BUSINESS LAW:  UCC (bankruptcy preference, notes, and discharge)
DATE RENDERED: 11/22/2006

Under the Uniform Commercial Code, payment of a promissory note serves to discharge the makers of the note.  COA held that the attempted payment of the promissory notes, which payment was later set aside as a preference in bankruptcy, did not operate to discharge the notes or the co-makers’ obligation to pay them.

In January 2004, Holter tendered nearly $50,000 to Wagner in an attempt to pay the notes in full. The following July, Holter filed for Chapter 7 bankruptcy protection in the United States Bankruptcy Court where she received a Discharge of Debtor in October 2004. During the course of the bankruptcy proceedings, the bankruptcy trustee voided the January 2004 payment to Wagner as an insider preference. Wagner subsequently paid $40,000 to the bankruptcy trustee in settlement of the preference claim.

Thus, under the plain language of KRS 355.3-602(1), a maker’s obligation is discharged “[t]o the extent of the payment[.]”

While the Uniform Commercial Code does not define payment, KRS 355.1-1033 states that “[u]nless displaced by the particular provisions of this chapter,” the UCC’s provisions are supplemented by “the principles of law and equity, including the law” relative to bankruptcy.

Kentucky decisions have recognized that certain attempted payments do not operate to discharge notes.  Under the Federal Bankruptcy Code, a payment which is set aside as a preference is null and void, as if no payment had been made, and the parties are returned to the status quo ante.

The order of the Fayette Circuit Court dismissing Wagner’s complaint is therefore vacated, and this matter is remanded to that court for further proceedings.

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