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C. Interest of the Debtor in Property Requirement.
The "property of the debtor" requirement is best understood as including property that would have been part of the debtor's estate had it not been transferred before the commencement of the case. Begier v. Internal Revenue Serv., 496 U.S. 53, 110 S. Ct. 2258, 110 L. Ed. 2d 46 (1990). In the absence of any controlling federal law, the definition of the term "interest in property" is generally a matter of state law. Barnhill, 503 U.S. 393, 112 S. Ct. 1386, 118 L. Ed. 2d 39; Butner v. United States, 440 U.S. 48, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979). Often, courts will look to the ability of the debtor to control the property at issue to determine whether the debtor has an interest in the transferred property. Riley v. National Lumber Co. (In re Reale), 584 F.3d 27 (1st Cir. 2009) (bankruptcy court did not err in determining that transferred funds were property of estate because debtor had control of funds, even though they were in bank account were titled in mother's name with father's social security number listed as beneficiary).
Transfers into escrow accounts provide a fertile area for litigation on this issue. Cf. O'Neill v. Dell (In re O'Neill), 204 B.R. 881 (Bankr. E.D. Pa. 1997). Sometimes the purchaser of the assets from a company in financial trouble pays some creditors of the seller. When that occurs within the preference period the Court must determine whether that payment should be characterized as "property of the debtor." The analysis is complex and requires getting into the mind of the purchaser. In Warsco v. Preferred Technical Group, Inc., 252 B.R. 459 (N.D. Ind. 2000), the District Court affirmed summary judgment for the defendant because there was no showing that the transfer involved "an interest of the debtor in property" as required by section 547(b). However, the Court of Appeals reversed. If the funds the third party used to pay the creditor were consideration for the debtor's sale of its assets, then those funds would have been part of the debtor's estate and would have been available for distribution had they not been transferred to the creditor. On the other hand, if the funds used to pay the creditor were not part of the sale price for the debtor's assets, then it is unlikely that the payment diminished the debtor's estate. The Court goes through two lines of cases, those that hold it was property of the debtor and those that held it was not. It states: In this case, there is no smoking-gun connection . . . ." Warsco v. Preferred Tech. Group, 258 F.3d 557, 566 (7th Cir. 2001).
In Gray v. Travelers Insurance Co. (In re Neponset River Paper Co.), 231 B.R. 829 (B.A.P. 1st Cir. 1999), the Court carefully examines the rights of the debtor in funds advanced by a third party into an account at Debtor's law firm with complex rules for disposition and determines that the Debtor exercised sufficient control over those funds to characterize them as property of the Debtor for purposes of section 547. In Ramette v. Digital River, Inc. (In re Graphics Technology, Inc.), 306 B.R. 630, 635 (B.A.P. 8th Cir. 2004), aff'd, 113 F. App'x 734 (8th Cir. 2004), the Court found that funds paid to the defendant during the preference period belonged to the debtor even though the debtor never had legal title to the funds. The court denied the defendants argument that the debtor had held the funds in a constructive trust for the benefit of the defendant. By
