In re Magic Circle Energy Corp.
| Decision Date | 19 August 1986 |
| Docket Number | BK-84-02884-B and BK-84-02883-B.,Bankruptcy No. BK-85-01336-B |
| Citation | 64 BR 269 |
| Parties | In re MAGIC CIRCLE ENERGY CORPORATION, Debtor. In re Wm. J. O'CONNOR and Jane O'Connor, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Oklahoma |
Andrews Davis Legg Bixler Milsten and Murrah by Jack L. Kinzie, Bobbie T. Shell and Laura J. Stakley, Oklahoma City, Okl., for Magic Circle Energy Corp.
Pate and Payne by William C. McAllister, Oklahoma City, Okl., for B.J. Hughes Services.
This matter comes on for consideration of an objection by the debtor, Magic Circle Energy Corporation ("Magic Circle") to a proof of claim filed by B.J. Hughes Services, a division of Hughes Tool Company ("Hughes"). After a hearing on the matter, the court requested that the parties file a stipulation of facts and any further legal memoranda in support of their respective positions. Pursuant to Fed.R.Bankr.P. 7052 the court now enters the following findings of fact and conclusions of law.
Concerning the subject claim and objection thereto, the parties filed a stipulation of facts, the pertinent of which are as follows.
On July 9, 1985, Hughes filed a proof of claim against Magic Circle in the amount of $142,906.01. On March 17, 1986, Magic Circle objected to this claim on the grounds that Hughes was the transferee of avoidable preferential transfers in the amount of $10,865.64. The claim arose as a result, commencing prior to the spring of 1983, of Hughes providing certain services to Magic Circle in connection with Magic Circle's oil and gas operations. That these services were provided by Hughes is evidenced by invoices submitted by Hughes to Magic Circle.
In the spring of 1983, Magic Circle began experiencing financial difficulties and entered into a workout with its creditors, including Hughes. As part of its workout with Hughes, the parties agreed to restructure Magic Circle's outstanding debt to Hughes, and on September 26, 1983, Magic Circle executed a promissory note in the amount of $174,282.97 with interest at a rate of eight percent per annum payable to Hughes in monthly installments over a seven year period.
On April 16, 1985, Magic Circle filed its petition for chapter 11 relief in bankruptcy. In the ninety days prior to April 16, 1985, Magic Circle made four installment payments to Hughes on the September 26, 1983 note totalling $10,865.64. Magic Circle argues that these payments are preferential transfers, avoidable pursuant to 11 U.S.C. § 547.1
As an initial matter we need address Hughes' contention that the issue of a preferential transfer must be brought by way of an adversary proceeding, Fed.R. Bankr.P. 7001 et seq., and since such is not the case in the matter at bar, the current proceedings are not in a proper procedural posture. Hughes asks that we reconsider our order of May 21, 1986, in which we held that Hughes' objection to proceeding with this matter absent the filing of an adversary proceeding, would be overruled. As we noted in the May 21 order, Fed.R. Bankr.P. 3007, dealing with objections to claims, is clear that should an objection to a claim be joined with a demand for relief of the kind specified in Fed.R.Bankr.P. 7001, it becomes an adversary proceeding. Accordingly, nothing persuades us that our order of May 21 was incorrect; Hughes' request for reconsideration will therefore be denied.
There seems to be no dispute between the parties that the subject payments constitute preferential transfers pursuant to 11 U.S.C. § 547.2 Assuming, without deciding, that the payments in question are preferential in nature, we address the sole issue before us: whether or not the subject payments are immunized from application of § 547 by way of § 547(c)(2).3
Attached to the stipulation filed by the parties in this matter were portions of the transcript of testimony taken of Wm. J. O'Connor, the president of Magic Circle, at a Rule 2004 examination conducted by Hughes in connection with this matter.4 Hughes urges that these selected portions clearly indicate that the subject transfers were within the ordinary course of business of the parties.5 Hughes refers us to no case law in support of its position, rather it relies solely on the testimony taken at the aforementioned Rule 2004 examination.6
Section 547(c)(2) speaks in the conjunctive. All three elements must be present in order to render the transfer in question nonavoidable.7 The subject transfer must be in payment of a debt which is both incurred by the debtor and made in the ordinary course of business of the debtor and the transferee, and must be made according to ordinary business terms. We will discuss these elements seriatim.
