Is a debtor's credit card payment a preference? The U.S. Tenth Circuit Court of Appeals speaks.(credit column)(Case overview)

A debate has raged over whether a debtor's payment by credit card, such as through a balance transfer from a credit card account, is a transfer of an interest of the debtor in property that would give rise to a preference claim. The United States Court of Appeals for the Tenth Circuit, in In re Marshall, recently ruled that the debtors' credit card balance transfers from one credit card issuer to pay down their credit card debt owing to another credit card issuer is a transfer of the debtors' property interest and, as such, is a recoverable preference. Interestingly, the Tenth Circuit's reversal and rejection of the only lower court opinions, that support the contrary and more trade creditor friendly view that credit card payments are not transfers of the debtor's interest in property, has undercut the trade's ability to assert a credit card payment as a defense to preference exposure.

Elements of a Preference Claim

Section 547(b) of the Bankruptcy Code permits a trustee or debtor-in-possession to recover a preference by satisfying all of the following requirements:

(a) The debtor transferred its interest in property to or for the benefit of a creditor (section 547(b)(1)). In the Marshall case, the court considered whether a debtor's payment by credit card, through a transfer of balances from one credit card company to pay off the debtor's indebtedness to another credit card issuer, is a transfer of an interest in the debtor in property;

(b) The transfer was on account of antecedent or existing indebtedness that the debtor owed the creditor (section 547(b)(2));

(c) The transfer was made when the debtor was insolvent (section 547(b)(3)). The debtor's insolvency is based on a balance sheet definition: the debtor's liabilities exceed its assets. The debtor's insolvency is also presumed during the 90-day preference period, which makes it easier for the trustee to prove insolvency;

(d) The transfer was made within 90 days of the debtor's bankruptcy filing, in the case of transfers to non-insider creditors, and within one year of bankruptcy for transfers to insiders of the debtor, such as the debtor's officers, directors, controlling shareholders and affiliated companies (section 547(b)(4)); and