513 B.R. 682
Bankr. E.D. Tex.2014Background
- Debtor Bobby G. Loggins (married to Linda Loggins) executed guaranties that left him personally liable to Bank of Tyler for about $3.6 million; several bad checks deposited into two companies’ accounts produced $2,107,658.64 in overdrafts.
- On December 31, 2010 / January 7, 2011, Debtor sold ~145 acres to Elvin “Buddy” Lowery (a Bank director/insider); the Sales Contract expressly "earmarked" $2,107,658.64 of the $2.2 million purchase price to be paid to Bank of Tyler at closing.
- Closing occurred January 7, 2011; Landmark Title paid $2,103,917.62 net to Bank of Tyler; Debtor retained possession via leaseback and right of first refusal.
- An involuntary Chapter 7 petition was filed March 30, 2011 (within 90 days); Trustee Christopher Moser sued to avoid and recover the ~$2.1 million as a preference under 11 U.S.C. § 547 (and alternatively as a fraudulent transfer).
- The Bank argued (inter alia) that (1) proceeds were exempt homestead sale proceeds, (2) the earmarking doctrine prevents avoidance, (3) it had a perfected § 4.210 security interest in the items/proceeds, and (4) contemporaneous/subsequent new value defenses applied.
Issues
| Issue | Moser's Argument | Bank of Tyler's Argument | Held |
|---|---|---|---|
| Whether the $2.1M payment was a "transfer of an interest of the debtor in property" under § 547(b) | Debtor sold unencumbered property and voluntarily directed proceeds to Bank; sale proceeds belonged to debtor’s estate and thus were property of the debtor | Proceeds were either (a) exempt homestead sale proceeds under Tex. Prop. Code § 41.001(c), or (b) never debtor property because they were "earmarked" to Bank | Court: Transfer was an interest of the debtor. Homestead-proceeds exemption inapplicable because Debtor retained a homestead on remaining acreage; earmarking exception does not apply where debtor voluntarily divests his equitable interest to prefer a creditor. |
| Whether the earmarking doctrine bars avoidance | Earmarking is inapplicable: debtor had equitable interest and voluntarily redirected proceeds to favor Bank; substance controls over form | Earmarking protects Bank because funds were designated to satisfy its specific debt and handled by closing agent | Court: Earmarking does not apply; transaction viewed as a device to prefer Bank and thus is avoidable. |
| Whether § 547(c)(1) contemporaneous exchange or § 547(c)(4) subsequent new value defenses apply (new value given) | Trustee: No new value was given to Debtor personally; loans went to LLCs owned by spouse and Bank produced no evidence that Debtor’s individual estate was enhanced | Bank: Loaned $425,000 working capital to spouse’s LLCs; Debtor has community property interest so he received new value (or later unsecured advances) | Court: Bank failed to show specific evidence that Debtor’s individual estate was enhanced; both defenses fail on summary judgment. |
| Whether Bank received more than in Chapter 7 (effect of payment) and whether Bank is recoverable initial transferee under § 550 | Trustee: Estate assets insufficient; Trustee’s affidavit + schedules/claims show unsecured creditors will not be paid in full, so Bank received more than in liquidation; Bank was initial transferee with dominion/control | Bank: Speculative argument that 100% distribution might be possible; contested status as transferee or other protections asserted | Court: Trustee established lack of 100% payout; Bank was initial transferee with dominion over funds and is liable to return transfer. |
Key Cases Cited
- Begier v. Internal Revenue Service, 496 U.S. 53 (U.S. 1990) (scope of "property of the estate" informs § 547 analysis)
- Union Bank v. Wolas, 502 U.S. 151 (U.S. 1991) (elements and purpose of § 547 preference provisions)
- Coral Petroleum v. Banque Paribas-London, 797 F.2d 1351 (5th Cir. 1986) (earmarking / substitution-of-creditor analysis)
- Cage v. Wyo-Ben, Inc. (In re Ramba, Inc.), 437 F.3d 457 (5th Cir. 2006) (debtor interest in proceeds — encumbered assets and effect on earmarking)
- Palmer v. Radio Corp. of America, 453 F.2d 1133 (5th Cir. 1971) (asset sale with buyer assumption/payment can be preferential)
- Maple Mortgage, Inc. v. Jenkins (In re Maple Mortgage, Inc.), 81 F.3d 592 (5th Cir. 1996) (earmarking is a challenge to trustee's proof of debtor interest in property)
- Entringer Bakeries v. First Bank & Trust (In re Entringer Bakeries, Inc.), 548 F.3d 344 (5th Cir. 2008) (discussion of earmarking doctrine and control over funds)