Global Distribution Network, Inc. v. Star Expansion Co.

• Citation: 16 UCC Rep.Serv.2d 394,949 F.2d 910
• Decision Date: 19 November 1991
• Docket Number: Nos. 91-1151,91-1152,s. 91-1151
• Parties: , Bankr. L. Rep. P 74,321, 16 UCC Rep.Serv.2d 394 GLOBAL DISTRIBUTION NETWORK, INC., Plaintiff-Appellee, v. STAR EXPANSION CO., et al., Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 910

949 F.2d 910

60 USLW 2362, Bankr. L. Rep. P 74,321, 16

UCC Rep.Serv.2d 394

GLOBAL DISTRIBUTION NETWORK, INC., Plaintiff-Appellee, v. STAR EXPANSION CO., et al., Defendants-Appellants.

Nos. 91-1151, 91-1152.

United States Court of Appeals Seventh Circuit.

Argued Sept. 25, 1991.

Decided Nov. 19, 1991.

John M. Galich (argued), Brusso & Associates, Chicago, Ill., for Star Expansion Co. and IFC (Fasteners), Inc.

John V. Del Gaudio, Jr. (argued), Chicago, Ill., for Global Distribution Network, Inc.

Before CUMMINGS, FLAUM, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

When does a check create a "transfer" for purposes of 11 U.S.C. § 547(b)? This statute allows the estate of a debtor in bankruptcy to avoid transfers made during the 90 days before the filing of the petition. If the transfer occurs when the check is honored, then Global Distribution Network is entitled to recover about $20,000 from its creditors, who supplied goods on open account. If the transfer occurs at any earlier time, the creditors prevail. Bankruptcy Judge Barliant ruled that the transfer occurs on the bank's payment of the instrument, 114 B.R. 157 (Bankr.N.D.Ill.1990), and the district court affirmed, 133 B.R. 927 (N.D.Ill.). This conclusion accords with our holding under the 1898 Act, Fitzpatrick v. Philco Finance Corp., 491 F.2d 1288 (7th Cir.1974), and the tenth circuit's view of the 1978 Code, In re Antweil, 931 F.2d 689 (1991), cert. granted under the name Barnhill v. Johnson, --- U.S. ----, 112 S.Ct. 48, 116 L.Ed.2d 26 (1991). We conclude, however, that under the 1978 Code a transfer occurs on receipt of the check, provided the check is honored within 10 days.

Adversary proceedings in Global Distribution's bankruptcy sought to recover, as preferences, payments to several of its suppliers. Many payments concededly fell within the 90-day period. A few checks were right at the fringe. Some $20,000 in payments was made by checks dated October 27, 1986, and received by suppliers in Canada on November 28, 1986. (The record does not explain the gap.) The suppliers deposited the checks that day in Montreal. They were honored by Global Distribution's bank in the United States on December 3, 1986, three business days later. Global Distribution filed its petition in bankruptcy 90 days later, on March 3, 1987. Section 547(b)(4)(A) authorizes the recovery of transfers made "on or within 90 days before the date of the filing of the petition". (Other requirements of § 547(b) have been conceded for purposes of this case.) So if the transfer occurs when the check is honored, Global Distribution recovers the money, to be shared ratably among its general creditors.

The 1978 Code supplies two definitions of "transfer", one general and one for purposes of § 547. The general definition appears in 11 U.S.C. § 101(54):

"transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption; ...

The specialized definition in § 547(e)(2) says that "[f]or the purposes of this section ... a transfer is made"

(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time;

(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days; ...

This reference to "perfection" creates difficulties, for although security interests are "perfected" other transfers are not.

Five definitions of the date of "transfer" by check are possible. Transfer may occur:

. When the debtor tenders (mails or delivers) the check.

. When the creditor receives the check.

. When the creditor negotiates the check.

. When the debtor's bank honors the check.

. When the creditor receives the check, provided the bank honors the check within 10 days.

The bankruptcy and district judges in our case adopted the date-of-honor rule. Antweil is in accord. Cases support the other possibilities, too. In re Kenitra, Inc., 797 F.2d 790, 791 (9th Cir.1986), holds that the transfer occurs "at the time the debtor gave the check to the creditor", provided the check is "presented to the bank within a reasonable time and honored by the bank." The ninth circuit uses the 10-day period of § 547(e)(2)(A) as the outer limit. In re Wadsworth Building Components, Inc., 711 F.2d 122, 123 (1983). In re Belknap, Inc., 909 F.2d 879, 884 (6th Cir.1990), holds that the transfer occurs on delivery of the check but that "delivery occurs upon the creditor's actual receipt of the check". Belknap adds that the creditor must negotiate the check within 30 days, which § 3-503(2)(a) of the UCC defines as a reasonable time for presentment. The fourth circuit treats delivery as transfer, In re Virginia Information Systems Corp., 932 F.2d 338 (4th Cir.1991), apparently without regard to the time of presentment. Decisions of district and bankruptcy courts line up behind all five of the main possibilities and some additional variants.

