Appellate Case: 22-2073 Document: 010110967059 Date Filed: 12/12/2023 Page: 1 FILED United States Court of Appeals PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS December 12, 2023
Christopher M. Wolpert FOR THE TENTH CIRCUIT Clerk of Court _________________________________
In re: CHUZA OIL COMPANY,
Debtor.
--------------------------------
PHILIP J. MONTOYA, Chapter 7 Trustee,
Plaintiff - Appellee,
v. No. 22-2073
PAULA GOLDSTEIN; BOBBY GOLDSTEIN PRODUCTIONS INC.; ROBERT (BOBBY) GOLDSTEIN,
Defendants - Appellants. _________________________________
Appeal from the Bankruptcy Appellate Panel (BAP No. 21-029-NM) _________________________________
David C. Japha (Evan J. House, with him on the briefs), Levin Jacobson Japha, P.C., Denver, Colorado, for Defendants-Appellants.
Daniel A. White, Askew & White, LLC, Albuquerque, New Mexico, for Plaintiff- Appellee. _________________________________
Before TYMKOVICH, BACHARACH, and PHILLIPS, Circuit Judges. _________________________________
TYMKOVICH, Circuit Judge. _________________________________ Appellate Case: 22-2073 Document: 010110967059 Date Filed: 12/12/2023 Page: 2
Bobby Goldstein operated Chuza Oil Co., a New Mexico petroleum company.
After encountering financial difficulties, he petitioned for Chapter 11 bankruptcy,
which resulted in a plan establishing the order of priority for paying Chuza’s
creditors. During reorganization, Mr. Goldstein and another company he owned
infused additional capital into Chuza. Some of the funds transferred into Chuza were
earmarked to pay interest on a promissory note held by Mr. Goldstein’s mother,
Paula. After Chuza went into involuntary Chapter 7 bankruptcy, the trustee sought to
claw back the payments to Paula because she was paid before creditors with higher
priorities under the Chapter 11 plan.
The bankruptcy court declined to avoid the payments because it concluded
Chuza did not have an interest in the earmarked funds, a requirement for avoidance
under the Bankruptcy Code. On appeal, the Bankruptcy Appellate Panel saw it
differently, finding Chuza had a cognizable interest because the transfers depleted the
bankruptcy estate by replacing subordinated debt (the debt on Paula’s note) with
unsubordinated debt (debt from Mr. Goldstein’s loans). Because the bankruptcy
court did not clearly err in its findings that Chuza did not have an interest in the
earmarked funds and that the bankruptcy estate was not diminished, we disagree with
the BAP and affirm the bankruptcy court.
I. Background
Chuza was a New Mexico petroleum production company that Mr.
Goldstein controlled as shareholder, CEO, and director. He also operated another
company, Bobby Goldstein Productions, Inc. (BGPI), which Mr. Goldstein used to
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help run Chuza. In 2012, Mr. Goldstein’s father loaned Chuza $500,000 under a
promissory note guaranteed by Mr. Goldstein and BGPI. The note was due in a
year, although it could be (and was) extended. After his father died, his mother Paula
held the note.
In 2014, Chuza filed for Chapter 11 bankruptcy to reorganize its affairs. Its
plan was confirmed in March 2016. The confirmed plan established the priority for
Chuza to pay back its creditors, placing repayment to insider unsecured creditors, like
Paula, below other creditors.
But business did not improve. Beginning in September 2016 and continuing
through December 2017, Mr. Goldstein, BGPI, and Paula loaned Chuza nearly
$500,000 in additional funds in a futile effort to keep the business afloat.1 Contrary
to the Chapter 11 plan, Chuza then transferred some of the money it received from
Mr. Goldstein and BGPI to Paula as payment on the note even though it had not paid
all remaining claims with higher priorities. The transfers to Paula totaled $46,885.
According to the testimony of Mr. Goldstein, Chuza was loaned the $46,885 as long
as the funds were used only to pay Paula.
