If an ordinary check has not been “paid” by the bank, we know there has not yet been a transfer and that the underlying funds belong to the maker, not to the payee.
But what about a cashier’s check that was delivered to the payee but has not been honored by the bank? Do the funds belong to the debtor or to the payee?
Chief Bankruptcy Judge Janice D. Loyd of Oklahoma City answered the question of first impression in an April 10 opinion.
The manager of a small business had signatory authority on the company’s bank account. The manager purchased a cashier’s check for about $118,000 from the company’s bank using the company’s funds. The manager had the bank make him the payee, allegedly in payment of compensation he was owed.
The manager turned the cashier’s check over to his bank for deposit to his personal account.
Believing that the manager was defrauding the company, the owner of the company terminated the manager’s authority over the account and prevailed on the company’s bank to stop payment of the cashier’s check before it was paid. Given the dispute over the funds, the company’s bank held the funds in its own general account but did not redeposit the funds into the company’s account.
The company filed a chapter 7 petition, and the trustee mounted a turnover action against the bank and the manager under Section 542(a). Judge Loyd identified the ownership of the funds as the only dispute.
The answer lay in both the Uniform Commercial Code and Supreme Court authority.
In Johnson v. Barnhill, 503 U.S. 393 (1992), the Supreme Court held that the date when a check is honored is the date of transfer for preference purposes. Section 3-408 of the UCC provides that the issuance of a check by itself is not an assignment of funds to the drawee bank.
Judge Loyd noted how the Official Comment to UCC § 3-408 says that the section is in accord with Barnhill.
Citing the Tenth Circuit Bankruptcy Appellate Panel, Judge Loyd said that funds underlying an ordinary check that has not been cashed or honored are property of the estate. In re Ruiz, 455 B.R. 745, 749 (B.A.P. 10th Cir. 2011).
Is the result different if there was an intermediate step when funds in the debtor’s account were used to purchase a cashier’s check?
In the case at hand, Judge Loyd said that the cashier’s check had not been finally paid under UCC § 4-215(a) and that the bank was a “mere conduit” because it never exercised dominion or control over the funds.
According to Judge Loyd, the bank could not have argued that the funds were its property.
The funds did not belong to the manager, Judge Loyd said, because the check was never paid. Therefore, the funds were estate property that the bank must turn over to the trustee.
Still, Judge Loyd said, the manager “might have a claim” that “should be adjudicated in the claims process in the bankruptcy proceeding.” Presumably, the manager will have an unsecured claim absent evidence that the bank, for some reason, was acting as an agent or had some transcendent duty to the manager.
If an ordinary check has not been “paid” by the bank, we know there has not yet been a transfer and that the underlying funds belong to the maker, not to the payee.
But what about a cashier’s check that was delivered to the payee but has not been honored by the bank? Do the funds belong to the debtor or to the payee?
Chief Bankruptcy Judge Janice D. Loyd of Oklahoma City answered the question of first impression in an April 10 opinion.
The manager of a small business had signatory authority on the company’s bank account. The manager purchased a cashier’s check for about $118,000 from the company’s bank using the company’s funds. The manager had the bank make him the payee, allegedly in payment of compensation he was owed.
The manager turned the cashier’s check over to his bank for deposit to his personal account.
Believing that the manager was defrauding the company, the owner of the company terminated the manager’s authority over the account and prevailed on the company’s bank to stop payment of the cashier’s check before it was paid. Given the dispute over the funds, the company’s bank held the funds in its own general account but did not redeposit the funds into the company’s account.
The company filed a chapter 7 petition, and the trustee mounted a turnover action against the bank and the manager under Section 542(a). Judge Loyd identified the ownership of the funds as the only dispute.
The answer lay in both the Uniform Commercial Code and Supreme Court authority.