We deny Appellant’s motion for rehearing, but we vacate our previous opinion,
Southmark Corporation, as debtor-in-possession, sought to .recover its $400,000 pre-petition 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 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 South-mark to pay severance benefits in the event it terminated the contract. In 1986, South-mark 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 South-mark 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 South-mark’s Payroll Account. The payor bank cleared the cheek 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 South-mark 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 South-mark’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,
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 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.
A debt is antecedent under § 647(b) if the debtor incurs it before making the alleged preferential transfer.
In re Intercontinental Publications,
Southmark first contends that it incurred its debt when it and Marley signed the employment contract that called for payment of 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.,
Under the Code, a party to an ex-ecutory 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,
In
Intercontinental Publications,
the debt- or 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 court held that the debtor incurred its debt when the debtor terminated its employee.
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,
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
State law governs the rights and duties of parties to a check transaction.
Id.
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.
Notes
. "[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 debt-
. 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,