In Re Reale

United States Court of Appeals
For the First Circuit

No. 08-9010

In re: RICHARD A. REALE, JR.,

Debtor,
____________________

LYNNE F. RILEY, Chapter 7, Trustee,

Appellee,

v.

NATIONAL LUMBER COMPANY,

Appellant.

APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT

Before

Boudin, John R. Gibson,* and
Howard, Circuit Judges.

Mark E. Barnett for appellant.
Lynne F. Riley for appellee.

October 15, 2009

*
Of the Eighth Circuit, sitting by designation.
 JOHN R. GIBSON, Circuit Judge. This is an action by a

bankruptcy trustee to recover money paid to a creditor. The

trustee argues that the payment in question was a preferential

transfer and is avoidable under the Bankruptcy Code, 11 U.S.C. §

547(b). The bankruptcy court entered a $20,000 preference recovery

judgment against National Lumber Company ("National Lumber"). The

United States Bankruptcy Appellate Panel for the First Circuit

affirmed the bankruptcy court's judgment. We affirm.

I. Background

Richard A. Reale Jr. (“Reale Jr.”) was a partial owner of WSI

Contracting, Inc. (“WSI”), a company that did business with

National Lumber. In late 2000, WSI purchased materials from

National Lumber, and National Lumber extended credit to WSI that

was personally guaranteed by Reale Jr. and others. A dispute

concerning the account arose, and National Lumber filed suit to

recover the balance that Reale Jr. and others owed to it for

materials purchased. Eventually, National Lumber agreed to settle

with Reale Jr. and the other parties. On September 26, 2005, Reale

Jr. tendered a $20,000 treasurer's check to National Lumber in

partial satisfaction of his portion of the agreement. The funds

that Reale Jr. paid were drawn from bank accounts titled in the

name of Reale Jr.’s mother, Helen Reale. In addition, the accounts

listed the name Richard A. Reale, a name shared by Reale Jr. and

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his father, as the beneficiary. The beneficiary’s social security

number, however, was that of Reale Sr.

Reale Jr.’s mother had previously sought and obtained

authority from the Probate and Family Court to make gifts to Reale

Jr. from the estate of Reale Jr.’s grandmother as a means of

reducing the estate’s tax liability. Reale Jr. stated that he knew

he had funds on deposit at the Village Bank and that he was aware

that the funds had been given to him by his late grandmother. Both

Reale Jr.’s mother and Reale Sr. testified1 that although the

accounts were titled in the name of Reale Jr.’s mother and listed

Reale Sr.’s social security number as the beneficiary’s, the money

was actually Reale Jr.’s and could be used for anything he wanted.

Although one bank employee testified that the funds were payable on

death accounts and that under applicable bank policies Reale Jr.

could not access the funds without the signature of Reale Jr.’s

mother, a bank manager who knew the family well permitted Reale Jr.

to withdraw the funds. Following the $20,000 payment to National

Lumber, Reale Jr. transferred the $2,761 that remained in the

accounts to his personal checking account and used the money to pay

various small bills.

On December 23, 2005, Reale Jr. filed a voluntary chapter 7

petition. The trustee brought an adversary proceeding against

1
Due to illness, Helen Reale was not able to testify at trial,
but her deposition testimony was admitted as evidence.

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National Lumber to recover Reale Jr.’s $20,000 payment as an

avoidable preference under section 547(b) of the Bankruptcy Code.

After conducting the trial, but before issuing a decision, the

bankruptcy judge who heard the matter resigned from the bench.

Judge Rosenthal became the successor and took over the case. Judge

Rosenthal issued a certification pursuant to Federal Rule of

Bankruptcy Procedure 9028, stating that he had reviewed the docket,

pleadings, and trial transcript and had determined the matter could

proceed to decision without prejudice to the parties. Twelve days

later, Judge Rosenthal entered an order in favor of the trustee and

a judgment against National Lumber. The Bankruptcy Appellate Panel

for the First Circuit affirmed the bankruptcy court's judgment.

