In re Mills, Bankruptcy No. 92-41070-7. Adv. No. 93-7176. No. 94-4084-SAC.

Decision Date15 November 1994
Docket NumberBankruptcy No. 92-41070-7. Adv. No. 93-7176. No. 94-4084-SAC.
Citation176 BR 924
PartiesIn re Everett MILLS, Debtor. Joseph I. WITTMAN, Trustee, Plaintiff, v. STATE FARM LIFE INSURANCE COMPANY, INC., Defendant, and Everett Mills, Intervenor.
CourtU.S. District Court — District of Kansas

William E. Metcalf, Metcalf & Justus, Topeka, KS, for Everett Mills.

Wayne A. Robinson, State Farm Ins. Companies, Law Dept., Bloomington, IL, Cynthia J. Sheppeard, Heck, Hendrix, Wright & Sheppeard, Topeka, KS, for State Farm Life Ins. Co. Inc.

Joseph I. Wittman, Trustee, Topeka, KS, pro se.

MEMORANDUM AND ORDER

CROW, District Judge.

This bankruptcy appeal presents the following issue: Is there an unauthorized postpetition transfer under 11 U.S.C. § 549 when the debtor issues the check before filing for bankruptcy but the check is not honored by the drawee bank until after the filing? The trustee here commenced an adversary action to avoid the debtor's transfer of $2,500 by check to State Farm Life Insurance Company, Inc. ("State Farm") as an unauthorized postpetition transfer pursuant to 11 U.S.C. § 549. The intervenor appeals the bankruptcy court's order granting summary judgment in favor of the trustee. In re Mills, 167 B.R. 663 (Bankr.D.Kan.1994).

In his first brief, the intervenor says he does not want oral argument, but he changes his mind and requests it in his reply brief. Other than positing that the issues are complex and important, the intervenor does not demonstrate any need for oral argument. In his brief, the trustee does not seek oral argument and does not raise issues different from those considered by the bankruptcy court. The parties have adequately identified and addressed the issues in the written briefs. Because oral argument is not likely to assist the court materially, the intervenor's request is denied.

The relevant facts are not disputed. The debtor issued a check on May 29, 1992, to State Farm in the amount of $2,500 in payment of a loan against his life insurance policy. State Farm received the check on June 2, 1992. The check did not clear the debtor's credit union until June 3, 1992. The debtor filed for bankruptcy on June 2, 1992, the day before the check was honored by the drawee credit union.

The plaintiff Wittman was appointed trustee for the bankruptcy estate. He filed this adversary action against State Farm seeking to recover this check payment pursuant to 11 U.S.C. § 549. State Farm answered but did not actively defend the action leaving that to the debtor who had intervened. In response to the trustee's motion for summary judgment, the debtor agreed the facts were undisputed and asked the bankruptcy court to decide the issues as a matter of law.

In relevant part, § 549 provides:

(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate—
(1) that occurs after the commencement of the case; and
(2)(A) that is authorized only under section 303(f) or 542(c) of this title; or
(B) that is not authorized under this title or by the court.

Section 549(a) authorizes, subject to the exceptions in subsections (b) and (c), a trustee's avoidance of a (1) transfer of, (2) property of the estate, (3) occurring after the bankruptcy petition is filed, if (4) the transfer is authorized only under §§ 303(f) or 542(c) or is not authorized by the Bankruptcy Code or by the court.

The bankruptcy court found that the debtor's credit union account became property of the estate upon the debtor filing for bankruptcy. The court relied on Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), in holding that the transfer occurred postpetition when the drawee bank honored the debtor's check. 167 B.R. at 664. The bankruptcy court concluded that the transfer here was authorized only by § 542(c) and that the stay exception provided in § 362(b)(11) did not authorize the transfer. Id. Thus, the court entered judgment for the trustee against State Farm in the amount of the postpetition payment, $2500.

The debtor appeals arguing the bankruptcy court erred in its legal conclusions. First, the debtor contends the Supreme Court's holding and reasoning in Barnhill is inapplicable to § 549. Second, the debtor believes that his payment was not prohibited by Code and that State Farm's presentment of the check was authorized under 11 U.S.C. § 362(b)(11). In short, the debtor concedes that his credit union account became property of the estate upon filing for bankruptcy. He also does not take issue with the fact that a transfer of estate property occurred. The debtor, however, disputes that the transfer occurred postpetition and that it was authorized only under § 542(c).

The district court sits as an appellate court in this proceeding. See Bankruptcy Rule 8013. The bankruptcy court's legal determinations are reviewed de novo. In re Raymond, 987 F.2d 675, 676 (10th Cir.1993).

