Opinion ID: 727230
Heading Depth: 2
Heading Rank: 2

Heading: The Jasmins' Instruction to LSB

Text: 31 The trustee argues that even in the absence of possession of the loan proceeds, Kelton Motors did have a property interest in the proceeds of the Jasmin Loan because the Jasmins signed the July 29 Document which directed LSB to pay the loan proceeds as directed by Charlie Kelton. The Bank of Vermont responds, however, that no contractual rights were created in Kelton Motors because the July 29 Document mentions only Charlie Kelton and not Kelton Motors. Furthermore, the Bank of Vermont argues, the July 29 Document by its own terms did not create an enforceable legal or equitable interest in either Charlie Kelton or Kelton Motors. 32 Because the bankruptcy court's findings with regard to the July 29 Document are unclear, we cannot conclude, as a matter of law, that the document either did or did not create rights in Kelton Motors that constitute property of the estate. In its written decision on the Bank of Vermont's renewed motion for summary judgment, the bankruptcy court found that [t]he Jasmins ... placed no written restrictions on Mr. Kelton's use of the funds and that Mr. Kelton, as president of [the] Debtor, maintained sufficient control over the loan proceeds to place the transaction outside the narrowly defined earmarking doctrine and therefore within the reach of [the] Trustee's avoiding powers. Kelton Motors I, 153 B.R. at 429. Because of the unambiguous language of the July 29 Document and other evidence that the parties submitted, the court concluded that the Bank of Vermont has not alleged facts that, even when read in a light most favorable to [it], could meet its burden of showing that [LSB] maintained strict control over the funds that it advanced to Debtor. Id. 33 In its ruling from the bench after trial, however, the court found that the Kelton Loan was nonetheless outside of Kelton Motors's estate. The court stated: 34 I'm reversing--I'm not reversing myself on Jasmin. What I'm saying is there's double earmarking, that Jasmin clearly designated that [Charlie] Kelton had control of [the Jasmin Loan]. But when you c[o]me to the next step, the Bank could still control the [disbursement] of the funds, and that's still earmarking; so the entire loan is earmarked. 35 Any contractual rights created by the July 29 Document in Kelton Motors would bring the Jasmin Loan proceeds within the Kelton Motors estate. See, e.g., National Union Fire Ins. v. Titan Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325, 328-29 (8th Cir.1988) (insurance policies constitute property of debtor's estate). There are at least three different ways to interpret the July 29 Document. First, it might be the written record of a contract between the Jasmins and Kelton Motors that gave Kelton Motors the right to use the Jasmin Loan proceeds as it wished. This is the interpretation that the bankruptcy court implied it was accepting in its decision on the renewed summary judgment motion in March 1993. Kelton Motors I, 153 B.R. at 429. 36 Second, the July 29 Document could be construed as a gratuitous assignment by the Jasmins to Kelton Motors. Although an assignment usually requires consideration in order to be effective, see 6 Am.Jur.2d Assignments 82, at 263 (1963), an assignment may pass by gift, without consideration, when completed by delivery, id. § 90, at 272 (footnote omitted). Thus, if the letter was indeed a valid gift assignment of the loan proceeds to Kelton Motors (and not just Charlie Kelton), the letter would constitute a property interest in favor of Kelton Motors. 37 Finally, the July 29 Document might be viewed as creating no rights in Kelton Motors. The document makes no mention of Kelton Motors and refers only to Charlie Kelton. 2 This may be a simple drafting error or may constitute the true intent of the parties. In addition, the document may not suffice to constitute an assignment, even to Charlie Kelton. Although an assignment requires [n]o words of art and no special form of words are necessary to effect an assignment, the assignment must still indicate[ ] the intention of the owner of a claim ... to transfer it.... 6 Am.Jur.2d Assignments § 82, at 263 (footnote omitted). 38 The bankruptcy court's findings on the renewed motion for summary judgment and at trial do not address these issues. The bankruptcy court focused only on Charlie Kelton's control over the funds and even then found at trial that LSB had superior control, i.e., LSB could not be forced by Charlie Kelton to disburse the proceeds. The court also failed to address the legal basis for Charlie Kelton's control--either a contract with the Jasmins or an assignment by the Jasmins. Finally, the bankruptcy court made no ruling at trial as to whether Charlie Kelton was acting as the agent of Kelton Motors when he directed that payment be made to the Bank of Vermont. Because these are issues of fact essential to any decision on the status of the Jasmin Loan, we vacate the judgment as to the Jasmin Loan for a determination of these issues by the bankruptcy court in the first instance. 39 We note that if the bankruptcy court determines that the July 29 Document did indeed create a property interest in favor of Kelton Motors, the court must also determine whether the earmarking defense applies to the transfer from the Jasmins to Kelton Motors. The earmarking doctrine applies only where a third party lends money to the debtor for the specific purpose of paying a selected creditor. In re Smith, 966 F.2d at 1533. 3 In this scenario, because the transfer to Kelton Motors is from the Jasmins, and not from LSB, then the bankruptcy court must consider whether the Jasmins transferred their interest in the Jasmin Loan proceeds to Kelton Motors for the specific purpose of paying the Bank of Vermont. If so, the earmarking doctrine may apply; if not, then a voidable preferential transfer exists.