Regrettably the term "ordinary course of business" has been left undefined by the Bankruptcy Code. The legislative history merely provides that "the purpose of this exception § 547(c)(2) is to leave undisturbed normal financing relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor's slide into bankruptcy." S.Rep. No. 989, 95th Cong., 2d Sess. 88 (1978), U.S.Code Cong. & Admin.News, 1978, pp. 5787, 5874. "Congress found in Section 547(c)(2) a means to protect normal financial relations between the debtor and its creditors." Merrill v. Abbott (In re Independent Clearing House Co.), 41 B.R. 985, 1014 (Bankr.Utah 1984) (emphasis supplied). See also Evans Temple Church of God in Christ and Community Center, Inc. v. Carnegie Body Company (Matter of Evans Temple Church of God in Christ), 55 B.R. 976, 984 (Bankr.N.D.Ohio 1986) (); Morris v. United States (In re Morris), 53 B.R. 190, 192 (Bankr.Or.1985)("This court believes that the purpose of § 547(c)(2) was to encourage creditors to continue short-term credit dealings with troubled debtors in order to forestall bankruptcy rather than encourage it.").
The foregoing definitions, albeit helpful, do not however preclude further discourse. Application of § 547(c)(2) requires the court to examine a subject transaction from two distinct perspectives. The term "ordinary course of business" may be viewed as one which attempts to express the relation between the debtor and a creditor as though that relation were in a vacuum. Stated another way, the court need determine that which is "ordinary" as between the debtor and a creditor from a purely subjective viewpoint. See 11 U.S.C. § 547(c)(2)(A) and (B). The court is further required to view the subject transaction from an objective viewpoint: whether the subject transfer was made according to common industry practice. 11 U.S.C. § 547(c)(2)(C).8 "To be subjectively `ordinary' as between the parties implies some consistency with other business transactions between the debtor and the creditor." Production Steel, Inc. v. Sumitomo Corporation of America (In re Production Steel, Inc.), 54 B.R. 417, 423 (Bankr.M.D. Tenn.1985). To be objectively "ordinary" implies that the subject transfer did not deviate from the industry norm.
As we have previously noted, the Bankruptcy Code leaves "ordinary course of business" and "ordinary business terms" undefined. The definition of these terms will necessarily be determined on a case-by-case basis. Nonetheless, it should not be supposed that these terms are defined without some reference point. Inasmuch as a court is called upon to place itself in a commercial setting when interpretation of § 547(c)(2) arises, it is perforce logical to allude to commercial law and in particular the Uniform Commercial Code, adopted in Oklahoma at Okla.Stat. tit. 12A, § 1-101 et seq. (1981). While the Commercial Code does not define "ordinary course of business" and "ordinary business terms", it does define "course of dealing" and "usage of trade".9 Resort to a definition of these latter terms would provide further illumination if necessary.
Magic Circle posits that while it initially incurred the debt for the services Hughes rendered to it in the course of Magic Circle's oil and gas operations, the restructuring of the debt by way of the workout created a "new" debt with the execution of a long-term promissory note; that "there is a marked difference between a long-term loan and the ordinary credit transactions protected by § 547(c)(2)." Debtor's Supplemental Brief at 7. It is argued that this long-term installment note cannot be considered as being incurred in the ordinary course of business of either Magic Circle or Hughes.
We do not accept the proposition that the consolidation of Magic Circle's debt owed to Hughes into a long-term promissory note wrought a metamorphosis wherein the nature of the debt was altered. There is no suggestion that an accord and satisfaction occurred, see Walker v. Ellinghausen, 309 P.2d 1058 (Okla.1957), and we do not find one to be present today.
While we can concur in the proposition that there exists a distinction between a long-term loan and an ordinary credit transaction, we do not believe that such dissimilitude is pertinent to the matter at bar. There is no dispute that the underlying debt was incurred in the ordinary course of business affairs of Magic Circle and Hughes. The mere restructuring of the payment terms does not alter the fact that the underlying debt was incurred under normal circumstances. Cf. Matter of Evans Temple Church of God in Christ, supra, 55 B.R. at 984 ( .). We find that the debt was "incurred in the ordinary course of business"...
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