IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 6, 2008
No. 07-30499
Charles R. Fulbruge III
Clerk
In the Matter Of: ENTRINGER BAKERIES INC
Debtor
AARON E CAILLOUET, Trustee
Appellant-Cross-Appellee
v.
FIRST BANK AND TRUST
Appellee-Cross-Appellant
Appeals from the United States District Court
for the Eastern District of Louisiana
Before SMITH and PRADO, Circuit Judges, and YEAKEL*, District Judge.
PER CURIAM:
Aaron Caillouet, the trustee of the bankruptcy estate of Entringer Baker-
ies (“Entringer”), sued First Bank and Trust (“FBT”) to avoid two pre-petition
transfers from Entringer to FBT. The bankruptcy court held that both transfers
were of funds that had been “earmarked” for FBT and were therefore avoidable
*
District Judge of the Western District of Texas, sitting by designation.
No. 07-30499
only to the extent that the transfers diminished the estate. The court held that
the transfers diminished the estate by $74,381.04 and entered judgment for the
trustee in that amount. The trustee appealed the court’s application of the ear-
marking doctrine; both parties appealed the finding as to the amount the trans-
fers diminished the estate.
The district court affirmed. The trustee appealed, and FBT cross-ap-
pealed. We affirm the judgment in favor of the trustee but vacate the award and
render an award in a different amount.
I.
On September 29, 2000, Entringer borrowed $180,000 from FBT. The loan
was secured not by Entringer’s property but by the guaranty and pledge of a per-
sonal brokerage account of Marc Leunissen, one of the new principal owners of
Entringer. Interest payments were due monthly, with the principal due at ma-
turity on December 29, 2000. The loan was short-term financing intended to
give Entringer time to arrange long-term financing, part of which would be used
to repay the FBT loan.
Entringer applied for long-term financing from Whitney National Bank
(“Whitney”). Specifically, it sought a loan from Whitney that the Small Business
Administration (“SBA”) would guarantee. In mid-December, the SBA agreed to
guarantee the loan, so long as Entringer received additional financing from vari-
ous other institutions. Those conditions delayed closing on the Whitney loan un-
til after the December 29 maturity date of the FBT loan.
Aware that Entringer had arranged for the SBA-backed loan from Whit-
ney, FBT did not issue a notice of default but instead permitted Entringer to
execute a second promissory note on January 30, 2001, requiring one interest
payment on March 5 and a final payment of principal and interest on March 30.
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No. 07-30499
Accordingly, Entringer made an interest payment of $1,203 to FBT on
March 6. By March 30, the Whitney loan had not closed, and Entringer
requested additional time to satisfy its debt. FBT understood that the Whitney
loan would close in a matter of days and allowed the loan to mature without
issuing notice of default.
On April 6, 2001, the Whitney loan closed and on April 12 was funded.
The next day Entringer delivered to FBT a check for $181,702.50, representing
principal and accrued interest. The check cleared on April 16, and both FBT
promissory notes were stamped “PAID April 17, 2001.”
Entringer filed for bankruptcy on May 29, 2001. Though guaranteed by
the SBA, the Whitney loan was also secured by fixtures, certain machinery and
equipment, and a leasehold interest. The trustee liquidated the collateral, and
Whitney received $74,381.04.
II.
The trustee filed the instant adversary proceeding against FBT to avoid
the interest payment of March 61 and the final payment of April 13 as impermis-
sible preferences under 11 U.S.C. § 547(b).2 The only issue before the bankruptcy
1
Though the trustee initially sought to avoid the March 6 interest payment, he has
abandoned that claim in this appeal by addressing only the April 13 payment of $181,702.50
in his argument.
2
Section 547(b) reads,
Except as provided in subsections (c) and (i) of this section, the trustee may
avoid any transfer of an interest of the debtor in property (1) to or for the benefit
of a creditor; (2) for or on account of an antecedent debt owed by the debtor
before such transfer was made; (3) made while the debtor was insolvent;
(4) made (A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition,
if such creditor at the time of such transfer was an insider; and (5) that enables
such creditor to receive more than such creditor would receive if (A) the case
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No. 07-30499
court was whether the funds transferred to FBT were “of an interest of the
debtor in property.” Id. The court applied the equitable “earmarking” doctrine3
and held that the payments to FBT were not transfers of Entringer’s interest in
property. The court held, however, that payments of earmarked funds to an
unsecured creditor, such as FBT, are still avoidable as a preference to the extent
of the value of the collateral given to the new lender, here Whitney. Thus, the
court entered a judgment in favor of the trustee for $74,381.04, the amount of
the collateral pledged to secure the Whitney loan.
