BARNHILL v. JOHNSON, TRUSTEE
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of William J. Arland, III
Chief Justice Rehnquist: We'll hear argument next in 91-159, William Barnhill v. Elliot Johnson.
Mr. Arland, you may proceed.
Mr. Arland: Mr. Chief Justice, and may it please the Court:
We're here today on a petition for writ of certiorari from the Tenth Circuit Court of Appeals for Johnson v. Barnhill.
The purpose today is to uphold the intent of Congress and to promulgate the policies... the public policies espoused by Congress in the bankruptcy laws, to promote unity of the law, equal distribution among creditors of equal priority of the property of the estate of the debtor, and to in fact bring the preference provisions of the Bankruptcy Code into conformity with modern commercial practices and the Uniform Commercial Code.
The specific section which is being challenged at this time is section 547(b) of the Bankruptcy Code.
We are asking this Court to uphold and to find that a date of delivery rule for the purposes of 547(b) satisfies and meets and promotes the three policies just mentioned as opposed to a date of honor rule.
Section 11, or 11 U.S.C. 547(b) describes the purposes, or the events and transactions, by which a trustee may set aside transfers made by a debtor to its creditors.
It does not define within 547(b) itself what a transfer is, nor does it delineate whether or not a rule... a date of delivery rule or a date of honor rule should be adopted in analyzing whether or not the transactions fall inside the preference window, which is the 90-day period immediately preceding a filing of the case.
The facts in this case are essentially very short and very simple.
On November 18, 1985, the debtor, Alan Antweil, delivered to William Barnhill, a creditor of Antweil, a check.
The check was dated November 19, 1985.
Unknown Speaker: Do you know why it was post-dated one day?
Mr. Arland: I do not know why it was post-dated one day, Justice Blackmun.
I do know that it was delivered in the evening of November 18.
Unknown Speaker: Would it be any difference if it were post-dated a month or so?
Mr. Arland: If it were post-dated a month or so, I believe it would be different, Justice Blackmun.
It would in fact not be a contemporaneous exchange and would not be a cash transaction as a check is normally looked to.
The post-dating here was only one day, and in effect it became a cash transaction the very next day on November 19.
The check was presented for honor on November 20 and was honored by the bank.
The November 20 date is the 90th date, so that for the purposes of 547(b) the transfer if a date of honor rule is accepted would be on or within the 90-day period, November 20 being the day--
Unknown Speaker: That's the final date here.
Mr. Arland: --I'm sorry--
Unknown Speaker: That's the final date here, November 20.
Mr. Arland: --November 20, Justice Blackmun, is the final date here, yes.
Unknown Speaker: Well, does your response to Justice Blackmun... is it based partly on 547(c) as well as 547(b)?
Mr. Arland: No, Mr. Chief Justice, it's not based on 547(c) itself.
My response to Justice Blackmun was merely centered upon the effect of giving a post-dated check in a transaction, the difference being, I believe, when a check is considered a credit transaction and when a check is considered a cash transaction.
Inasmuch as the post-dating was only one date, and that date, the November 19, was still outside the preference window, the date of the check being outside the preference window, it became a cash transaction on November 19, and so it had no application with respect to a credit transaction that would have fallen within the preference period.
Unknown Speaker: Is your answer based in part on the fact that the hypothesis of a 1-month post-dating would have brought the date written on the check within the preference period?
Mr. Arland: Yes, it would, Mr. Chief Justice.
That would be the position, and I believe in that instance that in fact the transaction would have fallen within... if it was... quite frankly, according to the Uniform Commercial Code, had the post-dating exceeded 30 days, which I believe section 3503 of the Uniform Commercial Code provides that if a check is presented for honor within 30 days of its date of delivery, then it is essentially considered a reasonable period of time and essentially is a cash transaction.
If it exceeds the reasonable time of 30 days, then in fact the transaction date is the date the check is honored, so that if the day that Justice Blackmun was referring to were 31 days or greater... the presentment date was 31 days or greater than the date of the check, then by all means it was a credit transaction and the transaction would have fallen within the preference period as long as the honoring was done 31 days after the date of the check.
Unknown Speaker: Would the same be true if a check were given as sort of a security deposit not to be cashed until certain events occurred, or unless certain events occurred?
Mr. Arland: In any... if... I believe, Justice O'Connor, speaking specifically about 547(c), in which it is as surety for it, I believe that it would be.
To answer your question directly, yes, I think it would be.
Unknown Speaker: It would be what?
Mr. Arland: It would be a credit transaction until the date of the check, at which time it does become a cash transaction.
We have another element there, Justice O'Connor, of the check being presented as security.
Normally a check, in commercial practice when a check is presented it is considered a cash transaction as long as it is honored within a reasonable period of time and the date of the check is equivalent to the date of delivery.
Unknown Speaker: Are you sure that the UCC considers it not to come within that rule if it's cashed within 30 days of its date but beyond 30 days after the actual delivery of it?
You say that the--
Mr. Arland: Justice Scalia, the two issues that are raised are, one, the reasonable period of time from presentment for honor from date of the check is 30 days.
The second part is that if the check is presented or honored subsequent to the 30 days, is that the date of honoring?
I am... my interpretation and understanding of the code is that the answer to the first question is 30 days is reasonable.
I am not certain--
Unknown Speaker: --30 days from the date... the date on the check.
Mr. Arland: --30 days from the date on the check is reasonable.
Unknown Speaker: Right, that's what I understand.
