Opinion
No. 76 B 166
January 15, 1980
Former Bankruptcy Act — Preferences — Avoidance — Knowledge of Insolvency — Insufficient Funds Check
Reasonable cause to believe that a debtor is insolvent, sufficient to establish that element of a voidable preference under Section 60b, can be shown by such facts and circumstances as would cause a reasonable man to make further inquiry into the financial condition of his debtor. The creditor's receipt of a replacement check for a check on which the debtor had stopped payment, together with other circumstances, should have raised an inquiry as to the debtor's financial condition. Therefore, the creditor was charged with knowledge of the debtor's insolvency at the time of the transfer in question. See Sec. 60b at ¶ 2562 and Sec. 547(b) at ¶ 9529.
[Digest of Opinion]
The debtor, when purchasing goods from the creditor, customarily would issue checks postdated from sixty to seventy-five days as payment, upon receipt of an invoice. This arrangement had been followed for two years prior to the transaction which created the alleged preference. Early in November, 1975, the creditors received a check from the debtor postdated to December 16, 1975. The debtor subsequently stopped payment on this check and then notified the creditor that he had done so because there were insufficient funds to cover this check. In addition, he told the creditor that hopefully within the next two weeks there would be sufficient funds and that he would then issue a replacement check. The debtor testified that he recalled at least one later conversation with the creditor regarding the issuance of the replacement check wherein the debtor had stated that he was "in trouble" and "waiting for additional funds to come in." The debtor noted that he did not order stop payments in the ordinary course of business.Upon dishonorment of the check, the creditor demanded and received immediate payment by replacement check dated December 29, 1975. On January 8, 1976 the debtor filed its voluntary petition. The trustee alleged that the issuance and payment of this replacement check constituted the preferential transfer at issue.
All other elements of a preferential transfer having been proven, the court looked to the issue of whether the creditor had "reasonable cause to believe that the debtor was insolvent at the time of the transfer." It determined that reasonable cause can be shown by such facts and circumstances sufficient to cause a reasonable man to make further inquiry into the financial condition of the debtor. Once a duty to inquire is raised, the creditor is charged with knowledge of those facts such inquiry would have disclosed. Dishonoring a check in itself does not necessarily give rise to "reasonable cause to believe" but it is sufficient to put a creditor on notice as to the debtor's financial condition. The stop payment of the postdated check, together with the debtor having informed the creditor of his financial troubles, the creditor's knowledge that the debtor did not issue stop payments in the ordinary course of business, and the creditor's demand that the debtor's president personally guarantee the creditor's account were sufficient to indicate knowledge of the debtor's insolvency. Therefore, the trustee was allowed to recover the payment to the creditor as a preferential transfer voidable under Section 60.