In re Safe-T-Brake of South Florida, Inc.

• Decision Date: 13 October 1993
• Docket Number: Bankruptcy No. 90-25733-BKC-AJC. Adv. No. 92-1016-BKC-AJC-A.
• Citation: 162 BR 359
• Parties: In re SAFE-T-BRAKE OF SOUTH FLORIDA, INC., Debtor. Marika TOLZ, Trustee, Plaintiff, v. BARNETT BANK OF SOUTH FLORIDA, N.A., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

162 B.R. 359 (1993)

In re SAFE-T-BRAKE OF SOUTH FLORIDA, INC., Debtor Marika TOLZ, Trustee, Plaintiff, v. BARNETT BANK OF SOUTH FLORIDA, N.A., Defendant.

Bankruptcy No. 90-25733-BKC-AJC. Adv. No. 92-1016-BKC-AJC-A.

United States Bankruptcy Court, S.D. Florida.

October 13, 1993.

Reggie David Sanger, Fort Lauderdale, FL, for trustee.

Janie Locke Anderson, Coll, Davidson, Carter, Smith, Salter & Barkett, Miami, FL, for Barnett Bank.

MEMORANDUM OPINION AND ORDER

ROBERT E. GINSBERG, Bankruptcy Judge.

This matter comes before the court on cross motions of the trustee, Marika Tolz, plaintiff in this adversary proceeding to recover an alleged preference, and the defendant in the adversary, Barnett Bank of South Florida, N.A., for summary judgment brought under Fed.R.Civ.P. 56, made applicable to adversary proceedings in bankruptcy cases by Fed.R.Bankr.P. 7056. For the reasons stated below, this court denies the Trustee's motion for summary judgment and grants Barnett Bank's cross motion for summary judgment.

FACTS

Safe-T-Brake of South Florida, Inc. ("Debtor") was a wholesale brake shoe manufacturer and reconstructor. In early 1988, the Debtor experienced rapid growth and found itself in need of extra operating funds. On April 15, 1988, the Debtor obtained a revolving line of credit from Barnett Bank of South Florida, N.A. ("Defendant"). The loan provided the Debtor with necessary working capital. It was secured by a blanket security interest in the Debtor's assets, including after-acquired property. Barnett perfected its security interest on April 15, 1988 by filing a UCC-1 Financing Statement with the Florida Secretary of State. In addition, the loan was personally guaranteed by Debtor's principals and/or shareholders Wallace Millman, Anthony Ferrante, Francis Pulini, and Jeanette Millman, Wallace Millman's wife.

The loan provided the Debtor with a working capital line of credit in the amount of $2.5 million. Thereafter, from time to time, the Debtor borrowed additional funds from Barnett, also secured by Barnett's perfected blanket security interest in the Debtor's assets. This relationship continued until late 1989, when Barnett refused to renew the Debtor's obligations to the bank. The Debtor obviously had no choice but to find another lender if it hoped to stay in business. In early 1990, the Debtor began negotiations with SunBank of South Florida, N.A. ("SunBank"). As a result of these negotiations, the Debtor entered into an asset-based lending agreement with SunBank in March 1990.

Under the terms of the Revolving and Term Loan and Security Agreement ("the Agreement"), SunBank was to extend to the Debtor up to $3,500,000.00 in funds for operating capital, as well as a $255,000.00 term loan. Pursuant to the Agreement, SunBank required a first priority lien in the Debtor's assets including assets that were subject to Barnett's prior lien. There is no suggestion anywhere in the record that Barnett was willing to subordinate its first priority lien claim on the Debtor's assets. Therefore, the only way that SunBank could have the first priority lien on the Debtor's assets would be by somebody paying off the Barnett loan. As of the closing of the SunBank loan, March 5, 1990, the total amount the Debtor owed Barnett was $3,271,125.63.

Of course, the Debtor did not have, nor could it borrow, sufficient funds to both close the SunBank loan and pay off Barnett independent of the SunBank loan transaction. Thus, at least nominally at the request of the Debtor, the loan Closing Statement and Disbursement Schedule instructed SunBank to pay directly to Barnett sufficient funds to completely satisfy its obligations to Barnett.