Mr. Arland: Subsequent to the 30 days if it is presented for honor that is not reasonable, and that is considered the day of the transaction at that point in time.
Unknown Speaker: Right, but it doesn't matter for that purpose when the check is actually handed over.
If I give you a check now that's dated 30 days from now, that becomes a cash transaction 30 days from now, does it not?
Mr. Arland: Yes, it does, Justice Scalia... it does.
It becomes a cash transaction at the time that the check can be honored and is presented at that time.
To that extent, if one presents a... does not present a check within that 30-day period, then the Uniform Commercial Code I believe tells us that in fact that is not substantially a cash transaction, because the giving of a check is a conditional transfer as defined under 101, section either 48 or 54 of the Bankruptcy Code.
The condition is, is that it will be presented within a reasonable period of time, and that upon presentment it will be honored.
Then it relates back to the date of delivery.
Unknown Speaker: If you post-date the check there are two conditions.
One is that the later date come about, and the second is that it be presented, and it becomes a cash transaction when the first condition is met, and then still subject to the subsequent presentation.
Mr. Arland: I would agree with you, Justice Scalia, only in the instance where the post-dating of the check exceeds 30 days.
That's when it becomes a cash transaction... correction.
If the post-dating of the check is within 30 days, the condition... and it is presented within 30 days, it is a... the condition is removed and it goes back to the date of delivery.
If the presentment is made in... in 31 days or in excess of 31 days, then the delivery date is of no force and effect because we're beyond the 30-day reasonable time.
Unknown Speaker: May I just ask a little different question on post-dating?
Supposing that 93 days before bankruptcy a post-dated check was delivered dated 7 days later, just not a... forget the 30-day problem, just think about a 7-day problem for a moment.
Would you say the date of delivery or the date of the check is the critical date?
Mr. Arland: I would... Justice Stevens, I think that in that instance the date of the check is the critical date.
Unknown Speaker: So the date of delivery rule for which you're arguing is one... the date of delivery or date of the check, whichever is later.
Mr. Arland: Yes, Justice Stevens, whichever is later.
I think as a practical matter, the way our commercial system is devised, until the date on the check arrives one has no claim to the funds that underlie the validity of that check, and therefore the date on the check, if it is beyond the date of delivery, must control... must control.
547(b) is... as I say, it doesn't define a date of delivery or a date of honor rule for us, and in fact to the extent that we can look solely to 547(b) to tell us whether date of delivery or date of honor rules should apply, it doesn't do that.
However, we know that the Bankruptcy Code itself is a great statutory scheme, and we can look within the code when sections of the code do not provide us with a clear-cut answer.
Section 101(48) and (54) defines what a transfer is, and I think that is where we have to begin.
It in fact shows that a transfer is any mode of transaction or a transaction of transfer whether it is absolute, whether it is conditional... it is a very broad definition.
A check is certainly a conditional conveyance.
It is a conditional transfer.
Unknown Speaker: What is conveyed?
The principal point your opponent makes is it has to be transfer of property of the debtor.
What property of the debtor is being transferred?
Mr. Arland: I believe, Justice Scalia, that the definition under 101(48) says the transfer of an interest of a debtor in property, as opposed to the transfer of interest to property.
The interest that's being transferred between the debtor and the creditor... and those terms only apply if the payor on the check subsequently files for bankruptcy... is that the payor on the check is representing by giving this check on the date on the check that there are sufficient funds in his account to cover that check.
There is an underlying principle of good faith under the Uniform Commercial Code which is specifically applicable to this case that I as payor of the check am representing that those funds are in my bank.
Unknown Speaker: But a representation by the payor is not a transfer of an interest, it's just a representation, and in fact UCC says, as I understand it... correct me if I'm wrong... that the check does not operate as an assignment of the funds.
Mr. Arland: We are not talking about an assignment of the funds, Justice Scalia.
Unknown Speaker: Well, the question is what interest in property is transferred, and your answer to Justice Scalia was that there is a representation made that funds are in the bank, but that doesn't sound to me like a transfer of any property.
Mr. Arland: Well, the transfer of the--
Unknown Speaker: The question here is if he can stop payment on the check.
Mr. Arland: --He may stop payment on the check, but I believe that once the check is delivered, Justice Kennedy and Justice White, and if I can answer Justice Scalia's question and consolidate my answer here, is that when a check is transferred that is the end of a transaction, a previous transaction, a transaction where you have a vendor or a vendee.
Goods or services are delivered.
Those goods and services are then paid for by a check.
In the commercial world, when a check is delivered that transaction is terminated.
That's the end of that transaction.
Once the check is given, it is--
Unknown Speaker: Not if the check isn't honored.
Mr. Arland: --If the... but it is a conditional transfer, Justice Kennedy, which is covered under 101(54).
Unknown Speaker: Well, then it seems rather odd to say the transaction is ended but it's conditional.
Mr. Arland: The conditional portion, Justice Kennedy, with all due respect is the check.
The vendor-vendee transaction has in fact terminated.
That is the termination.
If, as Justice White has suggested... if a stop payment order is issued on the check prior to it being honored, then the condition of the transfer has not been met.
There is no way for the check to be honored, and therefore you have no date problem because you don't revert back to the date of delivery.
There is no honoring.
Unknown Speaker: But if you look at the matter as a completed transaction under your analysis at the time of the delivery, it is a completed transaction which did not involve the transfer of an interest in property.
