Cartage Co., Inc., 899 F.2d 1490, 1493 (6th Cir. 1990); See also In re Rocor Intern., Inc., 380 B.R. 567, 571 (10th Cir. BAP 2007); In re 360nettworks USA Inc., 327 B.R. 187, 190 (Bankr. SDNY 2005); 5 Lawrence P. King, et al., Collier On Bankruptcy § 547.03. Notwithstanding clear legal authority to the contrary, the Trustee made demand upon the County of Monroe for turnover of the funds paid by the debtor to the Monroe County Clerk in respect of real property taxes within 90 days of the filing of the Chapter 7 case. In reliance upon the Trustee's authority, without any detriment to its interests (as a fully secured creditor), and without notifying plaintiff or her counsel, the County of Monroe remitted funds on the plaintiff's account, to the Trustee, immediately upon the Trustee's demand.
The Trustee is now holding the amount of $6,600.79 which he obtained improperly, and which he refuses to return without legal or factual basis therefore. It would be completely inequitable and unfair to require the debtor to proceed to recover the same amount from the County who in good faith paid it over to the Trustee, when the Trustee in fact still retains the funds. (Early Aff. ¶¶ 8--10.)
In its decision, the Bankruptcy Court determined that the Debtor's payment to Monroe County was not a preference (Transcript (Jul. 15, 2009) 5:6--7), that "[t]he Court has discretion.[i]t's not a legal question in terms of your adversary proceeding," and that the Court had no basis "to exercise its discretion to reverse this situation or cause the trustee to pay over those moneys to the debtor" (Id. 9:15--18). Now on appeal, Debtor raises the following issue:
Did the Bankruptcy Court err in dismissing the Plaintiff's complaint for failure to state a cause of action upon which relief may be granted. The Bankruptcy Court's decision to grant amotion to dismiss for failure to state a cause of action is a ruling of law subject to de novo review on appeal. In re NYSE Specialists Sec. ...