§ 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