Publications

The Earmarking Defense Lives On

March 3, 2008
New York Law Journal

Defending bankruptcy preference suits is not easy. Typically litigated in the trustee’s home court, preference suits force effective litigators to come up with seemingly esoteric substantive defenses and other procedural strategies. Fortunately for defense counsel, three Circuit Courts of Appeals confirmed in the past year the continued vitality of an often overlooked substantive defense—the so-called “earmarking” doctrine. In re Lazarus, 478 F.3d 12, 16 (1st Cir. 2007) (reversing bankruptcy and district courts; doctrine held not available to lender who belatedly recorded its mortgage, even when lender’s new loan refinanced prior lender and creditors were not prejudiced); In re Flanagan, 503 F.3d 171, 186 (2d Cir. 2007) (doctrine applied when debtor replaced oversecured obligation with fully secured obligation, but payment was voidable to extent transfer diminished debtor’s estate); and In re Adbox, Inc., 488 F.3d 836 (9th Cir. 2007) (earmarking not an affirmative defense; defendants did not waive defense by failing to plead it in answer; but defendants failed to show debtor’s agreement with lender conditioning use of borrowed funds for payment to them or that use of funds was otherwise limited).