LOCATION: Northern District Court of New York
DOCKET NO.: 91-159
DECIDED BY: Rehnquist Court (1991-1993)
LOWER COURT: United States Court of Appeals for the Tenth Circuit
CITATION: 503 US 393 (1992)
ARGUED: Jan 14, 1992
DECIDED: Mar 25, 1992
Nancy S. Cusack - on behalf of the Respondent
William J. Arland, III - on behalf of the Petitioner
Facts of the case
Media for Barnhill v. JohnsonAudio Transcription for Oral Argument - January 14, 1992 in Barnhill v. Johnson
Audio Transcription for Opinion Announcement - March 25, 1992 in Barnhill v. Johnson
William H. 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.