In Re Egidi

Citations: 571 F.3d 1156; 2009 WL 1684601Docket: 08-15958

Court: Court of Appeals for the Eleventh Circuit; June 18, 2009; Federal Appellate Court

Original Court Document: View Document

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The case involves an appeal concerning the bankruptcy proceedings of Gisela Egidi. After consolidating her debts into a single credit card and making substantial payments totaling $16,065 to MBNA (now Bank of America) via cash advances and balance transfers in August 2006, Egidi filed for bankruptcy on October 28, 2006. The Chapter 7 Trustee, Barry Mukamal, sought to recover the payments, arguing they were avoidable preferences under 11 U.S.C. § 547(b). The Bankruptcy Court ruled in favor of the Trustee, determining the transfers were preferences that could be avoided, and awarded a judgment against Bank of America.

Bank of America appealed the decision to the District Court, which upheld the Bankruptcy Court's ruling. The appeal to the Eleventh Circuit Court of Appeals challenges the legal conclusions reached by the lower courts. The appellate court reviews the Bankruptcy Court's factual and legal determinations independently, applying de novo review standards. Preferences in bankruptcy are defined as transfers allowing a creditor to receive more than they would have in a typical distribution of the bankruptcy estate's assets. The Trustee is permitted to recover certain transfers made within 90 days of the bankruptcy petition if they meet the criteria for avoidable preferences.

Under 11 U.S.C. § 547(b) of the Bankruptcy Code, a trustee can avoid transfers of a debtor's property interest if five criteria are met: (1) the transfer benefits a creditor; (2) it is for an antecedent debt owed before the transfer; (3) it occurs while the debtor is insolvent; (4) it is made within 90 days preceding the bankruptcy filing or between 90 days and one year before if the creditor is an insider; and (5) it allows the creditor to receive more than they would in a Chapter 7 bankruptcy if the transfer had not occurred. The statute aims to ensure equal distribution among creditors, preventing preferential treatment of any creditor prior to filing for bankruptcy. 

The burden of proof rests with the trustee to demonstrate all five elements, which the parties agree has been satisfied in this case. The contested issue revolves around whether payments made to Egidi’s MBNA credit card from other credit card accounts qualify as a "transfer of an interest of the debtor in property." The Supreme Court defines "property of the debtor" as assets that would be included in the bankruptcy estate if not transferred before filing. The 1984 amendments to the Bankruptcy Code changed the terminology but retained the same legal principles. Additionally, it has been established that any funds under the debtor's control are considered the debtor's property, and any transfers that reduce this property can be avoided. The concept of "initial transferee" is also addressed, emphasizing that legal control over received assets is crucial in determining liability for transfers.

Egidi exercised sufficient control over funds from credit card companies, which were deemed "property of the debtor." The Bankruptcy Court found that transferring these funds to MBNA within 90 days before filing for bankruptcy constituted an avoidable preference. The District Court affirmed this determination, emphasizing Egidi's control over fund disposition. 

On appeal, BOA contended that the transfer merely substituted creditors and did not constitute an avoidable preference, arguing that the funds were not Egidi's property as they were never in her bank account. This argument was dismissed, as the focus was on Egidi's control over the funds, not the method of payment. The court noted that directing credit card companies to pay MBNA amounted to a discretionary use of borrowed funds, which typically qualifies as a preferential transfer.

BOA further argued that the transfer did not harm other creditors since the funds remained with the credit card companies. This was also rejected; the transfer deprived Egidi's creditors of equal asset distribution, as she could have used the funds to pay other debts or acquire assets for the bankruptcy estate. The court highlighted that the preference law aims to ensure equitable distribution among creditors. The conclusion aligns with findings from other circuits, reinforcing the importance of equal treatment in bankruptcy asset distribution.

The Tenth Circuit determined that a debtor’s direction to transfer funds from one credit card company to MBNA to pay off credit card debt constituted a preferential transfer avoidable by the trustee, as the debtor controlled the funds, directed their distribution, and the transfer reduced the bankruptcy estate available to creditors (In re Marshall, 550 F.3d at 1256). Similarly, the Sixth Circuit held in In re Dilworth that a balance transfer between credit card companies, directed by the debtor, was preferential and avoidable because the funds were not earmarked and diminished the estate (560 F.3d 562). The Bankruptcy Court's ruling that the transfer was preferential was upheld (Id. at 565). 

In contrast, BOA did not present any supporting decisions from other circuits against the preference argument. Previous cases cited by BOA had been abrogated (In re Marshall, 550 F.3d 1251; In re Lee, 530 F.3d 458). The notion that the earmarking exception could apply was dismissed, as it only pertains to cases where a third party lends funds specifically to satisfy a designated creditor's claim, which was not applicable here since the debtor, Egidi, controlled the transfer (5 Collier on Bankruptcy § 547.03[2]; Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351). The court declined to apply the earmarking doctrine and noted that the funds were not under the lender's control (In re Marshall, 550 F.3d at 1257). Additionally, BOA’s argument characterizing the transfer as a “bank to bank transfer” or a mere substitution of creditors was rejected, as that defense applies only when a lender directs the payments, ensuring the funds were never available for general creditors (Genova v. Rivera Funeral Home, In re Castillo, 39 B.R. 45).

Egidi directed a payment that could have satisfied other creditors, indicating that the transfers were not mere bank-to-bank transactions but involved the preferential transfer of assets. The loan proceeds were considered an asset of the estate before being transferred to MBNA. The transfer diminished Egidi’s estate. Bank of America (BOA) argued that the transfers constituted a “debt swap,” which could not be avoided by the Trustee under 11 U.S.C. § 546(g). However, this argument was not raised in the Bankruptcy Court and was only briefly mentioned in BOA's brief to the District Court, leading the Court to conclude that the issue was waived. Arguments not fully presented in the initial brief or raised for the first time in a reply brief are typically deemed waived. Consequently, the Court affirmed the decisions of the Bankruptcy and District Courts, ruling that the transfer of credit card funds to pay Egidi’s debt to MBNA within 90 days of the bankruptcy petition was a preference subject to avoidance under 11 U.S.C. § 547(b). The Trustee was awarded judgment for the amount of the transfer, totaling $16,065.00.