In July 2018, a Chapter 7 involuntary bankruptcy petition was filed against
Chuza. The bankruptcy court granted the petition and appointed Philip Montoya as
trustee. Using his power to set aside certain transfers of money, the trustee later filed
an adversary proceeding to avoid (1) some transfers to Paula as preferential transfers
1 On appeal, the parties only contest the loans from Mr. Goldstein and BGPI.
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under 11 U.S.C. § 547(b); (2) all the transfers as fraudulent under 11 U.S.C.
§ 548(a)(1)(A); and (3) all the transfers as constructively fraudulent under 11 U.S.C.
§ 548(a)(1)(B).
The bankruptcy court refused to avoid the transfers. It concluded Chuza never
had a cognizable interest in the challenged funds because they were earmarked for
Paula’s benefit. It also found the preferential-transfer claim failed because the
defendants—Mr. Goldstein, BGPI, and Paula—established the loans were part of a
contemporaneous exchange for new value (a statutory exception), the actual-fraud
claim failed because there was no intent to commit fraud, and the constructive-fraud
claim failed because reasonably equivalent value was exchanged for the transfers
(another statutory exception). The trustee appealed to the Bankruptcy Appellate
Panel, challenging the court’s rulings on the preferential transfer and constructive
fraud claims.
The BAP reversed. It found Chuza had an interest in the funds because the
transfers diminished the estate by impairing the interests of a preferred class of
creditors established by the Chapter 11 plan. The transfers did so by replacing debt
that was subordinated under the plan—the original debt on Paula’s note—with new,
unsubordinated debt—debt to Mr. Goldstein and BGPI from the loans. The BAP also
found the statutory exceptions were not satisfied.
II. Analysis
Mr. Goldstein, his mother, and BGPI contend that Chuza never had an
interest in the transferred funds: Because the funds were always earmarked to
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Paula, they never became part of Chuza’s estate. And, regardless, the defendants
assert the transfers satisfied the relevant statutory exceptions.
When a party appeals from the BAP, we “independently review[] the
underlying bankruptcy court’s decision,” examining its legal conclusions de novo
and its factual findings for clear error. In re Mkt. Ctr. E. Retail Prop., Inc.,
730 F.3d 1239, 1244 (10th Cir. 2013). The BAP’s ruling—although not entitled
to deference—may be and often is persuasive. In re Miller, 666 F.3d 1255, 1260
(10th Cir. 2012).
A. Jurisdiction
Before we proceed to the merits, we must first ensure we have jurisdiction.
See Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541 (1986); First State
Bank and Tr. Co. of Guthrie v. Sand Springs State Bank of Sand Springs,
528 F.2d 350, 353 (10th Cir. 1976). A party can only appeal to us following a
final BAP decision, judgment, order, or decree. 28 U.S.C. § 158(d); In re
Farmland Indus., 567 F.3d 1010, 1015 (8th Cir. 2009). The BAP’s decision is
final if it “does not remand for ‘significant further proceedings.’” In re
Zwanziger, 741 F.3d 74, 75 n.1 (10th Cir. 2014) (quoting In re Buckner, 66 F.3d
263, 265 (10th Cir. 1995)); see also Farmland Indus., 567 F.3d at 1015 (noting a
BAP decision is final and appealable if it requires the bankruptcy court to
perform only “ministerial duties”).
The BAP remanded for the bankruptcy court to enter judgment for the
trustee on the two claims at issue. Because the bankruptcy court only had to
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perform that ministerial duty, the BAP’s decision was final and appealable. See
Zwanziger, 741 F.3d at 75 n.1; In re Bryan, 857 F.3d 1078, 1081 (10th Cir. 2017)
(finding a BAP order appealable when it remanded for “a task requiring little
judicial discretion”).
B. The Transfers
The Bankruptcy Code allows a trustee to avoid—or, colloquially, claw
back—certain transfers made by a bankrupt debtor, but only if the debtor had an
“interest” in the transferred property. § 547(b); 2 § 548(a)(1)(B); 3 Mann v. LSQ
Funding Grp., L.C., 71 F.4th 640, 645 (7th Cir. 2023). If the transfers are
2 The statute provides in part:
(b) Except as provided in subsections (c) and (i) of this section, the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property-- (1) to or for the benefit of a creditor * * *.
