U.S.A. Inns of Eureka Springs, Arkansas, Inc., In re

Citation9 F.3d 680
Decision Date07 December 1993
Docket NumberNo. 93-1631,93-1631
Parties, 24 Bankr.Ct.Dec. 1486, Bankr. L. Rep. P 75,516 In re U.S.A. INNS OF EUREKA SPRINGS, ARKANSAS, INC., Debtor. Claude R. JONES, Plaintiff-Appellant, v. UNITED SAVINGS AND LOAN ASSOCIATION, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Steven Bruce Davis, Harrison, AR, argued for plaintiff-appellant.

Norman E. Beal, Kansas City, KS, argued (Paul T. Fullerton, Kansas City, MO, and Gail-Inman-Campbell of Harrison, AR, on the brief), for defendant-appellee.

Before HANSEN, Circuit Judge, LAY and BRIGHT, Senior Circuit Judges.

LAY, Senior Circuit Judge.

The trustee of the bankruptcy estate of the U.S.A. Inns of Eureka Springs, Arkansas, Inc. (the "U.S.A. Trustee") appeals the judgment of the district court holding that certain preferential payments made by the debtor to United Savings and Loan Association ("United") in the ninety days preceding the debtor's bankruptcy filing were excepted from the trustee's avoidance power under the "ordinary course of business" exception of 11 U.S.C. Sec. 547(c)(2).

Prior to bankruptcy, U.S.A. Inns of Eureka Springs, Arkansas ("U.S.A. Inns") assumed liability under an existing promissory note in favor of United. The promissory note, in the original principal amount of $2,700,000, called for repayment in equal monthly installments in the sum of $27,940.00, due on the 30th day of each month. When U.S.A. Inns filed bankruptcy, United's claim against the debtor totaled $2,815,037.65 and was secured by collateral with a fair market value of $2,620,000.00. The U.S.A. Trustee brought suit against United to recover certain payments made by the debtor to United during the ninety days preceding the debtor's bankruptcy filing. The debtor's payments were irregular as to both time and amount, and were never in the amount of the full monthly installment. 1 The parties stipulated On appeal, the United States District Court for the Western District of Arkansas 3 reversed the bankruptcy court's decision holding that the bankruptcy court erred in requiring objective evidence of industry practice under Sec. 547(c)(2)(C) and, in the alternative, that the bankruptcy court's finding that United had produced no evidence sufficient to carry its burden under Sec. 547(c)(2)(C) was clearly erroneous. See Jones v. United Sav. & Loan Ass'n (In re U.S.A. Inns of Eureka Springs, Arkansas, Inc.), 151 B.R. 492 (W.D.Ark.1993). On the basis of the district court's alternative holding, we affirm.

to the preferential nature of the payments, conceding that the requirements of Sec. 547(b) were satisfied, but contested whether the payments were excepted from avoidance as having been made in the ordinary course of business and according to ordinary business terms under 11 U.S.C. Sec. 547(c)(2). The bankruptcy court 2 held that United proved the transfers satisfied the requirements of subsections (c)(2)(A) and (c)(2)(B) in that the debts were incurred and the payments were made by the debtor in the ordinary course of business of the debtor and United. The bankruptcy court concluded, however, that United did not produce any evidence on the issue of whether the payments had been made according to ordinary business terms under 11 U.S.C. Sec. 547(c)(2)(C) and thus had failed to prove one of the three essential elements of Sec. 547(c)(2). The bankruptcy court granted judgment for the U.S.A. Trustee in the amount of $63,000.00. See Jones v. United Sav. & Loan Ass'n (In re U.S.A. Inns of Eureka Springs, Arkansas, Inc.), 151 B.R. 486 (Bankr.W.D.Ark.1992).

Section 547(c)(2)(C)

Section 547(b) provides that transfers made by the debtor in the ninety days preceding the petition for bankruptcy may be avoided by the trustee in bankruptcy as a "preference." However, the Bankruptcy Code permits the transferee of a preferential payment to prevent the avoidance by satisfying the three requirements set forth in Sec. 547(c):

(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.

