Court: United States Bankruptcy Court, W.D. Missouri; February 22, 2007; Us Bankruptcy; United States Bankruptcy Court
Terry Hollis provided multiple loans totaling $29,612.60 to his daughter, Shawna Matlock, and her husband, Mark Matlock, to assist with purchasing a home. The Matlocks repaid these loans shortly after the home purchase; however, they subsequently filed for bankruptcy. Under bankruptcy law, specifically 11 U.S.C. § 547, payments made to creditors within 90 days (or up to one year) prior to bankruptcy can be considered avoidable preferences, which can disadvantage other creditors. The court found that the payments made by the Matlocks to Hollis fall within this timeframe and are thus avoidable as preferences. Consequently, the Trustee's motion for summary judgment on this issue was granted.
The essential uncontested facts detail the loans made by Hollis, which included an earnest money deposit, payoff of secured debts, and a down payment for the residence. These loans were interest-free, unsecured, and not documented in writing. Despite the Matlocks' initial repayments, they ultimately did not meet the conditions of their financial obligations following the bankruptcy filing. The court's standard for granting summary judgment requires the moving party to demonstrate the absence of genuine material fact issues, which was satisfied in this case.
On November 26, 2004, the Debtors secured a $13,000 loan from Getz Credit Union, using the funds to repay Hollis, who had previously loaned them the same amount to satisfy a debt secured by their Jeep. The Debtors claim that delays in refinancing the Jeep, due to the prior lienholder's failure to provide the title and lien release, prevented them from repaying Hollis sooner. The Debtors filed for Chapter 7 bankruptcy on January 18, 2005, with all payments to Hollis occurring within one year prior to this filing.
The Court acknowledges that the transfers totaling $29,612.60 to Hollis are preferential transfers under 11 U.S.C. § 547, as they involved the Debtors' cash for the benefit of Hollis, an insider and relative, during a time of insolvency, and allowed him to receive more than he would have otherwise in bankruptcy. Hollis's defenses against the Trustee's motion rely on statutory exceptions to avoidability, which the Court finds inapplicable.
Hollis first argues that the $11,756.34 transfer on October 29, 2004, constituted a "contemporaneous exchange for new value" under § 547(c)(1). However, he fails to demonstrate any new value provided in exchange for this transfer, which is classified as a payment for an antecedent debt, thus not protected from avoidance.
Additionally, Hollis claims the transfers were made in the ordinary course of business, which should exempt them from avoidance under § 547(c)(2). However, the Court disagrees, noting that the burden of proof lies with Hollis to establish this defense, which requires evidence that the transfers were part of an ordinary course of business between the Debtors and Hollis.
Hollis, the transferee, failed to prove that the transfers in question satisfy the elements of § 547(c)(2). The debts incurred were not part of the debtor's ordinary financial affairs, as they were significantly larger than previous debts to Hollis, which ranged from $50 to $200. These debts were specifically for purchasing a house, and the Debtors did not provide evidence of being in the business of buying houses, either with or without Hollis's help. The disparity in purpose and amounts indicates that these transfers do not qualify as occurring in the ordinary course of business.
Additionally, the transfers did not meet the 'ordinary business terms' requirement. For this prong, evidence must show that transfer terms align with industry standards, but Hollis provided no proof. The court noted that since the transfers were between family members, demonstrating ordinary terms would be challenging, but Hollis's lack of evidence precluded this showing. The loans from Hollis were interest-free and contingent on 'extraordinary' events, further complicating the argument for ordinary terms.
Regarding the earmarking defense, Hollis claimed that the Trustee could not avoid a $13,000 transfer made on November 26, 2004, as the earmarking doctrine should apply. This doctrine requires: (1) an agreement for new funds to pay an existing debt, (2) performance of that agreement, and (3) no overall reduction of the estate's assets. Hollis argued that he had an agreement with the Debtors to lend them money to pay off a loan secured by their Jeep, which they would repay upon refinancing. However, the court found that Hollis's view of the transaction ignored that the Jeep was unsecured between the transactions in question. The court rejected the notion of viewing the transactions as a whole, emphasizing that the transfer on November 24, 2004, was independent of the earlier loan to Hollis.
Hollis became an unsecured creditor when he loaned the Debtors $13,000, and his awareness of the loan's intended use did not alter this status. The transfer of $13,000 on November 24 reduced the estate's value because the Debtors encumbered their unencumbered Jeep to secure a loan from Getz Credit Union. The earmarking doctrine does not apply when securing a loan to pay off an unsecured debt. Prior to the transfer, the Debtors had a $13,000 unsecured debt and an unencumbered vehicle; post-transfer, the Jeep was encumbered by a secured debt.
As for prejudgment interest, the Bankruptcy Code lacks specific provisions, thus federal common law applies. This law entitles the prevailing party to interest on liquidated recoveries from the demand date. Courts generally award prejudgment interest to trustees who avoid preferential transfers from the date of demand, provided the amount is ascertainable. In this case, the transfer amount was easily ascertainable from the demand made on the Defendant, and the Defendant did not provide valid reasons against awarding prejudgment interest. Consequently, the Court will award prejudgment interest on $29,612.60 from January 5, 2006, at a rate of 5.06% as specified in 28 U.S.C. § 1961.
The Court found that the $29,612.60 transfer to Hollis, made within a year of the Debtors filing for bankruptcy, is avoidable as a preference under 11 U.S.C. § 547. Summary judgment is granted in favor of the Trustee against Hollis for this amount, with interest accruing from the demand date. A separate order will follow this Memorandum Opinion, consistent with the relevant procedural rules.
