Quinn Wholesale, Inc. v. Northen
| Decision Date | 23 August 1988 |
| Docket Number | Civ. No. C-88-302-G,Bankruptcy No. B-86-02467C-7. |
| Citation | 100 BR 271 |
| Court | U.S. District Court — Middle District of North Carolina |
| Parties | QUINN WHOLESALE, INC., Plaintiff/Appellant, v. John A. NORTHEN, Trustee in Bankruptcy for Gordon Foods, Inc., Defendant/Appellee. |
Michael E. Weddington, Amos U. Priester, IV, Raleigh, N.C., for Quinn Wholesale, Inc.
Charles T.L. Anderson, Chapel Hill, N.C., for Northen.
Quinn Wholesale, Inc. ("Quinn") takes this appeal from a judgment of the bankruptcy court requiring Quinn to return a payment received from Gordon Foods, Inc. ("Debtor") to the Trustee in Bankruptcy for Gordon Foods. The bankruptcy court found the payment to Quinn to be a post-petition transfer for a pre-petition debt, avoidable by the Trustee under 11 U.S.C. § 549. For the reasons discussed below, the court finds that the transfer was made before the bankruptcy petition was filed, and therefore reverses the bankruptcy court's decision.
Debtor owned and operated grocery stores under the retail name "Piggly Wiggly" in and around Sanford, North Carolina. Quinn supplied grocery inventory to Debtor on a weekly basis. On December 4, 1986, Quinn delivered an order of inventory to Debtor and at the same time received a check in the amount of $72,444.62 payable to Quinn Wholesale, Inc., and drawn on the Debtor's account with Branch Banking & Trust Co. That amount represented the cost of the previous week's shipment. Branch Banking & Trust honored the check on December 9, 1986.
On December 5, 1986, before the check had been honored, Debtor filed a voluntary petition in bankruptcy under Chapter 11 of the Bankruptcy Code of 1978 (the "Code"). On March 9, 1987, Debtor's bankruptcy petition was converted from a Chapter 11 reorganization to a Chapter 7 liquidation and appellee John Northen was appointed as Trustee in Bankruptcy for Gordon Foods, Inc. Northen then brought this action in bankruptcy court seeking to set aside the payment to Quinn as an unauthorized post-petition payment of a pre-petition debt, which is avoidable under 11 U.S.C. § 549. Quinn argued unsuccessfully to the bankruptcy court that the transfer occurred at the time Debtor tendered the check to Quinn, rather than when the bank honored it. Therefore, the transfer was pre-petition, and Section 549 does not apply.1 The bankruptcy court disagreed, saying that the weight of authority supported a finding that a payment by check is not considered a transfer until the check is honored. Since the check was honored four days after Debtor filed its bankruptcy petition, the payment was an avoidable post-petition transfer. Thus the sole issue on appeal is the legal question of when a transfer is deemed to occur under the Bankruptcy Code for payments made by check.
This court has jurisdiction to hear appeals from final orders of the bankruptcy court under 28 U.S.C. § 158. Although the bankruptcy court's factual findings should not be disturbed unless clearly erroneous, Bankr.R. 8013, Willemain v. Kivitz, 764 F.2d 1019, 1022 (4th Cir.1985), its legal conclusions are subject to de novo review. In the Matter of Bufkin Bros., Inc., 757 F.2d 1573, 1577-78 (5th Cir.1985); see also Caswell v. Lang, 757 F.2d 608, 609 (4th Cir.1985).
11 U.S.C. § 101(50) (Supp.1988) defines a "transfer" very broadly as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property." This language does not speak directly to whether the interest represented by a check is sufficient to render delivery of a check a "transfer" under the Code.
The bankruptcy court followed decisions of other courts and looked to state law to determine the interests involved. As had the courts in both Matter of Isis Foods, Inc., 37 B.R. 334, 336 (W.D.Mo.1984), and Matter of Bridges Enterprises, Inc., 44 B.R. 979, 982 (Bankr.S.D.Ohio 1984), the bankruptcy court relied on the language of Uniform Commercial Code § 3-409, as adopted by state statute. North Carolina General Statute § 25-3-409 states that "a check or other draft does not of itself operate as an assignment of any funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until he accepts it." The bankruptcy court found that this statutory embodiment of common law negotiable instruments law is applicable to the bankruptcy context. The bankruptcy court also cited two older North Carolina cases, Perry v. Bank of Smithfield, 131 N.C. 117, 42 S.E. 551 (1902), and In re Will of Winborne, 231 N.C. 463, 57 S.E.2d 795 (1950), as further support for the position that title to funds on deposit does not pass to the payee until the check is honored. The bankruptcy court concluded that since title does not pass upon delivery of the check, such delivery is not "a parting with property or with an interest in property," i.e., a transfer under the Bankruptcy Code.
