A bakery entered into a deal with a packaging company for four carton-packer machines. Under the agreement, the bakery placed a one-third downpayment on an order for four machines.

The bakery sent the packaging company a check for over $33,000. However, three weeks later, the packaging company refunded the payment stating it "could not execute the project as originally planned" because of its "current business climate." Soon afterwards, the packaging company filed a voluntary Chapter 7 Bankruptcy Petition. The trustee for the bankruptcy estate filed to have the bakery's downpayment returned to the estate. He claimed the refund occurred during the 90-day preference period, and therefore was a preferential transfer.

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

The bakery complained that the transfer failed to meet three of the six requirements for a preferential transfer. It said the transfer

• Was not of an interest of the debtor in property. The bakery claimed the deposit was simply held in trust by the packaging company, and that the company did not have a "property interest" in the money.

• Was not to or for the benefit of a creditor. The baker argued that it was not a creditor since it had no claim against the packaging company.

• Was not for or on account of an antecedent debt owed by the debtor before such transfer was made. The bakery said the payment was not on an "antecedent" debt.

The court disagreed on all three points. First, it said that once the company deposited the bakery's check into its own bank account, it had a right to "withdraw, transfer, or otherwise use the payment funds in anyway it wanted." It had "complete dominion and control" over the funds, and so had an interest in property.

Next, the court explained that the term "claim" has a broad definition. A claim is a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured." A claim is also a "right to equitable remedy for breach of performance if such breach gives rise to right of payment." The court ruled that as soon as the packaging company deposited the deposit check the bakery had the right to demand either performance or a refund. This, then was the bakery's claim which made it a creditor.

Finally, the court said, "The terms debt and claim are coextensive: a creditor has a 'claim' against the debtor; the debtor owes a 'debt' to the creditor." The "debt"--either to deliver machines or return the downpayment--was incurred three weeks before the refund payment was delivered. Therefore, the court ruled, that the refund was made on an antecedent debt.

The court ordered the refunded downpayment be returned to the bankruptcy estate.

In re Cybermech, Inc., 13 F.3d 818 (4th Cir. 1994)

Comment: Not all creditors to a bankruptcy estate start out as creditors. In this case, a purchaser has been transformed into a creditor through bankruptcy law. If you are a creditor hoping to receive a fair and equitable settlement from a customer's liquidation, make certain all the bases are being covered. Ask if there has been any transfers of funds that could turn a purchaser into a creditor for the estate.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.