Barnhill v. Johnson

• Decision Date: 25 March 1992
• Docket Number: No. 91-159,91-159
• Citation: 503 U.S. 393,112 S.Ct. 1386,118 L.Ed.2d 39
• Parties: William BARNHILL, Petitioner v. Elliot JOHNSON, Trustee
• Court: U.S. Supreme Court

503 U.S. 393

112 S.Ct. 1386

118 L.Ed.2d 39

William BARNHILL, Petitioner

v Elliot JOHNSON, Trustee.

No. 91-159.

Argued Jan. 14, 1992.

Decided March 25, 1992.

Syllabus

The debtor's check in payment of a bona fide debt was delivered to petitioner Barnhill in New Mexico on November 18 and honored by the drawee bank on November 20, the 90th day before the debtor filed a Chapter 11 bankruptcy petition. Respondent Johnson, the trustee of the debtor's estate, filed an adversary action against Barnhill, claiming that the payment was recoverable under 11 U.S.C. § 547(b) as a transfer of the debtor's property made on or within 90 days of the bankruptcy filing. Johnson asserted that the transfer occurred on the date that the bank honored the check, but Barnhill claimed that it occurred on the date that he received the check. The Bankruptcy Court agreed with Barnhill and denied recovery, and the District Court affirmed. The Court of Appeals reversed, holding that a date of honor rule should govern § 547(b) actions.

Held: For the purposes of § 547(b), a transfer made by check is deemed to occur on the date the check is honored. Pp. 396-402.

(a) "What constitutes a transfer and when it is complete" is a matter of federal law. McKenzie v. Irving Trust Co., 323 U.S. 365, 369-370, 65 S.Ct. 405, 407-408, 89 L.Ed. 305. The Bankruptcy Code defines "transfer" as "every mode, . . . absolute or conditional, . . . of disposing of . . . property or . . . an interest in property." 11 U.S.C. § 101(54). In the absence of any controlling federal law, "property" and "interests in property" are creatures of state law. McKenzie, supra, at 370, 65 S.Ct., at 408. Under the Uniform Commercial Code, which has been adopted by New Mexico, a check is simply an order to the drawee bank to pay the sum stated on demand. If the check is honored, the debtor's obligation is discharged, but if it is not honored, a cause of action against the debtor accrues to the check recipient "upon demand following dishonor." Pp. 396-399.

(b) An unconditional transfer of the debtor's interest in property did not occur before November 20, since receipt of the check gave Barnhill no right in the funds the bank held on the debtor's account. No transfer of any part of the debtor's claim against the bank occurred until the bank honored the check, at which time the bank had the right to "charge" the debtor's account and Barnhill's claim against the debtor ceased. Honoring the check left the debtor in the position that it would have occupied had it withdrawn cash from its account and handed it over to Barnhill. Thus, it was not until the debtor directed the bank to honor the check and the bank did so, that the debtor implemented a "mode . . . of disposing . . . of property or . . . an interest in property" under § 101(54) and a "transfer" took place. Pp. 399-400.

(c) Barnhill's argument that delivery of a check should be viewed as a "conditional" transfer is rejected. Any chose in action against the debtor that he gained when he received the check cannot be fairly characterized as a conditional right to "property or . . . an interest in property," since, until the moment of honor, the debtor remained in full control over the account's disposition and the account remained subject to a variety of actions by third parties. In addition, the rule of honor is consistent with § 547(e)(2)(A), which provides that a transfer occurs at the time it "takes effect between the transferor and the transferee," particularly since the debtor here retained the ability to stop payment on the check until the very last. Barnhill's appeal to legislative history is also unavailing. Pp. 400-402.

931 F.2d 689 (CA 101991), affirmed.

REHNQUIST, C.J., delivered the opinion of the Court, in which WHITE, O'CONNOR, SCALIA, KENNEDY, SOUTER, and THOMAS, JJ., joined. STEVENS, J., filed a dissenting opinion, in which BLACKMUN, J., joined.

William J. Arland, III, Albuquerque, N.M., for petitioner.

Nancy S. Cusack, Roswell, N.M., for respondent.

THE CHIEF JUSTICE delivered the opinion of the Court.

