Walters v. Stevens, Littman, Biddison, Tharp & Weinberg, LLC (In re Wagenknecht)

• Court: U.S. Court of Appeals — Tenth Circuit
• Writing for the Court: EBEL, Circuit Judge.
• Citation: Walters v. Stevens, Littman, Biddison, Tharp & Weinberg, LLC (In re Wagenknecht), 971 F.3d 1209 (10th Cir. 2020)
• Decision Date: 24 August 2020
• Docket Number: No. 19-1206,19-1206
• Parties: In the MATTER OF: Eric Theodore WAGENKNECHT; Susan Elizabeth Colbert, Debtors. Jared Walters, Trustee, Plaintiff - Appellee, v. Stevens, Littman, Biddison, Tharp & Weinberg, LLC, Defendant - Appellant.

971 F.3d 1209

In the MATTER OF: Eric Theodore WAGENKNECHT; Susan Elizabeth Colbert, Debtors.

Jared Walters, Trustee, Plaintiff - Appellee,

v.Stevens, Littman, Biddison, Tharp & Weinberg, LLC, Defendant - Appellant.

No. 19-1206

United States Court of Appeals, Tenth Circuit.

FILED August 24, 2020

Craig A. Weinberg, Stevens, Littman, Biddison, Tharp & Weinberg, LLC, Boulder, Colorado, for Defendant-Appellant.

David V. Wadsworth, Wadsworth Garber Warner Conrardy, P.C., Littleton, Colorado, for Plaintiff-Appellee.

Before BRISCOE, EBEL, and LUCERO, Circuit Judges.

EBEL, Circuit Judge.

The Chapter 7 bankruptcy trustee administering the estates of Eric Wagenknecht and his wife initiated this 11 U.S.C. § 547 preference action against the law firm of Stevens, Littman, Biddison, Tharp & Weinberg, LLC (the "Law Firm"). The bankruptcy court entered summary judgment in favor of the Trustee, and the Bankruptcy Appellate Panel for the Tenth Circuit ("BAP") affirmed. The Law Firm now appeals. Exercising jurisdiction under 28 U.S.C. § 158(d)(1), we reverse.

I. BACKGROUND

Eric Wagenknecht and his wife, Susan Colbert, filed for relief under Chapter 13 of the Bankruptcy Code on January 19, 2016¹ (the "Petition Date"). The case was converted to Chapter 7 on April 28, 2017. Jared Walters was appointed as the Chapter 7 trustee for the estate (the "Trustee").

Prior to the Petition Date, the Law Firm provided legal services to Eric. By the end of 2015, Eric owed the Law Firm over $20,000. In January 2016, Eric asked his mother, Sharon Wagenknecht, if he could borrow $21,672.65 to pay the Law Firm.² Sharon agreed to loan Eric the money for the sole purpose of paying the Law Firm. On January 11, 2016, Eric executed a promissory note to repay Sharon. The note does not place any conditions on the loan, but Sharon stated in an affidavit that she "required ... as a condition of the loan, that the entire $21,672.65 be used exclusively to pay the specific debt owed to the Law Firm and for no other purpose." (App. 17.) Sharon further stated that she "would not have made [the] loan unless the funds were used exclusively to pay the Law Firm." (Id. ) On January 14, 2016, Sharon wrote a check, drawn on her bank account, directly to the Law Firm in the amount of $21,672.65, and delivered the check directly to the Law Firm. The Law Firm cashed the check on January 15, 2016.

In January 2018, the Trustee initiated an adversary proceeding against the Law Firm. The Trustee alleged that the payment to the Law Firm was a preferential transfer under 11 U.S.C. § 547. The Trustee therefore sought to avoid and recover the payment under 11 U.S.C. §§ 547 and 550.

The parties cross-moved for summary judgment, and the bankruptcy court entered an order denying the Law Firm's motion for summary judgment and granting the Trustee's cross-motion for summary judgment.

II. STANDARD OF REVIEW

"Although this is an appeal from a BAP decision ... ‘we review only the [b]ankruptcy [c]ourt's decision.’ " Rebein v. Cornerstone Creek Partners, LLC (In re Expert S. Tulsa, LLC), 842 F.3d 1293, 1296 (10th Cir. 2016) (quoting Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete ), 412 F.3d 1200, 1204 (10th Cir. 2005) ). "We treat the BAP as a subordinate appellate tribunal whose rulings may be persuasive but are not entitled to deference." Id. We review the bankruptcy court's summary judgment ruling de novo, "examining the evidence in the light most favorable to the [nonmovant] to determine whether [the movant] established that there was ‘no genuine dispute as to any material fact’ and it was ‘entitled to judgment as a matter of law.’ " Jubber v. SMC Elec. Prods., Inc. (In re C.W. Mining Co.), 798 F.3d 983, 986 (10th Cir. 2015) (quoting Fed. R. Civ. P. 56(a) ).

