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Check Cleared for Payment Post-Petition Avoidable

A check issued by a debtor pre-petition that cleared the debtor’s bank for payment days after the debtor’s bankruptcy case was filed was avoidable by the trustee as a post-petition transfer of estate property under Bankruptcy Code Sec. 549, the Bankruptcy Appellate Panel for the Ninth Circuit has decided. Addressing an issue of first impression in the Ninth Circuit, the BAP held that the U.S. Supreme Court’s rationale in Barnhill v. Johnson, 503 U.S. 393 (1992),—that an ordinary check does not “transfer” estate property until it is presented for payment by the payee—applies to post-petition transfers under Sec. 549.

The debtor’s chief financial officer issued a check from the debtor’s bank account to the debtor’s bankruptcy attorney but the attorney refused the check in favor of a cashier’s check. The CFO drew the cashier’s check from his personal bank account, and, on the day of its bankruptcy filing, the debtor issued a check to the CFO as reimbursement for the CFO’s payment to the debtor’s attorney. The check cleared the debtor’s bank four days after the debtor filed for bankruptcy.

The trustee filed a complaint to avoid the debtor’s check to the CFO as a post-petition transfer under Sec. 549. The bankruptcy court granted summary judgment in favor of the trustee, rejecting the CFO’s argument that the payment was a non-avoidable preference under Sec. 547.

The BAP affirmed. In Barnhill, the U.S. Supreme Court held that an ordinary check does not transfer property of the estate until the check is honored by the debtor’s bank. The decision overruled Ninth Circuit precedent that transfers occur upon the delivery of ordinary checks to creditors. However, Barnhill did not overrule a unanimous line of cases holding that the date of delivery rule applies to ordinary check payments with respect to the affirmative defenses available under the preference statute. Relying on the reasoning of these cases, the CFO unsuccessfully argued that the transfer was a non-avoidable contemporaneous exchange for new value.

However, the BAP determined that this was not a preference case. In a preference case, the debtor’s check would have been delivered to the debtor’s attorney and honored by the debtor’s bank within the 90-day preference period. Unlike a preference case, the present case straddled both pre- and post-petition periods: the CFO delivered the check prepetition, but the debtor’s bank honored it post-petition. Consequently, the transfer was subject to the trustee’s strongarm powers under Sec. 549. Otherwise, the BAP observed, ordinary checks delivered prepetition but honored post-petition would be recoverable neither as a preference nor as post-petition transfer, a result that Congress could not have intended. Further, Barnhill was not limited to preference cases. Although Barnhill was a preference case, the holding applied to any “transfer” within the meaning of Sec. 101(54), including a transfer under Sec. 549.

Lewis v. Kaelin (In re Cresta Tech. Corp.), No. NC-17-1186-BSTa, 2018 Bankr. LEXIS 1057 (B.A.P. 9th Cir. Apr. 6, 2018)