Payments by Check as Voidable Preferences: The Impact of Barnhill v. Johnson

Under the Bankruptcy Reform Act of 1978 (the Code), the trustee in bankruptcy has the duty to seek to avoid “preferential” transfers of the debtor\u27s property made ninety days or less before the date of the filing of the bankruptcy case. Because of the delay that may occur between the time a check in payment of a debt is delivered by the debtor and when it is honored by the drawee bank, determining when the transfer was made to the payee-creditor has been a difficult issue for courts to resolve. The Supreme Court recently addressed this problem when it ruled, in Barnhill v. Johnson, that the date of honor of the check is the transfer date for purposes of preference law. The Court\u27s decision, however, has the potential to create significant practical problems because it frustrates general bankruptcy policy, it creates a conflict with existing preference exceptions law, and it is inconsistent with general commercial practice. In explaining these conclusions, this Article first considers the policies and goals of bankruptcy preference law. It then explores the language of the preference statute and analyzes the application of the statute to transfers by check. Next, this Article examines the recent Supreme Court opinion deciding the issue of the transfer date for payments by check and the dissenting opinion of Justice Stevens, with whom Justice Blackmun joined. This Article then discusses the potential problems that the Court\u27s decision creates. Finally, this article recommends that Congress revise the Bankruptcy Code to adopt the “date of delivery” rule for the effective date of check transfers in view of the problems that the “date of honor” rule will create