The trustee appealed to the district court the bankruptcy court’s applica-
tion of the earmarking doctrine, alleging that the payments were a transfer of
Entringer’s interest in property. The trustee also appealed the valuation of the
collateral. FBT cross-appealed, averring that, because the payment it received
was only a fraction of the Whitney loan, it ought to be liable for only a pro rata
share of the $74,381.04, the value of the liquidated collateral. The district court
affirmed, and both parties now appeal the same issues, except that the trustee
has waived his argument with respect to the $1,203 payment.
III.
The trustee asserts that the transfer of funds on April 13 from Entringer
to FBT to pay the interest and principal on the $180,000 loan is a simple
preference that he can avoid under § 547(b). The parties have stipulated to all
were a case under chapter 7 of this title; (B) the transfer had not been made;
and (C) such creditor received payment of such debt to the extent provided by
the provisions of this title.
3
The earmarking doctrine is a judicially created, equitable exception to § 547(b) that
holds that money loaned to a debtor by a new creditor to pay an existing debt to an old creditor
is not a “transfer of an interest of the debtor in property.” See Coral Petroleum, Inc. v. Banque
Paribas-London, 797 F.2d 1351, 1356 (5th Cir. 1986).
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No. 07-30499
of the elements of a preference under § 547(b) except for that subsection’s
requirement that the payment was a “transfer of an interest of the debtor in
property.” The bankruptcy court and district court both applied the earmarking
doctrine and held that the payment was not such a transfer. The trustee
contends this was error.
“We review the decision of a district court, sitting as an appellate court, by
applying the same standards of review to the bankruptcy court’s findings of fact
and conclusions of law as applied by the district court.” U.S. Dep’t of Educ. v.
Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003) (citation omitted). A
bankruptcy court’s findings of fact are reviewed for clear error, and its
conclusions of law are reviewed de novo. Id.
We have described the earmarking doctrine’s application to a preference
action as follows:
For the preference to be voided under section 547, it is essential that
the debtor have an interest in the property transferred so that the
estate is thereby diminished. If all that occurs in a “transfer” is the
substitution of one creditor for another, no preference is created
because the debtor has not transferred property of his estate; he still
owes the same sum to a creditor, only the identity of the creditor has
changed. This type of transaction is referred to as “earmark-
ing” . . . . The earmarking doctrine is widely accepted in the
bankruptcy courts as a valid defense against a preference claim,
primarily because the assets from the third party were never in the
control of the debtor and therefore payment of these assets to a
creditor in no way diminishes the debtor’s estate.
Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1355-56 (5th
Cir. 1986) (internal quotation marks and citations omitted). The court cited
COLLIER ON BANKRUPTCY to describe this doctrine further:
In cases where a third person makes a loan to a debtor specifically
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No. 07-30499
to enable him to satisfy the claim of a designated creditor, the
proceeds never become part of the debtor’s assets, and therefore no
preference is created. The rule is the same regardless of whether
the proceeds of the loan are transferred directly by the lender to the
creditor or are paid to the debtor with the understanding that they
will be paid to the creditor in satisfaction of his claim, so long as
such proceeds are clearly “earmarked.”
Id. at 1356 (quoting 4 COLLIER ON BANKRUPTCY para. 547.25 at 547-(101-102)
(15th ed. 1986)). In invoking the earmarking doctrine, the court in Coral
Petroleum noted that “at no time did [the debtor] have general control over the
funds whereby it could independently designate to whom the money would go.”
Coral Petroleum, 797 F.2d at 1356.
At the outset, we reject the trustee’s argument that the earmarking
doctrine is no longer a viable exception to a preferential transfer under § 547(b).