Quinn argued below and argues again on appeal that reliance on state law is misplaced. The Supreme Court has stated that "what constitutes a transfer ... is necessarily a federal question, since it arises under a federal statute intended to have uniform application throughout the United States." McKenzie v. Irving Trust Co., 323 U.S. 365, 369-70, 65 S.Ct. 405, 407-08, 89 L.Ed. 305 (1945). In making the argument for uniformity and for finding a transfer at time of delivery of the check Quinn relies heavily on the Ninth Circuit Bankruptcy Appellate Panel's decision in In re Trois Etoiles, Inc., 78 B.R. 237 (9th Cir.BAP 1987). In In re Trois Etoiles, the Panel expressly acknowledged and rejected prior decisions relying on state law, including Matter of Isis Foods and Matter of Bridges Enterprises. 78 B.R. at 238. The Panel instead looked to Ninth Circuit precedent regarding when transfers by check occur under the Code, and also considered commercial reality in concluding that a debtor's tendering of a check to the creditor before filing the bankruptcy petition constitutes a pre-petition transfer, despite the fact that the check was not honored until after the petition had been filed.
The bankruptcy court countered Quinn's arguments in two ways, which the Trustee has adopted in his response to this appeal. First, the bankruptcy court noted that other provisions of the Bankruptcy Code refer to state law for clarification of parties' rights, see, e.g., 11 U.S.C. § 522 (), and also reasoned that the desired uniformity can be achieved through reference to the Uniform Commercial Code. Reference to state law may be helpful in determining rights under the Bankruptcy Code, and in fact in McKenzie the Court determined the comparative rights of the payee versus lien creditors under state law. 323 U.S. at 370, 65 S.Ct. at 408. However, the Court was applying a provision under the Bankruptcy Act of 1898 which was comparable to Section 547(e)(1)(B) of the Code, which defines the time of transfer in terms of when the payee's rights became superior to the claim of any possible contract creditor who obtains a judicial lien.2 The Fourth Circuit has ruled that the Section 547(e)(1)(B) standard applies only where security interests are involved. In re Continental Commodities, Inc., 841 F.2d 527, 530 (4th Cir.1988).
In contrast, the general definition of "transfer" in Section 101(50) of the Code applies to all transactions and is sufficiently broad that it need not be interpreted as making the timing of a transfer dependent on the respective rights of the payee against other creditors. Therefore, it does not require a reference to such rights as defined under state law.
Moreover, although adoption of the UCC by all but one state means that the statutory language in those states is comparable, a fair reading of UCC Section 3-409 would not compel a finding that passage of a check from debtor to creditor is not a transfer under 11 U.S.C. § 101(50). An at least equally reasonable interpretation of the two provisions is that regardless of when title to the funds vests in the payee, delivery of the signed check is a mode of parting with the debtor's interest in those funds. The check is an unconditional order to pay the funds, UCC § 3-104(1)(b) and 2(a), (b), so that at the time of delivery the debtor has essentially completed his affirmative acts necessary to make the transfer. The possible intervening events mentioned by the trustee and the bankruptcy court, such as a stop-payment order, are subsequent affirmative acts needed to negate that transfer, and in the absence of them the debtor's relinquishment of funds is complete.3
The bankruptcy court also found for the Trustee because it was unpersuaded by the Ninth Circuit Bankruptcy Appellate Panel's decision in In re Trois Etoiles. The bankruptcy court rejected the Panel's position as erroneously based on analogies with the "contemporaneous exchange" and "ordinary course of business" exceptions to the preference rules. 11 U.S.C. § 547(c). Numerous courts, including recently the Fourth Circuit, have found that for the purposes of the Section 547(c) exceptions a transfer should be considered made upon delivery rather than when the check is honored. See In re Continental Commodities, 841 F.2d at 530; O'Neill v. Nestle Libbys P.R., Inc., 729 F.2d 35, 37 (1st Cir. 1984); Bernstein v. RJL Leasing (In re White River Corp.), 799 F.2d 631, 633 (10th Cir.1986). Those decisions were based in part on the legislative history of the provisions, which contains explicit statements about the timing of transfers, see 124 Cong.Rec. S17414 (daily ed. Oct. 6, 1978) (statement of Senator DeConcini) ("Payment is considered to be made when the check is delivered for purposes of Sections 5471 and 2."), cited in O'Neill, 729 F.2d at 37, but the courts also considered policy justifications and...
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