Union Bank v. Wolas Zzzz

• Decision Date: 11 December 1991
• Docket Number: No. 90-1491,90-1491
• Citation: 116 L.Ed.2d 514,502 U.S. 151,112 S.Ct. 527
• Parties: UNION BANK, Petitioner v. Herbert WOLAS, Chapter 7 Trustee for the Estate of ZZZZ Best Co., Inc
• Court: U.S. Supreme Court

502 U.S. 151

112 S.Ct. 527

116 L.Ed.2d 514

UNION BANK, Petitioner

v Herbert WOLAS, Chapter 7 Trustee for the Estate of ZZZZ Best Co., Inc.

No. 90-1491.

Argued Nov. 5, 1991.

Decided Dec. 11, 1991.

Syllabus

During the 90-day period preceding its filing of a petition under Chapter 7 of the Bankruptcy Code, ZZZZ Best Co., Inc. (Debtor) made two interest payments and paid a loan commitment fee on its long-term debt to petitioner, Union Bank (Bank). After he was appointed trustee of the Debtor's estate, respondent Wolas filed a complaint against the Bank to recover those payments as voidable preferences under 11 U.S.C. § 547(b). The Bankruptcy Court held that the payments were transfers made in the ordinary course of business pursuant to § 547(c)(2) and thus were excepted from § 547(b). The District Court affirmed, but the Court of Appeals reversed, holding that the ordinary course of business exception was not available to long-term creditors.

Held:

1. Payments on long-term debt, as well as those on short-term debt, may qualify for the ordinary course of business exception to the trustee's power to avoid preferential transfers. Section 547(c)(2) contains no language distinguishing between long- and short-term debt and, therefore, provides no support for Wolas' contention that its coverage extends only to short-term debt. Moreover, § 547's relevant history in part supports, and is not otherwise inconsistent with, a literal reading of the statute. While § 547(c)(2), as originally enacted, was limited to payments made within 45 days of the date a debt was incurred, Congress amended the provision in 1984 by deleting the time limitation entirely. That Congress may have intended only to address particular concerns of specific short-term creditors in the amendment or may not have foreseen all of the consequences of its statutory enactment is insufficient reason for refusing to give effect to § 547(c)(2)'s plain meaning. Also unpersuasive is Wolas' argument that Congress originally enacted § 547(c)(2) to codify a judicially crafted "current expense" rule covering contemporaneous exchanges for new value, since other § 547(c) exceptions occupy some (if not all) of the territory previously covered by that rule, and since there is no extrinsic evidence that Congress intended to codify the rule in § 547(c)(2). Nor does the fact that the exception's availability to long-term creditors may not directly further § 547's underlying policy of equality of distribution among all creditors support limiting § 547(c)(2) to short-term debt, for it does further the provision's other policy of deterring creditors from racing to the courthouse to dismember a debtor and may indirectly further the equal distribution goal as well. Pp. 154-162.

2. The question whether the Bankruptcy Court correctly concluded that the Debtor's payments qualify for the ordinary course of business exception remains open for the Court of Appeals on remand. P.162.

921 F.2d 968 (CA9 1990), reversed and remanded.

STEVENS, J., delivered the opinion for a unanimous Court. SCALIA, J., filed a concurring opinion.

John A. Graham, Los Angeles, Cal., for petitioner; Lesley Anne Hawes, Donald Robert Meyer, Stephen Howard Weiss, Los Angeles, Cal., on brief.

Herbert Wolas, South Pasadena, Cal., for respondent.

Justice STEVENS delivered the opinion of the Court.

Section 547(b) of the Bankruptcy Code, 11 U.S.C. § 547(b), authorizes a trustee to avoid certain property transfers made by a debtor within 90 days before bankruptcy. The Code makes an exception, however, for transfers made in the ordinary course of business, 11 U.S.C. § 547(c)(2). The question presented is whether payments on long-term debt may qualify for that exception.

On December 17, 1986, ZZZZ Best Co., Inc. (Debtor) borrowed seven million dollars from petitioner, Union Bank (Bank).¹ On July 8, 1987, the Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code. During the preceding 90-day period, the Debtor had made two interest payments totalling approximately $100,000 and had paid a loan commitment fee of about $2,500 to the Bank. After his appointment as trustee of the Debtor's estate, respondent filed a complaint against the Bank to recover those payments pursuant to § 547(b).

