## Facts

- Cybermech, Inc. agreed to sell Royal Cake Co. four carton-packer machines, with installation of a prototype for a trial period and payment terms requiring a one-third down payment with the order.
- On July 30, 1987, Royal ordered four machines and paid $33,306.67 as the down payment; Cybermech deposited the check into its general bank account.
- Cybermech later concluded it could not perform the project and, on August 24, 1987, sent Royal a check refunding $33,306.67.
- Cybermech filed a Chapter 7 petition on September 16, 1987, within 90 days of the refund.
- The Chapter 7 trustee sued to avoid the August 24 refund as a preferential transfer under 11 U.S.C. § 547(b).
- The bankruptcy court entered judgment for the trustee (including prejudgment interest), and the district court affirmed.

## Issues

1. Whether the refunded down payment was a “transfer of an interest of the debtor in property” under 11 U.S.C. § 547(b) when the funds were initially received and deposited into the debtor’s general account.
2. Whether the refund was made “on account of an antecedent debt” owed by the debtor to the buyer under 11 U.S.C. § 547(b)(2).

## Decision

- The Fourth Circuit affirmed.
- The court held Cybermech acquired a property interest in the down payment when it received and deposited the funds without any trust, escrow, or segregation arrangement.
- The court held the refund was made on account of an antecedent debt because, once Cybermech repudiated or could not perform, Royal had a restitutionary claim for return of the down payment that constituted a “debt” (liability on a claim).
- The court rejected Royal’s attempt to treat the down payment as Royal’s property via a constructive-trust or “conditional payment” theory, reasoning it would improperly prefer one unsecured creditor over others.

## Legal Principles

- For § 547(b), funds paid to and deposited by a debtor into its general account are ordinarily the debtor’s property absent a recognized device (e.g., trust or escrow) that limits the debtor’s ownership interest.
- A buyer’s right to restitution of a down payment arising from the seller’s repudiation or inability to perform constitutes a “debt” under the Bankruptcy Code; a later refund satisfies § 547(b)(2) as payment on an antecedent debt.
- Constructive-trust theories based solely on contractual nonperformance are generally disfavored in bankruptcy when they would elevate a disappointed buyer above other unsecured creditors and defeat ratable distribution.

## Conclusion

The Fourth Circuit held the debtor’s prepetition refund of a down payment was an avoidable preference because the debtor owned the funds when received and the refund satisfied an already-existing restitution obligation, so the buyer had to share pro rata with other unsecured creditors.


Sigmon v. Royal Cake Co. (In re Cybermech, Inc.), 13 F.3d 818 (4th Cir. 1994)