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John P. Finan

Abstract

The Uniform Commercial Code (UCC) 4-303 addresses two areas where the UCC and the Bankruptcy Code intersect. The first relates to the vulnerability of drawee banks that honor checks after their customer has taken bankruptcy (has filed a voluntary petition or is the defendant in an involuntary case); the second relates to the timing of transfers made by check under 547 of the Bankruptcy Code (the preference section). In both areas there is a less than perfect fit between the Bankruptcy Code and UCC 4-303. The first area poses problems for practitioners whose clients have received notice of bankruptcy in situations where UCC 4-303 clearly provides protection but where Bankruptcy Code 542(c), at least arguably, does not. The second area involves the timing of a transfer by check. The majority of courts equate transfer with honor which is generally correct since honor generally is the time after which a creditor of the depositor cannot garnishee funds in the depositor's account. However sometimes, as explained below, priority contests between holders who present checks and garnishing creditors are not determined at the time of honor under UCC 4-303. A minority of courts simply ignore the priority rules of UCC 4-303 and hold that the transfer takes place when the check is honored. (Note: 547(e) of the Bankruptcy Reform Act of 1978 makes the priority rules of applicable non-bankruptcy law determinative of the issue of timing.) A compromise position equates transfer and issue if, but only if, honor is within ten days of issuance.

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