Opinion ID: 3048909
Heading Depth: 2
Heading Rank: 2

Heading: The Motion for Summary Judgment in the Prefer-

Text: ence Action [4] Under 11 U.S.C. § 547 the bankruptcy trustee may recover certain transfers made by the debtor within 90 days before filing for bankruptcy, if the trustee proves: (1) a transfer of an interest of the debtor in prop- erty; (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 90 days before the date of the filing of the petition; and (6) one that enables the creditor to receive more than such creditor would receive in a Chapter 7 liquidation of the estate. 1 We do not foreclose the possibility that under different circumstances, Rule 7013 might permit a creditor to bypass the proof of claim process provided by 11 U.S.C. §§ 501-02 and Rule 3001 via a counterclaim, but in this case the district court correctly affirmed the bankruptcy court’s dismissal of the counterclaim for failure to satisfy the “opposing party” requirement of Rule 13. See Collier on Bankruptcy § 7013.03 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2006). IN RE ADBOX, INC. 6683 In re Superior Stamp & Coin Co., Inc., 223 F.3d 1004, 1007 (9th Cir. 2000) (citing 11 U.S.C. § 547(b)). Such a transfer is known as an “avoidable preference” or a “preferential transfer.” Id. at 1007-09. The “earmarking doctrine” is a courtmade exception to this rule that applies when a third party advances funds to the debtor subject to an agreement requiring the debtor to use the funds to pay off another creditor. Id.; In re Sierra Steel, Inc., 96 B.R. 271, 274 (B.A.P. 9th Cir. 1989). In such circumstances, the funds are deemed “earmarked” and are not considered part the debtor’s estate. Sierra Steel, 96 B.R. at 274.
[5] The trustee argues that the Metcalfs waived their earmarking defense entirely by failing to plead it as an affirmative defense in their answer to the preference action complaint. Federal Rule of Civil Procedure 8(a) and (c) provide that a defendant’s failure to raise an “affirmative defense” in his answer effects a waiver of that defense. See Morrison v. Mahoney, 399 F.3d 1042, 1046 (9th Cir. 2005); 5 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure § 1278 (2d ed. 1990). It is not well-settled, however, whether earmarking is an affirmative defense and therefore waived if not pled in the answer. We have not directly addressed the issue and out-of-circuit cases reach contrary conclusions. Compare In re Winstar Comm’ns., Inc., 348 B.R. 234, 273 (Bankr. D. Del. 2005) (earmarking is an affirmative defense and waived because not pled in the answer), with In re Libby Int’l., Inc., 247 B.R. 463, 467 (B.A.P. 8th Cir. 2000) (“The earmarking doctrine is not strictly an affirmative defense under Section 547(c),” but rather “is derived from an element of the plaintiff’s proof . . . .” ), and In re Int’l Ventures, Inc., 207 B.R. 618, 620 (Bankr. E.D. Ark. 1997) (“[T]he earmarking doctrine is not required to be pleaded as an affirmative defense since it is an element of the plaintiff’s proof rather than an affirmative defense.”) (citations omitted). 6684 IN RE ADBOX, INC. [6] The reasoning of the Eighth Circuit’s Bankruptcy Appellate Panel in Libby International is persuasive, and we adopt it here. Earmarking is not one of the affirmative defenses enumerated in Rule 8, and we decline to construe it as such under Rule 8’s residuary clause for “any other matter constituting an avoidance or affirmative defense.”2 Properly understood, the earmarking doctrine is not an affirmative defense under Rule 8, but rather a challenge to the trustee’s claim that particular funds are part of the bankruptcy estate under 11 U.S.C. § 547. See Libby Int’l., 247 B.R. at 467. Thus, the Metcalfs did not waive their earmarking defense by failing to plead it in their answer in the preference action.
