“Date of Transfer” When Preference Action Targets Property Held In Custodia Legis

By Karl Johnson posted 10-30-2022 04:27 PM


In Ahlgren v. Miller (In re Holbert), 643 B.R. 332 (Bankr. D. Minn. 2022), the bankruptcy court held that for purposes of a preference action, a transfer occurs on the date funds are deposited with a court and not, as the trustee argued, on the date the court distributes the funds to the preference defendant.  Because this was outside the 90-day preference window, the complaint was dismissed.

Years before seeking bankruptcy protection, the debtor entered into an agreement to own certain real property jointly with the preference defendant.   Seven years later, the defendant commenced a lawsuit against the debtor in county court related to the debtor’s actions regarding the real estate.  The debtor filed counterclaims.  After the debtor and the defendant requested partition of the property to resolve the dispute, the county court directed the property be sold at public auction, the net sale proceeds to be deposited with the county court, and for the net proceeds to ultimately be split between the debtor and the defendant per their respective shares in the property.  Eventually, the defendant’s share was deposited into her lawyer’s IOLTA account.  Almost three months later the debtor filed for Chapter 7 bankruptcy protection. The Trustee filed a complaint seeking to recover the transfer to the defendant as a preference.

The defendant moved to dismiss the adversary proceeding, arguing that the transfer in question occurred before the 90-day preference period.  The defendant argued that the transfer occurred no later than the time the net proceeds were deposited with the county court, following the logic set forth in Matter of Newcomb, 744 F.2d 621 (8th. Cir. 1984).  The Trustee argued Newcomb applies only in cases where an escrow is established to secure payment of a debt, not when deposited in custodia legis to maintain the status quo.  Instead, the Trustee argued that the transfer occurred when the funds were distributed to the defendant’s lawyer’s IOLTA account.

The bankruptcy court first noted that the net proceeds from the sale of the property were held by the county court in custodia legis (in the custody of law). While no 8th Circuit law exists on the topic, other courts have held that when property is held in custodia legis a transfer under 11 U.S.C. § 547(b) occurs when the property is first deposited with the court.  Next, the court considered whether it could analogize the facts of the case to 8th Circuit case law regarding property held in escrow, found it could, and therefore that Newcomb, a case considering determination of a transfer when an escrow is involved, applied.  Applying Newcomb, the bankruptcy court concluded the relevant transfer occurred when the net proceeds were deposited with the county court, that the date of that deposit was outside the 90-day preference period, and therefore, the adversary proceeding was dismissed. 

Co-Editors in Chief
Karl J. JohnsonTaft Stettinius & Hollister LLP
David M. TanabeWinthrop & Weinstine, P.A.