Kelton Motors, Inc., In re

Citation97 F.3d 22
Decision Date25 September 1996
Docket NumberNo. 1606,D,1606
Parties, 30 UCC Rep.Serv.2d 1032 In re KELTON MOTORS, INC. Gleb GLINKA, Trustee of the Estate of Kelton Motors, Inc., Plaintiff-Appellant, v. BANK OF VERMONT, Defendant-Appellee. ocket 95-5091.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 22

97 F.3d 22
29 Bankr.Ct.Dec. 1009, 30 UCC Rep.Serv.2d 1032
Gleb GLINKA, Trustee of the Estate of Kelton Motors, Inc.,
BANK OF VERMONT, Defendant-Appellee.
No. 1606, Docket 95-5091.
United States Court of Appeals,
Second Circuit.
Argued June 12, 1996.
Decided Sept. 25, 1996.

Page 23

Gleb Glinka, Glinka & Schwidde, Cabot, VT (John J. Kennelly, Carroll, George & Pratt, Rutland, VT, on the brief), for Plaintiff-Appellant.

Philip D. Saxer, Saxer Anderson Wolinsky & Sunshine, P.C., Burlington, VT, for Defendant-Appellee.

Before LUMBARD, ALTIMARI, and WALKER, Circuit Judges.

WALKER, Circuit Judge:

Plaintiff Gleb Glinka, the trustee for debtor Kelton Motors, Inc. ("Kelton Motors"), appeals from an order of the United States District Court for the District of Vermont (J. Garvan Murtha, Chief District Judge ) that affirmed the judgment of the United States Bankruptcy Court for the District of Vermont (Francis G. Conrad, Bankruptcy Judge ). On appeal, Glinka contends that the proceeds of two loans made by defendant Bank of Vermont, totaling $2,948,255.52, constitute a preferential transfer under 11 U.S.C. § 547(b). The Bank of Vermont argues that no preferential transfer occurred because (1) the loan proceeds were never part of Kelton Motors's estate and (2) even if they were part of the estate, the loan proceeds were earmarked for the payment of other creditors.

We affirm in part, and vacate and remand in part.


Starting with a single General Motors truck franchise in the mid-1950s, Carl "Charlie" Kelton, largely through acquisitions of other dealerships, built his network of dealerships into the largest one in Vermont. In the course of acquiring his empire, however, Charlie Kelton and Kelton Motors incurred a large debt, and in 1988 Kelton Motors became financially distressed.

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In February 1988, Charlie and his wife Shirley opened a checking account at the Bank of Vermont on behalf of Charlie Kelton Chrysler Plymouth Dodge of Brattleboro, Inc. (the "Brattleboro Dealership"). After a period of time, however, they began to use the account for other Kelton corporations, including the debtor. In July 1988, Kelton Motors deposited into the account numerous checks drawn on other accounts belonging to other corporations owned by Charlie. The Bank of Vermont then granted Kelton Motors provisional credits based on these deposits. At the same time, numerous checks were written against the account, drawing against the provisional credits. The Bank of Vermont's decision to grant the provisional credits proved to be unwise: many of the checks deposited into the account were not paid because they were drawn on accounts elsewhere that had insufficient funds. As a result, by July 26, 1988, the account had a negative balance of $3,679,427.18. On that same date, the Bank of Vermont brought an action in Vermont Superior Court to recover the overdrafts naming as defendants the Brattleboro Dealership, the debtor Kelton Motors, Charlie and Shirley Kelton, the other Kelton corporations, and Richard A. Crate, who was a signatory on the account at the bank. Also on that date, the court granted the Bank of Vermont an ex parte attachment against all the named defendants.

Immediately after the suit was filed, Charlie Kelton entered into negotiations with the Bank of Vermont to resolve the dispute. Simultaneously, Charlie approached Lydonville Savings Bank ("LSB")--an institution with which Charlie and Kelton Motors had a long-standing relationship--to obtain a $3,000,000 loan to repay the Bank of Vermont. Although LSB refused to make a loan directly to Charlie due to his insufficient assets, LSB agreed to make two other loans, in the amount of $1,500,000 each. The first loan was made on July 28 to Alfred and Carol Kelton (the "Kelton Loan"). Alfred and Carol Kelton are relatives of Charlie but have no interest in any Kelton corporation. The Kelton Loan was evidenced by a promissory note. In addition, the Kelton Loan was secured by a number of mortgages owned by or given by Charlie and Shirley Kelton, mortgages on various other dealerships owned by Charlie and Shirley Kelton, and property owned by Kelton Motors. The bankruptcy court found that the total value of the security for the Kelton Loan was $1,998,169.27, with the property owned by Kelton Motors worth $18,645.