To that end, Debtor requested pay off figures from Barnett, which Barnett supplied. The Debtor obtained the necessary information from Barnett, and, at the time the SunBank loan was funded, the Debtor's principal signed the Closing Statement. This Closing Statement authorized SunBank to transfer from the loan proceeds enough money to satisfy the Debtor's obligations to Barnett. SunBank made the transfer by wire on March 5, 1990. Thereafter, every time the Debtor wished to draw upon its line of credit with SunBank, the Debtor's principal would call in and provide verbal authorization. Another loan report would be issued bearing the signature of the Debtor's principal, and the disbursement of funds would be authorized.

Approximately four months after the loan closing, SunBank discovered that the Debtor's principals had been fraudulently overstating the size and extent of the Debtor's inventory and accounts receivable. Not surprisingly, SunBank called the loan. Of course, the Debtor was unable to repay to SunBank the full amount of the debt it owed SunBank, and on August 20, 1990, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On September 5, 1990, the case was converted to Chapter 7 and Marika Tolz appointed Chapter 7 Trustee. On October 9, 1992, the Trustee filed the instant complaint against Barnett, seeking to recover the wire transfer SunBank had made to Barnett on March 5, 1990 as an avoidable preference under section 547(b) of the Bankruptcy Code.

In support of its motion for summary judgment, Barnett relies on the "earmarking doctrine" which it says protects the payment it received from SunBank on the Debtor's behalf on March 5, 1990 from being avoided as a preference. In support of her motion for summary judgment, the Trustee contends that the record does not support the application of the earmarking doctrine in the instant proceeding. Instead, she contends, the facts demonstrate that the transfer of funds from the Debtor to Barnett was a preference and thus voidable under section 547(b) of the Bankruptcy Code.

JURISDICTION AND PROCEDURE

The court has jurisdiction over this matter under 28 U.S.C. § 1334 as a matter arising under § 547 of the Bankruptcy Code. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(F) and is before the court pursuant to the Standing Order of Reference of the United States District Court for the Southern District of Florida automatically referring bankruptcy cases and proceedings to this court for hearing and determination.

STANDARD FOR SUMMARY JUDGMENT

Under Fed.R.Civ.P. 56(c), made applicable to bankruptcy proceedings by Fed. R.Bankr.P. 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). On a summary judgment motion, the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). There is no genuine issue for trial if the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party. Matsuhita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).

DISCUSSION

I. Voidable Preferences

The elements of a voidable preference are set forth in section 547(b) of the Bankruptcy Code. That section sets out five specific enumerated elements the trustee must allege and prove in order to establish that the transfer in question is a voidable preference. Sections 547(b) and (g) require the trustee to prove that the transfer in question was:

(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 within 90 days before the date of the filing of the petition, or within one year before the date of the filing of the petition, if the creditor was an "insider" at the time of the transfer, and

(5) the transfer enables the creditor to receive a greater percentage of its claim than that creditor would have received had the transfer not taken place and the debtor\'s assets been liquidated in a Chapter 7 case.

The trustee has the burden of proving each of the elements of section 547(b) by a preponderance of the evidence in order to avoid the transfer in question. See § 547(b), (g); In re Prescott, 805 F.2d 719, 726 (7th Cir.1986); see also Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

There is, however, a sixth element that the trustee must prove to establish that a transfer is a voidable preference. While this sixth element is not specifically identified and enumerated, as are the other elements of a voidable preference in section 547(b), it nevertheless appears clearly in the introductory language in section 547(b). The Bankruptcy Code requires the trustee to establish by a fair preponderance of the evidence that there was a transfer of ". . . an interest of the debtor in property." See § 547(b). The law is clear that if a third party chooses for whatever reason to use its own property, in which the debtor has no interest, to pay one or more of the debtor's creditors, even if the other five elements of a voidable preference are established, the transfer cannot be recovered by the trustee. See e.g. Coral Petroleum Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356 (5th Cir.1986); In re Hartley, 825 F.2d 1067, 1070-1071 (6th Cir.1987). This notion, that the trustee must show a transfer of an interest of the debtor in property, becomes particularly important in the application of the "earmarking doctrine" in proceedings to avoid a transfer as a preference.

Under the earmarking doctrine, a transfer cannot be avoided where a third party makes a transfer of its property directly to one or more of the debtor's creditors or transfers property to the debtor with the clear agreement that the property transferred is...