When does a payment by check accomplish a transfer of property? In Barnhill, the Supreme Court held that in determining whether a transfer occurred within the preference period of § 547(b)(4)(A), a transfer made by check is deemed to occur not when the recipient is presented with the check, but later when the drawee bank honors the check. 503 U.S. at ___, 112 S.Ct. at 1387, 118 L.Ed.2d at 44. The Court's reasoning in Barnhill is tethered not so much to the narrow scope of § 547(b)(4)(A) but to the general definition of "transfer" found at 11 U.S.C. § 101(54).1

The underpinning of Barnhill is the general law of check transactions found in the Uniform Commercial Code. The Supreme Court began its analysis with a summary of that law and then rejected the notion that a check could be an unconditional transfer of property:

Receipt of a check gives the recipient no right in the funds held by the bank on the drawer\'s account. Myriad events can intervene between delivery and presentment of the check that would result in the check being dishonored. The drawer could choose to close the account. A third party could obtain a lien against the account by garnishment or other proceedings. The bank might mistakenly refuse to honor the check.

112 S.Ct. at 1389-91, 118 L.Ed.2d at 46-47 (footnote omitted).2 From that discussion, the Court drew the conclusion that no transfer as defined at 11 U.S.C. § 101(54) occurs until the check clears the drawee bank:

We thus believe that when the debtor has directed the drawee bank to honor the check and the bank has done so, the debtor has implemented a "mode, direct or indirect . . . of disposing of property or an interest in property." 11 U.S.C. § 101(54) (emphasis added). For the purposes of payment by ordinary check, therefore, a "transfer" as defined by § 101(54) occurs on the date of honor, and not before.

112 S.Ct. at 1390, 118 L.Ed.2d at 47.

The Court acknowledged that "transfer" is defined broadly at § 101(54) to include all modes of transfer, even a "conditional" mode. 112 S.Ct. at 1390, 118 L.Ed.2d at 47. The definition, however, encompasses only those modes for "disposing of or parting with property or with an interest in property." 11 U.S.C. § 101(54). The recipient of a check gains, at most, a "contingent cause of action" against the drawer and receives no right in the drawer's account or right against the drawee bank. 112 S.Ct. at 1390, 118 L.Ed.2d at 47. This chose in action against the debtor is not a conditional right to property or an interest in property. Id. "To treat . . . the nebulous right to bring suit as a `conditional transfer' of the property would accomplish a near-limitless expansion of the term `conditional.'" 112 S.Ct. at 1391, 118 L.Ed.2d at 48. Because the payee receives no interest in the drawer's property until the check is honored, the mere delivery of the check does not constitute a "transfer" as defined at § 101(54).

The Court does not suggest that § 547 affected its initial conclusion that a transfer occurs only when the check is honored. In discussing the particular terms of § 547, the Court said simply this:

Finally, we note that our conclusion that no transfer of property occurs until the time of honor is consistent with § 547(e)(2)(A). That section provides that a transfer occurs at the time the transfer "takes effect between the transferor and the transferee. . . ." For the reasons given above, and in particular because the debtor in this case retained the ability to stop payment on the check until the very last, we do not think that the transfer of funds in this case can be said to have "taken effect between the debtor and petitioner" until the moment of honor.

112 S.Ct. at 1391, 118 L.Ed.2d at 48. The opinion plainly reveals that the Supreme Court reached its conclusion on "transfer" without reliance on the terms or scope of § 547(b). The Court looked to § 547(e)(2)(A) only to insure that the definition and rule were compatible with § 547(b).

The intervenor's arguments for exempting § 549 from the general rule in Barnhill that no transfer of property occurs until the time of honor are not persuasive. The Supreme Court did not rely upon § 547(e) for this rule. Beyond saying the rule was consistent with § 547(e), the Court did not look to this subsection for support. That § 549 lacks a subsection comparable to § 547(e), therefore, is of no significance.

Upon receipt of the debtor's check, State Farm did not gain "an absolute right . . . to obtain payment if the funds are in the account. . . ." (Intervenor's Brief, Dk. 3 at 9). Prior to presentment, State Farm held the check subject to the same "myriad events" discussed in Barnhill. The drawer or even the trustee could have stopped payment or closed the account. Other checks, liens, or other proceedings could have exhausted or frozen funds in the account requiring the drawee bank to dishonor the check. The drawee bank might have dishonored the check mistakenly. This is a far cry from any "absolute right . . . to obtain payment."

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