Forker v. Duenow Management Corp. (In Re Calvert)

Citations: 227 B.R. 153; 1998 Bankr. LEXIS 1514; 33 Bankr. Ct. Dec. (CRR) 653; 1998 WL 822099Docket: 98-6037NI

Court: United States Bankruptcy Appellate Panel for the Eighth Circuit; November 30, 1998; Us Bankruptcy; United States Bankruptcy Court

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Duenow Management Corporation appealed a bankruptcy court ruling that deemed a pre-petition transfer made by debtors David and Sandra Calvert to Duenow as avoidable under 11 U.S.C. § 547. The bankruptcy court ordered the recovery of $8,875.00 plus costs. The Calverts filed a joint Chapter 7 petition on March 5, 1997, after David Calvert's employment with Duenow ended due to alleged embezzlement. In December 1996, Calvert settled Duenow's claim for $11,844.90, funded by a $12,000 loan from his parents. The transaction involved a series of checks and mortgage agreements, including a mortgage on their home and a lien on a 1992 Ford Ranger. The bankruptcy court determined that the Calverts had only $17.17 in equity in their home at the time of the transfer and that the pickup truck was valued at $8,875. The payments to Duenow and the securing of loans occurred within ninety days before the bankruptcy filing while the debtors were insolvent. The trustee sought recovery, arguing that the earmarking doctrine did not apply because the loan was secured, thus rendering the transaction an avoidable preference. However, the bankruptcy court ruled that the mortgage on the residence did not diminish the estate, allowing the earmarking doctrine to apply to that portion of the debt, making it not recoverable as a preference under § 547(b).

The court determined that the earmarking doctrine did not apply to the lien on the pickup truck because the parents held a valid security interest in that portion of the debt. Consequently, the trustee could recover $8,875 from Duenow, reflecting the value of the pickup. However, upon appeal, it was concluded that the bankruptcy court erred in finding that a valid security interest existed, which invalidated the application of the security interest exception to the earmarking doctrine. Therefore, the earmarking doctrine applied, and the trustee could not recover the payment to Duenow as a preference under § 547(b). The decision of the bankruptcy court was reversed.

The court's review process involved checking the bankruptcy court's factual findings for clear error and legal conclusions de novo. Under § 547 of the Bankruptcy Code, the trustee can recover certain payments made to creditors before filing for bankruptcy, with six requirements for a transfer to qualify as a preference. The primary dispute was over whether there was a transfer of the debtor's interest in property, specifically concerning the earmarking doctrine, which is a judicial interpretation of the statutory requirement. For the earmarking doctrine to apply, three conditions must be met: an agreement between the new lender and the debtor to use new funds for a specific debt, compliance with that agreement, and overall transaction analysis showing no reduction in the estate's value. If applicable, the earmarking doctrine prevents the new funds from becoming part of the debtor's property, thus precluding a preference claim. However, it only applies if the new and old creditor have the same priority.

The earmarking doctrine applies to security interests established for funds used to pay secured debts, not for unsecured debts. If the security interest exception is applicable, the transfer in question is not considered earmarked and is avoidable to the extent it depletes the debtor's estate or equals the value of the collateral surrendered. The trustee must prove that the earmarking doctrine does not apply, thus shifting the burden to demonstrate the security interest exception's applicability. In this case, the trustee contended that a security interest in a pickup truck was granted to David Calvert's parents. Nebraska law requires that for a security interest to attach to goods, the collateral must either be in the secured party's possession or a signed security agreement describing the collateral must exist. Since the pickup truck was not in the parents' possession, the trustee needed to provide evidence of such an agreement. No written security agreement was presented, but the only evidence was the notation of David Calvert's father as lienholder on the Certificate of Title, which was validated by the county clerk's signature and seal. Under Nebraska law, perfection of a security interest can be achieved through this lien notation on the Certificate of Title. The key question is whether this notation can create a presumption of an existing written security agreement, given the absence of such documentation.

The bankruptcy court ruled that the presumption of official acts, as established by Nebraska law, applied in this case, leading to a presumption that the Calverts presented a security agreement to the county clerk when the lien was noted. The court found Duenow's evidence insufficient to counter this presumption. However, the ruling was deemed erroneous for two reasons. First, the doctrine referred to as a presumption may not function as a true legal presumption. True presumptions shift the burden of proof, which is not the case here. Instead, the Majerus doctrine is more accurately described as a rule of law designed to protect public officials’ actions, placing the burden on the challenger to prove the lien's invalidity. Since the acts of the county clerk were not under scrutiny, the Majerus rule was not applicable, and the bankruptcy court should not have applied a presumption that shifted the burden to Duenow to disprove the existence of a security agreement.

The 'official acts presumption' is relevant only in cases where there is a collateral attack on the validity of a lien. The key issue is whether the trustee's challenge against Duenow under § 547 constitutes such a collateral attack. The bankruptcy court determined it did, asserting that the dispute was between the trustee and an unrelated party, thus allowing the presumption to apply. This conclusion is disputed, with the argument that there is no attack—direct or collateral—against the lien's validity, meaning the presumption does not apply.

The trustee has the burden to demonstrate that the earmarking doctrine does not apply and must prove that a valid security interest was granted to David Calvert's parents, which requires evidence of a signed security agreement describing the collateral. The current proceedings do not challenge the lien's validity but focus on proving the existence of a security agreement, which should be done independently of any presumption. 

The bankruptcy court incorrectly applied the presumption to help the trustee meet his burden, resulting in a finding that Duenow's evidence was insufficient to rebut it. However, since the validity of the lien has not been contested, the trustee must provide affirmative evidence of a security agreement without relying on the presumption. A review of the trial evidence revealed that the trustee failed to produce sufficient proof of such an agreement, relying primarily on the lien notation, which was inadequate to substantiate the claim.

No written security agreement was presented as evidence, nor did any witnesses confirm its existence. Mr. Uhlir, the attorney involved in the transaction, testified that he prepared relevant documents, including a note and mortgage for real estate, and instructed parties to record a lien on the truck’s title, but he did not prepare a security agreement for the truck itself. The documents he possessed included a mortgage note, a second mortgage document, a handwritten loan summary, and a title copy with a lien notation; none resembled a security agreement.

The bankruptcy court inferred that Mr. Uhlir did not draft a security agreement, supporting the conclusion that the Calverts likely created one independently, a claim unsupported by evidence. David Calvert indicated he merely delivered the truck title to his parents for lien notation, and Sandra Calvert mentioned signing notes for a mortgage on the house, also prepared by Mr. Uhlir, without reference to a security agreement for the truck.

The evidence presented was insufficient for the trustee to prove a signed security agreement existed, leading to the conclusion that the trustee could not demonstrate the absence of the earmarking doctrine. Consequently, payments made to Duenow from funds loaned by the Calverts were not part of the debtors' estate and were not avoidable preferences under § 547(b). The bankruptcy court's application of the official acts presumption to establish a valid security interest in the pickup truck was incorrect, and the ruling was reversed and remanded for judgment consistent with these findings.

The decision on this appeal does not require addressing whether a 'trust receipt, conditional sales contract, or similar instrument' qualifies as a 'security agreement' under Neb.Rev.Stat. U.C.C. § 9-203(1)(a). Scholars have criticized the misuse of 'presumptions' in legal contexts, suggesting that the term should be abandoned to confront evidentiary issues more effectively. Ronald J. Allen and G. Michael Fenner highlight the confusion surrounding presumptions and express concern that extensive discussions have not clarified the matter. The authors aim to contribute meaningfully to this discourse without adding to the existing confusion in legal literature.