In Re Continental Commodities, Inc., Tax I.D. No. 56-1207008, Debtor. Albert F. Durham, Trustee for Continental Commodities, Inc. v. Smith Metal and Iron Company
Docket: 87-3732
Court: Court of Appeals for the Fourth Circuit; March 3, 1988; Federal Appellate Court
Smith Metal and Iron Company appeals a district court ruling that classified a payment for goods sold to Continental Commodities, Inc. as a preference under the Bankruptcy Code of 1978, specifically 11 U.S.C. § 547. The central issue is whether the transfer of funds via check is effective upon the creditor's receipt of the check or when the debtor's bank honors it. The bankruptcy court and district court determined the transfer was effective only when Continental's bank honored the check. However, the appeals court disagreed, stating the transfer should be considered effective when Smith received the check.
Continental had purchased scrap metal from Smith for resale and issued a check to Smith for $23,874.16 on October 5, 1983. Smith received the check on October 6 but misplaced it, leading to a delay in its deposit until October 25. Continental filed for Chapter 7 bankruptcy on November 18, 1983, after which trustee Albert F. Durham sought to recover the payment from Smith, arguing it was an avoidable preference under § 547(b). Smith contended that the payment was made in the ordinary course of business and therefore not avoidable under § 547(c)(2).
Smith's defense relied on the assertion that the payment met the criteria of § 547(c)(2), which includes that the transfer must be made within 45 days of incurring the debt. Smith argued that the check's receipt on October 6 was within the allowable timeframe, as it was presented for payment within 30 days, aligning with UCC guidelines. Thus, based on these facts, Smith maintained that it fulfilled all requirements of § 547(c)(2), making the transfer non-avoidable by the trustee.
The trustee argues that the transfer of funds from Continental to Smith did not occur until Continental's bank honored the check on October 26, which was more than 45 days after Continental incurred the debt to Smith. This position relies on section 547(e)(1)(B) of the Code, which states that a transfer is perfected when a creditor cannot obtain a superior judicial lien. The trustee contends that Continental's creditors could have claimed rights superior to Smith's before the check was honored, indicating the transfer was not effective when Smith received the check.
The bankruptcy court agreed with the trustee, determining that Smith satisfied the requirements of sections 547(c)(2)(A), (C), and (D) but failed to meet the 45-day requirement of section 547(c)(2)(B). The court concluded that the transfer occurred on October 26, 1983, when the check was honored, rather than on October 6, when Smith received it. Thus, Smith did not receive payment in the ordinary course of business, allowing the trustee to avoid the payment as a preference under section 547(b). This decision was affirmed by the district court, prompting Smith to appeal.
The relevant precedent, O'Neill v. Nestle Libbys P.R. Inc., established that the date of delivery of a check is the effective date of transfer for section 547(c)(2)(B) if the check is presented for payment within 30 days and honored. O'Neill rejected the notion that section 547(e)(1)(B) mandates that a transfer is only effective after the check is honored, clarifying that this section pertains to the perfection of security interests rather than creditor transactions not involving security interests. Legislative history supports this interpretation, indicating that section 547(e) aims to harmonize the differing standards under prior versions of the Uniform Commercial Code.
The court of appeals cites two key decisions regarding the timing of transfers under section 547(c)(2)(B) of the Bankruptcy Code: O'Neill and In Re White River Corp., 799 F.2d 631 (10th Cir. 1986). The White River decision fully endorsed O'Neill’s rationale, emphasizing that recognizing the delivery date as the transfer date encourages trade creditors to engage with distressed businesses, aligns with commercial practices of considering check receipt as payment, and allows the debtor to control the transfer date. Consequently, it was concluded that a check transfer is effective upon the creditor's receipt, provided the debtor's bank honors the check within the 30-day timeframe stipulated by U.C.C. Sec. 3-503(2). This ruling supports Smith’s position, preventing the trustee from recovering $23,874.16 as an avoidable preference.
The 45-day requirement in section 547(c)(2)(B) was removed in the 1984 Bankruptcy Code amendments, applicable only to cases filed after July 10, 1984, and does not pertain to the current case. The amendment aimed to alleviate burdens on creditors with longer billing cycles. The evidence indicates that the debt was incurred on August 26. There exists a split among North Carolina bankruptcy courts regarding the timing of check transfers, with some, like Southern of Rocky Mount, Inc. v. Evans, asserting that the transfer occurs upon check receipt, while others argue it happens when the bank honors the check. Various cases reflect this division, with some supporting the receipt view and others the bank-honor view. Continental references Nicholson v. First Investment Co. and Fitzpatrick v. Philco Finance Corp., but neither case interpreted section 547(c)(2)(B).