The Bankruptcy Court found that the loans had been made "in the ordinary course of business or financial affairs" of both the Debtor and the Bank, and that both interest payments as well as the payment of the loan commitment fee had been made according to ordinary business terms and in the ordinary course of business.² As a matter of law, the Bankruptcy Court concluded that the payments satisfied the requirements of § 547(c)(2) and therefore were not avoidable by the trustee.³ The District Court affirmed the Bankruptcy Court's summary judgment in favor of the Bank.⁴

Shortly thereafter, in another case, the Court of Appeals held that the ordinary course of business exception to avoidance of preferential transfers was not available to long-term creditors. In re CHG International, Inc., 897 F.2d 1479 (CA9 1990). In reaching that conclusion, the Court of Appeals relied primarily on the policies underlying the voidable preference provisions and the state of the law prior to the enactment of the 1978 Bankruptcy Code and its amendment in 1984. Thus, the Ninth Circuit concluded, its holding in CHG International, Inc. dictated a reversal in this case. 921 F.2d 968, 969 (1990).⁵ The importance of the question of law decided by the Ninth Circuit, coupled with the fact that the Sixth Circuit had interpreted § 547(c)(2) in a contrary manner, In re Finn, 909 F.2d 903 (1990), persuaded us to grant the Bank's petition for certiorari. 500 U.S. ----, 111 S.Ct. 2009, 114 L.Ed.2d 97 (1991).

I

We shall discuss the history and policy of § 547 after examining its text. In subsection (b), Congress broadly authorized bankruptcy trustees to "avoid any transfer of an interest of the debtor in property" if five conditions are satisfied and unless one of seven exceptions defined in subsection (c) is applicable.⁶ In brief, the five characteristics of a voidable preference are that it (1) benefit a creditor; (2) be on account of antecedent debt; (3) be made while the debtor was insolvent; (4) be within 90 days before bankruptcy; and (5) enable the creditor to receive a larger share of the estate than if the transfer had not been made. Section 547 also provides that the debtor is presumed to have been insolvent during the 90-day period preceding bankruptcy. 11 U.S.C. § 547(f). In this case, it is undisputed that all five of the foregoing conditions were satisfied and that the interest and loan commitment fee payments were voidable preferences unless excepted by subsection (c)(2).

The most significant feature of subsection (c)(2) that is relevant to this case is the absence of any language distinguishing between long-term debt and short-term debt.⁷ That subsection provides:

"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."

Instead of focusing on the term of the debt for which the transfer was made, subsection (c)(2) focuses on whether the debt was incurred, and payment made, in the "ordinary course of business or financial affairs" of the debtor and transferee. Thus, the text provides no support for respondent's contention that § 547(c)(2)'s coverage is limited to short-term debt, such as commercial paper or trade debt. Given the clarity of the statutory text, respondent's burden of persuading us that Congress intended to create or to preserve a special rule for long-term debt is exceptionally heavy. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241-242, 109 S.Ct. 1026, 1030-1031, 103 L.Ed.2d 290 (1989). As did the Ninth Circuit, respondent relies on the history and the policies underlying the preference provision.

II

The relevant history of § 547 contains two chapters, one of which clearly supports, and the second of which is not inconsistent with, the Bank's literal reading of the statute. Section 547 was enacted in 1978 when Congress overhauled the Nation's bankruptcy laws. The section was amended in 1984. For purposes of the question presented in this case, the original version of § 547 differed in one significant respect from the current version: it contained a provision that the ordinary course of business exception did not apply unless the payment was made within 45 days of the date the debt was incurred.⁸ That provision presumably excluded most payments on long-term debt from the exception.⁹ In 1984 Congress repealed the 45-day limitation but did not substitute a comparable limitation. See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, § 462(c), 98 Stat. 333, 378.

Respondent contends that this amendment was intended to satisfy complaints by issuers of commercial paper ¹⁰ and by trade creditors ¹¹ that regularly extended credit for periods of more than 45 days. Furthermore, respondent continues, there is no evidence in the legislative history that Congress intended to make the ordinary course of business exception available to conventional long-term lenders. Therefore, respondent argues, we should follow the analysis of the Ninth Circuit and read § 547(c)(2) as protecting only short-term debt payments. Cf. In re CHG International, 897 F.2d, at 1484.

We need not dispute the accuracy of respondent's description of the legislative history of the 1984 amendment in order to reject his conclusion. For even if Congress adopted the 1984 amendment to redress particular problems of specific short-term creditors, it remains true that Congress...