Jubber v. SMC Elec. Prods., Inc. (In re C.W. Mining Co.)

• Decision Date: 10 August 2015
• Docket Number: No. 13–4175.,13–4175.
• Citation: 798 F.3d 983
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: In re C.W. MINING COMPANY, Debtor. Gary E. Jubber, Trustee, Appellant, v. SMC Electrical Products, Inc.; Becker Mining America, Inc., Appellees.

798 F.3d 983

In re C.W. MINING COMPANY, Debtor.Gary E. Jubber, Trustee, Appellant

v.SMC Electrical Products, Inc.; Becker Mining America, Inc., Appellees.

No. 13–4175.

United States Court of Appeals, Tenth Circuit.

Aug. 10, 2015.

Peter W. Billings, Fabian & Clendenin, Salt Lake City, Utah (Gary E. Jubber and Douglas J. Payne, Fabian & Clendenin; and Michael N. Zundel and Callie Buys Rogers, Prince, Yeates & Geldzahler, Salt Lake City, Utah, with him on the briefs), for Appellant.

Jeffrey L. Shields (Jacob D. Lyons, with him on the brief), Callister Nebeker & McCullough, Salt Lake City, Utah, for Appellees.

Before KELLY, LUCERO, and HARTZ, Circuit Judges.

Opinion

HARTZ, Circuit Judge.

C.W. Mining Company, a coal-mining company, was forced into bankruptcy after creditors filed a petition for involuntary bankruptcy on January 8, 2008. Several months before the petition was filed, C.W. Mining had entered into its first contract with SMC Electrical Products, Inc.—an agreement to purchase equipment with a view toward greatly increasing coal production by converting its mining method from continuous mining to a longwall system. One payment for the equipment was a $200,000 wire transfer from C.W. Mining on October 16, 2007. Because this transfer was less than 90 days before the petition was filed, the bankruptcy trustee (the Trustee) sought to recoup the $200,000 for the bankruptcy estate by initiating an adversary proceeding to avoid the transfer under 11 U.S.C. § 547(b). Granting SMC summary judgment, the bankruptcy court rejected the Trustee's claim on the ground that the debt was incurred and the payment made in the ordinary course of business. This circuit's bankruptcy appellate panel (BAP) affirmed. We do the same.¹

I. DISCUSSION

A. Standard of Review

“In an appeal from a final decision of a bankruptcy court, we independently review the bankruptcy court's decision, applying the same standard as the bankruptcy appellate panel or district court.” Aviva Life & Annuity Co. v. White (In re Millennium Multiple Emp'r Welfare Benefit Plan), 772 F.3d 634, 638 (10th Cir.2014) (brackets and internal quotation marks omitted). We review a bankruptcy court's construction of the Bankruptcy Code de novo. See Fid. Sav. & Investment Co. New Hope Baptist, 880 F.2d 1172, 1174 (10th Cir.1989) (per curiam). Because the bankruptcy court granted summary judgment to SMC, we also review the record de novo, examining the evidence in the light most favorable to the Trustee to determine whether SMC established that there was “no genuine dispute as to any material fact” and it was “entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a) ; see Jubber v. Bank of Utah (In re C.W. Mining Co.), 749 F.3d 895, 898 (10th Cir.2014) (“this court reviews the bankruptcy court's grant of summary judgment de novo”); cf. Mallo v. IRS (In re Mallo), 774 F.3d 1313, 1317 (10th Cir.2014) (“In reviewing a bankruptcy court decision under 28 U.S.C. § 158(a) and (d), the district court and the court of appeals apply the same standards of review that govern appellate review in other cases.” (internal quotation marks omitted)).²

But we limit our review to the arguments that have been properly preserved. In particular, we do not consider matters in the record that were not presented to the bankruptcy court in the Trustee's summary-judgment pleadings. See Mitchell v. City of Moore, 218 F.3d 1190, 1199 (10th Cir.2000) (“The district court was not obligated to comb the record in order to make [appellant's] arguments for him.”).

B. Avoidance and the Ordinary–Course–Of–Business Exception

In general, a payment made by an insolvent debtor to a creditor on an antecedent debt made within 90 days before the filing of a bankruptcy petition is a preferential transfer, which the trustee may avoid so that it can include the value in the bankruptcy estate. See 11 U.S.C. § 547(b). As the Supreme Court has noted, “A preference is a transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankrupt estate.” Union Bank v. Wolas, 502 U.S. 151, 160–61, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991) (internal quotation marks omitted). The preference section serves two purposes. The more important one is to “facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that received a greater payment than others of his class is required to disgorge so that all may share equally.” Id. at 161, 112 S.Ct. 527 (internal quotation marks omitted). The other purpose is to discourage creditors “from racing to the courthouse to dismember the debtor during his slide into bankruptcy,” thereby giving the debtor an opportunity “to work his way out of a difficult financial situation through cooperation with all of his creditors.” Id. (internal quotation marks omitted).

