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.