Debtor issued three checks to his creditors prior to his filing a Chapter 7 bankruptcy, however, those checks had not cleared debtor’s bank at the time he filed bankruptcy.

The Trustee in Bankruptcy sought an order compelling debtor to turn over the funds in his account at the time he filed for bankruptcy in the amount of $1,083.11.

Debtor argued that since he had issued checks to creditors on the deposit, and prior to filing bankruptcy, that the funds on deposit should not become property of the bankrupt estate.

The court, however, concluded that:

It is the date a check is actually honored, and not the date it was delivered, which governs whether the deposit asset becomes property of the estate.

Here, since debtor’s checks had not actually cleared his account on the date bankruptcy was filed, the court ordered debtor to turn over the entire deposit to the Trustee.

EDITOR’S COMMENT

The U.S. Supreme Court has also ruled that for purposes of preferential transfer, a transfer of a check is not made on the date of delivery, but rather on the date the check is honored.

The Supreme Court noted that:

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. 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. Barnhill v. Johnson, 112 S.Ct. 1386.

Article Author: Charles R. Harroun, Attorney at Law