Mr. Arland: It transferred an interest in property--
Unknown Speaker: In what property?
Mr. Arland: --In the property that is represented by the cash in the bank.
Unknown Speaker: Did it transfer an interest in the bank account, do you think?
Mr. Arland: It transfer... it conditionally transfers it upon honoring, but it relates back to the date of delivery, Justice Stevens.
If in fact there's a dishonoring of the check for some reason, that is a separate cause of action.
Uniform Commercial Code section 3122 tells us that in fact as of the date of the check, that is submitted, the cause... a new cause of action arises for the vendor on the check itself, and I believe that there's a separate question there.
Unknown Speaker: Well, wouldn't it be more accurate to describe the transaction that way, rather than as a transfer of property?
The check gives the vendor, the drawee of the check, a different cause of action against the drawer.
He now has a cause of action on the check and not just on the open account.
Mr. Arland: Mr. Chief Justice, in fact the Uniform Commercial Code under article 3802 tells us that the receiver of the check, the payee on the check, has his option.
He may proceed under the underlying agreement, or he may proceed on the check.
He may elect his remedy, sir.
Unknown Speaker: Why isn't this a conditional transfer of a chose in action?
Is there anything in the UCC that prohibits that?
Mr. Arland: No, Justice Scalia, there's nothing in the UCC that prohibits that.
Unknown Speaker: The person who has money in the bank has a cause of action against the bank for the amount of that deposit, right?
Mr. Arland: --Correct, Justice Scalia.
Unknown Speaker: And he can assign to another person outright or conditionally part of his claim against the bank.
It's not binding upon the bank, but as between the two of them it's binding.
Mr. Arland: Correct.
The interest in property can be the chose in action.
Unknown Speaker: So it's a chose in action that's been transferred.
Mr. Arland: Correct.
Unknown Speaker: So if the bank chose to honor it, it's in trouble with the drawer.
Mr. Arland: Yes, Justice White, you're correct, the bank is in trouble... if it wrongfully fails to honor it the bank is in trouble with the drawer.
I think the perception, Justice White--
Unknown Speaker: But not with the drawee.
Mr. Arland: --Not with the drawee, no, that's correct, Justice White.
Unknown Speaker: So how come if it's a transfer, why isn't the bank in trouble with the drawee?
He's got some right in that account.
Why can't he sue the bank?
Mr. Arland: He cannot for wrongfully dishonoring.
The payor is the only one who has the right under the Uniform Commercial Code to--
Unknown Speaker: Well, why can you ever say it was a transfer to him, conditional or otherwise?
Mr. Arland: --Because of the relation back doctrine.
Unknown Speaker: I mean, what happened to his interest in the property that you say was transferred?
What happens to it when the bank dishonors... wrongfully dishonors the check?
Mr. Arland: If the bank--
Unknown Speaker: It disappears into thin air.
Mr. Arland: --Justice White, if the bank wrongfully dishonors the check I believe that in fact the payor on the check would have a cause of action against the bank as well.
Unknown Speaker: Why, sure, but not the payee.
Mr. Arland: The payee does not have--
Unknown Speaker: But you say that there was a transfer to the payee--
Mr. Arland: --That's correct--
Unknown Speaker: --at the time of delivery of the check.
Mr. Arland: --There's a transfer of an interest in property, a conditional transfer.
Unknown Speaker: Well, what happened to his interest?
Mr. Arland: The payee's interest is, by not--
Unknown Speaker: I mean the drawee... the drawee.
There was a delivery of a check to the drawee, is that it?
Mr. Arland: --Yes, Justice White.
Unknown Speaker: And you say that was a transfer.
Mr. Arland: Yes, it is.
Unknown Speaker: A conditional transfer.
Mr. Arland: Yes, Justice White.
Unknown Speaker: But then you would think that he had an interest in the property that he should be able to vindicate against the bank if the bank wrongfully dishonors the check.
Mr. Arland: I don't believe that's the case, Justice White, because the transaction... it's a three-party transaction.
The emphasis in the Bankruptcy Code, and we must remember that's what we're talking about, is the Bankruptcy Code, is the relationship between the payor and the payee, or the drawer and the drawee on the check.
That's who we're interested in, and we're interested in tolling a time of when this transfer takes effect, and commercial business practice just doesn't take place that way.
As a matter of fact, when we give a check--
Unknown Speaker: So we know what we're talking about, isn't the drawee the bank?
I always thought the bank was--
Mr. Arland: --There is a drawee bank.
The drawee... you have the payor.
That's the person who signs the check.
You have the payee, that's who the check's made out to.
Unknown Speaker: --The bank is the drawee bank, right?
Mr. Arland: That's correct.
Unknown Speaker: And the payor is also the drawer.
Mr. Arland: That's correct.
Unknown Speaker: On the drawee.
Mr. Arland: Yes, that's correct.
Unknown Speaker: I'm talking about the fellow to whom the check was delivered.
You say there was a transfer to him--
Mr. Arland: That's correct.
Unknown Speaker: --At that time.
Mr. Arland: That's correct, Justice White.
Unknown Speaker: And yet he cannot vindicate that interest that was transferred to him, you say, by a suit against the bank.
Mr. Arland: The transfer of interest was not the payor's actions against the bank itself for wrongful dishonor of the check.
That wasn't the transfer.
The transfer was of the liability that the bank owes to the payor.
The payor transferred his liability, or the bank's liability to him to the payee.
Unknown Speaker: Well then, why can't the payee sue the bank, then?
