Fidelity Sav. & Inv. Co. v. New Hope Baptist

• Decision Date: 25 July 1989
• Docket Number: No. 88-1711,88-1711
• Parties: , Bankr. L. Rep. P 72,994 FIDELITY SAVINGS & INVESTMENT CO., Plaintiff-Appellant, v. NEW HOPE BAPTIST; Robert Stone; Jeffrey Alan Dietert, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1172

880 F.2d 1172

58 USLW 2098, Bankr. L. Rep. P 72,994

FIDELITY SAVINGS & INVESTMENT CO., Plaintiff-Appellant, v. NEW HOPE BAPTIST; Robert Stone; Jeffrey Alan Dietert Defendants-Appellees.

No. 88-1711.

United States Court of Appeals Tenth Circuit.

July 25, 1989.

Thomas P. Goreson (Stephen J. Moriarty with him on the brief) of Edwards, Roberts & Propester, Oklahoma City, Okl., for plaintiff-appellant.

Thomas J. Kenan, Kenan & Peterson, Oklahoma City, Okl. (E. Elaine Schuster, Oklahoma City, Okl., and Robert Inglish of Inglish and Inglish, Okmulgee, Okl., with him on the brief), for defendants-appellees.

Before LOGAN, BRORBY and EBEL, Circuit Judges.

PER CURIAM.

This is an appeal from an order of the district court sitting as an appellate court in bankruptcy. The issue in this appeal is whether Sec. 547(c)(2) of the Bankruptcy Code, 11 U.S.C. Sec. 547(c)(2) (Supp. IV 1986), applies to a transfer unrelated to the payment of trade credit. Both the district and the bankruptcy courts ruled that such a transfer was within the terms of Sec. 547(c)(2), thereby granting summary judgment for the defendants. We affirm.

I. Facts

The plaintiff, Fidelity Savings & Investment Co., is an Oklahoma corporation engaged in the business of making small, high interest loans to consumers as permitted by Okla.Stat. tit. 14A, Sec. 3-508B (1983) and as regulated by the Oklahoma Department of Consumer Credit. To fund this business, Fidelity issued certain savings certificates, which were debt obligations of the corporation bearing interest at a rate of twenty-four to thirty percent per annum, with maturity dates of six months to two years. These certificates were registered as securities with the Oklahoma Securities Commission but fell within the single state exemption under federal securities law. In 1984, a number of the certificates were sold to small investors, including the defendants New Hope Baptist, Robert Stone, and Jeffrey Dietert.

In 1985, Fidelity began experiencing financial difficulties, and the Oklahoma Securities Commission undertook an investigation of the corporation. The Commission found that Fidelity had violated the Oklahoma Securities Act, Okla.Stat. tit. 71 Secs. 1-502 (1983), in that the corporation did not comply with certain terms contained in its prospectus for the sale of the certificates. In particular, the Commission noted that the corporation was undercapitalized, that it had compensated its registered sales agent more than provided for in the prospectus, and that the corporation was insolvent due to its problems in collecting delinquent loans and its high overhead. In addition, it determined that the corporation had not followed generally accepted accounting practices in calculating its represented net worth. Based on these findings, on April 2, 1985, the Commission issued an order revoking Fidelity's registration of its securities. On June 11, 1985, Fidelity filed a voluntary petition for bankruptcy.

Before Fidelity's filing, but within the ninety-day preference period prior to bankruptcy under 11 U.S.C. Sec. 547(b)(4)(A), the defendants' savings certificates reached maturity. As provided by the terms of the certificates, each defendant elected to receive a distribution from Fidelity representing the principal and accrued interest on the savings certificates, rather than renewing the certificates for an additional term. While the defendants were paid pursuant to the terms of their certificates, Fidelity did not pay certain other investors who had elected to receive a similar distribution. The certificates provided, however, that Fidelity could limit redemptions in any month to fifty percent of its net cash receipts during the previous month.

On September 8, 1986, Fidelity ¹ instituted the instant action, seeking to recover the distributions to the defendants as preferences under Sec. 547(b). Both Fidelity and the defendants filed cross motions for summary judgment, and the parties stipulated that the case was to be decided on the basis of these motions. The defendants admitted that the transfers met the elements of a preference under Sec. 547(b) of the Bankruptcy Code but argued that the transfers were protected by the terms of Sec. 547(c)(2) in that they were transfers made in the ordinary course of business. Conversely, Fidelity asserted that the ordinary course of business exception was limited to payments for trade credit, and that the defendants could not establish that the transfers met the elements of Sec. 547(c)(2) in light of the violations found by the Oklahoma Securities Commission.

