Earmarking Defense Helps in Dismissal of Case for Zero Payment

Before filing for bankruptcy, the Debtors operated as a company engaged in the making and selling of food products. The Defendant, our client, is a provider for small business loans, working capital, and money advances and contracted with the Debtor to provide a loan to the Debtor.

Upon the Debtors’ bankruptcy, the Trustee sought to avoid and recover an amount totaling $40,228.96 as alleged preferential transfers.

We analyzed the business history and business terms between the parties and showed that transfers amounting to $11,144 were made according to the agreed contractual terms between the parties. As for the remaining $28,812, we showed that this amount was earmarked for the Defendant’s benefit and the Debtor never took possession of this amount. With solid evidence and precedents, we showed that when a third-party loans money to a debtor specifically to enable Debtor to satisfy the claim of a designated creditor, the proceeds are not the Debtor’s property and therefore not avoidable by the Trustee.

Based on the strength of our defenses, the Trustee dismissed the case for no payment.

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