Mr. Arland: Because he--
Unknown Speaker: He's had something transferred to him.
Mr. Arland: --Because, Justice White, it is not an assignment.
It is not an assignment in the classic sense.
It is a conditional transfer.
Unknown Speaker: It isn't perfected yet, and the Bankruptcy Code anticipates that some of these things could be perfected later.
It becomes perfected when the bank gets the check and honors it, and before then it's good as between the payor and the payee, but it's not binding on the bank and the liability is between those two.
Mr. Arland: Justice Scalia, that is correct--
Unknown Speaker: And that's why the Bankruptcy Code talks about perfection.
Mr. Arland: --At 547(e), Justice Scalia, is where the Bankruptcy Code directs its attention to perfection.
It has largely been held by most courts that that section applies solely to real property interest in mortgages and the relation-back doctrine is clearly stated in 547(a) to (b).
Unknown Speaker: Well, 547 also talks about a substantially contemporaneous transfer, which I take it at least can be interpreted as the attempt of the Bankruptcy Code to accommodate this delay between the time the check is given and the time that it is honored, and that language has the effect of showing that even if you wait till the time that it's honored it's substantially contemporaneous.
Mr. Arland: Yes, 547(c) adopts that, Justice Kennedy, that's correct, and for the purposes of (c)(1) and (c)(2) this furthers... we want to have a substantially contemporaneous exchange or a cash transaction represented by a check because the purpose of 547(c), the exceptions to 547(b), is to promote vendors doing business with a debtor or a vendee who's sliding into bankruptcy.
We don't want to have a chilling effect on having nobody do business with this individual.
Unknown Speaker: But 547(c) deals with the normal course of business, doesn't it?
Mr. Arland: Yes, it does, Mr. Chief Justice.
Unknown Speaker: So how you would treat a check under the normal course of business section might not be determined, I would think, for 547(b) purposes.
Mr. Arland: That is certainly the position of the trustee in this case, and I would submit to the Court that to serve the purpose of the uniformity of the law as espoused in McKenzie v. Irving Trust, that in fact it makes no sense and it is illogical to have two different dates apply within the same section or subsection of the Bankruptcy Code.
As a matter of fact--
Unknown Speaker: If you're talking about two different purposes, one is to determine was this the kind of transaction you would expect in the normal course of business?
If a person is paid by check presently dated for 10 years and continues to do that, it's the normal course of business, but I don't see why it would be illogical to say a somewhat different test might apply in determining whether there's a transfer.
Mr. Arland: --Mr. Chief Justice, if in fact the date of honor rule were to satisfy an equality of distribution among creditors, which in fact 547(b) is designed to do, then I could not quarrel with you.
However, I can show this Court by a hypothetical example that a date of honor rule does not treat creditors equally.
If we will assume for a moment that a check is delivered to two creditors dated on the same day which is outside the preference window, one of the creditors is an in-State or even an in-town creditor, the other is out-of-State.
The in-State creditor receives the check on a given date outside the preference period, deposits it the next day as in this case, and the check is honored on that day.
The date of honoring in that instance is clearly outside the preference period.
However, the out-of-State creditor, by virtue of his location, is not quite as fortunate.
He must take that check, deposit it in his bank, usually wait a 3-to 10-day clearing period on the check before it's then presented to the in-State bank.
If during that period of time subsequent thereto that period of honoring of the out-of-State check falls within the preferential transfer period, we have not satisfied through the date of honor rule one of the stated policies of 547(b).
Unknown Speaker: I would think when you talk about treating creditors equally you mean treating similarly situated creditors equally, and on the facts you give I think a very good argument can be made those creditors are not similarly situated.
Mr. Arland: I think if they're trade creditors both based on antecedent debts, Mr. Chief Justice, that they are similarly situated creditors.
They are of equal priority.
If we assume, and we must assume for the purposes of the argument and the hypothetical, that they are of the same class... that is, they will be treated as in the same class under 1129 for the purposes of a plan, which is what we are attempting to resolve, it seems to me that there is a clear distinction, Mr. Chief Justice, that in fact they are between the treatment of two creditors of equal priority, just because one happens to be located out of the State, or out of the jurisdiction in which the transaction took place.
If there are no further--
Unknown Speaker: May I just ask one little... your position is date of delivery, assuming the check is honored within 30 days.
Mr. Arland: --That is correct, Justice Stevens.
The date of delivery is the date that satisfies all three of the public policy--
Unknown Speaker: And you can answer this question in a word, I think.
Suppose the fellow who writes the check and delivers it promptly then writes... goes to the bank and withdraws his account so that the check cannot possibly be honored.
Does the person to whom the check is delivered then sue on the check or on the original debt?
Mr. Arland: --I believe that the person to whom the check is delivered is faced with an election of remedies, Justice White, where he may either sue on the check or sue on the transaction.
Unknown Speaker: May he sue on the check?
Mr. Arland: He may sue on the check, Justice White, or he may sue on the transaction at his option.
Unknown Speaker: What would be his cause of action on the check, that there was an assignment, or what?
Mr. Arland: His cause of action on the check would be against the payor on the check probably for fraud.
In other words, you delivered this check to me and you represented it to me that you had funds sufficient to cover this, and that--
Unknown Speaker: Is this an action for fraud, or what?
Mr. Arland: --Pardon me?
Unknown Speaker: What is this, an action for fraud?
Mr. Arland: It would be an action for civil fraud.