On appeal, National Lumber argues that the property it

received from the chapter 7 debtor was not "an interest of the

debtor in property" within the meaning of section 547(b), and,

therefore, not a transfer avoidable by the trustee as a preference.

In addition, National Lumber asserts that the Bankruptcy Appellate

Panel for the First Circuit erred in allowing Judge Rosenthal’s

decision to stand because he did not preside over the trial, yet

issued an opinion that relied on the demeanor and credibility of

witnesses. We affirm.

II. Property of the Debtor

We first address National Lumber’s claim that the property it

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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)

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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

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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

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debtor had sufficient control over disposition of funds).

III. Successor Judge

Next, National Lumber contends that the bankruptcy court

abused its discretion by issuing a decision without recalling

witnesses who testified at the trial conducted by a predecessor

judge. National Lumber asserts that the credibility of the

witnesses was essential to the court’s ruling, but the court could

not have assessed the credibility without having viewed live

testimony. Specifically, National Lumber asserts that the

successor judge should have granted a new trial, sua sponte, or at

a minimum should have sought counsels’ opinion as to whether the

trial transcript and admitted documents would be sufficient. We

review for abuse of discretion a successor judge’s decision to

complete a case after a trial pursuant to Federal Rule of

Bankruptcy Procedure 9028. See Schubert v. Nissan Motor Corp. in

U.S.A., 148 F.3d 25, 30 (1st Cir. 1998) (stating that when judicial

action is taken in a discretionary matter, it is reviewed for abuse

of discretion).

Federal Rule of Civil Procedure 63, made applicable to

bankruptcy cases by Federal Rule of Bankruptcy Procedure 9028,

provides that:

If a judge conducting a hearing or trial is unable to
proceed, any other judge may proceed upon certifying
familiarity with the record and determining that the case

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 may be completed without prejudice to the parties. In a
hearing or a nonjury trial, the successor judge must, at
a party’s request, recall any witness whose testimony is
material and disputed and who is available to testify
again without undue burden. The successor judge may also
recall any other witness.

Fed. R. Civ. P. 63. Therefore, the successor judge in a nonjury

trial may proceed with a matter if he (1) certifies that he is

familiar with the case and determines that the case may proceed

without prejudice to the parties, and (2) if requested by a party,

recalls any witness whose testimony is material and disputed. See

Hoult v. Hoult, 57 F.3d 1, 8-9 (1st Cir. 1995).

National Lumber made no objection to Judge Rosenthal’s

reassignment or certification and did not request that witnesses be

recalled. The duly appointed successor judge, Judge Rosenthal,

fulfilled Rule 63's requirements. On February 29, 2008, he issued

the requisite certification that he had reviewed the docket, the

pleadings, and transcripts and determined that the adversary

pleadings could be completed without prejudice to the parties.

National Lumber does not claim that it received inadequate notice

or that it had insufficient time to respond to the certification.

Moreover, counsel conceded at oral argument before the Bankruptcy

Appellate Panel for the First Circuit that he considered he had a

“good case on the documents” and made a “judgment call” to let the

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matter proceed without requesting that witnesses be recalled.2

Consequently, as neither party requested the bankruptcy court to

recall witnesses or to order a new trial, the successor judge had

no obligation to do so. See Hoult, 57 F.3d at 8-9.

IV. Conclusion

For the foregoing reasons, we affirm.

2
As the Bankruptcy Appellate Panel for the First Circuit
noted, the judge did state that his analysis included consideration
of witnesses’ demeanor and credibility. We agree with the
Bankruptcy Appellate Panel for the First Circuit that while the use
of the term “demeanor” is unfortunate, it did not amount to an
abuse of discretion as there is sufficient evidence supporting the
judgment. See Riley v. Nat’l Lumber Co. (In re Reale), 393 B.R.
821, 826 n.5 (B.A.P. 1st Cir. 2008).

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