Durham v. SMI Industries Corp.

882 F.2d 881 (1989)

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Durham v. SMI Industries Corp.

United States Court of Appeals for the Fourth Circuit
882 F.2d 881 (1989)

Facts

Scrap-metal dealers SMI Industries, Inc. (SMI) (creditor) and Continental Commodities, Inc. (Continental) (debtor) frequently sold each other materials on open account. In order to reduce the account debts that SMI and Continental owed each other, SMI and Continental periodically (1) made mutual accounting entries to cancel corresponding debts and credits or (2) exchanged checks to cover the outstanding balances. SMI and Continental coordinated the timing of the check exchanges to ensure that the amounts would be deposited into their respective accounts simultaneously, allowing the checks to clear. SMI and Continental made a check exchange in August 1983 in which Continental sent SMI checks totaling $273,137.62 to cover deliveries in 1982 and 1983, and SMI sent Continental a check for $271,967.20 for deliveries from February through August 1983. SMI and Continental deposited the checks in their accounts on August 30. Less than 90 days later, Continental filed for Chapter 7 bankruptcy. Continental’s bankruptcy trustee, Albert Durham, filed an adversary proceeding against SMI to recover the $273,137.62 Continental had sent to SMI in the check exchange. The bankruptcy court found that the check payments to SMI were avoidable preferential transfers under 11 U.S.C § 547(b) and were not part of a valid setoff (i.e., an offsetting of mutual debts between the debtor and creditor by the amount each owes to the other). Accordingly, the bankruptcy court ruled in Durham’s favor and allowed recovery of the check payments. The district court affirmed, and SMI appealed.

Rule of Law

Issue

Holding and Reasoning (Wilkins, J.)

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