April 2, 2008

6th Circuit B.A.P. Confirms that a Chapter 7 Trustee May Avoid a Bank to Bank Transfer as a Preferential Transfer

The 6th Circuit Bankruptcy Appellate Panel in Yoppolo v. MBNA America Bank, N.A. (In re Dilworth), 2008 Bankr. LEXIS 543, (B.A.P. 6th Cir., March 12, 2008), confirmed the bankruptcy court’s decision that a chapter 7 trustee can avoid as a preference the debtor’s payment of a balance transfer check that was drawn on an account with one bank to another bank. 

The creditor defendant argued on appeal that the transfer of funds from one bank to another was not a transfer of property of the debtor and that there was simply a substitution of one creditor for another. The creditor further argued that there was no reduction to the debtor’s assets and that the funds transferred were “earmarked for payment.” The B.A.P. rejected the creditor’s arguments and adopted the decision of Meoli v.MBNA America Bank, N.A. (In re Wells), 2008 Bankr. LEXIS 283, 2008 WL 351281 (B.A.P. 6th Cir., February 11, 2008) which has nearly identical facts to the case at hand. The court found that the debtor had significant control over the funds when she decided to use the funds to pay another creditor, even though the funds were never actually in the debtor’s possession. The lender had no control over how the funds drawn on its account were used and the Debtor could have used the money for any purpose. 

The debtor’s estate was “depleted” when she used the funds obtained from the other bank to pay the debt owed to the defendant over other creditor obligations. Accordingly, the transfer was a transfer of an interest of the debtor in property and was an avoidable preference.

This E-alert was prepared by Laura M. Zaremski. Please contact any member of the Bricker & Eckler Creditor Rights & Bankruptcy group for more information.