Antweil gives three reasons for its date-of-honor rule: ease of proof, conformity with the UCC (§ 3-409(1) of which provides that "the drawee is not liable on the instrument until he accepts it"), and the purposes of the Bankruptcy Code. Antweil overlooks a fourth concern: consistency with the text. "Transfer" is a defined term in the 1978 Code, and neither Antweil nor any of the other courts of appeals has discussed § 101(54). "Transfer" means "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property" (emphasis added). A check is a "conditional" transfer of funds (the condition is the drawee's acceptance). By postponing the "transfer" until final payment, Antweil dishonors the language of § 101(54).

For what it is worth, we have other doubts about the three considerations on which Antweil relied. Start with ease of proof. Date stamps are more reliable than creditors' self-interested statements about when they received a check. But the dates on a check are not necessarily the right ones. Acceptance of an item is not truly final until the bank's "midnight deadline" has passed. See UCC §§ 4-213, 4-301(1). A bank may stamp a check "paid" yet reverse the credit and dishonor the item, provided it acts before midnight of the "banking day" after its receipt. "Banking day" is itself a term of art and, depending on state law or local practice, may or may not include Saturdays. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Devon Bank, 832 F.2d 1005 (7th Cir.1987). The midnight deadline is an outer limit; a bank's internal rules or a clearinghouse agreement may accelerate the process. So the date stamped on the check by the drawee bank is not dispositive; a date-of-honor rule does not eliminate disputes about timing.

Conformity with the UCC would be important if the definition of "transfer" came from state law, but it does not. McKenzie v. Irving Trust Co., 323 U.S. 365, 369-70, 65 S.Ct. 405, 407-08, 89 L.Ed. 305 (1945); Prudence Realization Corp. v. Geist, 316 U.S. 89, 95, 62 S.Ct. 978, 982, 86 L.Ed. 1293 (1942). The Code uses terms such as "perfection" that acquire significance from state law (§ 547(e)(1) defines perfection as whatever is necessary to defeat a judgment creditor under local law), but none of these terms is in dispute. At all events, a date-of-honor approach tracks the UCC only if federal law is searching for the date of "absolute" (that is, irrevocable) payment, which assumes the very subject in issue. If instead we are searching for the date of conditional transfer, there is no inconsistency between a date-of-delivery rule and any section of the UCC.

As for the purposes of the Code: although the preference-recovery period assures equal treatment of creditors who have claims in the three months before filing and this puts a damper on a stampede to grab assets in the last moments of a firm's life (creditors who use self-help end up no better off than creditors who remain passive), nothing in the idea of a preference period implies an answer to the question at hand. The statutory purposes would be served roughly as well by periods of 80, 90, or 100 days--and by rules defining "transfer" as negotiation or honor of checks. Far more important than the choice between 85 and 95 days is that the rule be simple and frustrate me-first strategies by creditors.

An analogy to § 544, which allows the trustee to avoid any interest that a creditor's hypothetical lien could have trumped on the date of the petition, supports the date-of-honor approach. Until the bank paid the instrument, some other creditor could have obtained a superior interest in the funds. The approach could be carried over to § 547 by characterizing a check as two § 101(54) transfers: a conditional transfer on delivery, and an absolute transfer on payment. If either of these transfers is within 90 days, the argument would conclude, the payment may be reversed. Under the 1898 Act this was indeed the proper understanding. Section 96(a)(2) of the old statute provided that "a transfer of property other than real property shall be deemed to have been made or suffered at the time when it becomes so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings could become superior to the rights of the transferee." That definition pointed inexorably to a date-of-honor rule in Fitzpatrick. Similar language appears in § 547(e)(1)(B) of the 1978 Code but serving a different purpose; the hypothetical-judgment approach to defining "transfer" is gone. The change in statutory language persuades us that the question is open to fresh consideration in this circuit.

The hypothetical-judgment definition from the 1898 Act yielded to language in § 547(e)(2) that defines as a transfer...