Under the Bankruptcy Code's preference avoidance section, 11 U.S.C. § 547, the trustee is permitted to recover, with certain exceptions, transfers of property made by the debtor within 90 days before the date the bankruptcy petition was filed. We granted certiorari to decide whether, in determining if a transfer occurred within the 90-day preference period, a transfer made by check should be deemed to occur on the date the check is presented to the recipient or on the date the drawee bank honors it. We hold that the latter date is determinative.

The relevant facts in this case are not in dispute. The debtor ¹ made payment for a bona fide debt to petitioner Barnhill. The check was delivered to petitioner on November 18. The check was dated November 19, and the check was honored by the drawee bank on November 20. The debtor later filed a Chapter 11 bankruptcy petition. It is agreed by the parties that the 90th day before the bankruptcy filing was November 20.

Respondent Johnson was appointed trustee for the bankruptcy estate. He filed an adversary proceeding against petitioner, claiming that the check payment was recoverable by the estate pursuant to 11 U.S.C. § 547(b). That section generally permits the trustee to recover for benefit of the bankruptcy estate transfers of the debtor's property made within 90 days of the bankruptcy filing. Respondent asserted that the transfer occurred on November 20, the date the check was honored by the drawee bank, and therefore was within the 90-day period. Petitioner defended by claiming that the transfer occurred on November 18, the date he received the check (the so-called "date of delivery" rule), and that it therefore fell outside the 90-day period established by § 547(b)(4)(A).

The Bankruptcy Court concluded that a date of delivery rule should govern and therefore denied the trustee recovery. The trustee appealed and the District Court affirmed. The trustee then appealed to the Court of Appeals for the Tenth Circuit.

The Court of Appeals for the Tenth Circuit reversed, concluding that a date of honor rule should govern actions under § 547(b). In re Antweil, 931 F.2d 689 (1991). It distinguished a prior decision, In re White River Corp., 799 F.2d 631 (1986), in which it held that, for purposes of § 547(c), a date of delivery rule should govern when a transfer occurs.² The Tenth Circuit concluded that § 547(b) and § 547(c) have different purposes and functions, justifying different rules for each. It further concluded that a date of honor rule was appropriate because such a rule was consistent with provisions of the Uniform Commercial Code, was capable of easier proof, and was less subject to manipulation. We granted certiorari to resolve a Circuit split.³ 502 U.S. ----, 112 S.Ct. 48, 116 L.Ed.2d 26 (1991).

In relevant part, § 547(b) provides:

"(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—

. . . . .

"(4) made—

"(A) on or within 90 days before the date of the filing of the petition. . . ."

Title 11 U.S.C. § 101(54) (1988 ed., Supp. II) ⁴ defines "transfer" to mean

"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."

Section 547(e) provides further guidance on the meaning and dating of a transfer. For purposes of § 547, it provides

"[ (e)(1) ](B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.

"[ (e) ](2) For the purposes of this section, except as provided in paragraph (3) of this subsection, 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. . . ."

Our task, then, is to determine whether, under the definition of transfer provided by § 101(54), and supplemented by § 547(e), the transfer that the trustee seeks to avoid can be said to have occurred before November 20.

"What constitutes a transfer and when it is complete" is a matter of federal law. McKenzie v. Irving Trust Co., 323 U.S. 365, 369-370, 65 S.Ct. 405, 407-408, 89 L.Ed. 305 (1945). This is unsurprising since, as noted above, the statute itself provides a definition of "transfer." But that definition in turn includes references to parting with "property and interests in property." In the absence of any controlling federal law, "property" and "interests in property" are creatures of state law. Id., at 370, 65 S.Ct., at 408; Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) ("Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law"). Thus it is helpful to sketch briefly the rights and duties enjoyed under state law by each party to a check transaction.⁵

A person with an account at a bank enjoys a claim against the bank for funds in an amount equal to the account balance. Under the U.C.C., a check is simply an order to the drawee bank to pay the sum stated, signed by the maker and payable on demand. U.C.C. §§ 3-104(1), (2)(b), 2 U.L.A. 224 (1991). Receipt of a check does not, however, give the recipient a right against the bank. The recipient may present the check but, if the drawee bank refuses to honor it, the recipient has no recourse against the drawee. U.C.C. § 3-409(1), 2A U.L.A. 189 (1991).⁶

That is not to say, however, that the recipient of a check is without any rights. Receipt of a check for an underlying obligation suspends the...