§ 547(b) (emphasis added). 3 The statute provides in part:
The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition * * *.
§ 548(a)(1)(B) (emphasis added).
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avoided, the property goes back into the bankruptcy estate. This “prevents
individual creditors from dismembering the assets of the debtor in a manner that
negatively impacts other creditors, and it allows all creditors to obtain a more
equitable distribution of the assets of the debtor.” In re Ogden, 314 F.3d 1190,
1196 (10th Cir. 2002).
The trustee here sought to regain the funds Chuza transferred to Paula after
the Chapter 11 plan became effective. He reasoned that Chuza had an interest in
the transferred funds because the transfers replaced subordinated debt to Paula
with unsubordinated debt to Mr. Goldstein and BGPI.
1. Earmarking
The defendants resist avoidance of the transfers, asserting the funds were
properly earmarked for payment to Paula. In other words, Mr. Goldstein’s loans
to Chuza included a condition that some of the funds be used only to pay portions
of Paula’s note. Thus, Chuza could not use the funds for other corporate
purposes.
The earmarking doctrine is a judicially created mechanism to determine
whether the debtor had an interest in transferred property. It allows a debtor to
borrow money to pay an existing creditor without the payments being avoided
and the money becoming part of the bankruptcy estate, but only if the borrowed
money was “earmarked” for that purpose. See In re Marshall, 550 F.3d 1251,
1254 (10th Cir. 2008); Nat’l Bank of Newport v. Nat’l Herkimer Cnty. Bank,
225 U.S. 178, 185 (1912) (applying earmarking doctrine). To earmark funds, the
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lender must condition the funds on payment to a specific creditor, and the debtor
must abide by that condition. See 2 Bankruptcy Desk Guide § 18:9 (Mar. 2023
update) (“There is an exception to the general rule that the use of borrowed funds
to discharge a debt constitutes the transfer of property of the debtor and that is
where borrowed funds have been specifically earmarked by a lender for payment
to a designated creditor.”).
Earmarking typically arises in co-debtor situations, where “the lender who
provides the funds to the debtor to pay off the creditor was also obligated to the
creditor either as a guarantor or surety.” Marshall, 550 F.3d at 1257 n.5; see also
In re Bohlen Enters., Ltd., 859 F.2d 561, 565 (8th Cir. 1988). The doctrine
ensures the funds will not be put into the estate, causing the guarantor or surety to
lose that money and still be on the hook for the original debt. Even so, some
courts have since extended earmarking beyond co-debtors. See In re Moses,
256 B.R. 641, 646 (B.A.P. 10th Cir. 2000); Bohlen Enters., 859 F.2d at 566; In re
Safe-T-Brake of S. Fla., Inc., 162 B.R. 359, 364 (Bankr. S.D. Fla. 1993).
Typically, “replacing one creditor with another of equal priority does not
diminish the estate.” Safe-T-Brake, 162 B.R. at 364; see also 2 Bankruptcy Desk
Guide, supra, § 18:9 (noting that earmarking applies when “one creditor is simply
substituted for another”).
We have applied earmarking in several cases. For instance, in In re Ogden,
314 F.3d at 1199, we briefly addressed and applied it when determining whether the
debtor, who ran a Ponzi scheme, “retained an interest” in fraudulently obtained
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funds. In that case, the debtor had induced certain parties to invest in his scheme,
and then used money from another individual to pay back the initial investors. After
the debtor went into involuntary Chapter 7 bankruptcy, the trustee sought to avoid
these payments. We determined the debtor retained an interest in the transferred
funds because there was “no indication that [the investors] had designated the
purpose of the investment as repaying [another investor].” Id.
