Chapter 5 Automatic Payment Services

• Jurisdiction: United States

Chapter 5 Automatic Payment Services

Automatic payment or transfer services enable a bank customer to make money transfers on a regular basis (i.e., daily, weekly, monthly, etc.) in recurring amounts. Tese services are sometimes referred to as "standing transfer orders," "banker's orders" or "standing instructions." Tese services can be used to make regular payments such as rent, installment loans and certain vendor invoices. Tey are also sometimes used to make scheduled transfers to affiliates, or to move money between accounts within a company's cash-management system.

Various mechanisms may be used to make the automatic payments, such as checks, wires, credit cards and ACH. The mechanism that is used affects the time span of the payment process, which can range from "same day" to months (for certain paper check transactions).

A. Bankruptcy Considerations

1. Automatic Payments and the Automatic Stay

An automatic-payment issue that frequently arises early in a bankruptcy occurs when a depositor (now a debtor) has been using automatic payments to pay a creditor. Recall that the automatic stay broadly prohibits actions against a debtor or its property to recover on a pre-petition debt. Does the creditor violate the automatic stay by continuing to accept the automatic payments?

Mechanically, once an automatic-payment order is established, the recipient of the funds does not need to do anything in order to receive the funds. Because automatic payments require no "action" on the part of the recipients, creditors have attempted to argue that the mere acceptance of the automatic payments does not violate the automatic stay. This argument however has failed because the automatic stay is intended to be very broad and courts apply it expansively. Therefore, a creditor's post-petition acceptance of a payment on account of a pre-petition debt — even if the payment was automatic — is a violation of the automatic stay.⁵⁸ Some courts hold that simply receiving the funds violates the automatic stay, while others hold that the stay is violated when the bank applies the funds to the debt.⁵⁹ Regardless, it is clear that once received, the money must be paid back to the debtor expeditiously.⁶⁰

There are exceptions of course to the above general rule. For example, automatic payments that are authorized by an order of the bankruptcy court do not violate the automatic stay. Some courts have also suggested that continued automatic payments do not violate the automatic stay if...