587 B.R. 548
Bankr. D. Kan.2018Background
- WB Services (Debtor) was prime contractor on EKAE's construction project; Kice was a subcontractor unpaid for work it performed.
- EKAE and Debtor agreed to use joint-payee checks: EKAE issued a check payable to Debtor and Kice for $118,191.35; Debtor endorsed the check and Kice deposited it on March 7, 2016 (within 90 days prepetition).
- Kice had executed conditional lien waivers for $82,661.35 before payment but had not filed a subcontractor's lien for the full $118,191.35.
- Debtor filed Chapter 7 on April 28, 2016; Trustee sued to avoid the $118,191.35 payment as a preference under 11 U.S.C. § 547.
- Kice moved for summary judgment arguing (1) the joint check was not an interest of the debtor in property (earmarking/independent-obligation/control arguments) and (2) alternatively, the new-value defense (§ 547(c)(1)) applies.
- The court found the payment was a transfer of an interest of the debtor and thus potentially preferential, but denied summary judgment on Kice’s new-value defense because material facts about EKAE’s setoff/indemnity rights and the amount covered by waivers remained unresolved.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the joint-payee payment was "a transfer of an interest of the debtor in property" under § 547(b) | Trustee: payment reduced Debtor's accounts receivable and thus diminished the estate | Kice: funds were earmarked/paid pursuant to EKAE's independent obligation and Debtor lacked control, so no estate interest | Court: Debtor had an interest; joint-check device did not defeat § 547(b) analysis; summary judgment denied for Kice |
| Whether the earmarking or independent-obligation doctrines removed the funds from the estate | Trustee: doctrines do not apply here because EKAE was not a guarantor/lender and did not restrict funds as required by those doctrines | Kice: Davidson and joint-check precedents exclude such funds from the estate | Court: Davidson's footnote not controlling; earmarking/independent-obligation defenses rejected on these facts |
| Whether the transfer satisfied § 547(b)(5) (creditor received more than in liquidation) | Trustee: Debtor's AR was reduced and Kice received full payment rather than unsecured recovery | Kice: EKAE could have paid to discharge a lien and set off against Debtor, so no preference | Court: No lien was filed; estate was diminished and § 547(b)(5) satisfied on the record |
| Whether § 547(c)(1) new-value (including indirect-transfer theory) defeats avoidance | Trustee: insufficient record to show EKAE would have provided setoff/new value on release of inchoate lien | Kice: release of lien rights (even inchoate) provided contemporaneous new value because EKAE would lose setoff/indemnity rights | Court: New-value/indirect-transfer may apply (J.A. Jones rationale) but unresolved facts about EKAE's pre-transfer setoff/indemnity rights and waiver amounts preclude summary judgment; trial needed |
Key Cases Cited
- Zions First Nat'l Bank v. Christiansen Bros., In re Davidson Lumber Sales, 66 F.3d 1560 (10th Cir.) (discusses joint-payee checks and mentions earmarking in footnote)
- Parks v. FIA Card Servs., N.A., In re Marshall, 550 F.3d 1251 (10th Cir.) (earmarking limited; dominion/control and diminution tests applied)
- In re J.A. Jones, 361 B.R. 94 (Bankr. W.D.N.C.) (endorses indirect-transfer new-value defense for release of inchoate lien)
- McCuskey v. Nat'l Bank, In re Bohlen Enters., 859 F.2d 561 (8th Cir.) (discusses earmarking doctrine and its requirements)
- In re Philip Servs. Corp., 359 B.R. 616 (Bankr. S.D. Tex.) (subcontractor's lien release can constitute new value to debtor)