In In re Marshall, 550 F.3d 1251, we acknowledged and applied earmarking
with additional elaboration. In that case, the debtors used Capital One credit cards to
pay down debt. After they went into Chapter 7 bankruptcy, the trustee sought to
avoid those payments. The bankruptcy court concluded that the debtors lacked an
interest in the payments, and the district court affirmed based on earmarking.
On appeal to our court, we applied two methods to determine whether the
debtors retained an interest in the transferred property. First, we looked to whether
the debtors retained some control over the funds: “[A] transfer of property will be a
transfer of ‘an interest of the debtor in property’ if the debtor exercised dominion or
control over the transferred property.” Id. at 1255 (emphasis added). Second, we
examined whether the transfers diminished the size of the bankruptcy estate. “Under
this analysis, a debtor’s transfer of property constitutes a transfer of ‘an interest of
the debtor in property’ if it deprives the bankruptcy estate of resources which would
otherwise have been used to satisfy the claims of creditors.” Id. at 1256.
Under both approaches, we concluded the debtors had an interest in the
payments. They had an interest under the dominion/control test because “Capital
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One placed no conditions on [their] use of the funds”—they controlled those funds
without restriction. Id. at 1257. And they had an interest under the diminution test
because “[t]he Capital One loan proceeds were an asset of the estate for at least an
instant before they were preferentially transferred” to pay debt. Id. at 1258.
We most recently considered earmarking in In re Wagenknecht, 971 F.3d 1209
(10th Cir. 2020). There, we again applied both tests, except this time we concluded
the debtor never had an interest in the funds under either. In that case, the debtor
received a loan from his mother under a promissory note that did not place any
conditions on the loan. But the mother later stated in an affidavit that she only
loaned her son the money on the condition it be used to pay a specific creditor. She
wrote a check from her bank account and delivered it directly to the creditor; her son
never actually possessed the money.
Applying the dominion/control test, we concluded the debtor did not control
the funds because “he did not have ‘an ability to direct their distribution’”—he was
bound by his mother’s condition. Id. at 1214 (quoting Marshall, 550 F.3d at 1256).
Nor did he have an interest under the diminution test: The money was never in his
account and he “played no role in delivering the funds.” Id.
As established by Ogden, Marshall, and Wagenknecht, earmarking applies if
the transfers can satisfy both the dominion/control and the diminution tests. See also
Joan N. Feeney & Michael J. Stepan, 2 Bankruptcy Law Manual § 9:13 (5th ed.
June 2023 update) (“Courts apply [earmarking] narrowly upon a showing of three
elements: 1) an agreement between the party advancing funds and the debtor that the
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new funds will be used to pay a specific debt; 2) implementation of the agreement;
and 3) absence of any diminution of the estate.”). Although in Marshall and
Wagenknecht we declined to say whether the doctrine applied beyond co-debtor
situations, we employed both tests even though neither case involved co-debtors.4
See Wagenknecht, 971 F.3d. at 1217 (Briscoe, J., dissenting). And we have
established that transfers may be avoided if the debtor had an interest in the
transferred property under either test. See id. at 1214 (applying diminution test after
concluding the debtor did not have an interest under dominion/control test). In other
words, a debtor must “pass” both tests for earmarking to apply and to avoid
avoidance.
We now proceed to the transfers at issue.
2. Chuza’s Transfers
The trustee sought to avoid Chuza’s payments to Paula because he believed
Chuza had an interest in the funds. To do so, he invoked the two statutes at issue
here: § 548(a)(1)(B) and § 547(b). Section 548(a)(1)(B) allows him to avoid
transfers that occurred “on or within 2 years before the date of the filing of the
[Chapter 7] petition.” In this case, that means the trustee can avoid all the
transfers—$46,885 in total to Paula. By contrast, § 547(b) allows him to avoid only
those transfers made “between ninety days and one year before the date of the filing
of the petition.” Here, that is $15,635 of the $46,885.
