Barnhill v. Johnson

1992-03-25

Headline: Bankruptcy rule holds a check pays when the bank honors it, not when delivered, making more recent check payments recoverable by trustees within the 90-day window.

Holding: The Court held that a transfer made by check occurs on the date the drawee bank honors the check, not on the date the payee receives the check, for purposes of the 90-day bankruptcy preference period.

Real World Impact:

Trustees may count the bank’s honor date when recovering payments within 90 days.
Creditors who merely receive checks earlier face greater risk of repayment demands.
Resolves conflicting rules and makes timing easier to prove for trustees.

Topics: bankruptcy law, check payments, creditor recovery, bank payment timing

Summary

Background

A group of related debtors paid a creditor by check that the creditor received on November 18, dated November 19, and that the bank honored on November 20. The debtor later filed for Chapter 11 bankruptcy. The trustee sued to recover the payment under the bankruptcy preference rule that reaches transfers made within 90 days before the bankruptcy filing. The lower courts split: the Bankruptcy Court and District Court applied a "date of delivery" rule, while the Court of Appeals adopted a "date of honor" rule. The Supreme Court agreed to resolve the disagreement.

Reasoning

The Court asked whether a check transfer occurs when the payee gets the check or when the drawee bank pays it. It looked to the Bankruptcy Code’s definition of "transfer," state law about property interests, and principles from the Uniform Commercial Code. The Court observed that a check recipient has no right to the bank funds until the bank honors the check and that many things could prevent payment between delivery and honor. Because honoring the check reduces the drawer’s bank claim and leaves the payee with the funds as if cash had been handed over, the Court held the transfer occurs on the date of honor. Applying that rule, the trustee could avoid the payment as within the 90-day window, and the Court affirmed the Tenth Circuit.

Real world impact

Going forward, trustees in bankruptcy can use the bank’s date of honor to decide whether a check payment falls inside the 90-day preference period. Creditors who receive checks earlier but whose banks honor them late may face recovery claims. The decision resolves a circuit split and relies on common commercial rules under the UCC.

Dissents or concurrances

Justice Stevens (joined by Justice Blackmun) dissented, arguing that delivery should count as the transfer date if the check is honored within ten days. He emphasized commercial practice, tax rules, and a broad statutory definition that treats delivery of a check as a conditional transfer that becomes effective on delivery when promptly honored.