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Genuine Issue of Fact Exist as to Whether Alleged Transfer is Earmarked for Payment of Pre-Petition Debt

Deeba v. Pinkerton & Finn, P.C. (In re Macco Props.), No. 12-1118-R, 2016 Bankr. LEXIS 2101 (U.S. Bankr. W.D. Okla. May 23, 2016).

The Trustee for Debtor Macco Properties, Inc. brought an action against Defendant Pinkerton & Finn, P.C.(P&F), contending that a few weeks after filing its Chapter 11 petition, Debtor wire-transferred a total of $61,288.05 from its general operating bank account to P&F in payment of a prepetition debt. The Trustee contended that the transfers were avoidable under 11 U.S.C. § 549(a), as they were not authorized by statute or by any court, and sought to recover the alleged transfers from P&F under 11 U.S.C. § 550(a).

P&F admitted that it received $61,288.05 from the Debtor, but asserted that the funds transferred by the Debtor were not property of the bankruptcy estate, but instead were funds that the Debtor received from a related entity that was not in bankruptcy. P&F argued that the alleged funds were deposited into the Debtor’s account for the express purpose of paying P&F’s invoices and hence, such funds were earmarked for payment to P&F. So, the Defendant argued that as earmarked funds are not the property of the estate; the estate cannot avoid the alleged transfer of such funds under Section 549(a)

The Court found that P&F could not establish from the given facts that earmarking occurred under any of the defined tests. There was no evidence that the Debtor lacked the power to choose who would and would not be paid from the account. There was no evidence that any entity depositing funds in the account restricted Debtor from using the funds for purposes other than payment of P&F. No evidence supported P&F’s allegation that funds were deposited into the Debtor’s account to cover the payments to P&F or that particular deposit was allegedly earmarked. The Defendant did not submit any evidence that supported an inference that the deposited funds were held by the Debtor in trust.
The Court held in favor of the Trustee to avoid and recover from P&F the full amount of the wire transfers, $61,288.05, for the benefit of the Debtor’s estate.