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proceeds be used to pay the pre existing loan. Lewis v. Providian Bancorp (In re Getman), 218 B.R. 490 (Bankr. W.D. Mo. 1998) refusing to apply earmarking to a transaction in which a credit card balance was "switched" from one card to another and citing Yoppolo v. Greenwood Trust Co. (In re Spitler), 213 B.R. 995 (Bankr. N.D. Ohio 1997). Some courts restrict the application of earmarking to situations protecting a surety or guarantor from being required to pay twice. McCuskey v. Nat'l Bank of Waterloo (In re Bohlen Enters., Ltd.), 859 F.2d 561 (8th Cir. 1988). Where the transaction actually diminishes the size of the estate earmarking will not apply. Int'l Ventures, Inc. v. Block Properties VII (In re Ventures, Inc.), 214 B.R. 590 (Bankr. E.D. Ark. 1997) (in which the new loan that paid off the antecedent unsecured loan was secured by property of the debtor).
The earmarking doctrine prevents a subcontractor's trustee's recovery of funds from general contractor that earmarked payments to subcontractor for payment to specific suppliers. Debtor/subcontractor had not controlled the payments and the payments did not diminish the debtor's estate. In re Gray Elec. Co., 142 F.3d 433 (6th Cir. 1998). Although the authors of a recent and thoughtful law review article would severely restrict or eliminate this defense, David Gray Carlson & William H. Widen, The Earmarking Defense to Voidable Preference Liability: A Reconceptualization, 73 Am. Bankr. L.J. 591 (1999), various courts have been using earmarking as a doctrine on the basis of which they are able to deny recovery of a preference claim that seems to meet the standards of section 547(b) and seems not to be amenable to any of the express defenses of section 547(c).
This trend may have begun with Kaler v. Community First National Bank (In re Heitkamp), 137 F.3d 1087 (8th Cir. 1998), in which the Court held that the earmarking doctrine protects from avoidability as a preference, transfer of late-perfected mortgage to a bank that lent money to pay creditors with mechanic's lien rights. Debtors were in the business of building and selling homes. Bank had previously lent $50,000 to Debtor to build a house and had taken a first lien. When Debtors ran out of money before completing the project, Bank lent them an additional $40,000 by issuing cashier's checks payable to specific
