Check Clearing and Voidable Preference Law Under the Bankruptcy Code

• Published in: The Business Lawyer 2018-06, Vol.73 (3), p.627-710
• Main Author: Carlson, David Gray
• Format: Article
• Language: English
• Subjects: Bank clearinghouses; Bank deposits; Bank overdrafts; Bankruptcy; Bankruptcy law; Bankruptcy laws; Banks; Check fraud; Clearing; Collections; Commercial law; Creditors; Customers; Deposit accounts; Fate; Federal court decisions; Foreclosure; Fraud; Interpretation and construction; Laws, regulations and rules; Liability; Overdrafts; Preferences; Uniform Commercial Code-US
• ISSN: 0007-6899; 2164-1838

Every business practice must withstand the critique of federal voidable preference law—an adjunct to the principle that unsecured creditors should be treated equally in bankruptcy. This article surveys how well the check clearing system fares under the voidable preference critique. Check clearing involves short-term unsecured and secured credit extended to customers by depositary banks. The fate of a bank in its customer's bankruptcy differs, according to which kind of credit is extended. In the case of an overdraft, banks have preference risk, but they also have powerful defenses to muster against liability. Credit advanced against the deposit of checks is secured credit, for which the risk is smaller but still existent. This latter case is the environment in which check kiting operates. This article explores the fate in bankruptcy proceedings of the lucky bank that escapes the kite without loss.