Unknown Speaker: But the payor warrants that the check will be paid, does he not?
Mr. Arland: He warrants... yes, Mr. Chief Justice, Justice White's--
Unknown Speaker: So you don't need an action for fraud, it's an action on the warranty that's implied by the drawing of a check.
Mr. Arland: --It--
Unknown Speaker: You have to have knowledge for fraud.
You don't want to make people have to prove that the other person knew he had no money in the bank.
Mr. Arland: --Under the facts that were presented by Justice White, if you write a check one day and withdraw all the funds the next day before that check has had a chance to clear, you may have sufficient grounds for fraud.
I don't want to get into that, but--
Unknown Speaker: I'm just really giving you an opportunity to say well, this shows there must have been a transfer if you can sue on the check.
Mr. Arland: --It's a conditional transfer, yes, it is, Justice White.
If there are no further questions, I'd like to reserve the remainder of my time for rebuttal.
Unknown Speaker: Very well, Mr. Arland.
Ms. Cusack, we'll hear from you.
Argument of Nancy S. Cusack
Mr. Cusack: Thank you.
Mr. Chief Justice, may it please the Court:
As Mr. Arland has already indicated, this case revolves around an attempt by a bankruptcy trustee to recover money as a voidable preference under section 547(b) of the Bankruptcy Code.
The check which is at the center of this controversy is a check which was post-dated.
It was dated and delivered prior to the 90-day preference period but in fact was honored on the 90th day, prior to the bankruptcy filing.
It is in this context that the Court must decide whether, for purposes of 547(b), it is the date of honor or the date of delivery which controls, and in making that decision whether or not the bankruptcy court acted properly in dismissing our lawsuit, which had initially been filed--
Unknown Speaker: For purposes of this case it's irrelevant that it was post-dated.
Mr. Cusack: --I don't think in fact it is irrelevant, because--
Unknown Speaker: Well, the check became a cash transaction the next day, which was before the 90th day.
Mr. Cusack: --Well, Your Honor--
Unknown Speaker: Is that right?
Mr. Cusack: --Well, under... our contention is that when a transfer takes place it is to be determined in accordance with State law, and under State law, in fact, a post-dated check is considered generally speaking to be effective as of the date of honor.
Unknown Speaker: Is that the... that is the unmistakable law of New Mexico?
Mr. Cusack: I believe it is, sir.
Unknown Speaker: What do you mean, effective?
When is a currently dated check deemed effective?
Mr. Cusack: Our position is also that--
Unknown Speaker: On the date of honor, of course--
Mr. Cusack: --Currently dated check is also the date of honor.
Unknown Speaker: --Yes.
You're not saying anything as far as the difference between post-dated and currently dated is concerned.
Your position is that the check has no effect until it's honored.
Isn't there an assignment of the chose in action, though?
When I write a check, am I not saying... am I not saying to the person that I give the check, you are entitled to my cause of action against the bank?
Isn't that what the whole thing is?
Mr. Cusack: Well, Your Honor, we would say that that's not what the whole thing is.
For there to be a valid assignment or a valid transfer it's contemplated that there must be some kind of transfer of dominion or control over the property being assigned or being transferred, and in fact--
Unknown Speaker: Well, for the transfer to be perfected that has to happen, and that's why the code in a later section says what the rules are for perfection, and that occurred within the requisite period here, the honor.
Mr. Cusack: --But... I'm sorry to disagree with you, but as... I don't see that there is an assignment, because of the fact that had there been a valid assignment, a valid transfer, in fact the transferor would have had no further ability to deal with those funds and the transferee would have had the ability to deal with those funds, and that's not what happens.
A check is issued, and up until the time that that check is honored, the issuer retains the ability to stop payment on that check, to close the account, to issue other checks, which may in effect have the effect of depleting the account and rendering that check absolutely useless; in addition the account can be garnished, so in fact there is no transfer or no change in control or dominion over those funds, so that in fact there is no assignment, no transfer of interest in property, and that will not take place until such time as that check is honored.
Unknown Speaker: Counsel, you really were suggesting that the word transfer as used in the Bankruptcy Code, and which is defined in the Bankruptcy Code, is controlled by State law.
I thought that would be a Federal question.
It may be that you might be persuaded that... you look around for probably any evidence of what it means, but you don't really think this is a question of State law.
Mr. Cusack: Well, actually, Your Honor, I do think it's a question of State law.
Unknown Speaker: The word transfer in all the--
Mr. Cusack: The Court... under the context of the Bankruptcy Code, first of all Congress has received constitutional authority to establish uniform laws on the subject of bankruptcies throughout the United States, and Congress exercised that authority by enacting the Bankruptcy Code.
Under the terms of the Bankruptcy Code there were some general definitions given in terms of what a transfer was.
101 indicates that a transfer is a method or a mode of disposing of an interest in property.
However, it's clear, and the McKenzie case makes it clear, that there are certain issues that have not been dealt with within the Bankruptcy Code itself and have not been specifically defined, and as a matter of fact there has been a policy to have certain issues determined in accordance with State law, and one of those issues is when the transfer takes effect, when a transfer is made, and so that in fact is an issue that is determined in the court--
Unknown Speaker: --Of course, that isn't what the court of appeals decided, is it?
Mr. Cusack: --Well, in fact the court of appeals did refer to the McKenzie case.
Unknown Speaker: I know it referred to it, but it didn't for a minute suggest that a transfer is... only takes place when State law says it does.
