Bank-to-Bank Transfer Within Preference Period is Voidable by Trustee
In the recent Yoppolo v. MBNA America Bank, N.A. (In re Dilworth), No. 08-3389 (6th Cir. March 27, 2009), the Sixth Circuit addressed whether a bank-to-bank transfer of funds within the preference period was a preferential transfer and, thus, voidable by a trustee.
Under the facts of the case, a debtor used a balance transfer check drawn on her Citibank credit card to pay off a balance of $10,500 on her MBNA credit card fifty-three days prior to filing for bankruptcy. The trustee brought a preferential transfer action against MBNA in the bankruptcy court, which held that the transfer was indeed preferential. The Bankruptcy Appellate Panel then affirmed the bankruptcy court’s ruling.
On appeal to the Sixth Circuit, MBNA argued that the transfer from Citibank to MBNA was not a transfer of an interest of the debtor in property, as required for a transfer to be preferential under 11 U.S.C. § 547, because the transfer was simply a means of substituting one creditor for another and as a result did not diminish the debtor’s assets. The court disagreed, and quoting the bankruptcy court, pointed out that “[t]he key here is that [the debtor] could have chosen to direct the funds to other creditors. . . . Such an ability to direct the funds necessarily constitutes a sufficient degree of control, such that the funds became a part of her estate.”
MBNA also argued that the funds were not actually property of the debtor under the earmarking doctrine, an equitable doctrine under which the use of borrowed funds to pay off a debt is deemed not to be a transfer of property of the debtor. The court rejected this argument, as well, emphasizing that a prerequisite to the application of the earmarking doctrine is that the lender and not the debtor must decide which creditor will receive the proceeds of the loan. In this case, however, the debtor had decided to which creditor the balance transfer check would be made out. The court thus affirmed the bankruptcy court’s ruling that the transfer was voidable by the trustee.
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Attorney Spotlight
William T. Repasky practices with the Litigation Department at Frost Brown Todd. He focuses on lending and commercial services; banking litigation and financial institutions.