Belknap, Inc., In re

• Decision Date: 25 July 1990
• Docket Number: No. 89-6235,89-6235
• Citation: 16 UCC Rep.Serv.2d 408,909 F.2d 879
• Parties: , Bankr. L. Rep. P 73,558, 16 UCC Rep.Serv.2d 408 In re BELKNAP, INC., Debtor. OFFICIAL UNSECURED CREDITORS' COMMITTEE OF BELKNAP, INC., Plaintiff-Appellant, v. The SHALER CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 879

909 F.2d 879

59 USLW 2166, Bankr. L. Rep. P 73,558, 16

UCC Rep.Serv.2d 408

In re BELKNAP, INC., Debtor.

OFFICIAL UNSECURED CREDITORS' COMMITTEE OF BELKNAP, INC., Plaintiff-Appellant, v. The SHALER CORPORATION, Defendant-Appellee.

No. 89-6235.

United States Court of Appeals,

Sixth Circuit.

Argued June 7, 1990.

Decided July 25, 1990.

Ronald R. Peterson, Jay S. Geller (argued), Jenner & Block, Chicago, Ill., Jeremiah A. Lloyd, Gerald F. McDaniel, Lloyd & McDaniel, Louisville, Ky., for plaintiff-appellant.

Richard H. Casper, Foley & Lardner, Milwaukee, Wis., Helen Lucier (argued), Charles R. Keeton, Brown, Todd & Heyburn, Louisville, Ky., for defendant-appellee.

Before: MERRITT, Chief Judge; KRUPANSKY and MILBURN, Circuit Judges.

MERRITT, Chief Judge.

The preference problem in this case involving three checks issued by the bankrupt debtor requires an interpretation of section 547(b) of the 1978 Bankruptcy Act. That section provides that "the trustee may avoid any transfer of an interest of the debtor in property" made on or within 90 days of the filing of the bankruptcy petition. 11 U.S.C. Sec. 547(b) (1988) (emphasis added). ¹ The two main questions presented are: (1) Is a bankrupt debtor's check to be treated as a cash transaction at the time of its delivery to the creditor so that a check delivered more than 90 days before bankruptcy does not constitute a voidable preference even though the check is honored within the 90-day preference period? (2) If the date of delivery, rather than the date the check is honored, is the crucial date for purposes of determining a "transfer," when does delivery occur--on the date of mailing or on the date the creditor receives the check?

Viewing the matter as one governed by state law, the Bankruptcy Court below reasoned that the "transfer of an interest of the debtor in property" occurred only on the date of payment by the bank and avoided as preferences all three checks in question here. 96 B.R. 108. On appeal, however, District Judge Siler disagreed with the Bankruptcy Court, holding instead as a matter of federal law that the preference question turns on the date of delivery. We agree with Judge Siler, who followed the rule adhered to by all the Courts of Appeals that have discussed the issue under the 1978 Act. We also conclude that the date the creditor receives the check, rather than the date of mailing, constitutes the date of delivery and hence the date of "transfer" under section 547(b).

On June 18, 1985, the creditor, the Shaler Corporation, shipped engine oil products to the debtor, Belknap, Incorporated, and the debtor paid for the goods by check. The 90-day preference period began to run on September 5, 1985. The pertinent dates are as follows:

                Check    Due    Amount   Mailed  Received  Honored
                36749  7/31/85  1614.60   8/30     9/3         9/5
                34525  7/31/85  1582.31   9/4      9/9        9/12
                36983  7/31/85  1582.31   9/10     9/12       9/16
                ----------
                

As the above dates show, the last check (number 36983), in the amount of $1582.31, was mailed, received, and honored within the 90-day preference period. Thus, because that check clearly qualifies as an avoidable preference, only two checks, numbers 36749 and 34525, rather than the three considered in the lower court proceedings, require a determination of the effective date of "transfer" within the meaning of section 547(b). There are three possible approaches for determining at what point a check transaction becomes a transfer. First, if a transfer occurs when the debtor places the check in the mail, then both checks (numbers 36749 and 34525), were transferred outside the 90-day preference period. Second, if a transfer occurs when the creditor actually receives the check from the debtor, then the first check (number 36749) would fall outside the preference period while the second check (number 34525) would fall inside the preference period. Finally, if a transfer occurs only when the debtor's bank honors the check, then both checks (numbers 36749 and 34525) were transferred inside the preference period.

I.

