In re Wagenknecht and Colbert

Case Type:
Case Status:
19-1206 (10th Circuit, Aug 24,2020) Published
Tenth Cir. reversed ruling of BAP, which had affirmed bankruptcy court (D. Colo.). Bankruptcy court entered summary judgment in favor of chapter 7 trustee on preference suit to avoid transfer of funds to law firm based on debtor's mom's loan for sole purpose of paying debt to firm. Debtor did not exercise dominion or control of funds. Transfer did not deprive estate of resources which could have otherwise been used to satisfy claims of creditors. Mom transferred funds directly. Funds never came under control or authority of debtor. Transfer was not of an interest of the debtor in property.
Procedural context:
Bankruptcy court (D. Colo.) entered summary judgment in favor of chapter 7 trustee on preference action against law firm. Defendant law firm appealed to BAP, which affirmed. Law firm appealed to 10th Circuit.
Eric Wagenknecht and his wife, Susan Colbert, filed for relief under Chapter 13 of the Bankruptcy Code on January 19, 20161 (the “Petition Date”). The case was converted to Chapter 7 on April 28, 2017. Jared Walters was appointed as the Chapter 7 trustee for the estate (the “Trustee”). Prior to the Petition Date, the Law Firm provided legal services to Eric. By the end of 2015, Eric owed the Law Firm over $20,000. In January 2016, Eric asked his mother, Sharon Wagenknecht, if he could borrow $21,672.65 to pay the Law Firm. Sharon agreed to loan Eric the money for the sole purpose of paying the Law Firm. On January 11, 2016, Eric executed a promissory note to repay Sharon. The note does not place any conditions on the loan, but Sharon stated in an affidavit that she “required . . . as a condition of the loan, that the entire $21,672.65 be used exclusively to pay the specific debt owed to the Law Firm and for no other purpose.” Sharon further stated that she “would not have made [the] loan unless the funds were used exclusively to pay the Law Firm.” (Id.) On January 14, 2016, Sharon wrote a check, drawn on her bank account, directly to the Law Firm in the amount of $21,672.65, and delivered the check directly to the Law Firm. The Law Firm cashed the check on January 15, 2016. In January 2018, the Trustee initiated an adversary proceeding against the Law Firm. The Trustee alleged that the payment to the Law Firm was a preferential transfer under 11 U.S.C. § 547. The Trustee therefore sought to avoid and recover the payment under 11 U.S.C. §§ 547 and 550.
Briscoe, Ebel, Lucero

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