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UNITED STATES COURT OF APPEALS
for the Fifth Circuit
_____________________
No. 94-10774
_____________________
IN THE MATTER OF: SOUTHMARK CORPORATION,
SOUTHMARK CORPORATION,
Plaintiff-Appellant,
VERSUS
D. VINSON MARLEY,
Defendant-Appellee.
______________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
______________________________________________________
ON PETITION FOR REHEARING
(Opinion June 26, 1995, 5th Cir., 1995, F.3d )
(August 8, 1995)
Before LAY1, DUHÉ, and DeMOSS, Circuit Judges.
DUHÉ, Circuit Judge:
We deny Appellant's motion for rehearing, but we vacate our
previous opinion, 55 F.3d 1071 (5th Cir. 1995), and substitute the
following:
Southmark Corporation, as debtor-in-possession, sought to
recover its $400,000 prepetition payment to D. Vinson Marley in an
adversary proceeding under Sections 547 and 548 of the Bankruptcy
Code. The bankruptcy court denied recovery after a bench trial.
Southmark appealed only the court's ruling on the § 547 preference
1 Circuit Judge, of the Eighth Circuit, sitting by designation.

action. Utilizing clear error review, the district court affirmed.
We affirm as well.

BACKGROUND
Southmark and Marley signed an employment contract in 1982
that required Southmark to pay severance benefits in the event it
terminated the contract. In 1986, Southmark transferred all its
employees to North American Mortgage Investors, Inc. (NAMI), a
wholly owned Southmark subsidiary, which in turn leased them back
to Southmark. On April 28, 1989, Southmark and Marley executed a
settlement agreement, and Marley received a check for $400,000. By
signing the agreement, Marley released all Southmark severance
obligations under the employment contract ($357,000) and agreed to
provide consulting services to Southmark for ninety days hence
($43,000). The check bore NAMI's name and was drawn on Southmark's
Payroll Account. The payor bank cleared the check on May 4, 1989.
Southmark filed for a Chapter 11 reorganization in bankruptcy
on July 14, 1989, and asserted this action to recover the $400,000
payment to Marley. In its preference cause of action, Southmark
alleged that the $357,000 payment of severance benefits was a
preference. On cross motions for summary judgment, the bankruptcy
court determined that Southmark had satisfied all the elements of
a preference except for whether the funds transferred to Marley
were property of the estate. In a ruling from the bench after
trial, the court denied the preference. The court held that the
transferred funds were not property of the estate because Southmark
2

failed to prove an interest in them. In addition, the court
applied the earmarking doctrine to hold that NAMI's payment to
Marley, to the extent that it released Southmark's liability to
him, merely substituted one creditor for another. As an alternate
holding, the court reconsidered its summary judgment ruling and
held that the transfer was not a preference because it was not on
account of an antecedent debt. Southmark contests the court's
three rulings on appeal.
DISCUSSION
While this appeal was pending, we decided Southmark Corp. v.
Grosz, 49 F.3d 1111 (5th Cir. 1995). Another Southmark preference
action, Grosz considered whether a Southmark subsidiary's check
drawn on Southmark's Payroll Account was property of Southmark's
estate. We answered that question in the affirmative. Id. at
1119. Consequently, Southmark argues here that Grosz controls the
property of the estate issue and requires reversal on that ground.
We need not address Grosz or the bankruptcy court's application of
the earmarking doctrine because we hold that the transfer was not
made on account of an antecedent debt.
In its summary judgment ruling, the bankruptcy court held that
Southmark established all the § 547(b) elements of a preference
with the exception of the property of the estate issue. In its
ruling after trial, however, the court changed its mind. It
determined that Southmark's debt arose when it terminated Marley.
Considering Marley's termination and the transfer to have been
simultaneous, the bankruptcy court concluded that the transfer was
3

not "for or on account of an antecedent debt," which is an element
of a preference.2 The district court saw no error in the
bankruptcy court's conclusion.
Southmark challenges the bankruptcy court's conclusion that
the debt was not antecedent with three alternative arguments.
First, Southmark contends that the debt arose in 1982 when
Southmark and Marley executed the employment contract. Second,
Southmark contends that it terminated Marley in mid-April 1989, not
on April 28. Third, even if the termination occurred on April 28,
Southmark argues that the transfer did not occur until May 4, when
the drawee bank paid the check.
A debt is antecedent under § 547(b) if the debtor incurs it
before making the alleged preferential transfer. In re
Intercontinental Publications, 131 B.R. 544, 549 (Bankr. D. Conn.
1991); Tidwell v. AmSouth Bank (In re Cavalier Homes), 102 B.R.
878, 885 (Bankr. M.D. Ga. 1989); 4 Lawrence P. King, Collier on
Bankruptcy ¶ 547.05 (15th ed. 1995). Our focus, therefore, is on
the date the debt was incurred and the date the transfer occurred.
The determinations of these dates involve mixed questions of law
and fact, which we review de novo. See Barnhill v. Johnson, 112 S.
Ct. 1386, 1389 (1992).
Southmark first contends that it incurred its debt when it and
Marley signed the employment contract that called for payment of
2 "[T]he trustee may avoid any transfer of an interest of the
debtor in property . . . for or on account of an antecedent debt
owed by the debtor before such transfer was made . . . ." 11
U.S.C. § 547(b)(2) (1988).
4