4 Of course, here we address a traditional co-debtor situation because Mr. Goldstein and BGPI guaranteed the note.
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Both statutes require that the debtor have an interest in the transferred
property. And because nothing indicates the meaning of “interest” differs between
the statutes, earmarking is available under both. See Mann, 71 F.4th at 646 (noting
avoidance attempts under § 547(b) and § 548(a)(1) “turn[ed] on the same question:
whether the payoff agreement constituted an ‘interest of the debtor in property’”);
In re TriGem Am. Corp., 431 B.R. 855, 864 (Bankr. C.D. Cal. 2010) (acknowledging
a “‘transfer of an interest of the debtor in property’ is equally a statutory requirement
of an action under § 548(a)(1) as it is for preferences”); Antonin Scalia & Bryan A.
Garner, Reading Law: The Interpretation of Legal Texts 172 (2012) (“The
presumption of consistent usage applies also when different sections of an act or code
are at issue.”). Accordingly, we analyze each of the transfers together.
Whether the debtor had an “interest” in the property is a legal question.
Marshall, 550 F.3d at 1254. The Bankruptcy Code does not define “an interest of the
debtor in property,” but the Supreme Court has concluded the term is analogous to
“property of the estate” as defined by § 541. Begier v. I.R.S., 496 U.S. 53, 58–59, 59
n.3 (1990). 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 case.”
Generally, state law creates and defines property interests for bankruptcy
proceedings, but “[o]nce that state law determination is made,” we “look to federal
bankruptcy law to resolve the extent to which that interest is property of the estate.”
Ogden, 314 F.3d at 1197 (internal quotation marks omitted). New Mexico broadly
defines “property” to include “every interest a person may have in a thing that can be
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the subject of ownership, including the right to enjoy, use, freely possess and transfer
that interest.” Muckleroy v. Muckleroy, 498 P.2d 1357, 1358 (N.M. 1972). Because
New Mexico law does not specifically delineate whether Chuza had an interest here,
we apply our two tests. See Marshall, 550 F.3d at 1255; Wagenknecht, 971 F.3d
at 1214.
a. Dominion/Control
At trial, Mr. Goldstein testified that the transferred funds were loaned to Chuza
as long as they were only used to pay Paula,5 testimony the bankruptcy court deemed
5 His testimony went as follows,
[Attorney]: Well, when money went into Chuza, was there a condition that Chuza spend that money to pay Paula? [Mr. Goldstein]: Yes. And that was the reason for the deposits. [Attorney]: Okay. And as head of Chuza, when you paid Paula, you were performing that condition, weren’t you? [Mr. Goldstein]: Yes. [Attorney]: Okay. What was your intention when you put all this money into Chuza? [Mr. Goldstein]: Which money are you referring to? The one for her deposits or the larger deposit from her? [Attorney]: In all of the other deposits that you made. [Mr. Goldstein]: The intention was to honor the obligation that Chuza, BPGI [sic], and BG had, pay interest on the note. So when I made a deposit, it was with the intention of covering that obligation.
App., Vol. II, 233. He also testified,
[Attorney]: Did Chuza perform its obligation to pay the deposits to Paula Goldstein? ***
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“uncontradicted and plausible.” App., Vol. I, 151. The bankruptcy court concluded
the evidence established that Mr. Goldstein placed a valid condition on the funds he
loaned to Chuza. On clear-error review, we cannot disagree.
That the condition was unwritten is of no moment. In Wagenknecht, we
affirmed a binding condition that was unwritten and only surfaced after the fact.
971 F.3d at 1212, 1214. Of course, this case differs slightly from Wagenknecht
because the money here passed through Chuza’s account; the new creditors
[Mr. Goldstein]: And when we made deposits through me or my other company, we did it with -- with the intent to cover its overhead, including those checks to Paula. When we made these deposits, I made them and earmarked the funds based on what I knew had to be paid, calculated in advance, put the money in, and the money would go out for Chuza’s operating expenses and plan payments. And I put additional sums in there with the intent to pay the interest on the $500,000 note, which was guaranteed.