Mr. Cusack: That wasn't the specific holding of the court of appeals, no, sir, you're right.
The court of appeals indicated that a transfer only took place at such time as the check was honored, which in fact is consistent with what our State law indicates.
Unknown Speaker: And it thought the... it thought that its holding was consistent with the Uniform Commercial Code.
Mr. Cusack: Absolutely.
Unknown Speaker: As adopted in New Mexico.
Mr. Cusack: As adopted in the State of New Mexico, which again provides that a transfer takes place upon honor.
Unknown Speaker: Mrs. Cusack, what do you make of subsection (e)(1), which is on page 33a of the petition... I'm sorry, (e)(2), which seems to make a distinction between two types of transfer, just a transfer plain and simple and a perfected transfer.
It seems to me that your argument assumes that there's no transfer unless it's a perfected transfer, but (e)(2) says for purposes of this section a transfer is made at the time... A, at the time it takes effect between the transferor and the transferee if it is perfected at or within 10 days after such time.
Now, it seems to me it's... that is meant to cover exactly this situation.
If I gave you the money right now, that's a completed transfer... it's perfected.
What does it mean to have a transfer which takes effect between the transferor and the transferee but is not yet perfected?
What does that cover, if it doesn't cover this?
Mr. Cusack: Well, let me remind the Court that in this specific instance what we're doing is attempting to recover the money, and with respect to money you cannot have a transfer made until you have it in hand.
Likewise, you cannot perfect an interest in money until you are holding that money in your hand.
This section, though, can also contemplate situations where, for example, a transfer is made as between two parties and yet it's not perfected until such time as to third parties.
There is no creditor that can come in and take a superior interest.
For example, a deed to a house.
I may deed my house to you, but if the deed is not recorded, while the transfer may be effective between the two of us, it's simply not perfected until such time as that is filed of record.
Unknown Speaker: I think your mistake is to say that this is a transfer of money.
It's not a transfer of money, it's a transfer of a chose in action, which is property.
It's a transfer of a claim for money.
Mr. Cusack: But there's no enforceable... again, what... first of all, what we're seeking to recover under 547(b) is not a recovery of that claim for money.
We are seeking within the parameters of the preference suit to recover that $157,000 which in fact was transferred and which Mr. Barnhill received.
Getting the check back, which represents the chose in action, isn't going to do anything as far as the bankruptcy estate or the trustee is concerned.
Unknown Speaker: You would agree that if the payee could enforce it against the bank, if the bank dishonors it, then your position would be different.
Mr. Cusack: I think our position in that instance would be different if he could enforce it against the bank, but in fact he cannot.
As I indicated previously, Congress has constitutional authority to establish uniform laws and has enacted that authority by enacting the Bankruptcy Code.
What is a transfer and when it is completed is necessarily a Federal question because it does arise under the terms of the Federal statute, which of course is intended--
Unknown Speaker: I thought a minute ago, Mrs. Cusack, you told Justice White that that was a matter of State law.
Mr. Cusack: --The Federal question has not been answered, and consequently in accordance with the McKenzie case the Court has said that in the event that that question is not answered pursuant to law, then it becomes a matter of deference to the State.
It's a State law in this case that governs.
Unknown Speaker: You mean if it's not answered by the Federal statutory provision.
Mr. Cusack: If it's not answered by the Federal statute, and it's certainly... the issue of when a transfer is made specifically is not answered within the statute.
Unknown Speaker: Ms. Cusack, do you take the position that under New Mexico law when the check is delivered that it does not at least conditionally transfer a chose in action to the payee?
Mr. Cusack: No.
Unknown Speaker: Would New Mexico recognize that it conditionally transfers a chose in action to the payee when the check is delivered?
Mr. Cusack: What New Mexico recognizes is that when a check is tendered there is a conditional payment and there is a doctrine of relation back that is in effect in the State of New Mexico, and what New Mexico recognizes is that that conditional payment is subject to the condition of a transfer taking place.
Unknown Speaker: Is New Mexico's law substantially different from that of most other States--
Mr. Cusack: No, I think it's very similar.
Unknown Speaker: --In this regard, or is it the same?
Mr. Cusack: It's the same as the law in most States.
Unknown Speaker: And when you look at the definition in the Bankruptcy Code 101 of what a transfer means, it means every mode, absolute or conditional... or conditional... of disposing or parting with property or with an interest in property.
Do you say that the delivery of a check does not meet that definition?
Mr. Cusack: I think that the delivery of the check comes within the definition of what a transfer is under 101--
Unknown Speaker: Under 101.
Mr. Cusack: --Because 101 is a very expansive definition and it indicates, at least in my mind, that one way that an individual can make a transfer of an interest in property is indirectly through the delivery of the check.
However, what's important for purposes of 547(b) is making a determination in fact when the transfer takes place so that the trustee knows and the other creditors know what assets ultimately will be available for distribution to those creditors and to the estate.
Under 547(b) the trustee is allowed to recover any transfers of a debtor's interest in property so long as certain things have made... so long as those transfers have been made within 90 days and they have been payment for an antecedent debt, and it's again going back to the idea of dominion and control.
There in fact is no transfer between the transferor or the transferee until those funds have been tendered and until... and in actuality those funds have been removed from the bankruptcy estate.
Unknown Speaker: May I just question that, because perhaps it's the same point Justice Scalia made, but I want to be sure I understand your answer.
