In re Marshall

• Decision Date: 30 December 2008
• Docket Number: No. 08-3080.,08-3080.
• Citation: 550 F.3d 1251
• Parties: In re Bryan K. MARSHALL and Julie M. Marshall, Debtors. Linda S. Parks, Trustee, Plaintiff-Appellant, v. FIA Card Services, N.A., Successor in interest to MBNA Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

550 F.3d 1251

In re Bryan K. MARSHALL and Julie M. Marshall, Debtors Linda S. Parks, Trustee, Plaintiff-Appellant, v. FIA Card Services, N.A., Successor in interest to MBNA Corporation, Defendant-Appellee.

No. 08-3080.

United States Court of Appeals, Tenth Circuit.

December 30, 2008.

Gaye B. Tibbets (with Jennifer Goheen-Lynch on the briefs) of Hite, Fanning & Honeyman, L.L.P., Wichita, KS, for Plaintiff-Appellant.

Elizabeth A. Carson (with Petra H. Johnson on the briefs) of Bruce, Bruce & Lehman, L.L.C., Wichita, KS, for Defendant-Appellee.

Before TACHA, BRISCOE, and O'BRIEN, Circuit Judges.

O'BRIEN, Circuit Judge.

During the ninety-day period prior to filing of their Chapter 7 bankruptcy petition, Bryan and Julie Marshall (Debtors) used their Capital One credit card accounts to make payments on their MBNA credit card accounts. Linda Parks, the bankruptcy Trustee, filed an adversary complaint against MBNA (now FIA Card Services) seeking to avoid the payments as preferential transfers under 11 U.S.C. § 547(b). The bankruptcy court concluded the payments were not preferential transfers; the district court agreed. We reverse.¹

I. BACKGROUND

The parties stipulated to the following facts. Debtors had two credit card accounts with MBNA: 6264 and 7781. They also had two credit card accounts with Capital One—a Platinum MasterCard account with a $30,000 line of credit and a Platinum Visa account with a $25,000 line of credit. On July 27, 2005, Debtors directed Capital One to pay MBNA $17,000 on the 6264 MBNA account through a balance transfer from their Capital One Platinum MasterCard account. On the same day, they directed Capital One to pay MBNA $21,000 on the 7781 MBNA account through a balance transfer from their Capital One Platinum Visa account.

On October 13, 2005, Debtors filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code. Parks was appointed Trustee. Because Debtors' payments to MBNA were made within ninety days of the filing of the bankruptcy petition (referred to as the preference period), Parks filed an adversary complaint against MBNA seeking to avoid these payments as preferential transfers under 11 U.S.C. § 547(b). Shortly thereafter, FIA Card Services (FIA), MBNA's successor-in-interest, was substituted as the defendant.

The bankruptcy court determined Debtors' payments to MBNA were not preferential transfers because they did not constitute transfers of an interest of Debtors in property as required by 11 U.S.C. § 547(b):

[T]he funds paid to . . . MBNA were assets of Capit[a]l One in which the Debtors did not have an interest for purposes of § 547. Debtors merely exercised an offer to transfer credit card balances; this offer, if not exercised as of the date of filing, would have added no value to the estate. The transfer was a mere substitution of creditors which had no impact on either the property of the estate or the value of the claims asserted against the estate.

(R.App. at 80-81.) Parks appealed to the district court.

The district court affirmed the bankruptcy court's decision but analyzed the case under the earmarking doctrine which, in its broadest terms, exempts a debtor's use of borrowed funds from the Trustee's avoidance powers when those funds are lent for the purpose of paying a specific debt. In doing so, it looked to the amount of control Debtors exercised over the payments to MBNA and whether the transfer of those payments diminished the bankruptcy estate. It thought Debtors lacked the requisite control over the payments for them to constitute interests of Debtors in property:

It is undisputed that the debtors never possessed a check or proceeds of a loan. Capital One was under no obligation to cooperate with the debtors' request. The debtor[s] could not compel Capital One to make a payment. Nonetheless, Capital One chose to make a payment directly and specifically to MBNA on the debtors' behalf and essentially substituted itself as the debtors' creditor for the MBNA debt under the terms agreed [to] through the balance transfer agreement. The Court finds this to be a bank to bank transfer resulting in a substitution of the debtors' creditors.

(Id. at 156-57 (footnote omitted).) The district court also concluded that because there was never a transfer of assets, only credit, the bankruptcy estate was not diminished.