Id., 235–36. And,
[Attorney]: And there wasn’t any -- there wasn’t any contract for that, right? That was just your intent? [Mr. Goldstein]: Well, it’s a contract amongst all the parties that we speak of, Chuza, BGPI, me, and Paula Goldstein. [Attorney]: When you say there’s a contract, you’re referring to the promissory note and personal guaranty or something else? [Mr. Goldstein]: I’m talking about the honor of performance, to me, is a contract. [Attorney]: But there’s no written document that says that when you deposited X dollars, that Y dollars had to go to Paula Goldstein, is there? [Mr. Goldstein]: There is nothing in writing to that effect.
Id., 245.
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(Mr. Goldstein and BGPI) did not directly pay the old creditor (Paula). But in
Wagenknecht, we placed more significance on the debtor’s lack of control than the
fact that the money was never in the debtor’s account. See id. at 1214. Likewise, in
Marshall, we found it significant that the debtors had full, unconditional control of
the funds. See 550 F.3d at 1257.
And other courts have noted the materially significant difference between
control and simple possession. See, e.g., In re Superior Stamp & Coin Co., 223 F.3d
1004, 1009 (9th Cir. 2000) (“[T]he proper inquiry is not whether the funds entered
the debtor’s account, but whether the debtor had the right to disburse the funds to
whomever it wished, or whether their disbursement was limited to a particular old
creditor or creditors under the agreement with the new creditor.”). Because Chuza
could only use the transferred funds to pay Paula, we conclude it did not control the
funds under our dominion/control test.
b. Diminution of the Estate
We next turn to the diminution test, which looks to whether the transfers
diminished the bankruptcy estate. The trustee asserts that the transfers diminished
the estate by depriving it “of resources which would otherwise have been used to
satisfy the claims of creditors.” Marshall, 550 F.3d at 1256. He points to the
Chapter 11 plan, which restricted Chuza’s ability to pay Paula by requiring that it
first pay back other creditors. He contends that because the new debt to Mr.
Goldstein and BGPI was not restricted under the plan, Chuza could pay them before
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paying others. In other words, he believes Chuza used the transfers to ensure
insiders—Paula, Mr. Goldstein, and BGPI—received their money first.
Turning to our precedent, we found a property interest in Marshall because the
funds were part of the estate, as here, for an instant before they were transferred.
550 F.3d at 1258. But we found no interest in Wagenknecht because the funds were
never in the debtor’s account and were conditioned on paying a specific creditor.
971 F.3d at 1214.
This case differs from both, however, because at the time of the transfers,
Chuza was subject to a Chapter 11 plan that required it to pay other debts before
paying on the note. As the trustee argues and the BAP observed, Chuza’s transfers
seemingly allowed it to replace debt subordinated by the Chapter 11 plan—debt to
Paula—with unsubordinated debt—new debt to Mr. Goldstein and BGPI. In other
words, it did not simply “replac[e] one creditor with another of equal priority.”
Safe-T-Brake, 162 B.R. at 364 (emphasis added).
Of course, because of the promised transfers Chuza received significantly
more money than it paid out to Paula. Viewing the economic realities of this
situation, it is hard to say the transfers diminished the estate under the diminution
test. To be sure, the transfers may have done so by replacing subordinated debt
under the Chapter 11 plan with new, unsubordinated debt. Cf. In re Davis, 319 B.R.
532, 536 (Bankr. E.D. Mich. 2005) (concluding “[t]he estate was not diminished”
when “[t]he [d]ebtor exchanged one secured debt for another”). Indeed, some of
Chuza’s debt to Paula was replaced with debt to Mr. Goldstein and BGPI. But if
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Chuza was also restricted in its ability to pay Mr. Goldstein and BGPI or if it did not
benefit from their apparent status as unsubordinated creditors, then other creditors
were not hurt, and there was no diminishment.
