100 Iowa L. Rev. 1865 (2015)

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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 But because bankruptcy court decisions have only persuasive—not precedential—value, costly litigation will continue to dispute whether provisional credits create claims such that repayments are preferential transfers.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.