[7] As the district court noted, there is “substantial confusion” over who bears the burden of proof on an earmarking defense. The Ninth Circuit Bankruptcy Appellate Panel addressed this question in Sierra Steel, where it denied an earmarking defense because the defendant “ha[d] not traced the funds to money received by the debtor from [the lender].” 96 B.R. at 275. While the Sierra Steel court started from the general principal that the trustee has the burden of establishing that property is part of the bankruptcy estate, it also noted that the funds in question were disbursed from the defendant’s general account. Id. at 274 n.5. The source of the funds raised the presumption that the funds were property of the bankruptcy estate and the burden of proof accordingly shifted from the trustee—to establish that the funds were part of the estate 2 Rule 8 lists the following as “affirmative defenses” that are waived if not pled in the answer: accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, [and] waiver. Fed. R. Civ. P. 8(c). IN RE ADBOX, INC. 6685 —to the defendant—to show that they were not. Id. (citing In re Bullion Reserve of N. Am., 836 F.2d 1214, 1217 n.3 (9th Cir. 1988)).3 [8] We follow well-established law in holding that the trustee bears the initial burden of establishing that a transfer is an avoidable preference under § 547. See Sierra Steel, 96 B.R. at 274. If, however, the trustee establishes that the transfer of the disputed funds was from one of the debtor’s accounts over which the debtor ordinarily exercised total control, we follow the approach of Sierra Steel and find that the trustee makes a preliminary showing of an avoidable transfer “of an interest of the debtor” under § 547(b). The burden then shifts to the defendant in the preference action to show that the funds were earmarked. [9] In the present case, the Metcalfs assert an earmarking defense regarding funds first deposited in Adbox’s general account and then disbursed to the Metcalfs. Accordingly, while Adbox bore the initial burden of proving that the funds were part of the bankruptcy estate, that burden shifted to the Metcalfs when the funds were deposited into Adbox’s general account. 3 After Sierra Steel, the Ninth Circuit Bankruptcy Appellate Panel made passing reference to this issue again in In re Lee, where it noted that “[i]f [the defendant] were asserting an earmarking defense, it failed to meet its burden to present evidence on such a theory.” 179 B.R. 149, 156 n.3 (B.A.P. 9th Cir. 1995) (citing Sierra Steel, 96 B.R. at 274-75). While we acknowledge that In re Lee may be read to suggest that the defendant always bears the initial burden of proof in an earmarking defense, we do not believe such a reading is proper. In re Lee addressed earmarking only as a hypothetical, and moreover, its statement only suggests that the defendant in that case would have had the burden of proof on an earmarking defense, not that all defendants always have it. We read In re Lee to be entirely consistent with Sierra Steel and the law of this circuit, as described above. 6686 IN RE ADBOX, INC.
[10] We now turn to the merits of the motion for summary judgment in the preference action. The earmarking doctrine applies “when a third party lends money to a debtor for the specific purpose of paying a selected creditor.” Superior Stamp, 223 F.3d at 1008 (quoting In re Kemp Pac. Fisheries, Inc., 16 F.3d 313, 316 (9th Cir. 1994)). In Superior Stamp, we identified the key question for the applicability of earmarking: “whether the debtor had the right to disburse the funds to whomever it wished, or whether their disbursement was limited to a particular creditor or creditors under the agreement with the new creditor.” Id. at 1009. [11] Under Superior Stamp, the Metcalfs’ claim fails because they have not raised a genuine issue as to whether the lender (Accenta/Ernetoft) and debtor (Adbox/Wernerdal) agreed that the loan must be used to pay the antecedent debt to the Metcalfs. Because the loaned funds traced to Adbox’s general account, the burden to establishing earmarking shifted to the Metcalfs, and the Metcalfs admit that there is no direct evidence of any agreement with the lender requiring that the funds be used to satisfy the debt to them. [12] The Metcalfs argue, however, that the existence of such an agreement may be inferred from the surrounding factual circumstances. In support of this assertion, the Metcalfs cite Ernetoft’s testimony that “Christer [Wernerdal] came to me and he needed . . . some money. I think it was for paying Mr. Metcalf,” that Adbox needed the loan because “they had this [sic] $22,000 as they said they will use to pay off Mr. Metcalf,” and that it was his understanding that Whitburn used the loan proceeds “to pay the amount that was owing [sic] to Mr. Metcalf.” However, the Metcalfs identify no evidence that the loan was in any way conditioned on its being used to pay the debt to them; no direct evidence of any agreement between Ernetoft, Wernerdal, or Whitburn that the funds be so used; and no evidence that Wernerdal’s (and Adbox’s) IN RE ADBOX, INC. 6687 use of and control over the funds was in any way constrained. Because the Metcalfs bore the burden of proof on their earmarking defense, it was their burden at the summary judgment stage to identify “specific facts showing that there is a genuine issue for trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986) (internal quotation marks omitted). The Metcalfs have not met this burden, and the district court properly affirmed the grant of summary judgment in the trustee’s favor.