600 B.R. 335
Bankr. E.D. Pa.2019Background
- Debtor received a Prudential 401(k) hardship withdrawal check for $45,965 on December 7, 2017 to stop a foreclosure by Peoples First Federal Credit Union (Peoples).
- The check was endorsed by Debtor, given to her attorney with instructions to pay Peoples, and was deposited by counsel on December 11, 2017; counsel paid Peoples on December 14, 2017.
- Debtor filed a Chapter 7 petition on December 7, 2017 (after delivery of the check but before counsel deposited it), creating the bankruptcy estate at petition date.
- The Chapter 7 Trustee sued to avoid the $45,965 transfer as an unauthorized post-petition transfer under 11 U.S.C. § 549(a); Peoples asserted the earmarking doctrine and argued the funds were exempt because Trustee did not object to Debtor’s Schedule C exemption of the 401(k).
- The court found the withdrawn funds ceased to be part of the 401(k) prepetition and thus were property of Debtor and of the estate at filing; Trustee’s summary judgment was granted and Peoples’ cross-motion denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were the withdrawn funds property of the bankruptcy estate at petition date? | Withdrawal removed funds from 401(k); they became Debtor’s property and thus estate property at filing. | Funds were earmarked for Peoples and never became estate property. | Held: Withdrawn funds were not in the 401(k) at filing and therefore were property of the estate. |
| Does the earmarking doctrine bar avoidance of the transfer? | N/A (Trustee contends funds were estate property; burden shifts to Peoples to prove earmarking) | Earmarking applies because Debtor designated the funds and instructed counsel to pay Peoples. | Held: Earmarking inapplicable—no new lender provided funds; doctrine narrowly construed and not met. |
| Does Debtor’s unobjected exemption of the 401(k) protect the withdrawn funds? | Trustee: No — exemption applies only to property that actually existed in the account at filing; withdrawn funds were not in the 401(k). | Peoples: Because Trustee didn’t object to the exemption, the claimed exemption stands and covers the funds. | Held: The exemption was "empty" as to withdrawn funds; failure to object does not restore funds not in the account at filing. |
Key Cases Cited
- Winstar Commc'ns, Inc. v. Schubert, 554 F.3d 382 (3d Cir. 2009) (articulates earmarking doctrine elements and narrow construction)
- Bohlen Enters., Ltd. v. McCuskey, 859 F.2d 561 (8th Cir. 1988) (describes earmarking rationale and requirements)
- Superior Stamp & Coin Co. v. Adams, 223 F.3d 1004 (9th Cir. 2000) (recognizes earmarking in preference context)
- Owen v. Owen, 500 U.S. 305 (U.S. 1991) (property exempted is withdrawn from estate upon allowance)
- Taylor v. Freeland & Kronz, 503 U.S. 638 (U.S. 1992) (procedure and effect of objecting to exemptions)