severance benefits in the event of termination. The Code defines
"debt" as "liability on a claim." 11 U.S.C. § 101(12) (1988). A
debtor incurs a debt when he becomes legally obligated to pay it.
In re Emerald Oil Co., 695 F.2d 833, 837 (5th Cir. 1983); see also
Sherman v. First City Bank (In re United Sciences of Am.), 893 F.2d
720, 724 (5th Cir. 1990) (explaining, in setoff context, that bank
incurred debt when right to payment arose, not when bank asserted
right).
Under the Code, a party to an executory contract has a claim
against the debtor only when the debtor has rejected the contract.
See 11 U.S.C. §§ 365(g), 502(g) (1988); Wainer v. A.J. Equities,
984 F.2d 679, 684-85 (5th Cir. 1993) (per curiam). Consequently,
a debtor who breaches an executory contract incurs a debt only at
the time of breach. See Wainer, 984 F.2d at 685. Courts have
reached the same conclusion in preference actions. See In re
Energy Coop., 832 F.2d 997, 1002 (7th Cir. 1987) (holding that
purchaser incurred debt when it anticipatorily repudiated contract
to buy crude oil); In re Gold Coast Seed Co., 751 F.2d 1118, 1119
(9th Cir. 1985) (holding that seed buyer became obligated to pay at
time of shipment, not when parties executed contract for future
shipment).
In Intercontinental Publications, the debtor terminated an
employee whose employment contract provided for severance benefits
payable in installments after termination. The debtor brought a
preference action, and the bankruptcy court considered whether the
installment payments were on account of an antecedent debt. The
5

court held that the debtor incurred its debt when the debtor
terminated its employee. 131 B.R. at 550. Likewise, we conclude
that Southmark incurred its debt to Marley at the time it
terminated him.
The bankruptcy court found that Marley's termination occurred
simultaneously with the execution of the settlement agreement. We
review a bankruptcy court's factual findings for clear error, and
we adhere strictly to that standard of review when the district
court has affirmed those findings. In re Young, 995 F.2d 547, 548
(5th Cir. 1993). Southmark contends that Marley was terminated in
mid-April 1989, before the parties executed the settlement
agreement on April 28. As sole support of its contention,
Southmark cites the deposition of its Chief Executive Officer,
Arthur G. Weiss. Weiss's deposition testimony, however, does not
support Southmark's contention; instead, Weiss explained that the
settlement agreement provided payment to Marley in termination of
the employment contract. The bankruptcy court's finding is not
clearly erroneous.
Finally, Southmark contends, even if it incurred the debt on
April 28, that the transfer occurred on May 4 when the bank paid on
the check. Southmark cites Barnhill for the proposition that a
transfer by check occurs, for purposes of § 547(b), on the date of
honor, not the date of delivery. 112 S. Ct. at 1391. Because
Barnhill makes the date of transfer later than the date Southmark
incurred the debt, Southmark contends that the transfer was on
account of an antecedent debt. We disagree.
6

State law governs the rights and duties of parties to a check
transaction. Id. at 1389. Barnhill recognizes that the obligee's
receipt of a check suspends the underlying obligation so long as
the check is presented to the drawee bank within a reasonable time.
Id. (citing U.C.C. § 3-802(1)(b) (1991)); In re Child World, 173
B.R. 473, 477 & n.3 (Bankr. S.D.N.Y. 1994). Consequently, if the
debtor delivers a check before incurring a debt, the transfer is
not made on account of an antecedent debt because the underlying
obligation is suspended until the check clears. Child World, 173
B.R. at 477.3
In this case, Marley received his check simultaneously with
his termination. His taking of the check suspended Southmark's
simultaneous obligation to pay his severance benefits until the
check was presented to the drawee bank. When the transfer occurred
at the time of honor, Southmark's simultaneous obligation was
discharged. The transfer, therefore, was on account of a
simultaneous debt, not an antecedent debt.
CONCLUSION
For the foregoing reasons, the district court's judgment
affirming the bankruptcy court is AFFIRMED.
3 The issue in Barnhill was whether the check transfer came within
the 90 day preference period of § 547(b)(4). Because the date of
honor rule allows the trustee to test more transfers as
preferences, that rule furthers the bankruptcy goal of distributive
equality among creditors. Child World, 173 B.R. at 477 n.2. In
contrast, treating check payments of simultaneous debts as
antecedent debt transfers potentially offers other creditors a
windfall at the expense of the check holder because he has offered
current consideration for the check. Id. at 477 & n.2.
7