  |
  |
  |
    
  
   |
 | |||
|
|
|
|
| |||
subcontractors that supplied the goods or services to construct the house. At the bank's direction, the Heitkamps obtained mechanic's lien waivers from the subcontractors in exchange for the cashier's checks. Bank took a second mortgage to secure the $40,000 loan but failed to record it for at least three months, until three days before the Debtors filed a Chapter 7 petition. The Trustee sued to avoid the filing of the second mortgage as a preferential transfer given to secure an antecedent debt. The Bankruptcy Court agreed, but the Eighth Circuit reversed on the basis of the earmarking defense. The Court stated:
According to the earmarking doctrine, there is no avoidable transfer of the debtor's property interest when a new lender and a debtor agree to use loaned funds to pay a specified antecedent debt, the agreement's terms are actually performed, and the transaction viewed as a whole does not diminish the debtor's estate. . . . [A] new creditor merely steps into the shoes of an old creditor.
Id. at 1089. The Court held that the Bank had merely replaced the contractors and suppliers that had lien rights. This is an unusual application of the earmarking doctrine and demonstrates its flexibility.
In 1999, the Bankruptcy Appellate Panel for the Eighth Circuit followed or expanded upon Heitkamp by holding that a late perfected security interest in an automobile securing a loan which was used to pay preexisting secured purchase money loan was likely protected from attack as a preference by the earmarking doctrine. Krigel v. Sterling Nat'l Bank (In re Ward), 230 B.R. 115 (B.A.P. 8th Cir. 1999). The Bankruptcy Court for the Southern District of Illinois completely disagreed with the holding in Ward. Perfection of security interest which secured new loan to pay off loan of existing creditor fifty days after release of security interest in Debtor's property precludes invocation of earmarking defense. Vieira v. Anna Nat'l Bank (In re Messamore), 250 B.R. 913 (Bankr. S.D. Ill. 2000). Judge Meyers sees that late perfection within the preference period creates a preference that this is not defeated by the use of earmarking in support of a "refinancing" or no diminution theory." The Court speculated that the
