McKenzie v. Irving Trust Co.

Background

A bankruptcy trustee sued to recover $150,000 that a construction contractor had paid to a trust company creditor after getting a government progress payment. The contractor endorsed a $155,865.50 government check, mailed it to the trust company on November 27, 1940, and the bank credited $150,000 to the contractor’s debt on November 28. The contractor’s bankruptcy petition was filed March 28, 1941, exactly four months after the bank’s receipt. The trustee argued the payment was an unlawful preference — a payment that unfairly favors one creditor over others — if it was made within the four months before bankruptcy.

Reasoning

The Court framed the question as when the payment should be treated as transferred for the purposes of the four-month rule. It relied on federal law’s command to use state law standards for when a transfer is perfected against other creditors. The New York Court of Appeals had concluded that by endorsing and placing the government check in the mail the contractor had parted with possession and intended to transfer the money, so the transfer was complete at mailing. The Supreme Court accepted that conclusion and sustained the judgment on that ground, holding the transfer occurred before the four-month window and was therefore not an unlawful preference. The Court noted a separate argument about retroactive validation of an assignment but did not decide that issue.

Real world impact

The decision means trustees may be unable to recover payments that a debtor endorses and mails to a creditor before the four-month cutoff. It also confirms that creditors who receive funds without notice of earlier claims can keep them, and courts must apply state law standards to decide when transfers are perfected.

Dissents or concurrances

Justice Black dissented, but the Court did not adopt his view.