In Re Marshall
2008 WL 5401418, 550 F.3d 1251 (2008)
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Rule of Law:
When a debtor uses a line of credit from one creditor to pay another creditor via a balance transfer, that transfer is of an 'interest of the debtor in property' under 11 U.S.C. § 547(b). The debtor's direction to the new creditor on how to disburse the loan proceeds constitutes sufficient dominion and control to create a property interest, making the transfer potentially avoidable as a preference.
Facts:
- Bryan and Julie Marshall (Debtors) held two credit card accounts with MBNA and two credit card accounts with Capital One.
- The Marshalls' Capital One accounts had credit lines totaling $55,000.
- On July 27, 2005, the Marshalls directed Capital One to pay MBNA a total of $38,000 through two balance transfers from their Capital One accounts.
- Capital One transferred the funds directly to MBNA to pay down the Marshalls' debt.
- The Marshalls never had physical possession of the funds transferred from Capital One to MBNA.
- On October 13, 2005, within 90 days of the balance transfers, the Marshalls filed for Chapter 7 bankruptcy.
Procedural Posture:
- Linda Parks, the bankruptcy Trustee, filed an adversary complaint against MBNA's successor, FIA Card Services, in the U.S. Bankruptcy Court, seeking to avoid the balance transfers as preferential.
- The bankruptcy court concluded the payments were not preferential transfers because they did not constitute transfers of the Debtors' property interest.
- The Trustee, as appellant, appealed to the U.S. District Court.
- The district court affirmed the bankruptcy court's decision, holding that the Debtors lacked control over the funds and the transfer did not diminish the bankruptcy estate.
- The Trustee, as appellant, appealed the district court's judgment to the U.S. Court of Appeals for the Tenth Circuit, with FIA Card Services as the appellee.
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Issue:
Does a debtor's use of a balance transfer from one credit card account to pay a debt on another credit card account within the 90-day preference period constitute a transfer of 'an interest of the debtor in property' that is avoidable by a bankruptcy trustee under 11 U.S.C. § 547(b)?
Opinions:
Majority - Judge O'Brien
Yes. A debtor's use of a balance transfer from one credit card to pay another constitutes a transfer of an 'interest of the debtor in property' under § 547(b). The court reasoned that the transaction is not a single event but a sequence: the Debtors drew on their Capital One credit line, which converted available credit into a loan, and they then directed Capital One to use those loan proceeds to pay MBNA. This exercise of directing the funds' distribution is a manifestation of dominion and control, which is sufficient to create a property interest, even if the interest was only fleeting and the Debtors never physically possessed the money. This transfer diminished the potential bankruptcy estate because the loan proceeds were an asset that would have been part of the estate had they not been preferentially transferred to MBNA. The court also held the earmarking doctrine inapplicable because it only applies when the new lender, not the debtor, dictates that the funds must be used to pay a specific, pre-existing debt.
Analysis:
This decision aligns the Tenth Circuit with the majority of courts on the issue of credit card balance transfers as preferential payments. It solidifies the principle that 'control' over funds is the key determinant of a property interest for § 547(b) purposes, regardless of whether the debtor physically possesses the money. By characterizing the drawdown of credit as the creation of a new asset (loan proceeds), the court strengthens the trustee's avoidance powers, thereby reinforcing the bankruptcy policy of ensuring equal distribution among creditors. The ruling clarifies that the earmarking doctrine defense is narrow and does not protect transfers where the debtor retains discretion over the use of the new loan.