On November 9, 1987, the bankruptcy court granted the defendants' motions for summary judgment. It ruled that the transfers fell within the Sec. 547(c)(2) exception because they were made in payment of debts incurred by Fidelity in the ordinary course of its and the defendants' business or financial affairs, the transfers themselves were made in the ordinary course of Fidelity's business and in the ordinary course of the defendants' financial affairs, and they were made according to ordinary business terms. The court rejected Fidelity's arguments that the Sec. 547(c)(2) exception was limited solely to protecting transfers made to trade creditors, and that revocation of Fidelity's securities registration indicated that the transfers were not made in the ordinary course of Fidelity's business. The district court thereafter affirmed on appeal. Fidelity now contends that these rulings were in error.

II. Application of Section 547(c)(2) to Transfers Not Made

to Trade Creditors

Fidelity's primary argument in this appeal is that Sec. 547(c)(2) is limited to protecting only short-term trade credit payments from avoidance as a preference and that payments on other obligations, such as those at issue in this case, were never intended to fall within the scope of the ordinary course of business exception. When reviewing an order of the district court sitting as an appellate court in bankruptcy, we apply the same standard of review as the district court. The bankruptcy court's findings of fact must be upheld unless clearly erroneous; its conclusions of law are subject to de novo review. Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir.1988); In re Mullet, 817 F.2d 677, 678-79 (10th Cir.1987). Since the bankruptcy court's interpretation of Sec. 547(c)(2) is a matter of law, we review its conclusions de novo.

Section 547(b) of the Bankruptcy Code provides that a trustee in bankruptcy may avoid a transfer made to or for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent that enables the creditor to receive more than he would receive if the transfer had not been made and the debtor's estate liquidated. 11 U.S.C. Sec. 547(b)(1)-547(b)(5). Section 547(c) of the Code sets forth certain exceptions, however, to this power of the trustee. In particular, Sec. 547(c)(2) provides,

(c) The trustee may not avoid under this section a transfer--

....

(2) to the extent that such transfer was--

(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;

(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and

(C) made according to ordinary business terms[.]

Id. Sec. 547(c)(2).

Fidelity's statutory argument is based on the fact that Sec. 547(c)(2), prior to its amendment in 1984, applied only to transfers made in payment of a debt incurred within forty-five days before the transfer. The forty-five day limitation had generally been interpreted as indicating Congress' intent to limit application of the ordinary course of business exception to payments for trade credit. See, e.g., Aguillard v. Bank of Lafayette (In re Bourgeois), 58 B.R. 657, 659 (Bankr.W.D.La.1986). With the amendment of Sec. 547(c)(2) in 1985, however, the forty-five day limitation was removed. ² Fidelity argues that this amendment did nothing more than eliminate an arbitrary requirement that the trade credit payment be made within a certain period of time, and that it was not intended to broaden the ordinary course of business exception beyond its application to trade creditors. We do not read the ordinary course of business exception so narrowly.

"In determining the scope of a statute, the court must begin with the statutory language itself." Wilson v. Stocker, 819 F.2d 943, 948 (10th Cir.1987). When the terms of the statute are clear, the statutory language is controlling absent exceptional circumstances. Id. As is apparent from the statutory language of Sec. 547(c)(2) quoted above, there is no express limitation that the transfer be in payment of trade credit. The words "trade credit" appear nowhere. The sole requirements of this exception are that the transfers in question be in payment of a debt incurred in the ordinary course of the debtor and the transferee, that the transfer itself be made in the ordinary course, and that it be made according to ordinary business terms. See WJM, Inc. v. Massachusetts Dep't of Public Welfare, 840 F.2d 996, 1010-11 (1st Cir.1988).

We are additionally persuaded by the legislative history relevant to the amendment of this section that Sec. 547(c)(2) was not intended to be restricted only to trade credit. While there was no explanatory statement in the Conference Report accompanying the bill enacting this amendment, the following statements of Senators DeConcini and Dole shed light on Congressional intent as to the scope of the ordinary course of business exception:

Mr. DeCONCINI: I know that the Senator from Kansas, along with the Senator from South Carolina, was the principal sponsor of this provision deleting subsection (c)(2) of section 547 of the code, and I would like to clarify two points regarding the effect of this change.

Am I correct that the elimination of the 45-day restriction in subsection (c)(2) of section 547 will...