September 7, 2018, Northern District of Texas – Debtor Dependable Auto Shippers, Inc. (“DAS”) was a vehicle transport company that contracted both with individuals and with corporate customers. Individual customers paid DAS when they hired the company to transport their vehicles but DAS would bill corporate customers, issuing invoices payable within thirty days. The Debtor filed for bankruptcy and the dispute centered on the Debtor’s pre-bankruptcy use of its corporate accounts receivable to obtain money to run its business.
The Trustee sued Defendant TBK and Schiff to avoid and recover certain transfers as preferential and fraudulent transfers under Bankruptcy Code §§ 547(b) and 548(a)(1). The Defendants’ asserted defenses, arguing that the Transfers were not avoidable under either Bankruptcy Code provision because (i) the earmarking defense meant the transferred funds were not property of the Debtor and (ii) the transfers did not “enable the Defendants to receive more than they would otherwise have received if the transfer had not been made and the case had proceeded under Chapter 7,” an essential element of both §§ 547(b) and 548(a)(1) avoidance claims
The Trustee contended that because the agreement did not explicitly obligate the Debtor to use the creditor’s funds to repay the Defendant, the Debtor had dominion over the money and with it unfettered discretion to pay any creditor of its choosing. The Defendants, in contrast, argued that the alleged funds were earmarked to pay off the Debtor’s debt to the Defendant, a condition precedent to creditor’s providing post-petition funding to the Debtor. Therefore, they argued that the Debtor lacked control over the alleged funds before they were transferred to the Defendants.
The Court held in favor of the Defendants and reasoned that the transfer of money from one of the Debtor’s creditors to the Defendant to pay off the Debtor’s debt to the Defendant was not a preferential transfer under 11 U.S.C.S. § 547 or a fraudulent transfer under 11 U.S.C.S. § 548 because, under the earmarking doctrine, it was not a transfer of an interest of the Debtor in property. Further, the Court stated that even if assuming for the sake of argument that the Defendants did not make out a case for the earmarking defense, the Defendants still did not receive more than they would have had the Debtor liquidated under Chapter 7. The Court reasoned that the other creditor’s collateral was worth more than the amount that the Trustee hoped to avoid as a preference
The Court held that the Defendants were entitled to summary judgment on their earmarking defense and each of the Trustee’s claims.