Yaple v. Dahl-Millikan Grocery Co.

Background

A creditor had an unpaid balance for goods sold on an open account to a customer who became insolvent and was later formally declared bankrupt. Four months before the bankruptcy, the creditor made several credit sales to that customer, and during the same period the creditor received a number of payments on the account. Those payments were received in good faith, and the creditor had no knowledge that the customer was insolvent. Over the period, the total value of new sales exceeded the total payments the creditor received. The Court issued this response as a formal certificate presenting two legal questions for decision.

Reasoning

The narrow question asked was whether those payments count as a legally forbidden "preference" that the creditor must give back before the creditor's claim is allowed under the bankruptcy law. The Court answered that question "no." The Court relied on an earlier case, Jaquith v. Alden, to reach that result. The second question asked whether each payment, if treated as a preference, should be offset by later sales, carrying forward any excess preference but not sales, and then surrendered. Because the Court disposed of the first question, it did not answer that second, more technical question about offsetting under section 60c of the bankruptcy law.

Real world impact

This ruling means that, in these described circumstances, a creditor who lacked knowledge of the debtor's insolvency and who continued to sell on credit need not surrender those payments as a preference before the creditor's claim is allowed. The narrower follow-up question about deducting sales from payments under section 60c remains unresolved by this decision. Because the Court did not answer the second question, some practical accounting issues under section 60c remain unsettled.