By Ryan C. Wood
This is an issue that comes up quite a bit believe it or not. The issue for consumer bankruptcy cases is scheduling the bankruptcy filer’s assets properly in Schedule B at the time the case is filed if a check is outstanding but not yet cashed. In a recent Ninth Circuit Bankruptcy Appellate Panel case the opinion begins with “No good deed goes unpunished.” See Matthew Lewis, Appellant v. Doris A. Kaelin, Chapter 7 Trustee; Adv. No 17-05030 and BAP No. NC-17-1186. This Ninth Circuit Bankruptcy Appellate Panel case is about the payment of the debtor’s attorneys’ fees prior to the case being filed. The bankruptcy filer/debtor is a corporation. At first the corporation issued a check from the corporation’s business checking account to the corporation’s bankruptcy attorney. The bankruptcy attorney for whatever reason refused the check and wanted a cashier’s check or money order for payment of the $10,000. The CFO then obtained a cashier’s check or money order from this personal account to give to the attorney with the understanding that the corporation would reimburse the CFO. That is what happened. The corporation then issued a check to the CFO to reimburse him for paying the corporations attorneys’ fees.
There is a catch though. The check from the corporation was written before the filing of the Chapter 7 bankruptcy petition for the corporation and the CFO cashed the reimbursement check after the corporation’s petition for Chapter 7 was filed. Uh oh.
How Is This Relevant to Consumer Bankruptcy Cases
When listing assets and filing a consumer bankruptcy petition for relief under Chapter 7, Chapter 13 or Chapter 11 the bankruptcy filer may have checks that are not cashed at the time the bankruptcy case is filed. The number one type of expense that usually exists like this, a straddle check, is a check to pay rent. Next are vehicle loan payments. This bankruptcy attorney has over and over again been told what the account balance will be once the check clears. I over and over again explain to my client that it is the balance in the account right now that matters and what must be exempted. Matthew Lewis, Appellant v. Doris A. Kaelin, Chapter 7 Trustee; Adv. No 17-05030 and BAP No. NC-17-1186 clearly tells us that it is not when the check is delivered that matters, but when the check is presented to be honored and cashed. Rarely in consumer Chapter 7 bankruptcy cases are post-petition transfers of property of the debtor avoided under Section 549. The consumer has to pay rent and live by spending their money to live. Also a consumer bankruptcy filer is entitled to exempt from the bankruptcy estate their bank account money depending upon how much they have to exempt or protect. This is even though the Ninth Circuit Court of Appeals held in In the Matter of Mwangi (No. 12-16087, August 26, 2014) a debtor has no right to possess exempted assets until after the deadline to object to an applied exemption. It stands to reason a chapter 7 trustee could avoid all transfers of estate property between the time a debtor files for bankruptcy and the deadline to object to an applied exemption pursuant to Section 549…… food for thought. What makes more sense is the property of the estate that is exempted revests in the debtor and the trustee, creditors and parties in interest have the right to objection to a claim of exemption. That would make sense. Although most chapter 13 plans provide the property of the estate revests in the debtor upon confirmation of a chapter 13 plan…… I digress. Lets just say the revesting of property to the debtor is a misunderstood and inconsistently applied legal issue.
Section 547 of the Bankruptcy VS. Section 549
First let us discuss Section 547 vs. Section 549. The debtor’s bankruptcy attorney argued that Section 547 of the Bankruptcy Code applied given there are defenses to Section 547 preferential transfers made to creditor before a bankruptcy case is filed. The problem is Section 547 preferential transfers only applies to a debt owed and paid before the bankruptcy case is filed. Section 547 does not apply to debts that exist prior to the bankruptcy case but paid after the bankruptcy case is filed. Section 547 provides that payments made to creditor during the 90 days prior to the bankruptcy case being filed are preferential given the debtor is presumed by law to be insolvent during this period. The point is to bring these payments back into the bankruptcy estate and paid to all creditors equally and not allow the creditors that received these payments during the 90 days prior to be preferred over other creditors. There is much more to preferences payments, but this is the basic premise. If there is a preferential payment prior during the 90 days there are defenses and if successful the preferential payment will not have to be returned to the bankruptcy estate. Again, this is why the debtor’s attorney in this case argued Section 547 is applicable, to hopefully prove a defense.
The Court and Ninth Circuit Bankruptcy Appellate Panel both held Section 549 applies given the check was cashed after the petition for relief under the bankruptcy code was filed. See Barnhill v. Johnson, 503 U.S. 393, 394-95 (1992). Prior to this Supreme Court of the United State case the Ninth Circuit held a “transfer” of an ordinary check is when delivered to the creditor, not on the date the check is honored. The Ninth Circuit now follows Barnhill as to when the transfer took place. Barnhill was a Section 547 preferential transfer case and not a Section 549 post-petition transfer case………
549(a) of the Bankruptcy Code and Section 550(a)(1)
Section 549(a) of the Bankruptcy Code permits the trustee to avoid a post-petition transfers of estate property and Section 550(a)(1) of the Bankruptcy Code permits the trustee to recover the amount of the avoidable transfer from the person or company the estate property was transferred to. For a trustee to recover pursuant to Section 549 a trustee will have to prove the post-petition transfer occurred after the filing of the bankruptcy petition and that the transfer was not authorized by either the bankruptcy code or the bankruptcy court. In the Ninth Circuit Bankruptcy Appellate Panel case the transfer was not authorized by the Bankruptcy Court or authorized by the Bankruptcy Code. After Barnhill a number of courts have held the “transfer” of an ordinary check is honored regarding Section 549 and Section 547. Consistency is key and I agree with that. See Guinn v. Oakwood Porps., Inc. (In re Oakwood Mkts., Inc.) 203 F.3d 406, 409 (6th Circuit 2000).
Section 101(54) Defines The Term “Transfer”
The Barnhill holding is not limited to Section 547 but also applicable to Section 549 given the definition of the term “transfer” is enumerated in Section 101(54) of the Bankruptcy Code. To hold otherwise would result in the inconsistent use the term “transfer.” The Barnhill holding overruled Tarver v. Trois Etoiles, Inc. (In re Trios Etoiles, Inc.), 78 B.R. 237, 239 (9th Circuit BAP 1987). The date of deliver used to be controlling for both Section 547 and Section 549. In Barnhill the Supreme Court of the United States reasoned that upon delivery of the an ordinary check the payee of the check only obtains the right to funds held by the debtor. The payee of the check must make the affirmative step of presenting the check for deposit for the funds to be transferred and the actual “transfer” take place. Between delivery and depositing there could be any number of intervening events that prevent the check from ever being deposited, ever.
