Earmarked Loan

A creditor’s defense to a preference action that the funds it received as an alleged preference were never property of the debtor because they were not under the debtor’s control and were instead “earmarked” for the payment of that creditor and only that creditor. Thus the debtor’s property was not diminished by the transaction since it merely substituted one creditor for another. The transferee will not be protected if the estate was diminished by the transaction, such as where the earmarked loan is secured.

Bankruptcy Code § 547. See also Preference.

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