Presenting Post-Dated Checks after the Bankruptcy Filing
By Robert Norman

May a vendor present a post-dated check for payment after a debtor has filed bankruptcy? Although most credit professionals who are familiar with bankruptcy law and the automatic stay provision would likely respond �No,� a bankruptcy court in the Western District of Missouri has stated ot herwise. The bankruptcy court in In re Thomas₁ held that the presentment of postdated checks upon a drawee bank for payment after the debtor filed a Chapter 7 petition was not a violation of the automatic stay. The court reasoned that since the holder of the check was entitled to enforce the negotiable instrument under applicable law there was not automatic stay violation.₂ The court went on to find that, although the transfer was not a violation of the automatic stay, the transfer of the funds from the debtor�s checking account was subject to avoidance and recoverable from the creditor.₃

In re Thomas the debtor obtained four separate payday loans from the creditor, Money Mart. In exchange for cash, the debtor gave the creditor several post-dated checks. The debtor filed bankruptcy prior to the dates indicated on the post-dated checks. Moreover, the debtor�s counsel and the court both notified the creditor of the bankruptcy filing. Notwithstanding, the creditor presented the post-dated checks to the debtor�s bank which were honored almost one month after the bankruptcy filing. After the checks were cashed, the debtor asserted that the creditor violated the automatic stay by cashing the post-dated checks after the debtor filed bankruptcy. The debtor asserted that the creditor was subject to actual damages and punitive damages because of the willful violation of the automatic stay by the creditor.

Pursuant to Bankruptcy Code 11 U.S. C. � 362, a petition filed under � 301 operates as a stay, applicable to, among other things, �any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate� and �any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.� Essentially, debt collection efforts must stop on the filing of the bankruptcy petition.

However, � 362(b) of the Bankruptcy Code contains several exceptions to the automatic stay, including � 362(b)(11) which provides that �[t]he filing of a petition under � 301�of this title�does not operate as a stay under subsection (a) of this section of the presentment of a negotiable instrument and the giving of notice of and protesting dishonor of such an instrument.�₄Given the plain language of the Bankruptcy Code, the court in In re Thomas was asked to determine whether the creditor was unaffected by the automatic stay because of the exception enumerated above.

The bankruptcy court noted that the post-dated checks were �negotiable instruments� and that �presentment� is defined as �a demand by or on behalf of a person entitled to enforce an instrument��₅ The good news for the creditor professional is that the court found that the creditor was the holder of the instruments and was entitled to enforce the instruments under the exception to the automatic stay for such instruments. Although the checks were written prior to the petition filing, the drawee bank honored the checks in good faith, and the trustee did not attempt to avoid the transfer, the court noted that the debtor�s checking account balance became property of the estate on the date of the petition, and that the checks were honored by the debtor�s bank after that time. As such, after proper a demand, the creditor was required to turn over the funds, however, the creditor was not subject to punitive damages because there was no violation of the automatic stay.

When considering whether to accept a post-dated check, in addition to the bankruptcy provisions above, the credit professional should also consider the following from the Uniform Commercial Code.

Under section 4-401 of the Uniform Commercial Code, a post-dated check is permissible so long as the drawee has given the financial institution notice of the postdated check and has described the postdated check with �reasonable certainty.� In order to assure that a post-dated check will not be cashed early, notice to the bank must be received by the financial institution so as to provide them with a reasonable opport unity to respond to the request. Otherwise, the bank may cash the check and hold the drawee responsible.

To recap, according to the court in In re Thomas, the creditor may present the post-dated check after the bankruptcy wit hout risking violation of the automatic stay, however, the proceeds from the post-dated check may be subject to avoidance as a post-petition transfer of property of the estate. Additionally, a financial institution may honor a post-dated check early, without recourse, unless proper notice was given to the financial institution.

1. 2004 WL 1354301 (Bankr. W.D.Mo. 2004).
2. Id at **2.
3. Id.at **5.
4. (emphasis added).
5. 2004 WL 1354301, **2 (Bankr. W.D. Mo. 2004).

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Fall 04