Thomas Elmer Reep and Denise Lynne Reep

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The court incorporates by reference in this paragraph and adopts as the findings and orders
of this court the document set forth below.

Russ Kendig
United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

CHAPTER 7

IN RE:

THOMAS ELMER REEP AND CASE NO. 09-63908

DENISE LYNNE REEP,
JUDGE RUSS KENDIG

Debtors.
MEMORANDUM OF OPINION
(NOT INTENDED FOR
PUBLICATION)

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In an interesting twist on a preference action, Debtors seek to recover a payment the
chapter 7 trustee, Anthony J. DeGirolamo (hereafter “Trustee”) received from a creditor.
The creditor, Nelnet, turned the money over at Trustee’s request without litigation. Debtors
argue that the transfer was not a preferential transfer, relying on the earmarking doctrine.
Trustee contends the earmarking does not protect the transfer at issue, so the payment is
properly included as part of Debtors’ bankruptcy estate. A hearing was held on May 24,
2010. The parties filed a stipulation of facts on June 7, 2010.

The court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 1334 and the
general order of reference entered in this district on July 16, 1984. Venue in this district and
division is proper pursuant to 28 U.S.C. § 1409. The following constitutes the court’s
findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure

7052.

This opinion is not intended for publication or citation. The availability of this
opinion, in electronic or printed form, is not the result of a direct submission by the court.

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FACTS

With the filing of the joint stipulation of fact, there are no material undisputed
facts. On August 11, 2009, prepetition, Debtor Denise Lynne Reep’s mother, Barbara L.
Watts, withdrew $7,000.00 from her savings account with First Federal of Ohio (hereafter
“First Federal”) and deposited the money in Debtors’ checking account at First Federal.
The transfer was accomplished in the span of approximately one minute. Per the
agreement between Mrs. Watts and her daughter, the money was designated to pay a
Nelnet student loan owed by Mrs. Reep and was a loan to be repaid to Mrs. Watts by

Debtor.'

Once deposited in to Debtors’ checking account, Debtors had full access to the
funds and complete control of the funds. Although Mrs. Reep attempted to pay Nelnet on
the same day the transfer was made by her mother, online issues prevented her paying
Nelnet until August 13, 2009, as evidenced by a confirmation communication from
Nelnet. Nelnet received $7,073.93 in full satisfaction of its debt on August 14, 2009.
Debtors filed a joint chapter petition on September 23, 2009.

LAW AND ANALYSIS

The Bankruptcy Code outlines the requirements of a preference in 11 U.S.C. §
547(b), which permits a trustee to “avoid any transfer of an interest of the debtor in

property--
(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt
owed by the debtor before such transfer

was made;

(3) made while the debtor was insolvent;

(4) made--

(A) — onor within 90 days before the date
of the filing of the petition; or

(B) between ninety days and one year
before the date of the filing of the
petition if such creditor at the time
of such transfer was an insider; and

(5) that enables such creditor to receive more
than such creditor would receive if--

! Mrs. Watts is not listed as a creditor in the schedules.

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(A) the case where a case under chapter 7
of this title;

(B) _ the transfer had not been made; and

(C) such creditor received payment of such
debt to the extent provided by the provi-
sions of this title.

The parties do not dispute that the transfer at issue satisfied 11 U.S.C. § 547(b)(1) - (5).
The transfer was for the benefit of a creditor, Nelnet, on account of an antecedent debtor
owed prior to the date of the transfer. Under 11 U.S.C. § 547(f), for the purposes of the
preferential transfer provision, a debtor is presumed to be insolvent in the ninety (90) day
period before the petition is filed. The transfer was made in the ninety day period before
the Debtors filed for bankruptcy relief and the payment resulted in Nelnet receiving more
than it would have received in a chapter 7 case in the absence of the transfer. Thus, the
issue is whether the payment to Nelnet was the “transfer of an interest of the debtor in

property.”

Debtors deny it was a transfer of an interest in their property, relying on the
earmarking doctrine. Earmarking is an equitable doctrine created to except transfers
borrowed from but directed by a third party to a creditor, for the benefit of the debtor, to
be excluded as transfers of interests in a debtor’s property. See Yoppolo v. MBNA
America Bank, N.A. (In re Dilworth), 560 F.3d 562 (6" Cir. 2009) (citing McElmore v.
Third Nat’] Bank in Nashville (In re Montgomery), 983 F.2d 1389, 1394 (6" Cir. 1993);
Mandross v. Peoples Banking Co. (In re Hartley), 825 F.2d 1067 (6" Cir. 1987)). The
premise of the earmarking doctrine as a preference defense is that the designation of the
property of a third party to a particular creditor, even if it flows through the debtor, is not

property of the debtor/estate.

