- “Intraday Overdraft” Payments Are Not Avoidable In Bankruptcy
- August 10, 2017 | Author: Lawrence D. Coppel
- Law Firm: Gordon Feinblatt LLC - Baltimore Office
In a case of first impression, the United States Court of Appeals for the Eighth Circuit affirmed district and bankruptcy court decisions that rejected a bankruptcy trustee’s preference claim to recover pre-bankruptcy payments made by a bank depositor to satisfy “intraday overdrafts” in the depositor’s account. Applying Iowa law, the appeals court defined an “intraday overdraft” as one that has occurred and is settled prior to the bank’s midnight deadline under Iowa’s version of the Uniform Commercial Code (UCC). The court reasoned that since a payor bank is only acting as a “conduit” until an overdraft becomes final at the midnight deadline, the bank is not an “initial transferee” for preference avoidance purposes under the Bankruptcy Code. Although the court found for the bank as to the intraday overdraft payments, it also affirmed a decision in favor of the trustee as to payments made to satisfy “true overdrafts” (the time when a provisional settlement becomes final at the midnight deadline). In doing so, the court rejected the bank’s “ordinary course of business defense” stating that the number of payments made on account of true overdrafts had increased during the 90 day preference period as compared to the pre-preference period. The issue of whether payments on intraday or true overdrafts may be avoided as preferences has not been decided by the United States Court of Appeals for the Fourth Circuit or the district or bankruptcy courts in Maryland, but this case could be instructive for Maryland courts as the Iowa UCC sections cited by the Eighth Circuit are substantially similar to Maryland’s comparable UCC provisions.