In re Entringer Bakeries, Inc.

• Decision Date: 06 November 2008
• Docket Number: No. 07-30499.,07-30499.
• Citation: 548 F.3d 344
• Parties: In the Matter of: ENTRINGER BAKERIES, INC., Debtor. Aaron E. Caillouet, Trustee, Appellant-Cross-Appellee, v. First Bank and Trust, Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

548 F.3d 344

In the Matter of: ENTRINGER BAKERIES, INC., Debtor.

Aaron E. Caillouet, Trustee, Appellant-Cross-Appellee, v. First Bank and Trust, Appellee-Cross-Appellant.

No. 07-30499.

United States Court of Appeals, Fifth Circuit.

November 6, 2008.

David J. Messina (argued), Fernand L. Laudumiey, IV, Gordon, Arata, McCollam, Duplantis & Eagan, New Orleans, LA, for Caillouet.

Philip K. Jones, Jr. (argued), Carey L. Menasco, Liskow & Lewis, New Orleana, LA, for First Bank & Trust.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before SMITH and PRADO, Circuit Judges, and YEAKEL^*, District Judge.

PER CURIAM:

Aaron Caillouet, the trustee of the bankruptcy estate of Entringer Bakeries ("Entringer"), sued First Bank and Trust ("FBT") to avoid two pre-petition transfers from Entringer to FBT. The bankruptcy court held that both transfers were of funds that had been "earmarked" for FBT and were therefore avoidable only to the extent that the transfers diminished the estate. The court held that the transfers diminished the estate by $74,381.04 and entered judgment for the trustee in that amount. The trustee appealed the court's application of the earmarking doctrine; both parties appealed the finding as to the amount the transfers diminished the estate.

The district court affirmed. The trustee appealed, and FBT cross-appealed. We affirm the judgment in favor of the trustee but vacate the award and render an award in a different amount.

I.

On September 29, 2000, Entringer borrowed $180,000 from FBT. The loan was secured not by Entringer's property but by the guaranty and pledge of a personal brokerage account of Marc Leunissen, one of the new principal owners of Entringer. Interest payments were due monthly, with the principal due at maturity on December 29, 2000. The loan was short-term financing intended to give Entringer time to arrange long-term financing, part of which would be used to repay the FBT loan.

Entringer applied for long-term financing from Whitney National Bank ("Whitney"). Specifically, it sought a loan from Whitney that the Small Business Administration ("SBA") would guarantee. In mid-December, the SBA agreed to guarantee the loan, so long as Entringer received additional financing from various other institutions. Those conditions delayed closing on the Whitney loan until after the December 29 maturity date of the FBT loan.

Aware that Entringer had arranged for the SBA-backed loan from Whitney, FBT did not issue a notice of default but instead permitted Entringer to execute a second promissory note on January 30, 2001, requiring one interest payment on March 5 and a final payment of principal and interest on March 30.

Accordingly, Entringer made an interest payment of $1,203 to FBT on March 6. By March 30, the Whitney loan had not closed, and Entringer requested additional time to satisfy its debt. FBT understood that the Whitney loan would close in a matter of days and allowed the loan to mature without issuing notice of default.

On April 6, 2001, the Whitney loan closed and on April 12 was funded. The next day Entringer delivered to FBT a check for $181,702.50, representing principal and accrued interest. The check cleared on April 16, and both FBT promissory notes were stamped "PAID April 17, 2001."

Entringer filed for bankruptcy on May 29, 2001. Though guaranteed by the SBA, the Whitney loan was also secured by fixtures, certain machinery and equipment, and a leasehold interest. The trustee liquidated the collateral, and Whitney received $74,381.04.

II.

The trustee filed the instant adversary proceeding against FBT to avoid the interest payment of March 6¹ and the final payment of April 13 as impermissible preferences under 11 U.S.C. § 547(b).² The only issue before the bankruptcy court was whether the funds transferred to FBT were "of an interest of the debtor in property." Id. The court applied the equitable "earmarking" doctrine³ and held that the payments to FBT were not transfers of Entringer's interest in property. The court held, however, that payments of earmarked funds to an unsecured creditor, such as FBT, are still avoidable as a preference to the extent of the value of the collateral given to the new lender, here Whitney. Thus, the court entered a judgment in favor of the trustee for $74,381.04, the amount of the collateral pledged to secure the Whitney loan.