Dilworth denied application of the earmarking doctrine. In Dilworth, the debtor
used a credit card check from a CitiPlatinum Select Card (hereafter “Citi’’) to pay a
balance on her MBNA credit card. The Sixth Circuit found that it was the Debtor who
controlled the payment of the MBNA card, not Citi. Dilworth at 565. Trustee makes a
similar argument on the present facts: when the funds were placed into Debtors’ account,
Debtors had full control and authority to pay any creditor. Debtors could have chosen to
pay another creditor or no creditor at all. According to Trustee, this possessory interest

defeats application of the earmarking doctrine.

This approach ignores the distinguishing fact between this case and Dilworth: the
property transferred not only was that of a third-party, it was also directed by the third-
party, Debtor’s mother. It is undisputed Debtor’s mother provided the funds specifically
to pay Debtor’s obligation to Nelnet. In other words, a contingency in use of the funds
existed. This is squarely within the Sixth Circuit’s pronouncement on application of the
earmarking doctrine: “where the borrowed funds have been specifically earmarked by the
lender for payment to a designated creditor, there is held to be no transfer of property of
the debtor even if the funds pass through the debtor’s hands getting to the selected
creditor.” Montgomery, 983 F.2d at 1394 (citing Hartley, 825 F.2d at 1070) (other

citations omitted); cf’ Meoli v. MBNA America Bank, N.A. (In re Wells), 382 B.R. 355

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(B.A.P. 6" 2008). This distinguishing fact is key. On these facts, Debtor’s mother
directed how the proceeds of her loan to her daughter were to be paid. Debtor did, in fact,
pay the proceeds in accordance with the agreement. There was no dimunition in the value
of Debtors’ estate. Consequently, the earmarking doctrine renders the transfer to Nelnet

to not be a transfer of an interest of the debtor.

In his response to the motion to return the avoided preference, Trustee challenged
Debtors’ standing to recover the preference payment. This argument was not explored in
further briefing by Trustee. To the extent the argument was not abandoned, the court
rejects it. As noted by the Sixth Circuit, relying on the United States Supreme Court,

standing hinges on three elements:

First, the plaintiff must have suffered an “injury in fact.” Id.

The injury must be “concrete and particularized” and it must

be “actual or imminent, not conjectural or hypothetical.” Jd.
(citations omitted). Second, the injury suffered must be “fairly
traceable,” or causally connected, to the challenged conduct. Jd.
(citation omitted). Third, it must be likely, and not merely specu-
lative, that the injury will be “redressed by a favorable decision.”
Id. at 561, 112 S.Ct. 2130.

Cohn y. Brown, 161 F.ed.Appx. 450 (6" Cir. 2005) (unreported) (citing Lujan v.
Defenders of Wildlife, 504 U.S. 555, 2130 (1992)). The elements are clearly met. First,
Debtors were injured when the money was recovered by the Trustee, resulting in revival
of a previously satisfied debt. Further, student loans are generally nondischargeable debts
under 11 U.S.C. § 523(a)(8), so a discharge will not extinguish the revived debt. Second,
the injury was directly caused by Trustee’s recovery of the alleged preferential payment.
Finally, a decision concluding that the transfer was not a preference will result in the
return of funds to the creditor. The debt will be satisfied and the injury cured.

CONCLUSION

Debtors have standing to contest Trustee’s recovery of an alleged preferential
payment from Nelnet, a student loan creditor. The funds used to pay the debt were
borrowed from Debtor’s mother, who directed the funds be used to pay Nelnet. The
funds were paid to Nelnet and the Debtors’ estate was not thereby decreased. As
earmarked funds, the transfer was not a transfer of an interest in property of Debtors and
therefore does not constitute a preference. Trustee’s recovery of the transfer was
therefore in error and should be refunded.

An appropriate order will be issued immediately.

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Service List:

C. Richard Thompson
371 Lexington Avenue
Mansfield, OH 44907

Anthony J. DeGirolamo
Courtyard Centre, Suite 307
116 Cleveland Ave., N.W.
Canton, OH 44702

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