We have often commented that “in the absence of an intervening contrary or
superseding decision by this court sitting en banc or by the United States
Supreme Court, a panel cannot overrule a prior panel’s decision.” United States
v. Lipscomb, 299 F.3d 303, 313 n.34 (5th Cir. 2002) (internal citation and
quotation marks omitted). Coral Petroleum recognized the earmarking doctrine
in this circuit, and there are no intervening contrary or superseding decisions
from the Supreme Court or this court sitting en banc to overrule that case. The
trustee points to the Supreme Court’s decision in Begier v. IRS, 496 U.S. 53
(1990), but the Court in Begier did not question the viability of the earmarking
doctrine. Instead, the Court merely clarified the definition of “property of the
debtor” that is subject to the preferential transfer provision of § 547(b). Id. at 58.
The Court noted that the transfer of property that a trustee can avoid as a
preference includes “property that would have been part of the estate had it not
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No. 07-30499
been transferred before the commencement of the bankruptcy proceedings.” Id.
This is virtually the same definition that we used in Coral Petroleum. See Coral
Petroleum, 797 F.2d at 1355 (stating that to avoid a preference under § 547, “it
is essential that the debtor have an interest in the property transferred so that
the estate is thereby diminished” (internal quotation marks and citation
omitted)). Accordingly, Begier did not overrule Coral Petroleum or the viability
of the earmarking doctrine.4
In Coral Petroleum, we invoked the “control” test to determine if a
payment was a preference because the money was property of the estate, or if
instead the parties “earmarked” the funds for a particular creditor.5 Id. at 1358.
Coral, the debtor, received a $35 million loan from Paribas-Suisse. Id. at 1353.
Leeward, an indirect subsidiary of Coral, deposited $35 million with Paribas-
Suisse as pledged collateral for Coral’s loan. Id. Coral decided to prepay the
loan and informed Leeward of this fact. Id. at 1353-54. Leeward then instructed
Paribas-Suisse to break its $35 million fiduciary deposit and transfer this money
to Coral’s Paribas-Suisse account. Id. at 1354. On the same day, Coral
instructed Paribas-Suisse to apply the incoming $35 million to its loan
obligation. Id. In accordance with these instructions, Paribas-Suisse engaged
in a simultaneous bookkeeping transaction resulting in Coral paying off the
4
We find rapport for this conclusion in the continued application of the earmarking
doctrine in other circuits after Begier. See, e.g., Cadle Co. v. Mangan (In re Flanagan), 503
F.3d 171, 185 (2d Cir. 2007); Adams v. Anderson (In re Superior Stamp & Coin Co.), 223 F.3d
1004, 1007-08 (9th Cir. 2000). But cf. Manchester v. First Bank & Trust Co. (In re Moses), 256
B.R. 641, 651 (B.A.P. 10th Cir. 2000) (holding that the earmarking doctrine “should not be
extended beyond codebtor cases”).
5
The “control” test is one of three tests that courts use to apply the earmarking
doctrine. See, e.g., In re Moses, 256 B.R. at 649-50.
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No. 07-30499
Paribas-Suisse loan from Leeward’s $35 million collateral. Id. We invoked the
earmarking doctrine to hold that this payment was not a preference because at
no time did Coral retain control over the money, even if theoretically there was
a “magical moment” when the funds appeared in Coral’s account. Id. at 1359.
We expounded upon what it means to “control” funds in In re Southmark
Corp., 49 F.3d 1111 (5th Cir. 1995). There, the debtor, Southmark, owed money
to a former employee. Id. at 1113. The parties entered into a settlement
agreement, and Southmark paid the employee from Southmark’s cash
management system, which Southmark also used for its various other corporate
entities. Id. at 1114. Southmark then filed for bankruptcy, and the trustee
sought to avoid the payment to the employee as a preferential transfer. Id. We
reversed the lower courts’ conclusion that the payment to the employee was from
a different corporate entity instead of from Southmark and therefore was not a
preference. Id. at 1116. In particular, we noted that the money that the
employee received “was drawn on Southmark’s Payroll Account, a general bank
account containing commingled funds, to which Southmark held complete legal
title, all indicia of ownership, and unfettered discretion to pay creditors of its
own choosing, including its own creditors.” Id. In reaching the conclusion that
the payment was from Southmark’s bankruptcy estate, we cited a known
bankruptcy treatise:
If the debtor determines the disposition of funds from the third
party and designates the creditor to be paid, the funds are available
for payment to creditors in general and the funds are assets of the
estate. In this event, because the debtor controlled the funds and
could have paid them to anyone, the money is treated as having
belonged to her for purposes of preference law whether or not she
actually owns it.