III. DISCUSSION

"One of the purposes of bankruptcy law is to provide fair remedies to creditors generally, and a corollary of this principle is to prevent, within limits, a debtor from giving preferred treatment to some creditors in derogation of the interests of other, similarly situated creditors." Rupp v. United Sec. Bank (In re Kunz), 489 F.3d 1072, 1074–75 (10th Cir. 2007). The Bankruptcy Code has "long recognized and addressed the concern that a debtor could circumvent this policy by making preferential transfers before filing his bankruptcy petition." Id. at 1075. Section 547 of the Bankruptcy Code governs such preferential transfers. Under § 547(b), a trustee is empowered to avoid a "transfer of an interest of the debtor in property" under certain conditions.³ 11 U.S.C. § 547(b).

The parties agree that those conditions were met in this case. The only issue raised in this appeal is whether the payment to the Law Firm constituted a "transfer of an interest of the debtor in property" as a matter of law under § 547(b). The Bankruptcy Code does not define "an interest of the debtor in property." Parks v. FIA Card Servs., N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir. 2008). However, the Supreme Court has held that the phrase is "coextensive with property of the estate as defined in 11 U.S.C. § 541(a)(1)." Id. at 1255 n.2 (citing Begier v. IRS, 496 U.S. 53, 58–59, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) ). " 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." Id. at 1255 (alteration in original). "The 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." Id. (alterations incorporated) (quoting Baer v. Jones (In re Montgomery), 224 F.3d 1193, 1194 (10th Cir. 2000) ).

For most bankruptcy proceedings, "property interests are created and defined by state law." Id. (quoting Bailey v. Bog Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1197 (10th Cir. 2002) ). "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." Id.

In Marshall, we identified two tests to determine whether a debtor has "legal or equitable interests" in the transferred property: the "dominion/control" test and the "diminution of the estate" test. Id. at 1255. Under the dominion/control 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." Id. Under the diminution of the estate test, "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." Id. at 1256.

In Marshall, the debtors directed one of their credit card lenders—Capitol One—to repay amounts they owed to a different credit card lender—MBNA—through a balance transfer. The debtors later filed a bankruptcy petition and the appointed trustee sought to avoid the transferred funds as a preferential transfer under § 547. Because applicable state law (Kansas) did not specifically address whether debtors retain a property interest in loan proceeds used to repay another lender, we applied both the dominion/control test and the diminution of the estate test to determine whether the Marshall debtors had a legal or equitable interest in the loan proceeds. We concluded that, under both tests, the debtors had a sufficient interest in the property to support avoidance of the payment under § 547(b).

Under the dominion/control test, we concluded that "[t]he payments were a debtor's discretionary use of borrowed funds to pay another debt." Id. at 1257. Even though "the debtors never possessed a check or proceeds of a loan," the debtors exercised their discretion to draw on their Capital One line of credit, and they directed Capital One to pay MBNA. Id. at 1254. That "ability to direct [the] distribution" of the loan proceeds was evidence of the debtor's dominion or control over the proceeds. Id. at 1256. Under the diminution of the estate test, we concluded that, after the debtors exercised their discretion to draw on their Capitol One line of credit, the proceeds became "part of the estate" before they were transferred to MBNA. Id. at 1258 (quoting Begier, 496 U.S. at 58, 110 S.Ct. 2258 ). Therefore, the transfer to MBNA "deprive[d] the bankruptcy estate of resources which would otherwise have been used to satisfy the claims of creditors." Id. at 1256.

Here, we have not identified any Colorado⁴ authority addressing whether a debtor has an interest in loan proceeds used to directly pay a pre-existing creditor under the conditions presented here, where the creditor exercised exclusive control over the disbursement of the loan proceeds and those proceeds never came under the control or authority or in the possession of the debtor, even for a nanosecond. We apply Marshall's dominion/control and diminution of the estate tests to determine whether Eric had a legal or equitable interest in the payment to the Law Firm. This case presents a different set of facts than those present in Marshall, and we conclude that neither the dominion/control test nor the diminution of the estate test is satisfied here.

First, Eric did not, and could not, exercise dominion or control over the funds used to pay the Law Firm because he did not have "an ability to direct their distribution." Id. In her sworn affidavit, Sharon indicated that she retained sole control over the disbursement of these funds when she stated that she agreed to loan Eric money "for the sole purpose of paying the Law Firm." (App. 17.) She further stated that she would not have made the loan for any other purpose; "the loan was not a general line of credit that [Eric] could have used however he wanted or desired." (Id. ) Sharon offered to make the loan with the limited condition that the funds be used to pay the Law Firm, and Eric accepted that...