Bankruptcy: Preferential Transfer - Purchase Contract

     In the case of Sigmon, Trustee v. Royal Cake Co. the United States District Court at Charlotte, North Carolina, reviewed a Bankruptcy Court ruling granting a trustee's objection to the return of a down payment on a purchase contract as an improper preferential transfer.

     The District Court found as fact that the debtor was the seller of certain machines who returned to a buyer corporation that corporation's down payment on a contract for the purchase of machines.
     The buyer corporation claimed that the down payment was collateral held in trust by the debtor on the buyer's behalf, and that, under North Carolina property law and federal bankruptcy law, the seller of the goods does not hold a property interest in such collateral.
     The District Court concluded that the Bankruptcy Court made a proper finding that the debtor did have a property interest in the down payment, and that the return of the payment was made on account of an antecedent debt for the benefit of the creditor. The District Court further concluded that the buyer corporation's claim that the payment was mere collateral or a deposit was flawed because the payment was actually the first payment for the machines purchased. By sending the payment check, the buyer was fulfilling its obligation under the sales contract, not merely guaranteeing future performance of its payment obligations. Once the debtor deposited the buyer's check into its own bank account, commingling the money with its other funds, the debtor had a right to withdraw, transfer or otherwise use the payment funds in any way it wanted. The debtor's ability to exercise complete dominion and control over the funds was sufficient to demonstrate an interest in property under the preferential transfer provision. Therefore, the Court concluded, the return of the down payment was a transfer of an interest of the debtor in the property.