Marshall v. FIA Card Services, N.A. (In re Bryan K. Marshall), 550 F.3d 1251 (10th Cir. 2008)

In In re Bryan K. Marshall, the Court of Appeals for the Tenth Circuit held that funds used by the debtor, Bryan K. Marshall, in a balance transfer between two credit cards can be the subject of a preference action. The Court found that those funds were briefly in the debtor’s possession and therefore could be included in the debtor’s estate.

The debtor had two credit card accounts with MBNA and two accounts with Capital One. On July 27, 2005, the debtor transferred his MBNA balances of $21,000 and $17,000 to Capital One, essentially causing Capital One to pay off the MBNA balances. On Oct. 13, 2005, the debtor filed for bankruptcy under chapter 7 of the Bankruptcy Code. The Chapter 7 trustee sought to avoid the payments to MBNA under Bankruptcy Code section 547(b). Bankruptcy Code section 547 provides the trustee with the power to avoid transfers of “an interest of the debtor in property” made within 90 days prior to the bankruptcy filing.

The bankruptcy court determined that the payments were not preferential because they were not transfers of “an interest of the debtor in property” as required under section 547(b). It held that the funds in question were assets of Capital One in which debtors did not have an interest. The bankruptcy court reasoned that the balance transfer was merely a “substitution of creditors” and if the balance transfer had not been initiated, the debtor’s estate would not have been any larger. On appeal, the district court arrived at the same result using a different theory. It held that the transfers to MBNA were protected under the “earmarking doctrine.” Under the earmarking doctrine, a trustee cannot avoid a transfer of funds to a lender where the debtor was required to use such funds to repay the lender.

The Tenth Circuit, reversing the bankruptcy court and the district court, stated that in analyzing whether something is “property of the estate,” the determining factor is whether the debtor could “exercise dominion or control” over the property, not whether the transfers decreased distribution to the debtor’s creditors. It noted that Bankruptcy Code section 541(a)(1) defines property of the estate as “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case” and that prior Tenth Circuit decisions held that Bankruptcy Code section 541 should be “generously construed.”

The Tenth Circuit also cited the Supreme Court’s decision in Begier v. IRS, 496 U.S. 53, 58- 59 (1990), which defined property of the estate to include “property that would have been part of the estate had it not been transferred before the

commencement of bankruptcy proceedings.” Finally, the Tenth Circuit stated that anything that is considered property of an estate under state law is property of the estate under the Bankruptcy Code. While the Tenth Circuit did not find any Kansas authority directly on point, it found precedent supporting the more general proposition that “the right to use an item or to control its use is a property interest.”

Turning to the balance transfers at issue, the Tenth Circuit stated that the transfers were, in reality, a series of separate, micro events notwithstanding that the events took place almost simultaneously. It stated that what essentially occurred was that the debtor borrowed money from Capital One, deposited the proceeds into its own account, and then transferred the money to MBNA. In other words, the debtor’s ability to instruct Capital One to transfer the funds to MBNA amounted to “constructive possession” of the funds. Accordingly, the Tenth Circuit found that the debtor had “dominion and control” over the money and that the transfers to MBNA were therefore avoidable.

The Tenth Circuit also rejected the district court’s holding that the earmarking doctrine applied, stating that “earmarking” applies only when a lender requires the funds in question to be used to pay a specific debt. Here, it found that Capital One had placed no conditions on the debtor’s use of the funds.

The holding in In re Bryan K. Marshall greatly expands the ability of a trustee to recover a debtor’s assets. It will prove very useful for bringing money back into a debtor’s estate for distribution to all creditors.