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No. 07-30499
Id. at 1116 n.17 (quoting 1 DAVID G. EPSTEIN ET AL., BANKRUPTCY § 6-7, at 522
(1992)).
Here, Entringer had dispositive control over the Whitney loan proceeds;
the money was Entringer’s property once Whitney deposited the funds into
Entringer’s general account. Cf. Coral Petroleum, 797 F.2d at 1361 (“The funds
were at all times under Paribas-Suisse’s lawful control. No evidence was
presented by the Committee that Coral at any time had control over these funds,
even for a moment.”). That is, Entringer could have done anything it wanted to
do with the money from the Whitney loan, meaning that the parties did not
“earmark” it to pay off the FBT debt. Gary Lorio, Whitney’s loan officer, testified
that Whitney did not control the money once it went into Entringer’s bank
account and that Entringer could have paid any of its creditors with that money.
Mark Leunissen, Entringer’s chief executive officer, agreed that the money from
the Whitney loan was Entringer’s money once it entered Entringer’s general
account.
As noted above, the money became Entringer’s property on April 12 when
Whitney deposited it into Entringer’s general account, and Entringer paid FBT
a day later. This fact makes the case distinguishable from Coral Petroleum,
where the debtor never once had any control over the money. Instead of a
simultaneous bookkeeping transaction as in Coral Petroleum, here the money
remained in Entringer’s account until Entringer chose to write a check to FBT
the day after receiving the funds from Whitney. Additionally, Entringer never
stipulated to FBT that it would use the Whitney money to pay the FBT loan,
unlike to the facts in Coral Petroleum, where Coral told Paribas-Suisse to use
the incoming money to satisfy Coral’s debt.
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No. 07-30499
The bankruptcy court here acknowledged that “the parties have stipulated
that [Entringer] had complete physical control over the money” from the
Whitney loan. Although physical control is not the sole indicator of whether the
parties earmarked the money for a particular creditor, it is particularly relevant
given that there was no agreement among Entringer, Whitney, and FBT that
Entringer would use the money to pay off FBT.6 Accordingly, the bankruptcy
court and district court erred in extending Coral Petroleum to this situation, as
Coral Petroleum explicitly required that the debtor have no dispositive control
over the funds.7 Because Entringer had control over the funds in question, the
earmarking doctrine does not apply, and the trustee can avoid the entire
payment to FBT as a preferential transfer.8
IV.
Although the earmarking doctrine does not render Entringer’s payments
6
That Whitney, in a Credit Memorandum, stated that it believed Entringer would use
the loan proceeds, combined with other loans Entringer was receiving, to pay off the FBT loan
is of no moment. Whitney’s unilateral belief that Entringer was planning to use its money for
the FBT debt is not the same as Entringer’s not having control to do as it wished with the
money once the money entered its general account.
7
FBT argues that two unpublished cases from this court mandate a different
conclusion. However, aside from having no precedential value as unpublished decisions, neither
case is on point. In In re Jazzland, Inc., 161 F. App’x 436, 437 (5th Cir. 2006) (per curiam)
(unpublished), this court held that the parties had earmarked the funds in a construction
retainage account for a creditor/contractor. There, the parties had specifically segregated the
funds and had designated them for eventual payment once the creditor/contractor had satisfied
all of the contract conditions, while here there was no underlying contract between the parties
and no segregation of funds. Similarly, in In re Searex Energy Services, 131 F. App’x 449 (5th
Cir. 2005) (per curiam) (unpublished), this court simply affirmed the decision of the district
court that “funds used to make payments to appellees were not within the control of the debtor
and therefore were not owned by the debtor at the time of the transfer.” Here, Entringer had
control of the money and chose to write a check to pay off the FBT debt.
8
Because we rule that the trustee can avoid the entire payment to FBT, we need not
reach the issue of the value of the collateral or FBT’s prorating argument.
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No. 07-30499
to FBT unavoidable, § 547(c) states that the trustee may not avoid certain trans-
fers that would otherwise be impermissible preferences. FBT asserts that the
trustee cannot avoid Entringer’s payments because they fit the ordinary course
of business exception under § 547(c)(2). The bankruptcy court found that
§ 547(c)(2) does not apply, because FBT’s loan to Entringer was not made in the
ordinary course of business. The district court affirmed that finding.
