“Transfers,” and when they occur, are important under the Bankruptcy Code for a number of reasons. Trustees may recover as a “preference” any “transfer…to of for the benefit of a creditor…for or on account of an antecedent debt…made within 90 days before the date of the filing of the petition…that enables such creditor to receive more than such creditor would receive if…the case were a case under chapter 7…[and] the transfer had not been made” under Section 547 of the Bankruptcy Code. Trustees may recover as a “fraudulent transfer” any “transfer…made…within 2 years before the date of the filing of the petition” if the debtor “made such transfer with actual intent to hinder, delay or defraud” a creditor or “received less than reasonably equivalent value in exchange for such transfer” and was insolvent at the time of the transfer or was rendered insolvent by the transfer under Section 548 of the Bankruptcy Code. Trustees may recover as a prohibited “post-petition transfer” a transfer “that occurs after the commencement of the case” and that “is not authorized under this title or by the court” under Section 549 of the Bankruptcy Code.
In In re: Barnhill, decided in 1999, the U.S. Supreme Court held that when the “transfer” that a trustee is seeking to avoid as a preference is a payment made by check, the transfer occurs, not when the debtor writes the check or delivers the check to the creditor, but when the check is honored by the debtor’s bank. The court based its decision on Bankruptcy Code Section 547(e), which provides that a transfer occurs for preference purposes, “when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.” Since the debtor’s check to its creditor would not have been paid if another creditor had garnished the debtor’s bank account to enforce a judgment before the check was honored, the Supreme Court concluded that a transfer made by check did not occur for preference purposes until the check was honored by the bank.
Section 548(d) of the Bankruptcy, which defines when a transfer occurs for fraudulent conveyance purposes, differs from Section 547(e). Section 548(d) provides that a transfer is made “when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest in the property that is superior to the interest in such property of the transferee, but if such transfer is not so perfected before the commencement of the case, such transfer is made immediately before the date of the filing of the petition.” Although Section 548(d) bears some resemblance to Section 547(e) in that it makes when a transfer occurs depend on when a third party could no longer acquire superior rights in the asset transferred, it differs in treating a transfer as if it occurred earlier than it really did if a third party could still have acquired superior rights at the time that the bankruptcy case is filed.
Given the detailed definitions that Congress provided of when transfers avoidable as preferences and fraudulent conveyances are deemed to have occurred for purposes of determining whether that occurred “within 90 days before” or “within 2 years before” the date of the filing of the petition, respectively, it is surprising that Section 549 contains no language governing how to determine whether a transfer “occurs after the commencement of the case.” In an April 6, 2018 decision in In re: Cresta Technology Corporation, much to the misfortune of the payee of the debtor’s check, the Ninth Circuit Bankruptcy Appellate Panel decided that the Supreme Court’s holding in Barnhill governed whether a transfer had occurred after the commencement of the case.
In Cresta Technology, the debtor’s bankruptcy lawyer had declined to accept the debtor’s check in payment of his retainer because he wanted to be paid by certified or cashier’s check. Presumably because the debtor did not have sufficient cleared funds on deposit in its account to pay the lawyer by certified or cashier’s check, the debtor’s CFO, Mathew Lewis, had a cashier’s check payable to the lawyer issued on his personal bank account. The debtor wrote a check to Lewis to reimburse him for the retainer he had paid for its benefit and delivered the check to him before the debtor filed its bankruptcy case. However, the debtor’s check to Lewis was not honored by the debtor’s bank until after the bankruptcy case was filed.
The debtor’s trustee sued Lewis to avoid the debtor’s payment to him as a post-petition transfer that was not authorized by the Bankruptcy Code or the bankruptcy court. Lewis defended that case on the grounds that the payment to him was not a post-petition transfer because it occurred when the debtor delivered its check to him and that the payment could not be avoided as a preference because the debtor’s payment to him was a “substantially contemporaneous exchange” for “new value” that he had provided to the debtor by paying the retainer to the debtor’s lawyer. The “contemporaneous exchange for new value” defense is a defense to an action to avoid a preference provided for in Bankruptcy Code Section 547.
The Cresta court acknowledged that the debtor’s payment to Lewis could not have been avoided as a preference because of Lewis’s new value defense. Unfortunately for Lewis, however, the court held that Barnhill dictated that the transfer to Lewis constituted a post-petition transfer since the debtor’s check to Lewis had not been honored until after the bankruptcy case was filed. The affirmative defenses provided for in Section 547 only apply in cases to avoid preferences. Because Section 549 provides no corresponding “contemporaneous exchange for new value” defense to a suit to avoid a post-petition transfer, Lewis had to refund to the trustee the amount that the debtor had paid him to reimburse him for paying its lawyer.
While the Cresta court’s desire for a uniform standard as to when a transfer occurs for purposes of determining whether it may be avoidable for bankruptcy purposes is understandable, its choice to apply a test that expressly applies only to avoidance of preferences to an action to avoid a post-petition transfer is questionable. Had the trustee sought to avoid the debtor’s payment to Lewis as a fraudulent conveyance, the transfer would have constituted a pre-bankruptcy transfer under the standard expressly made applicable to suits to avoid fraudulent transfers by Bankruptcy Code Section 548. Thus, Congress made it clear that it intended for different standards to apply, depending on the basis for avoiding the transfer. The Cresta court could just as easily filled the gap left by Congress in Section 549 by importing the Section 548 standard rather than the Section 547 standard. Applying the transfer timing standard in Section 547 without allowing the use of the affirmative defenses afforded by Section 547 left Lewis defenseless. Under the Cresta court’s reasoning, any party who has received payment by check before bankruptcy has received a voidable post-petition transfer if the check clears post-petition.
The lesson for anyone sued by a trustee to avoid any transfer is not to accept the allegations in the trustee’s complaint as to when the transfer occurred as true, but to look closely at when the transfer really occurred. Both the basis for the trustee’s suit and the defenses available to the transferee may depend on the date of the transfer.