But there are some exceptions to this avoidance power, one of which is the subject of this appeal. Under § 547(c)(2), a trustee may not avoid a transfer “to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee” when “such transfer was ... (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms.” At one time the Bankruptcy Code was often read to require the transferee to prove both (A) and (B)—that is, that the payment was made in the ordinary course and that it was made according to ordinary business terms. See 5 Collier on Bankruptcy § 547.04[2] (Alan N. Resnick & Henry J. Sommers eds., 16th ed.2014). But Congress amended the statute in 2005 to make clear that subparagraphs (A) and (B) are alternatives. See id. The language of each alternative, however, remains the same, so case law interpreting each survives. See id. SMC relies only on subparagraph (A).

This circuit construes the exception narrowly. See Jobin, 84 F.3d at 1339. And the transferee bears the burden of establishing the exception by a preponderance of the evidence. See 11 U.S.C. § 547(g).

“[The ordinary-course-of-business] exception was intended to leave undisturbed normal financial 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.” Union Bank, 502 U.S. at 160, 112 S.Ct. 527 (internal quotation marks omitted). Although “[o]n the one hand, any exception for a payment on account of an antecedent debt tends to favor the payee over other creditors and therefore may conflict with the policy of equal treatment,” id. at 161, 112 S.Ct. 527, “[o]n the other hand, the ordinary course of business exception may benefit all creditors by deterring the ‘race to the courthouse’ and enabling the struggling debtor to continue operating its business,” id.; see Clark v. Balcor Real Estate Fin., Inc. (In re Meridith Hoffman Partners), 12 F.3d 1549, 1553 (10th Cir.1993) (The preference section “discourages ‘unusual action’ that may favor certain creditors or hasten bankruptcy by alarming other creditors and motivating them to force the debtor into bankruptcy to avoid being left out.” But even if payments were “not common,” they may be in the ordinary course if “they did not favor certain creditors or encourage a race to dismember the [debtor].”).³

The incurrence of the debt and the payment must be in the ordinary course of business for both the debtor and the transferee. See 11 U.S.C. § 547(c)(2) (“debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee”); id. § 547(c)(2)(A) ( “made in the ordinary course of business or financial affairs of the debtor and the transferee”); Union Bank, 502 U.S. at 162, 112 S.Ct. 527 (remanding to court of appeals to decide “whether the loan involved in this case was incurred in the ordinary course of the Debtor's business and of the Bank's business”); Fid. Sav. & Inv. Co., 880 F.2d at 1177–78 (examining the ordinary course of business for each party); S.Rep. No. 95–989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5874 (the debt must be incurred and the transfer made “in the ordinary course of both the debtor and the transferee” (emphasis added)).

Some courts have instead required the incurrence of the debt and the payment to be in the ordinary course of business between the debtor and the transferee. See, e.g., Fitzpatrick v. Cent. Commc'ns & Elecs., Inc. (In re Tenn. Valley Steel Corp.), 203 B.R. 949, 954 (Bankr.E.D.Tenn.1996) (exception “requires proof that the debt and its payments are ordinary in relation to other business dealings between that creditor and that debtor”); Brizendine v. Barrett Oil Distribs., Inc. (In re Brown Transp. Truckload, Inc.), 152 B.R. 690, 692 (Bankr.N.D.Ga.1992) (“the better interpretation of the statute is that § 547(c)(2)(B) requires a transferee to show that the transfer was made in the ordinary course of business between those two parties ”). Under this standard, any first-time transaction (like the one between C.W. Mining and SMC) would seem to be per se ineligible for the exception because there is no prior course of dealing to examine. See In re Brown Transp. Truckload, Inc., 152 B.R. at 692 (“If there is no prior course of dealings between the parties, the transferee cannot satisfy this element.”).

But we agree with the three circuits that have addressed the issue, who have held that a first-time transaction can qualify for the exception. See Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys. Inc.), 482 F.3d 1118, 1125 (9th Cir.2007) (“We agree that first-time transactions may satisfy the requirements of [the exception].”); Kleven v. Household Bank F.S.B., 334 F.3d 638, 642 (7th Cir.2003) ; Gosch v. Burns (...