Cresta Technology Corporation
What date controls when a check is delivered before the debtor files bankruptcy, but is not cashed (honored) until after the debtor files bankruptcy: In In re Cresta Technology Corporation, 583 B.R. 224 (9th Cir. BAP 2018) the Bankruptcy Appellate Panel of the Ninth Circuit found, among other things, that a bankruptcy court did not err in finding that a check delivered pre-petition, but honored postpetition, constituted an unauthorized postpetition transfer recoverable by a chapter 7 trustee pursuant to 11 § USC 549.
On March 16, 2016, appellant Matthew Lewis (“Appellant”), in his role as Chief Financial Officer (“CFO”) of debtor Cresta Technology Corp. (“Debtor”), issued a check from Debtor’s bank account to Debtor’s bankruptcy attorney (“Counsel”), as payment for representing Debtor in its bankruptcy case. Counsel refused the check in favor of a cashier’s check. The next day, Appellant delivered Counsel a cashier’s check drawn on Appellant’s personal bank account for Debtor’s legal fees, with the agreement that Debtor would reimburse Appellant. On March 18, 2016, Debtor, through Appellant as its CFO, issued a check for $10,000 (“Check”) to Appellant from Debtor’s bank account. Later that same day, Debtor filed its chapter 7 bankruptcy petition, signed by Appellant. The Check cleared Debtor’s bank account on March 22, 2016, four days after the petition date.
Debtor’s chapter 7 trustee (“Trustee”) subsequently filed a complaint against Appellant seeking to avoid the $10,000 payment as a postpetition transfer under 11 U.S.C. §549(a) and to recover the funds for the benefit of the estate under 11 U.S.C. §550(a)(1). Relying on Barnhill v. Johnson, 503 U.S. 393 (1992), the Trustee moved for summary judgment arguing that a “transfer” by an ordinary check occurs when the check clears the originating bank account and not when it is delivered to the intended beneficiary. Thus, the Trustee argued, the Check constituted an authorized postpetition transfer.
The bankruptcy court granted the Trustee’s motion, determining that the “transfer” to Appellant occurred on March 22, 2016 – the date the Check was honored by Debtor’s bank, four days after the petition date. Therefore, and because the Check was “transferred” postpetition without authorization, the Bankruptcy Court for the Northern District of California held that the Check was an avoidable postpetition transfer under 11 U.S.C. §549(a). Noting that the issue was one “of first impression before any appellate court in the Ninth Circuit since Barnhill,” the Bankruptcy Appellate Panel of the Ninth Circuit affirmed the bankruptcy court’s entry of summary judgment in favor of the Trustee. Cresta, at 226.
Appellant argued that the bankruptcy court committed reversible error by applying 11 U.S.C. §549 instead of 11 U.S.C. §547, since the Check was delivered prepetition. Appellant further argued that the bankruptcy court should have applied the affirmative defenses available for a preferential transfer under section 547(c). The BAP rejected Appellant’s arguments, reasoning that while the transaction between Debtor and Appellant straddled the petition date, the most critical date to consider was when the check was honored by the Debtor’s bank, which occurred postpetition. Thus, the BAP found, neither 11 U.S.C. §547(b) nor the affirmative defenses available under 11 U.S.C. §547(c) applied. Relying on Barnhill, the BAP held that the “date of honor” rather than the “date of delivery” is when a “transfer” occurs in connection with an ordinary check.
Thus, the BAP concluded that the bankruptcy court did not err when it granted summary judgment in favor of the Trustee, finding that the Check was an unauthorized postpetition transfer and that Trustee was entitled to judgment as a matter of law.