On clear-error review, we cannot disagree with the bankruptcy court’s finding
that the bankruptcy estate was not diminished by the combination of payments into
and out of Chuza. A factfinder could reasonably view Chuza’s payments to Paula in
one of two ways:
(1) These payments harmed other unsecured creditors by forcing them to compete against Bobby Goldstein and his company for Chuza’s limited assets. (2) These payments didn’t harm other unsecured creditors because the payments had been conditioned on the infusion of extra cash into Chuza. The bankruptcy court took the second view. For this finding, the court pointed out
that every payment to Paula had come soon after Mr. Goldstein or his company had
loaned larger amounts to Chuza and Mr. Goldstein or his company had paid Chuza
more than eight times what Chuza repaid Paula.
When Chuza made the first of the transfers to Paula, Chuza was insolvent.
Over the next two months, Mr. Goldstein paid over $76,000 to Chuza and it paid only
$3,500 to Paula. In the next two months, Chuza received a net of $109,282 from Mr.
Goldstein or his company. The pattern continued. All of Chuza’s payments to Paula
came right after Mr. Goldstein or his company had put a greater amount into Chuza.
All told, Paula received $46,885 but Chuza received a total of $442,548.09, less the
payments to Paula for a net of $395,663.09. {Bankruptcy Order at 3–4}
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Two possible inferences exist. One is harm to Chuza’s non-insider creditors
from Chuza’s payments to Paula. But the bankruptcy court could also infer that the
payments from Mr. Goldstein and his company had kept Chuza afloat so that it could
pay at least something to the non-insider creditors. For that inference, a factfinder
might reasonably have credited testimony by Mr. Goldstein, who explained that he
had loaned the money to Chuza so that it could pay its other creditors.
Either inference is reasonable. The bankruptcy court chose the second
inference, which was permissible based on the evidence of cash infusions from
Mr. Goldstein and his company. Given the reasonableness of that inference, the
bankruptcy court’s finding is not clearly erroneous.6 Anderson v. City of Bessemer
City, 470 U.S. 564, 574 (1985).
The BAP disregarded these infusions, focusing only on the money paid out to
Paula. This reasoning assumes that Chuza could decide how to spend the new
money. But we have already pointed out that Chuza had to spend part of the new
money to repay Paula. In similar circumstances, every circuit to address the issue has
considered the infusion of new money into the bankruptcy estate when determining
whether later payments had resulted in a diminution. See, e.g., In re Bohlen
Enterprises, Ltd., 859 F.2d 561, 566 (8th Cir. 1988) (stating that the court assesses
diminution by viewing the transaction as a whole, including a new creditor’s infusion
6 On these facts, we cannot say that the unsecured creditors were injured as a result of the transfers because the infusions into the estate were substantially greater than the transfers to Paula.
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of funds to the debtor and the debtor’s later repayments to an old creditor); In re
Winstar Commc’ns, Inc., 554 F.3d 382, 400 (3d Cir. 2009) (same); In re Superior
Stamp & Coin Co., Inc., 223 F.3d 1004, 1008 (9th Cir. 2000) (same); First Nat. Bank
v. Phalen, 62 F.2d 21, 22 (7th Cir. 1932) (“It is . . . well settled by the authorities that
where a surety supplies out of his own funds the means for payment of an obligation
whereon he is surety, the estate of his principal debtor is not thereby depleted.”).
The trustee argues that we cannot consider the infusions into Chuza, relying on
In re Marshall, 550 F.3d 1251 (10th Cir. 2008). This argument rests on a
misapplication of Marshall. There the debtors indisputably had control over how to
use the funds, id. at 1257, a point we also found significant in our analysis of the case
above. Here, however, the bankruptcy court found that Chuza could not disregard the
condition, which required Chuza to use a part of the loan proceeds to repay Paula.
In sum, the bankruptcy court correctly concluded that the earmarking doctrine
was an available defense for the transfers to Paula. Under clear-error review, the
bankruptcy court did not err in finding that Chuza did not control the earmarked
funds, nor did the transfers diminish the estate.
c. Statutory Exceptions
The defendants also assert statutory exceptions to the trustee’s § 547(b)
preferential-transfer and § 548(a)(1)(B) constructive-fraudulent-transfer claims.
