National Apr 18, 2009, 18:01

In William Barnhill v. Elliot Johnson (No. 91-159), the United States Supreme Court held that the actual date a check is presented to the drawee bank will be the effective date to determine whether the transfer may be set aside by a trustee in bankruptcy.

Under the Bankruptcy Code’s preference, the trustee in bankruptcy is permitted to recover, with certain exceptions, transfers of property made by the debtor within 90 days before the date the bankruptcy petition is filed. This case decided whether, in determining if a transfer occurred within the 90-day preference period, a payment 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. The Supreme Court held that the latter date is determinative.

Here, the debtor made payment by check on a bona fide debt 92 days prior to debtor filing bankruptcy. The check was deposited on the next day and cleared the drawee bank on the 90th day before the bankruptcy petition was filed. The trustee in bankruptcy sought to set aside this payment in order to collect those funds and distribute the same to other creditors.

The Bankruptcy Court held that the transfer could not be set aside since the payment was actually made more than 90 days prior to debtor filing bankruptcy.

The U.S. Supreme Court, however, ruled that the date the payment was actually received by the creditor was not determinative. Instead, the date that the check cleared the drawee bank would be the date applicable for a transfer to be set aside. The Supreme Court found the transfer was not complete until the check cleared. Hence, the trustee was allowed to reverse this transfer and recover those funds as a preferential transfer.