September 02, 2020

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

A Case That Is Not About Earmarking

By Michael Enright

If you convince your mother to write and mail a check directly to one of your creditors because you cannot pay it, and then you file a bankruptcy petition, the creditor that received the payment from your mother gets the benefit of an “earmarking” defense, right?  The answer remains uncertain in some jurisdictions. Notably, in Walters v. Stevens, Littman, Biddison, Tharp & Weinberg, LLC (Matter of Wagenknetch), No. 19-1206 (10th Cir. Aug. 24, 2020) the court decided it did not need to answer that question, instead applying the “dominion and control” test of Parks v. FIA Card Servs., N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir. 2008) in a manner that sheltered the payment from recovery as a preference. Both the majority opinion and the dissent in this 2-1 decision discussed the earmarking doctrine in some depth, though it was not in fact the subject of the appeal. Apparently, that is because the 10th Circuit has not ruled on the availability of the defense outside of the context where both the debtor and his benefactor/lender each were liable in the first place for the debt owed to the creditor that received payment.  In addition to the robust discussion of the defense that was not before the court, the decision also is interesting because it relies on fine distinctions in the facts to distinguish precedent – in particular whether the debtor had the discretion to direct the payment of the creditor by the third party or not.  In the end, the recipient of the mother’s check was off the hook on the preference claim.  But the case is a good reminder that the earmarking defense may not be a reliable means to deflect a preference claim, and it matters what jurisdiction the debtor files in.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.