II. DISCUSSION

Addressing preferences, § 547(b) of the Bankruptcy Code states in relevant part:

[T]he trustee may avoid any transfer of an interest of the debtor in property —

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—(A) on or within 90 days before the date of the filing of the petition; . . . and

(5) that enables such creditor to receive more than such creditor would receive if—

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b). The purpose of the statute is two-fold: (1) "to secure an equal distribution of assets among creditors of like class" and (2) "to discourage actions by creditors that might prematurely compel the filing of a [bankruptcy] petition." Gillman v. Scientific Research Prods., Inc., of Del. (In re Mama D'Angelo, Inc.), 55 F.3d 552, 554 (10th Cir.1995). The Trustee bears the burden of proving the avoidability of a transfer under § 547(b). See 11 U.S.C. § 547(g). If the Trustee succeeds, 11 U.S.C. § 550(a) allows her to recover the transferred property for the benefit of the estate.

Only the threshold requirement of 11 U.S.C. § 574(b) is at issue here, i.e., whether the payments made to Debtors' MBNA credit card accounts from their Capital One credit card accounts constitute transfers of "an interest of the debtor in property." This is a legal issue we review de novo. See Morris v. Hicks (In re Hicks), 491 F.3d 1136, 1139 (10th Cir. 2007).

The Bankruptcy Code does not define "an interest of the debtor in property." However, in Begier v. IRS, the Supreme Court said:

Because the purpose of the avoidance provision is to preserve the property includable within the bankruptcy estate—the property available for distribution to creditors—"property of the debtor" subject to the preferential transfer provision is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings. For guidance, then, we must turn to § 541, which delineates the scope of "property of the estate" and serves as the postpetition analog to § 547(b)'s "property of the debtor."

496 U.S. 53, 58-59, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990).² Section 541(a)(1) provides that the property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case" wherever located and by whomever held. "[T]he scope of [§] 541 is broad and should be generously construed[;] . . . an interest may be property of the estate even if it is novel or contingent." Baer v. Jones (In re Montgomery), 224 F.3d 1193, 1194 (10th Cir.2000) (quotations omitted).

"For purposes of most bankruptcy proceedings, property interests are created and defined by state law. Once that state law determination is made, however, we must still look to federal bankruptcy law to resolve the extent to which that interest is property of the estate." Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1197 (10th Cir.2002) (citations and quotations omitted). We have uncovered no Kansas authority specifically addressing the issue presented here but, in general, the right to use an item or to control its use is a property interest. See J.A. Tobin Constr. Co. v. Holtzman, 207 Kan. 525, 485 P.2d 1276, 1281 (Kan.1971) ("The ownership of an item of property carries with it the right to use, or to control the use of, that item of property. Therefore, where one has been wrongfully deprived of the use of an item of property there has been a loss of one of the valuable rights or interests in property—the right to use the property.").³

Courts have used this dominion/control test to determine whether a transfer of property was a transfer of "an interest of the debtor in property." See, e.g., McLemore v. Third Nat'l Bank in Nashville (In re Montgomery), 983 F.2d 1389, 1395 (6th Cir.1993); In re Smith, 966 F.2d 1527, 1531 (7th Cir.1992). Under this test, a transfer of property will be a transfer of "an interest of the debtor in property" if the debtor exercised dominion or control over the transferred property. See id.

Other courts have applied a diminution of the estate test. See, e.g., Southmark Corp. v. Grosz (In re Southmark Corp.), 49 F.3d 1111, 1116-17 (5th Cir. 1995); Hansen v. MacDonald Meat Co. (In re Kemp Pac. Fisheries, Inc.), 16 F.3d 313, 316 (9th Cir.1994); Manchester v. First Bank & Trust Co. (In re Moses), 256 B.R. 641, 645 (B.A.P. 10th Cir.2000). Under this analysis, a debtor's transfer of property constitutes a transfer of "an interest of the debtor in property" if it deprives the bankruptcy estate of resources which would otherwise have been used to satisfy the claims of creditors. See id. "[I]f the debtor transfers property that would not have been available for distribution to his creditors in a bankruptcy proceeding, the policy behind the avoidance power is not implicated." Begier, 496 U.S. at 58, 110 S.Ct. 2258.

As both the district court and bankruptcy court acknowledged, their conclusion that the credit card payments in this case were not transfers of "an interest of [Debtors] in property" represents the minority view. The majority of courts to address the issue have gone the other way. See, e.g., Meoli v. MBNA Am. Bank, N.A. (In re Wells), 382 B.R. 355 (B.A.P. 6th Cir. 2008); Parks v. Boeing Wichita Credit Union (In re...