Subsection (e)(1)(b) contemplates... it refers to transfers of fixtures or property other than real property, and surely contemplates that a transfer can occur before it has been perfected, because it talks about a transfer, when a transfer will be perfected, and then in (e)(2) it says it's perfected if it's within 10 days and another... you can't get another lien against the property.
Now, if the transfer date and the perfection date are different, doesn't the date of honor establish the perfection date and the date of delivery establish the transfer date?
Why isn't that a correct analysis?
Mr. Cusack: Okay, our contention is with respect to money, the assets that we are seeking to recover, there is no transfer of those funds until such time as the transferor loses dominion or control over those funds--
Unknown Speaker: I understand--
Mr. Cusack: --And the transferee is able to exercise control and in this circumstance--
Unknown Speaker: --But would you not agree that the point you're describing is the point at which the transfer has been perfected?
Mr. Cusack: --But it's also the point in time when the transfer has been made.
Unknown Speaker: You're saying that with respect to checks, delivery of checks, there is no difference between the transfer date and the perfection date.
Mr. Cusack: When you're dealing with a check, that's correct.
Unknown Speaker: Mrs. Cusack, you're not seeking money any more than the payee of the check is seeking money.
You are not seeking some particular dollar bills that the bankrupt owns.
You are seeking to assert a chose of action against the bank on behalf of the trustee.
Mr. Cusack: No, sir, we're not--
Unknown Speaker: You say that the bank owes the estate money, isn't that what you're saying?
Mr. Cusack: --No, sir, we're not.
As a matter of fact, what we're seeking to recover is $157,000 that was paid to Mr. Barnhill as a result of a settlement agreement that had been reached, so no, we're not seeking to recover any funds--
Unknown Speaker: Paid to him by whom?
Mr. Cusack: --It was paid to him by the debtor, so we're not seeking to recover any money from the bank.
We're seeking to recover a preferential transfer from Mr. Barnhill.
Unknown Speaker: No, but to the extent you say that money that the bank gave to the petitioner here should have been given to the trustee, or should have remained in the estate, you're asserting a chose in action.
You're not asserting a claim for particular property.
Mr. Cusack: Well, we're asserting a claim for those funds once Mr. Barnhill's check is honored, which will in effect increase our estate.
So long as that--
Unknown Speaker: Against the bank, for any money that the bank has, not any particular money.
There's no segregated fund for your client in the bank... this is his money.
You're just asserting a claim against the bank.
Mr. Cusack: --That's correct, and if Mr. Barnhill issues us a check and it's not honored, then there will be no transfer of any funds and no increase for the benefit of the estate, that is correct.
But I also might remind the Court that the drawer will retain full control over that chose in action until such time as--
Unknown Speaker: Yes, but that just means that it's conditional, doesn't it?
I mean, it doesn't prove anything more than that the transfer is conditional.
Mr. Cusack: --The payment is conditional, and it is conditional upon the transfer being made.
In fact, there is--
Unknown Speaker: Well, but for that proposition you rely, as I understand it, on the position that the payee cannot enforce it against the bank.
Mr. Cusack: --That's right, the payee cannot enforce it against the bank because again he has no right to exercise any kind of dominion or control.
Unknown Speaker: But don't you also rely on the proposition that the payor may stop payment or may also withdraw his funds before the check clears?
Mr. Cusack: Absolutely, or that the funds may be garnished or levied against.
So in other words, there are many things that can happen, notwithstanding the fact that these checks are outstanding.
Under 547(b) in essence there is a mandate, if you will, that the trustee look not only what assets are there in the estate as of the date of the bankruptcy filing, but in fact that he take a backward look and look to see what assets were in the bankruptcy estate and make a determination as to what happened to those assets in the 90 days immediately preceding the bankruptcy.
If the trustee, in doing that, and in doing his preference screening, looks on the 90th day immediately preceding the bankruptcy filing, looks to see what's in the account, regardless of how many checks may be issued and how many checks may be outstanding, the fact is that as of that period in time it is the debtor who has control over all of the funds which remain in the bank account.
Again, the issue of control and dominion over those funds becomes material.
Mr. Arland has indicated that a date of delivery rule will conform with modern commercial practice, and he has indicated repeatedly that when a transaction is... or when a check is given the transaction stops.
In fact, that's an oversimplification of what happens.
First of all, I think intuitively one can see that payment by check is not the same as payment by cash.
For example, if I issue a check, I'm assured of the fact that I will be asked for an ID because of the fact that if the check is not honored the transaction will not stop.
In many States, including the State of New Mexico, statutes prohibit certain transactions from going forward until cash or immediately available funds are in place, and in addition I think that one has to be aware of the fact that the UCC provides that a tender of a check, in and of itself, does not operate to terminate an obligation, but in fact only operates to suspend that obligation and to suspend until it's determined whether or not the check has paid the obligation which has to be collected.
I think that under the terms of the date of honor rule there is certainly a unity of law that is presented, because of the fact that the Bankruptcy Code has consistently deferred certain matters to decisions under State law.
For example, exemptions are decided under State law.
The fact that a determination of when a transfer is made is to be decided under State law is also consistent with that unity, in effect helps to promote that by in fact ensuring that someone who does business in a certain State is not going to receive a windfall or be unduly penalized in the event that an individual goes into bankruptcy.
He can also structure his or her commercial transactions in such a way so that he knows that in terms of consistency what is going to happen in the Federal court is going to be consistent with what happens in the State court.