The trustee appealed to the district court the bankruptcy court's application of the earmarking doctrine, alleging that the payments were a transfer of Entringer's interest in property. The trustee also appealed the valuation of the collateral. FBT cross-appealed, averring that, because the payment it received was only a fraction of the Whitney loan, it ought to be liable for only a pro rata share of the $74,381.04, the value of the liquidated collateral. The district court affirmed, and both parties now appeal the same issues, except that the trustee has waived his argument with respect to the $1,203 payment.

III.

The trustee asserts that the transfer of funds on April 13 from Entringer to FBT to pay the interest and principal on the $180,000 loan is a simple preference that he can avoid under § 547(b). The parties have stipulated to all of the elements of a preference under § 547(b) except for that subsection's requirement that the payment was a "transfer of an interest of the debtor in property." The bankruptcy court and district court both applied the earmarking doctrine and held that the payment was not such a transfer. The trustee contends this was error.

"We review the decision of a district court, sitting as an appellate court, by applying the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court." U.S. Dep't of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir.2003) (citation omitted). A bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. Id.

We have described the earmarking doctrine's application to a preference action as follows:

For the preference to be voided under section 547, it is essential that the debtor have an interest in the property transferred so that the estate is thereby diminished. If all that occurs in a "transfer" is the substitution of one creditor for another, no preference is created because the debtor has not transferred property of his estate; he still owes the same sum to a creditor, only the identity of the creditor has changed. This type of transaction is referred to as "earmarking" .... The earmarking doctrine is widely accepted in the bankruptcy courts as a valid defense against a preference claim, primarily because the assets from the third party were never in the control of the debtor and therefore payment of these assets to a creditor in no way diminishes the debtor's estate.

Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1355-56 (5th Cir. 1986) (internal quotation marks and citations omitted). The court cited COLLIER ON BANKRUPTCY to describe this doctrine further:

In cases where a third person makes a loan to a debtor specifically to enable him to satisfy the claim of a designated creditor, the proceeds never become part of the debtor's assets, and therefore no preference is created. The rule is the same regardless of whether the proceeds of the loan are transferred directly by the lender to the creditor or are paid to the debtor with the understanding that they will be paid to the creditor in satisfaction of his claim, so long as such proceeds are clearly "earmarked."

Id. at 1356 (quoting 4 COLLIER ON BANKRUPTCY para. 547.25 at 547-(101-102) (15th ed.1986)). In invoking the earmarking doctrine, the court in Coral Petroleum noted that "at no time did [the debtor] have general control over the funds whereby it could independently designate to whom the money would go." Coral Petroleum, 797 F.2d at 1356.

At the outset, we reject the trustee's argument that the earmarking doctrine is no longer a viable exception to a preferential transfer under § 547(b). We have often commented that "in the absence of an intervening contrary or superseding decision by this court sitting en banc or by the United States Supreme Court, a panel cannot overrule a prior panel's decision." United States v. Lipscomb, 299 F.3d 303, 313 n. 34 (5th Cir.2002) (internal citation and quotation marks omitted). Coral Petroleum recognized the earmarking doctrine in this circuit, and there are no intervening contrary or superseding decisions from the Supreme Court or this court sitting en banc to overrule that case. The trustee points to the Supreme Court's decision in Begier v. IRS, 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990), but the Court in Begier did not question the viability of the earmarking doctrine. Instead, the Court merely clarified the definition of "property of the debtor" that is subject to the preferential transfer provision of § 547(b). Id. at 58, 110 S.Ct. 2258. The Court noted that the transfer of property that a trustee can avoid as a preference includes "property that would have been part of the estate had it not been transferred before the commencement of the bankruptcy proceedings." Id. This is virtually the same definition that we used in Coral Petroleum. See Coral Petroleum, 797 F.2d at 1355 (stating that to avoid a preference under § 547, "it is essential that the debtor have an interest in the property transferred so that the estate is thereby diminished" (internal quotation marks and citation omitted)). Accordingly, Begier did not overrule Coral Petroleum or the viability of the earmarking doctrine.⁴

In Coral Petroleum, we invoked the "control" test to determine if a payment was a preference because the money was property of the estate, or if instead the parties "earmarked" the funds for a particular creditor.⁵ Id. at 1358. Coral, the debtor, received a $35 million...