First, they contend that even if Chuza had an interest in the transferred
property, the trustee cannot avoid the transfers under § 547(b) because the transferred
funds were “(A) intended by the debtor and the creditor . . . to be [part of] a
19 Appellate Case: 22-2073 Document: 010110967059 Date Filed: 12/12/2023 Page: 20
contemporaneous exchange for new value given to the debtor; and (B) in fact [were
part of] a substantially contemporaneous exchange.” § 547(c) (emphases added).
And this is true even though Chuza received the funds from Mr. Goldstein and BGPI,
not Paula. See In re ESA Env’t Specialists, Inc., 709 F.3d 388, 398 (4th Cir. 2013).
Similarly, they note that the trustee cannot avoid a transfer under § 548(a)(1)(B) if
Chuza “received . . . reasonably equivalent value in exchange for such transfer or
obligation.” § 548(a)(1)(B)(i) (emphasis added).7 Whether the parties intended an
exchange is a factual question that we review for clear error. See In re Spada,
903 F.2d 971, 975 (3d Cir. 1990).
The bankruptcy court concluded the exceptions were satisfied. It found there
was a contemporaneous exchange for new value because Chuza received much more
in loans from the defendants than it paid Paula. And the court determined there was
an exchange for reasonably equivalent value because, again, Chuza received much
more than it paid out and it was also able to pay down some antecedent debt on the
note. The BAP disagreed. Among other reasons, it concluded neither exception
applied because there was never any “exchange.”
7 This is less of an “exception” than it is an argument that a statutory requirement for avoidance is lacking. Compare § 548(a)(1)(B)(i) (noting the trustee may avoid a transfer if the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation”), with § 547(c) (providing when “[t]he trustee may not avoid . . . a transfer”). But the difference is immaterial here because the analysis for each statute turns on the same question: whether there was an “exchange.”
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The defendants assert that the exceptions apply because, as the bankruptcy
court observed, Chuza received far more than it paid Paula. Both exceptions require
an “exchange,” which is “the act of giving or taking one thing in return for another”
or “reciprocal giving and receiving.” Webster’s New Collegiate Dictionary 395
(1979). The payments to Chuza were always contemporaneous with Chuza’s
transfers to Paula. For example, Paula usually received money from Chuza on the
same day that Mr. Goldstein or his company paid Chuza. This course of conduct
suggests that Mr. Goldstein and his company had conditioned the loans on Chuza’s
use of a portion to repay Paula.
The bankruptcy court could rely not only on contemporaneity but also on Mr.
Goldstein’s testimony that he had agreed to lend money to Chuza only if it paid some
of the money to Paula. See supra note 5. The court regarded this testimony as
“uncontradicted and plausible.” App., Vol. I, 151. It also found that the “value
exchanged [had] not simply [been] the payment of subordinated debt [to Paula
Goldstein].” Id., 152. Instead, Mr. Goldstein had “also transferred to [Chuza] a net
of about $400,000, more than eight times the money paid to [Paula Goldstein]. For
each of the 13 challenged payments to [Paula Goldstein], there was a
contemporaneous exchange of new value.” Id., 152–53.
The bankruptcy court thus interpreted Mr. Goldstein’s testimony to reflect his
intent to pay the entire amount to Chuza in exchange for its promise to repay some of
it to Paula, rather than the contrary interpretation that only part of the loan came with
the condition to pay Paula. Given that the evidence allows two permissible
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interpretations of the intent to exchange shared by Mr. Goldstein and Chuza, the
bankruptcy court’s finding that there was an exchange was not clearly erroneous.
In sum, the finding of an exchange satisfies the statutory exceptions that defeat
the trustee’s § 547(b) preferential-transfer and § 548(a)(1)(B) constructive-
fraudulent-transfer claims.
III. Conclusion
For these reasons, we affirm the bankruptcy court’s rejection of the trustee’s
claims involving improper preference and constructive fraud.