What constitutes a "transfer of an interest of the debtor in property" within the meaning of section 547(b) of the 1978 Act is necessarily a federal question, since it arises under a federal statute intended to have uniform application throughout the United States. The Supreme Court in analogous circumstances has so concluded. See McKenzie v. Irving Trust Co., 323 U.S. 365, 369-70, 65 S.Ct. 405, 407-08, 89 L.Ed. 305 (1945); Steele v. Louisville & N.R. Co., 323 U.S. 192, 204, 65 S.Ct. 226, 232-33, 89 L.Ed. 173 (1944); Prudence Realization Corp. v. Geist, 316 U.S. 89, 95, 62 S.Ct. 978, 982, 86 L.Ed. 1293 (1942). We recognize that in the absence of any controlling federal statute, the definition of "transfer" and its operation are controlled by state law. Although the 1978 Act does not delineate when a check becomes a transfer for purposes of section 547, the fact that Congress clarified its intent in enacting that section of the Code makes it unnecessary to look to state law for guidance. The legislative history to section 547 states that

payment of a debt by means of a check is equivalent to a cash payment, unless the check is dishonored. Payment is considered to be made when the check is delivered for purposes of sections 547(c)(1) and (2).

124 Cong.Rec. S17,414 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini); 124 Cong.Rec. H11,097 (daily ed. Sept. 28, 1978) (statement of Rep. Edwards); see 2 Norton, Bankruptcy Law & Practice Sec. 32.15 (1981).

Collier further reinforces our position that the preference question is a matter of federal law. According to Collier, "[t]he supremacy of state law is confined to determining what constitutes perfection of a transfer. The question of whether a transfer is preferential and avoidable by the trustee is governed by Sec. 547 of the Code." 4 Collier on Bankruptcy p 547.16, at 547-63 (L. King 15th ed. 1990). Any other approach, including the plaintiff's recommendation that "transfer" be defined not wholly as a matter of state law but "by reference to state law," would undermine the need for uniformity in the application of the preference section to checks and is inconsistent with the realities of day-to-day business transactions, both personal and commercial, where checks normally are considered present payments between parties. See, e.g., O'Neill v. Nestle Libbys P.R., Inc., 729 F.2d 35, 37 (1st Cir.1984); U.C.C. Sec. 3-104(2)(b) (1978) (a check is "a draft drawn on a bank and payable on demand."). This approach also draws support from section 547's underlying policy of affording some stability to struggling enterprises by attempting to relieve creditors' concerns that any payments received from the debtor could, depending on the vagaries of the check honoring process, later be avoided as preferences. ²

II.

The Courts of Appeals' opinions interpreting section 547 of the 1978 Act all have reached the conclusion that the delivery of a check is equivalent to a cash transaction if the check is not dishonored. O'Neill, 729 F.2d at 37 (delivery of check is date of transfer provided the check is presented for payment within 30 days and honored by debtor's bank); In re Continental Commodities, Inc., 841 F.2d 527 (4th Cir.1988) (same); Braniff Airways, Inc. v. Midwest Corp., 873 F.2d 805 (5th Cir.1989) (transfer occurs upon delivery of a check because "this construction is consistent with the legislative history ... the underlying purpose of Sec. 547, and accepted commercial standards"); In re White River Corp., 799 F.2d 631 (10th Cir.1986) (same); In re Kenitra, Inc., 797 F.2d 790 (9th Cir.1986) (same), cert. denied, 479 U.S. 1054, 107 S.Ct. 928, 93 L.Ed.2d 980 (1987).

The Court of Appeals cases said to be inconsistent with this approach, Nicholson v. First Inv. Co., 705 F.2d 410 (11th Cir.1983) (transfer occurs when check is honored by debtor's bank); Fitzpatrick v. Philco Fin. Corp., 491 F.2d 1288 (7th Cir.1974) (same); Klein v. Tabatchnick, 610 F.2d 1043 (2nd Cir.1979) (same), all interpret section 60 of the Chandler Act, the language and legislative history of which assume a more complete reliance on state law definitions of the word "transfer." See Bankruptcy Act of 1898, ch. 541, Sec. 60(b), 30 Stat. 544, 562 (repealed 1978); McKenzie, 323 U.S. at 365, 65 S.Ct. at 405. Obviously interpretations of the preference section of the old Bankruptcy Act do not control the interpretation of the new preference section in the new Act when the legislative history of the new Act, as discussed above, suggests that Congress intended that a "transfer" occur when the check is delivered.

III.

The Bankruptcy Court held below, and the Creditors' Committee now argues, that the date of delivery should only apply as the date of transfer for the exceptions to avoidance under subsection (c) of section 547 and should not apply to the rule of subsection (b). District Judge Siler properly rejected this view. There is no persuasive reason for giving the word "transfer" a different meaning under the two subparts of section 547. The policy of section 547(b) is to set aside transfers that potentially prefer selected creditors; section 547(c), in turn, defines groups of creditors who are excepted. To give the word "transfer" a different meaning in these complementary subparts seems inconsistent, unworkable, and confusing. See Ellis, Preferential Payments by Check: At What Point Is Payment Made?, 16 U.C.C.L.J. 46, 57 (1983) ("The application of two separate tests to such similar questions is illogical.").

Neither the general policy of equality of distribution applicable after the 90-day cut-off date nor the policy of encouraging uninterrupted trade before and after that date for certain groups of creditors excepted under subsection (c), necessarily demands a particular answer to the check transfer problem presented here. Given that the bankruptcy system must deal with...