Narrative Opinion Summary
The case involves JWJ Contracting, a debtor in bankruptcy, and its subcontractor, Endo Steel, Inc. JWJ issued a non-sufficient funds (NSF) check to Endo for materials supplied under a public improvement project, leading to Endo's unconditional release of a lien claim. Shortly thereafter, JWJ replaced the dishonored check with a cashier's check before declaring bankruptcy. The Chapter 7 Trustee sought to recover this payment as a preferential transfer under Bankruptcy Code § 547(b), arguing that it was made within 90 days of the bankruptcy filing and did not qualify as a contemporaneous exchange for new value. The Bankruptcy Court initially sided with Endo, but the Bankruptcy Appellate Panel reversed the decision, concluding that the transaction constituted a credit, not a contemporaneous exchange. The Ninth Circuit affirmed the BAP's ruling, emphasizing that the dishonored check transformed the nature of the transaction and referencing the revised Arizona lien statute, which Endo misapplied by issuing an unconditional release without payment. The court found the payment avoidable as a preference, supporting the equitable distribution purpose of § 547(b).
Legal Issues Addressed
Contemporaneous Exchange for New Value Exceptionsubscribe to see similar legal issues
Application: The court rejected the argument that the payment was a contemporaneous exchange for new value, as the initial check was dishonored and replaced, altering the nature of the transaction.
Reasoning: An exception to this power exists for 'contemporaneous exchanges,' where a transfer cannot be avoided if it was intended as an immediate exchange for new value, which does not deplete the debtor's estate.
Interpretation of Arizona Lien Statutesubscribe to see similar legal issues
Application: The court found that the use of an unconditional release form by Endo, contrary to the statutory advice for unpaid claims, was clear evidence of a credit transaction.
Reasoning: In 1992, Arizona revised its lien statute to provide standardized forms of lien releases, including conditional and unconditional releases for installment and final payments (A.R.S. § 33-1008).
Legal Effect of Dishonored Checkssubscribe to see similar legal issues
Application: The court determined that the dishonored check transformed the transaction into a credit transaction, making subsequent payments avoidable as preferences.
Reasoning: The courts have indicated that accepting a dishonored check in exchange for new value transforms the nature of the transaction, as seen in Morrison v. Champion Credit Corp., which upheld the avoidance of payments made to cover a bounced check during the preference period.
Preference Avoidance under Bankruptcy Code § 547(b)subscribe to see similar legal issues
Application: The court examined whether the payment to the subcontractor could be avoided as a preferential transfer under § 547(b), given it was made within 90 days before the bankruptcy filing.
Reasoning: A debtor's payment of an antecedent debt within 90 days before filing for bankruptcy can be challenged by the trustee under 11 U.S.C. § 547(b) as a preference action.