§ 547 - Credit Card Balance Transfer as Preferential Transfer

Yoppolo v. MBNA America Bank, N.A. (In re Dilworth), 2008 WL 649064 (B.A.P. 6th Cir. 2008). The debtor paid a debt of $10,500.00 owed by her to MBNA America Bank, N.A. by using a balance transfer check drawn on another credit card company’s account. Less than 90 days later, she filed for relief under Chapter 7. The Chapter 7 Trustee filed a complaint to avoid the transfer as being preferential under 11 U.S.C. § 547.

MBNA raised several arguments in its defense that were found to be without merit by the B.A.P. First, the Court found that when a debtor borrows non-earmarked funds and exercises control by using the funds to pay one creditor versus other creditors, the debtor’s bankruptcy estate is diminished. Here, the B.A.P. found that the earmarking doctrine was inapplicable because the lender had imposed no stipulation on the balance transfer check, and thus, the debtor, rather than the lender, had exercised control over how to use the balance transfer check and to whom it would be disbursed. Accordingly, the debtor’s use of borrowed funds to discharge a debt constitutes a transfer of property of the debtor.

Additionally, the B.A.P. found MBNA’s argument that the transaction resulted only in the substitution of one creditor for another and thus did not result in a depletion of the debtor’s estate to be without merit. The B.A.P. reasoned that the debtor’s estate was depleted when the debtor elected to use the proceeds of the balance transfer to pay MBNA versus other creditors of her estate. Had the debtor retained the loan proceeds rather than satisfying the obligation to MBNA, the proceeds would have been part of the debtor’s bankruptcy estate.

The B.A.P. found the transfer to be preferential and granted the trustee’s motion for summary judgment on this issue.

COMMENT: The opinion raises some concerns over whether a debtor who uses a "line of credit check" (or a similar instrument that does not limit a debtor's use of the funds received) drawn on a credit card within 70 days of filing bankruptcy receives a cash advance thereby triggering the presumption of nondischargeability in 11 U.S.C. § 523(a)(2)(C)(i)(II). Generally, courts have held that balance transfers effectuated in this manner are not "cash advances." See, e.g., In re Manning, 280 B.R. 171 (Bankr. S.D. Ohio 2002).

By finding that the debtor could use the borrowed funds to pay off any creditor or to purchase assets, the Yoppolo decision essentially holds that the debtor received cash by use of the balance transfer check. Creditors might use this case to revisit the law on balance transfers and the presumption of nondischargeability for cash advances.

Aaron Ridenbaugh

§ 707(b)(3) - Deduction of Student Loan Expense from Disposable Income

In re Reimer, Case No. 07-32787 (Bankr. N.D. Ohio February 21, 2008) (J. Speer). The United States Trustee’s Office filed a Motion to Dismiss pursuant to 11 U.S.C. § 707(b)(1) and (3) asserting that the debtors had sufficient disposable income from which to pay their creditors in a hypothetical Chapter 13 repayment plan.

Of particular note was the UST’s contention that the debtors’ deduction of a $400.00 per month student loan payment expense was impermissible. The debtors argued that due to the nondischargeability nature of student loans, they may be treated differently under the Bankruptcy Code when calculating disposable income.

The Court rejected the debtors’ argument, reasoning that although an obligation to pay a debt may survive bankruptcy, that basis, alone, does not entitle a debtor to treat that claim differently. Otherwise, all nondischargeable debts could be entitled to favorable treatment, including those debts that arise from a debtor’s wrongful conduct like fraud, embezzlement, and larceny under 11 U.S.C. § 523(a)(2) or (4). Although there are debts that are nondischargeable that are also entitled to receive favorable treatment, these two classifications are not co-dependent. Thus, just because a claim is nondischargeable, it does not mean the claim is entitled to favorable treatment under the Bankruptcy Code. This was one factor in the Court’s holding that, under the totality of the circumstances, the debtors’ bankruptcy filing constituted an abuse for purposes of § 707(b)(3), and accordingly, unless the debtors voluntarily converted their case, the Court would enter an order of dismissal pursuant to § 707(b)(1).

COMMENT: This opinion highlights an important consideration in cases where disposable income may be an issue. If a debtor is close to the line where a § 707(b) action might be possible when including payments on a student loan in his or her budget, debtor’s counsel might be well advised to take a closer look at the debtor’s budget. As this opinion demonstrates, a court might not be inclined to include payment on a nondischargeable debt as a permissible expense when determining how much money remains available to pay creditors in a Chapter 13 case.