An Argument for Creating an Exception to § 547 for Payments on Intraday Overdrafts

• Author: Zachary Gray Sanderson
• Position: J.D. Candidate, The University of Iowa College of Law, 2015; B.A., Iowa State University, 2011
• Pages: 1865-1889

1865

An Argument for Creating an Exception

to § 547 for Payments on Intraday

Overdrafts

Zachary Gray Sanderson

ABSTRACT: Banks routinely advance intraday or “daylight” credit to their

customers by provisionally honoring checks that overdraft the customer’s

account. Banks can dishonor these provisionally honored checks before

midnight on the day after the check is presented. Under the terms of the

Bankruptcy Code, these provisional credits create a corresponding claim, such

that repayment of the claim may be a preferential transfer. Nevertheless, courts

have found that provisional credit does not create a claim under the Code

because finding otherwise would lead to banks prematurely freezing accounts

and correspondingly halting liquidity in payment systems. This Note affirms

these policy considerations as not only sound financial policy, but also sound

bankruptcy policy. But because bankruptcy court decisions have only

persuasive—not precedential—value, costly litigation will continue to

dispute whether provisional credits create claims such that repayments are

preferential transfers. Identifying banks’ ability to dishonor payment as the

dispositive fact, and noting that courts have an obligation to follow the Code,

this Note proposes that Congress amend the Code to provide an exception for

payments on intraday overdrafts. The proposed amendment would allow

courts to pursue sound policy without questionable interpretation of the

Bankruptcy Code.

 J.D. Candidate, The University of Iowa College of Law, 20 15; B.A., Iowa State University,

2011. Thank you to Keith Larson for suggesting this topic, to Professor Patrick Bauer, Profes sor

Jonathan Carlson, and Professor Robert Miller for their advice and expertise, to Molly McPartland

for her guidance and encouragement, to Cody Brookhouser and Zane U msted for their helpful

comments and edits, and to Michelle Wallace, Lisa Castillo, Roseann Romano, and Kyle Essley for

their work preparing this Note for publicatio n.

1866 IOWA LAW REVIEW [Vol. 100:1865

I. INTRODUCTION ........................................................................... 1867

II. BANKRUPTCY PURPOSES, PREFERENTIAL TRANSFERS, AND INTRADAY

OVERDRAFTS ............................................................................... 1868

A. MITIGATING THE EFFECTS OF FINANCIAL FAILURE ON BOTH

DEBTORS AND CREDITORS ...................................................... 1868

B. PREFERENTIAL TRANSFERS ..................................................... 1871

C. ANTECEDENT DEBT ............................................................... 1873

D. INTRADAY OVERDRAFTS ......................................................... 1875

III. INTRADAY OVERDRAFTS AND THE DEFINITION OF “DEBT” .......... 1877

A. INTRADAY OVERDRAFTS UNDER THE TERMS OF THE BANKRUPTCY

CODE .................................................................................... 1877

B. PAYMENT SYSTEMS POLICY AND THE COURTS’ TREATMENT OF

INTRADAY OVERDRAFTS ......................................................... 1879

IV. EXCEPTING INTRADAY OVERDRAFTS FROM PREFERENCE

LIABILITY ..................................................................................... 1881

A. THE BANK AS CREDITOR ........................................................ 1882

B. RESOLVING CONFLICTING POLICY CONCERNS .......................... 1882

C. AN EXCEPTION TO § 547 FOR PAYMENTS ON INTRADAY

OVERDRAFTS ......................................................................... 1888

V. CONCLUSION .............................................................................. 1888