For a preference, the transfer occurs when property is placed in escrow or is delivered to the court to be held in custodia legis, according to Bankruptcy Judge William J. Fisher of St. Paul, Minn.
The debtor was in protracted litigation with a creditor over ownership of real property. Long before bankruptcy, the state court appointed a receiver who sold the property. Also, well outside the 90-day preference period, the state court directed that the sale proceeds be held by the court clerk in custodia legis. When the litigation was resolved by agreement, some $600,000 from the sale proceeds was to be disbursed to the creditor.
Court approval and actual disbursement to the creditor occurred with 90 days of the debtor’s chapter 7 filing. Consequently, the trustee sued the creditor to recover the $600,000 as a preference under Section 547.
The creditor filed a motion for summary judgment, seeking dismissal because the critical “transfer” occurred outside of the 90-day lookback period when the proceeds were placed in custodia legis. Judge Fisher agreed and granted the motion to dismiss in an opinion on August 19.
The creditor argued that the case was similar to In re Newcomb, 744 F.2d 621 (8th Cir. 1984), where the Eighth Circuit applied a broad definition to the word “transfer” and held that the transfer for preference purposes occurred when the property was placed in escrow, not when the disbursement was made to the creditor from the escrow account. Judge Fisher agreed that Newcomb was controlling.
Both Newcomb and the case before Judge Fisher turned on the meaning of the word “transfer” appearing in Section 547(b), as defined in Section 101(54). Subsection 54(D) describes a transfer as a “direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with . . . property.”
Further definition is provided by Section 547(e)(1)(A), which says that “a transfer of real property . . . is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee.”
Although the Eighth Circuit had held in Newcomb that a transfer occurs when property is placed in escrow, Judge Fisher said that the appeals court has not ruled on whether the transfer similarly occurs when property is placed in custodia legis. Nonetheless, he said that “several other courts . . . have held the transfer occurs when the property is first deposited with the court.”
Under the reasoning of those “other” cases, Judge Fisher held that “the transfer clearly occurred upon deposit of the sale proceeds with the [court clerk] . . . well before the ninety-day preference period.” He reasoned that the deposit with the court was “substantially similar” to the creation of an escrow, “with no material difference.” After the deposit, he said that the debtor only had a contingent right to funds.
Even if the deposit into court was not the transfer, the trustee would still lose, Judge Fisher said.
Probing the details, Judge Fisher recounted how the debtor and the creditor signed a settlement before the 90-day period. The trustee contended that the transfer did not occur until the state court approved the settlement during the 90-day period.
Judge Fisher said that court approval was “not the relevant transfer.” The broad definition of “transfer” means that a transfer can be conditional, as Section 101(54)(D) provides. In that regard, he pointed to Newcomb, where removal of the property from escrow depended on court action that occurred during the preference period. He therefore said the “transfer took effect” when “the parties were bound by the settlement,” which was more than 90 days before bankruptcy.
Judge Fisher granted the motion to dismiss because the transfer occurred more than 90-days before bankruptcy.
For a preference, the transfer occurs when property is placed in escrow or is delivered to the court to be held in custodia legis, according to Bankruptcy Judge William J. Fisher of St. Paul, Minn.
The debtor was in protracted litigation with a creditor over ownership of real property. Long before bankruptcy, the state court appointed a receiver who sold the property. Also, well outside the 90-day preference period, the state court directed that the sale proceeds be held by the court clerk in custodia legis. When the litigation was resolved by agreement, some $600,000 from the sale proceeds was to be disbursed to the creditor.
Court approval and actual disbursement to the creditor occurred with 90 days of the debtor’s chapter 7 filing. Consequently, the trustee sued the creditor to recover the $600,000 as a preference under Section 547.