Section 547(c)(2) states that
[t]he trustee may not avoid under this section a transfer to the ex-
tent that such transfer was (A) in payment of a debt incurred by the
debtor in the ordinary course of business or financial affairs of the
debtor and the transferee; (B) made in the ordinary course of busi-
ness or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms.9
The creditor bears the burden of proving by a preponderance of the evidence that
all three elements are satisfied. 11 U.S.C. § 547(g); see G.H. Leidenheimer
Baking Co. v. Sharp (In re SGSM Acquisition Co., LLC), 439 F.3d 233, 239 (5th
Cir. 2006).
The bankruptcy court addressed only the first of the § 547(c)(2) elements:
whether Entringer incurred the debt in the ordinary course of business. The
court made several specific findings of fact.
First, it found that the loan was “an emergency loan necessary to make
payroll and to prevent lessors from commencing eviction proceedings.” FBT does
not contest that finding but argues that this is the type of loan § 547(c)(2) intend-
9
Section 547(c)(2) was amended with the passage of the Bankruptcy Abuse and Preven-
tion and Consumer Protection Act of 2005 and now requires the creditor to prove only the sec-
ond and third elements. Pub. L. No. 109-8, 119 Stat. 23 (codified as amended at 11 U.S.C.
§ 547(c)(2) (2006)). The amendment has no bearing on this suit, because all pertinent events
occurred before the amendment.
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No. 07-30499
ed to permit. Without the protection of § 547(c)(2), “the moment that a debtor
faced financial difficulties, creditors would have an incentive to discontinue all
dealings with that debtor and refuse to extend new credit. Lacking credit, the
debtor would face almost insurmountable odds in its attempt to make its way
back from the edge of bankruptcy.” Gulf City Seafoods, Inc. v. Ludwig Shrimp
Co. (In re Gulf City Seafoods, Inc.), 296 F.3d 363, 367 (5th Cir. 2002). Thus,
§ 547(c)(2) “provides a safe haven for a creditor who continues to conduct normal
business on normal terms.” Id. We agree with FBT that Entringer’s distressed
situationSSits need for the loanSSdoes not by itself make FBT’s loan extraordi-
nary.
The court also found that FBT made the loan to Entringer in anticipation
of being repaid by proceeds from the SBA-guaranteed loan and not with an ex-
pectation that earnings from operations would be sufficient. FBT concedes this
point but offers the testimony of Louis Ballero, its chief commercial lender, who
testified that, under its loan policy, it was ordinary for FBT to consider the po-
tential for borrowing money in determining whether to make a loan. FBT avers
that it makes similar bridge loans “all the time.” FBT fails, however, to point to
evidence of similar transactions and offers only the conclusory statement that
“[c]learly, such bridge loans are not contrary to FBT’s . . . loan policies.”
Likewise, the court found that the loan to Entringer was contrary to FBT’s
policy, because the interest rate was below prime and Entringer was undercapi-
talized and with little or no cash flow. FBT concedes that the interest rate was
below prime but explains that the friendly interest rate was part of an effort to
establish a relationship with Entringer that would lead to future business. Ulti-
mately, FBT contends that the loan to Entringer was not contrary to its lending
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No. 07-30499
policy.
The record, however, includes support for the court’s finding. FBT’s credit
analysis of Marc Leunissen, Entringer’s chief executive officer, stated that the
$180,000 loan to Entringer that was secured by Leunissen “was made on a non-
conforming basis with the knowledge that the margin rate would be out of
compliance until a permanent credit facility was implemented.” Additionally,
the notes of FBT’s loan committee meeting in February 2001 state that “$180M
was granted to the principal[, Leunissen,] on a short-term basis and was ap-
proved as a policy exception out of margin.” In light of these statements, the
court’s finding that the loan to Entringer was not in accord with FBT’s lending
policy was not clearly erroneous, and FBT failed to carry its burden to prove the
debt was incurred in the ordinary course of business.
In sum, we AFFIRM the district court’s judgment in favor of the trustee,
VACATE the award, and RENDER an award in the amount of $181,702.50,
which is the entire amount of the preferential transfer.
13