## Facts

- Gary Stewart regularly bought cattle from Barry County Livestock Auction, Inc. (Barry), typically paying on the day of sale by personal check.
- On January 29, 2000, Stewart bought cattle from Barry; Barry delivered the cattle and issued an invoice, and Stewart tendered a personal check the same day.
- Stewart’s personal check was later returned for insufficient funds.
- After the dishonor, Stewart obtained and delivered a cashier’s check to Barry to cover the cattle purchase price.
- Stewart filed a Chapter 13 petition on April 11, 2000.
- The Chapter 13 trustee sought to avoid the cashier’s-check payment(s) to Barry as preferential transfers under 11 U.S.C. § 547(b).
- Barry asserted defenses under § 547(c), including that the payment was a contemporaneous exchange for new value and/or made in the ordinary course of business.
- The court proceeded to decide the preference claim; a separate automatic-stay claim asserted in the adversary proceeding was not resolved in the reported decision.

## Issues

1. Whether Stewart’s prepetition cashier’s-check payment to Barry, made after a personal check was dishonored and within 90 days of the bankruptcy filing, was an avoidable preferential transfer under 11 U.S.C. § 547(b).
2. Whether Barry proved the § 547(c)(1) defense that the transfer was intended to be and was in fact a contemporaneous exchange for new value.
3. Whether Barry proved the § 547(c)(2) defense that the transfer was made in the ordinary course of business (between the parties and under ordinary business terms).

## Decision

- The court held that the cashier’s-check payment(s) to Barry within the preference period satisfied the elements of § 547(b) and were avoidable preferences.
- The court found the payment was made to or for the benefit of a creditor and on account of an antecedent debt created by the earlier cattle sale, particularly once the initial personal check was dishonored.
- The court concluded the § 547(c)(1) contemporaneous-exchange defense did not apply because, after the dishonor, the later cashier’s-check payment functioned as payment of an existing obligation rather than a substantially contemporaneous exchange for new value.
- The court concluded the § 547(c)(2) ordinary-course defense did not apply because the pattern of dishonored checks followed by later cashier’s-check “catch-up” payments was not consistent with the parties’ prior dealings and was not shown to match ordinary business terms.
- The trustee was permitted to avoid the transfer(s) (reported as totaling $46,749.55) as preferential transfers.

## Legal Principles

- A trustee may avoid a transfer as a preference under 11 U.S.C. § 547(b) if the transfer (1) is of an interest of the debtor in property, (2) is to or for the benefit of a creditor, (3) is for or on account of an antecedent debt, (4) is made while the debtor is insolvent, (5) is made within 90 days before the petition date (for non-insiders), and (6) enables the creditor to receive more than it would receive in a Chapter 7 liquidation.
- When goods are delivered and the buyer’s personal check is later dishonored, a later replacement payment (including by cashier’s check) is generally treated as satisfaction of an existing debt rather than part of a substantially contemporaneous exchange.
- The § 547(c)(1) defense requires proof that the parties intended a contemporaneous exchange for new value and that the exchange was in fact substantially contemporaneous; a later payment made after dishonor does not meet that standard.
- The § 547(c)(2) defense requires proof that the transfer was made in the ordinary course of business between the debtor and creditor and according to ordinary business terms; unusual collection or payment patterns, such as post-dishonor “make-up” payments, may defeat the defense.
- In applying § 547(b)(5), courts compare what the creditor received from the challenged transfer to what the creditor would receive in a hypothetical Chapter 7 case, given the debtor’s assets, liabilities, and available non-exempt value for distribution.

## Conclusion

In re Stewart held that a prepetition cashier’s-check payment made after a debtor’s personal check for a cattle purchase was returned for insufficient funds was an avoidable preference under § 547(b), and the creditor could not shield the transfer under the contemporaneous-exchange or ordinary-course exceptions because the dishonor created an antecedent debt and the later cashier’s-check payment was not shown to fit ordinary practice.


In re Stewart, 274 B.R. 503 (2002)