dissenting.
I respectfully dissent. I would affirm the judgment of the district court. This case involves the question whether all or part of payments totalling $191,177.27 made to the bank are voidable preferences under 11 U.S.C. § 547(b). The district court ruled that the $125,068.50 payment was not a voidable preference. The district court ruled that these funds were borrowed funds which the credit union, the new creditor, had clearly “earmarked” for the payment of the debtor’s debt to the bank; however, the district court determined that the balance of $66,708.77 was recoverable by the trustee as a voidable preference. As the majority opinion correctly points out, the transfer in question meets four of the requirements under § 547(b) for a voidable preference. Slip op. at 564 (factors (l)-(4)). As further noted by the majority opinion, the major dispute centers on whether the transfer under attack is a transfer of an interest of the debtor in property. The majority opinion concludes that the funds constitute an interest of the debtor and, thus, the “earmarked funds” doctrine is inapplicable. I disagree.
For a preference to be avoided under § 547(b), the debtor must have an interest in the property transferred so that the debtor’s estate is diminished by the transfer. If a transfer has no effect on the assets of the debtor available for distribution to creditors, it is not a preferential transfer. Here, the transfer to the bank is traceable to funds the credit union lent to the debtor specifically to enable the debtor to satisfy the bank’s claims. The credit union and the debtor never intended that these “earmarked” funds would become the unrestricted property of the debtor, and the debtor’s payment of the “earmarked” funds to the bank in no manner diminished the debtor’s estate.
The logic of the “earmarked funds” doctrine is that third party payments neither diminish the assets nor increase the liabilities of the debtor. What is done, in fact, is no more than a substitution of a new creditor for an old one. Grubb v. General Contract Purchase Corp., 18 F.Supp. 680, 682 (S.D.N.Y.1937), aff'd, 94 F.2d 70 (2d Cir.1938).
There is no dispute that the credit union’s check, which was payable to the bank and the debtor jointly, in the amount of $125,068.50 was written for the purpose of paying off the debtor’s debt to the bank. The fact that this particular check was not used to pay the debtor’s debt to the bank in no way alters the fact that at least $125,-068.50 of the credit union’s funds, funds which were intended to be used to pay the debtor’s debt to the bank, were in reality used for that very purpose. See In re H. G. Prizant & Co., 257 F.Supp. 145 (N.D.Ill.1965).
The substance of the trustee’s argument is that once the borrowed funds are deposited in a bank account over which the debt- or has total dispository control, the borrowed funds lose their status as “earmarked” funds and become property of the debtor’s estate. The trustee’s argument is contrary to 4 Collier on Bankruptcy *569¶ 547.03, at 547-25 (15th ed. 1987) (emphasis added; footnote omitted):
The [earmarked funds] rule is the same regardless of whether the proceeds of the loan are transferred directly by the [new creditor] to the [old] creditor or are paid to the debtor with the understanding that they will be paid to the [old] creditor in satisfaction of [the old creditor’s] claim, so long as such proceeds are clearly “earmarked.”
In In re daggers, 48 B.R. 33 (W.D.Tex. 1985) (Jaggers), the court stated:
When a debtor uses the funds of a third party to pay an obligation of the debtor the Court must look to the source of the control over the disposition of the funds in order to determine whether a preference exists. If the debtor controls the disposition of the funds and designates the creditor to whom the monies will be paid independent of the third party whose funds are being used in partial payment of the debt, then the payments made by the debtor to the creditor constitute a preferential transfer.
See also 4 Collier on Bankruptcy If 547-03, at 547-26. Here, the check for $125,068.50 issued by the credit union and made payable to the debtor and the bank was “earmarked” specifically for the purpose of satisfying the debtor’s $125,000 obligation to the bank. While this transaction was not completed as intended, the bank did receive $191,777.27 from the funds supplied by the credit union. It was always the intention of the credit union that the bank receive at least $125,068.50, and the loan arrangements between the credit union and the debtor were such that the debtor was not to have control over that sum. Here, the debtor was a mere conduit for the transfer of funds from the credit union to the bank.
In my opinion, the debtor’s momentary physical control over the funds does not preclude application of the “earmarked funds” doctrine. In the present case, the fact that the credit union clearly intended that the debtor use part of the loan proceeds to pay the bank proves that the debt- or lacked dispositive control over at least those funds. See Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1361-62 (5th Cir.1986).
The daggers case does not support the trustee’s position. In that case, unlike the facts in the present case, the funds of the new creditor were available for use by the debtor generally and were not solely available for the purpose of discharging a particular debt to a particular creditor. 48 B.R. at 37. For that reason, the bankruptcy court concluded that the funds constituted assets of the debtor’s estate and thus the transfer was a voidable preference. Id.
The trustee’s reliance upon In re Howdeshell of Fort Myers, Inc., 55 B.R. 470, 474 (M.D.Fla.1985), and In re Telephone Stores of America, Inc., 54 B.R. 25 (D.N.M.1985), is similarly misplaced. Although the old creditor in each case claimed that the funds at issue were “earmarked,” the “earmarked funds" doctrine was held inapplicable because the new creditor did not intend that the debtor use the funds to pay a particular creditor. In each case the court’s decision turned on the intent of the new creditor as to the use of the funds, not the debtor’s admitted actual control over the funds. In re Howdeshell of Fort Myers, Inc., 55 B.R. at 474 (debtor had absolute control over designation of creditors to be paid); In re Telephone Stores of America, Inc., 54 B.R. at 26 (intention of new creditor that debtor could do anything it wanted to with funds).
Here, the credit union clearly “earmarked” the funds by making its check payable to the debtor and the bank jointly. Consequently, these funds were never the property of the debtor. To disregard the clear intention of the new creditor is to unjustly enrich the debtor’s estate as a result of the debtor’s own breach of its obligation. This is the kind of injustice that the “earmarked funds” doctrine was created to avoid. For this reason, I would affirm the judgment of the district court.