11 U.S.C. Sec. 547(c)(2).

For a payment to qualify under the exception of Sec. 547(c)(2), the transferee must prove by a preponderance of the evidence the three statutory elements. See 11 U.S.C. Sec. 547(g). First, under subsection (c)(2)(A), the transferee must show that the debtor incurred the underlying debt in the ordinary course of business of the debtor and the transferee. The bankruptcy court held, and the parties do not dispute, that United satisfied this requirement. Second, under subsection (c)(2)(B), the transferee must show that the debtor made the transfer in the ordinary course of business or financial affairs of the debtor and the transferee. This court has indicated that " 'there is no precise legal test which can be applied' in determining whether payments by the debtor during On appeal, the district court reversed the bankruptcy court on the grounds that, first, the bankruptcy court erred in interpreting the requirements of Sec. 547(c)(2)(C), and second, that the bankruptcy court's finding that United failed to prove the payments were made according to ordinary business terms was clearly erroneous. The district court held that the bankruptcy court applied the wrong standard under the law of this circuit in requiring an objective showing that the payments were made according to ordinary business terms of the industry in general. The district court stated that this circuit "effectively has ignored the distinction between subsection (c)(2)(B) and (c)(2)(C), concluding that both subsections were satisfied so long as the late payments were consistent with the course of dealings between the debtor and creditor. " In re U.S.A. Inns, 151 B.R. at 498 (emphasis added) (citations omitted). In reaching this conclusion, the district court relied upon the language in Lovett v. St. Johnsbury Trucking, 931 F.2d 494 (8th Cir.1991), which stated as follows:

                the 90-day period were 'made in the ordinary course of business';  'rather, th[e] court must engage in a "peculiarly factual" analysis.' " 4  Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir.1991) (citations omitted).  Relying upon the Lovett case, the bankruptcy court held that United satisfied this requirement as well since the payments conformed to the usual practice between the parties.  Finally, under subsection (c)(2)(C), the transferee must show that the payment was made according to ordinary business terms.  The bankruptcy court concluded that United failed to carry its burden of proof on this element of Sec. 547(c)(2).  The bankruptcy court stated that subsection (c)(2)(C) "requires an objective determination whether the payments are ordinary in relation to the standards prevailing in the relevant industry."  In re U.S.A. Inns, 151 B.R. at 491 (citations omitted).  The bankruptcy court held that United presented no evidence that the late note payments were so common within the savings and loan industry that it could be considered an ordinary business practice and therefore that United had failed to prove that the payments were made according to ordinary business terms.  On this basis, the court entered judgment against United for the $63,000 in preferential payments
                

International's payments to St. Johnsbury during the 90-day period were made "according to ordinary business terms" because the manner, form, and timing of these payments were consistent with the practice both parties followed previously. As noted, the record shows that International regularly and frequently sent St. Johnsbury checks covering a number of invoices for services rendered. The fact that most of the payments were not made within 30 days is, for the reasons given in Part II.B., not inconsistent with their having been "made according to ordinary business terms."

To the extent, if any, that subsection (c)(2)(C) requires comparison between the payment record of the particular debtor and the general practice in the industry regarding the time of payment, St. Johnsbury introduced testimony by two of its officials that it is "common" in the trucking industry--even when 30-day payment terms are required by contract--for payments "to be made over a 30-day period" (i.e., after 30 days from the date of the invoice) and that it is "[v]ery common" in the industry "that people pass the 30 day period." In the absence of any contrary evidence, this was sufficient to carry whatever burden St. Johnsbury may have had on this issue.

Id. at 499.

On this basis, the district court found that under the Lovett decision no independent evidence of ordinary business terms within the industry is necessary to satisfy subsection (c)(2)(C).

The district court's interpretation of Lovett places that decision at odds with the decisions of at least three other circuits that require an independent, objective standard of the practices of the relevant industry be applied under (c)(2)(C). See In re Tolona Pizza Prod. Corp., 3 F.3d 1029, 1033 (7th Cir.1993) (holding that the creditor must show that the payment he received was made in accordance with the ordinary business terms in the industry); Logan v. Basic Distribution Corp. (In re Fred Hawes Organization, Inc.), 957 F.2d 239, 243-44 (6th Cir.1992) (holding that each of the three independent elements must be satisfied and finding that (c)(2)(C) requires objective evidence of industry standards); WJM, Inc. v. Massachusetts Dep't of Pub. Welfare, 840 F.2d 996, 1010-11 (1st Cir.1988) (holding that each of the three distinct subsections must be established by the creditor); but see J.P. Fyfe, Inc....

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