Opinion ID: 204036
Heading Depth: 1
Heading Rank: 2

Heading: Property of the Debtor

Text: We first address National Lumber's claim that the property it received from Reale Jr. was not an interest of the debtor in property within the meaning of Bankruptcy Code § 547(b), and, thus, not a transfer avoidable by the trustee as a preference. We review a bankruptcy court's findings of fact for clear error and its legal conclusions de novo. See TI Fed. Credit Union v. Delbonis, 72 F.3d 921, 928 (1st Cir. 1995). A finding is clearly erroneous when, after careful review, the reviewing court is left with the definite impression that a mistake has been made. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985). Reale Jr. filed his chapter 7 petition on December 23, 2005. The bankruptcy court found that Reale Jr. used gift funds to pay National Lumber $20,000 on September 26, 2005, in partial satisfaction of the debt Reale Jr. owed to National Lumber. The court concluded that these gift funds became Reale Jr.'s property through inter vivos transfers and entered judgment on the trustee's claim that the debtor's payment to National Lumber was a preferential transfer. A bankruptcy court may set aside a preferential transfer of property made during a certain period of time before a bankruptcy petition is filed. To avoid a preferential transfer, a trustee must prove that the transfer involved: (1) an interest of the debtor in property; (2) to or for the benefit of a creditor; (3) for or on account of an antecedent debt; (4) made while the debtor was insolvent; (5) made on or within ninety days before the date of filing bankruptcy; and (6) such transfer enables the creditor to receive more than it would have in a chapter 7 liquidation. See Advanced Testing Techs., Inc. v. Desmond (In re Computer Eng'g Assocs., Inc.), 337 F.3d 38, 45 (1st Cir. 2003). In this case, National Lumber only challenges the first element, arguing that the $20,000 payment it received was not an interest of the debtor in property. 11 U.S.C. § 547(b). In support of the argument that the bank accounts were not Reale Jr.'s, National Lumber points to evidence that the accounts were titled in his mother's name and his father's social security number was listed as the beneficiary's. When determining whether certain funds are considered an interest of the debtor in property, the ability of the debtor to exercise control over the property can be determinative. See Gray v. The Travelers Ins. Co. (In re Neponset River Paper Co.), 231 B.R. 829, 833 (B.A.P. 1st Cir. 1999) (stating that the ability to exercise control over the property is sufficient to establish ownership); see also Sigmon v. Royal Cake Co., Inc. (In re Cybermech, Inc.), 13 F.3d 818, 820-21 (4th Cir. 1994) (showing that dominion and control is sufficient to demonstrate an interest in property); Hansen v. MacDonald Meat Co. (In re Kemp Pac. Fisheries, Inc.), 16 F.3d 313, 316 (9th Cir. 1994)(looking to debtor's control over the transferred property to determine ownership). Here, the bankruptcy court determined that Reale Jr. exercised sufficient control over the funds at issue to demonstrate that they were an interest of the debtor in property. This conclusion, and the facts underlying it, are supported by the record, and we are not left with the firm impression that the bankruptcy court erred. Accordingly, the bankruptcy trustee was entitled to the funds. National Lumber raises an alternative argument based on the so-called earmarking doctrine, asserting that the $20,000 were earmarked for payment to National Lumber and therefore should not be construed as an interest of the debtor in property. Under the earmarking doctrine, if funds received by the debtor are earmarked for another, some courts have held that the funds are not really the debtor's property so that the retransfer to the final recipient is not a preference under section 547(b). See Lazarus, 478 F.3d at 15. The classic case of earmarking occurs where a guarantor advances funds to the debtor to pay off debts to other creditors, substituting itself for the old creditor. See id.; see also Kemp Pac. Fisheries, Inc., 16 F.3d at 316-17; Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356 (5th Cir. 1986). The funds, then, pass through, but not by, the debtor's hand. See Lazarus, 478 F.3d at 15. Here, because the bankruptcy court was correct in determining that the funds paid by Reale Jr. to National Lumber were his own, the earmarking doctrine does not apply. See Neponset, 231 B.R. at 835 (rejecting application of the earmarking doctrine because the debtor had sufficient control over disposition of funds).