For these reasons, we would ask for an adoption or for a determination that in fact it is the State law that controls in making a determination when a transfer takes place, and that in fact the Court reject the implementation of a date of delivery rule.
Unknown Speaker: Are you aware of any States where the result would be different than it is under New Mexico law according to your view of the case?
Mr. Cusack: I'm not aware of any States where that would be different.
Basically, the States have all gone ahead and passed the Uniform Commercial Code, and basically it's in effect throughout all 50 of the States, so I'm not aware of any situation where any State is in a differing situation.
I do think the cases that have evolved are consistent, that in fact a transfer of a debtor's interest in property when a check is issued, or when there has been a check issued, that transfer under the UCC takes place at the time the check is honored.
Again, there is no assignment of any funds in the account, and there's no transfer of that dominion or control until such time as that happens.
Unknown Speaker: Thank you, Ms. Cusack.
Mr. Arland, do you have anything in rebuttal?
You have 2 minutes remaining.
Rebuttal of William J. Arland, III
Mr. Arland: Yes, Mr. Chief Justice, I'd like to take the 2 minutes for rebuttal if I might.
Unknown Speaker: Mr. Arland, may I ask you one question?
Mr. Arland: Yes, Justice.
Unknown Speaker: Why isn't your position that there's a conditional transfer here defeated by the fact that the payee cannot enforce that transfer against the bank if it's dishonored?
Mr. Arland: My position is that because the nature of a check is that it is a conditional transfer, and that it is recognized within the Uniform Commercial Code and in the bankruptcy courts.
Unknown Speaker: Then why can't it be enforced against the bank?
Mr. Arland: Because the concept of how commerce works and how banks honor checks does not permit it.
If we have a dishonor of a check within the preference period subsequent to delivery, you don't have a preference action, there's no question of that, because there's nothing... nothing has changed hands.
It is the conditional nature, however, of giving of a check and its relation back to the date of delivery that puts it in a unique circumstance.
It's much like the 547(e) provision, and the honoring of the check you can analogize, as we have in our brief, to the perfection of a security interest in either personal property or real property.
There is a definite relation back doctrine that must be taken into consideration.
Unknown Speaker: But isn't... you say it's a relation back, but doesn't the relation back occur only because the check is an authorization to pay, and if the person authorized accepts the authorization then the payment subject to conditions you've mentioned relates back, but it is not a chose in action in the sense that it can be enforced against the bank as the holder of funds.
Mr. Arland: The definition of property under 541 would cover a conveyance by check.
The property itself would be that chose in action.
Unknown Speaker: A nonenforceable authorization to a third party?
Mr. Arland: I'm sorry, Justice Souter.
Unknown Speaker: A nonenforceable authorization to a third party would fall within the definition of property?
Mr. Arland: I do not believe it unenforceable.
I believe that the check--
Unknown Speaker: Well, you can't enforce it against the bank.
That's what's holding me up.
Mr. Arland: --You can present it to the bank for honoring.
If it is wrongfully dishonored... and that would be the only reason it would be dishonored, in which the payee would have a cause of action or would want to enforce it against the bank if the bank wrongfully dishonored it.
That's the only reason--
Unknown Speaker: If it's wrongfully dishonored, can it sue the bank?
I thought you conceded that it could not.
Mr. Arland: --The payee can... if it's wrongfully dishonored, he cannot, but what he can do is he may sue the payor.
The payor may then sue the drawee bank for wrongfully dishonoring the check.
Unknown Speaker: Well, that's great, but it doesn't affect the transfer.
You simply go back to your original--
Mr. Arland: But it does affect the transfer, Justice Souter, with all due respect, if one looks to the Bankruptcy Code, and the Bankruptcy Code under section 101(54) provides for conditional transfer.
The conditional transfer is a transfer in and of itself.
The fact that the presentment of the check occurs within the period does not affect the date of transfer, which is the date of delivery itself.
Chief Justice Rehnquist: I think you've answered the question, Mr. Arland.
The case is submitted.
Argument of Chief Justice Rehnquist
Mr. Rehnquist: The third case is No. 91-159, Barnhill versus Johnson and it comes to us on certiorari to the Court of Appeals for the Tenth Circuit.
It involves a rather technical provision of the Bankruptcy Code which allows a trustee in bankruptcy to set aside transfers of property made by a debtor within a certain time before the debtor files for bankruptcy.
It is designed to prevent debtors who are facing bankruptcy from making last minute payments to favored creditors or friends.
But what the case boils down to is the determination of the consequences of a transaction in which millions of adults regularly engage in without any thought of bankruptcy.
The payment of a debt by check delivered to the debtor.
Does the actual legal transfer of the funds occur when the check is delivered to the debtor or when he debtor cashes it at the bank on which the check is drawn?
The Court of Appeals held it was the latter.
We agree and affirm its judgment.
Under the Uniform Commercial Code, which is the law in almost every state, the mere receipt of the check by the creditor does not give the creditor a right to sue the bank if the bank should decline to honor the check.
A bank remains free to refuse to honor the check because of insufficient funds, because a third party has garnished the debtor's account or even if the debtor closes the account with the result that the check bounces.
It is only when the check is honored by the bank that the creditor either has the funds in hand or has the right to sue the bank if it subsequently refuses to pay.
We, therefore, hold that the trustee in this case may set aside the transfer because the creditor did not cash the check until after the cut off date although he received it before hand.
Justice Stevens has filed a dissenting opinion in which Justice Blackmun joins.