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Lawrence Pono

Document Type

Article

Abstract

Conflicting social philosophies with their infinite variations will inevitably influence law making and law interpretation. Consciously or unconsciously, social and political attitudes affect even those concerned with such an apparently technical matter as the definition of preferential transfer in bankruptcy. As it evolved over time from its English law antecedents, the law of preferential transfers in the United States gradually shifted its concern from the culpability of commercial actors to the effect of the transfer on distributive equality goals, culminating in our current law of preferences as codified in the federal Bankruptcy Code. While crafted in a highly technical and formalistic fashion, the black-letter law is simply incapable of capturing all of the nuances of behavior in the credit marketplace. Therefore, the need has remained for the bankruptcy courts to put their gloss on the statute to ensure it serves its intended purposes in any given case and also as a system. One prominent example of this judicial explication is what's known as the earmarking doctrine, a court-made equitable invention intended to assure that the transfer under scrutiny truly involves property of the debtor, as opposed to circumstances where the debtor serves merely as a conduit to move funds from one creditor to another. Although its existence has been recognized almost without exception, courts, and for that matter commentators, disagree sharply over the circumstances when it is appropriate for the doctrine to be invoked and, even when there is agreement about those circumstances, similar disagreement over the standard to apply in determining if the transfer at issue is actually protected under the earmarking exception. This Article attempts to address both of these questions by proposing a fluid approach to defining the scope of the earmarking doctrine that conforms its application to what is asserted to be the foundational purpose of the preference law; namely, ratable distribution among creditors with similar rights. "The worst form of inequality is to try to make unequal things equal."

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