Rector v. Commercial National Bank
Headline: A bankruptcy trustee can recover $970.45 that a clearing house paid to a bank from a bankrupt partnership’s account; the Court reverses Ohio’s ruling and orders the money returned to the trustee.
Holding: The Court held that a trustee in bankruptcy may reclaim a $970.45 transfer made by the clearing house to a bank from a bankrupt partnership’s credits, and reversed the Ohio Supreme Court’s judgment.
- Lets bankruptcy trustees recover clearing-house payments taken from a bankrupt firm’s credits.
- Requires banks to return avoidable transfers received from clearing-house settlements.
Summary
Background
Reinhard & Company was a partnership run by John G. Reinhard and Henry A. Reinhard that kept an open account at the Commercial National Bank. On the morning of April 10, 1900, the bank advanced $2,000 in currency to Reinhard & Company in exchange for a New York draft, and that cash was paid out that day to the partnership’s customers. At about 12:15 p.m. the partners filed a deed of assignment because they were insolvent. The clearing house later balanced its accounts and paid $970.45 to the Commercial National Bank out of the credits that had belonged to Reinhard & Company.
Reasoning
The central question was whether that $970.45 payment from the clearing house, which came from credits belonging to the bankrupt partnership, was property the bankruptcy trustee could demand back. The Court applied the same principles it had just announced in a related case and concluded the clearing-house payment was a transfer of Reinhard & Company’s property. The Court rejected the bank’s argument that its earlier $2,000 advance gave it the right to keep the later clearing-house payment, noting the cash advance had been spent by the partnership that same day and that rules about rescinding transactions or following trust funds did not apply.
Real world impact
The Supreme Court reversed the Ohio Supreme Court and sent the case back for further proceedings consistent with this decision, meaning the trustee was entitled to recover the $970.45. Banks that receive clearing-house payments drawn from a bankrupt customer’s credits may have to return those amounts to the bankruptcy estate when the payment is avoidable.
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