LSB made the second loan on July 29 to Raymond, Janice, and Peter Jasmin (the "Jasmin Loan"). The Jasmins are friends of Charlie Kelton and also have no interest in the Kelton corporations. The Jasmin loan was collateralized by a commercial property owned by the three Jasmins; no property of Kelton Motors, Charlie Kelton, or Shirley Kelton was used as security. In a written document dated that same day (the "July 29 Document"), however, the Jasmins instructed LSB to pay the proceeds of the loan "as directed by [Charlie] Kelton."

On August 1, 1988, the Bank of Vermont, the Brattleboro Dealership, Charlie Kelton, and Shirley Kelton entered into a settlement agreement whereby, in exchange for the proceeds of the two loans, the Bank of Vermont agreed to dismiss the state court action with prejudice. That same day, LSB issued two treasurer checks, made payable to Kelton Motors, reflecting the proceeds of the loans. At the closing, the attorney for LSB produced the checks. Charlie Kelton then endorsed the checks as the agent of Kelton Motors and they were delivered to the Bank of Vermont.

On October 27, 1988, an involuntary bankruptcy petition was filed for Kelton Motors. The case subsequently was converted to a Chapter 7 liquidation and Glinka was appointed trustee. On March 3, 1990, the trustee filed this adversary proceeding, claiming that the payment of the loan proceeds constituted either a fraudulent conveyance or a preferential transfer. In October 1991, the Bank of Vermont moved for summary judgment and, after an initial denial, renewed the motion in December 1992. The bankruptcy court, in a written decision, granted in part and denied in part the renewed motion. Glinka v. Bank of Vermont (In re Kelton Motors, Inc.), 153 B.R. 417 (Bankr.D.Vt.1993) ("Kelton Motors I "). After

Page 25

a bench trial on January 19 and 20, 1995, the bankruptcy court concluded that the trustee had failed to prove that Kelton Motors had a property interest in the loan proceeds. Alternatively, the bankruptcy court found that even if such a property interest existed, no preference existed because the Bank of Vermont had established a valid defense under the so-called "earmarking doctrine." Under the earmarking doctrine, where a third party lends money to a debtor for the purpose of paying a specific creditor, the loan is not a preferential transfer. Instead the third party simply is substituted for the original creditor. See In re Smith, 966 F.2d 1527, 1533 (7th Cir.) (describing the earmarking doctrine), cert. dismissed, 506 U.S. 1030, 113 S.Ct. 683, 121 L.Ed.2d 604 (1992); Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1355-56 (5th Cir.1986) (same); cf. Smyth v. Kaufman (In re J.B. Koplik & Co.), 114 F.2d 40, 42-43 (2d Cir.1940) (concluding that unconditional loans to creditor were not earmarked).

Glinka appealed to the district court, which affirmed in a reported opinion. See 188 B.R. 125 (Bankr.D.Vt.1995) ("Kelton Motors II "). The district court agreed with the bankruptcy court that the trustee had failed to "meet his burden of demonstrating the debtor's interest in these funds." Id. at 129. Glinka now appeals the district court's judgment, again asserting that Kelton Motors had a valid interest in the loan proceeds and that the earmarking doctrine does not apply.


"Our review of the orders of district courts in their capacity as appellate courts in bankruptcy cases is plenary." South Street Seaport, Ltd. v. Burger Boys, Inc. (In re Burger Boys, Inc.), 94 F.3d 755, 759-60 (2d Cir.1996) (quotation omitted). Therefore, we review the district court's determinations of law de novo and its determinations of fact for clear error. Id.

Although the trustee's complaint in the bankruptcy court sought to recover the proceeds of the Kelton and Jasmin Loans as both a fraudulent conveyance and a preferential transfer, on appeal the trustee only asserts his preferential transfer claim. Section 547(b) of the Bankruptcy Code provides that

the 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 filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; 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 Bank of Vermont contends, and the lower courts agreed, that no voidable preferential transfer...

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