Bankruptcy

11th Circuit - Bank To Bank Credit Card Balance Transfers Are Avoidable Preferential Transfers

By Scott Riddle

Bank of America, NA v. Mukamai (In re Egidi), No. 08-15958 (June 18, 2009) (click here for .pdf of opinion).  The facts were not in dispute. Within 90 days of filing her bankruptcy petition, debtor caused one credit card company to directly transfer a total of $16,065 to Bank of America ("BOA") as part of a balance transfer.  The trustee filed suit against BOA to recover the payments, and BOA defended on several grounds discussed below.  The Bankruptcy Court ruled in favor of the trustee and the District Court affirmed.  The Eleventh Circuit affirmed as discussed below.

In Nordberg v. Sanchez (In re Chase & Sanborn Corp.), 813 F.2d 1177, 1181 (11th Cir. 1987), which involved fraudulent transfers, we discussed '[t]he rules established in the avoidable preference cases' and explained that 'any funds under the control of the debtor, regardless of the source, are properly deemed to be the debtor's property, and any transfers that diminish that property are subject to avoidance.' ...

On appeal, BOA argues that the Bankruptcy Court erred because the transfer was a bank to bank transfer that was a mere substitution of creditors and was not an avoidable preference. BOA asserts that the funds from the other credit card companies were not controlled by Egidi and were not the property of Egidi, the debtor. This argument fails.The evidence established that Egidi directed other credit   card companies to  pay MBNA and had control of the lines of credit from other credit card companies. There is no evidence that any credit card company decided to direct the funds to MBNA on its own accord or specifically instructed Egidi to pay MBNA with the funds...

BOA argues that the funds were not in the control of the debtor because they were never in Egidi's bank account. This argument must also fail. The inquiry is whether Egidi controlled the disposition of the funds, not whether she mechanically made the payment to MBNA. That the 'possession [by Egidi] took place electronically rather than mechanically (through deposit slips and checks) is of no moment.' ...

BOA also argues that the transfer was not an avoidable preference because it  did not diminish the funds available to the other creditors. According to BOA, the funds belonged to the other credit card companies and had the funds not been transferred, they would have remained the property of the other credit card companies...  Egidi's transfer of funds to MBNA, instead of other creditors, deprived her  creditors of 'an equal distribution of the . . . assets' and constituted a voidable preference. Once the credit card companies extended the lines of credit to Egidi, she could have paid  other creditors or purchased other assets that would have become part of the estate and been available to other creditors. Because Egidi  chose to pay MBNA from the  lines of credit, the other creditors were denied payment or an opportunity for payment. ...

More after the break --

BOA attempts to seek refuge in the earmarking exception, but that doctrine provides no shelter. Other courts have recognized an exception to section 547(b) when the property is 'earmarked.' ... This exception exists 'primarily because the assets from the third party were never in the control of the debtor and therefore payment of these assets to a creditor in no way diminishes the debtor's estate.'  This Court has not expressly applied the earmarking doctrine in the past, and we decline to do so today. .. Because Egidi, not the lender, designated the recipient of the transferred funds, the earmarking doctrine is inapplicable and additional discussion is not warranted...

BOA also attempts to cloud the issue by calling the transfer a 'bank to bank transfer' and argues that the transfers were mere 'substit[utions of] one creditor for another' which did not diminish the estate. This argument is only applicable when the new lender directs the payments and '[t]he money was never available to satisfy the claims of general creditors.'...

BOA lastly argues that the transfers were really a 'debt swap,' which cannot be avoided by the Trustee, pursuant to 11 U.S.C. § 546(g). This argument was not raised before the Bankruptcy Court and was mentioned in a single sentence in the conclusion section of BOA's brief to the District Court.

Full post as published by Georgia Bankruptcy Blog on June 28, 2009 (boomark / email).