11 U.S.C. § 547(c)(2); Ordinary Course of Business
Ogier, Chapter 7 Trustee for Express Factors, Inc. v. Trautman, 2005 Bankr. LEXIS, Adv. No. 04-6076 (Bankr. N.D. Ga. September 30, 2005)(Diehl)
Debtor, in the factoring business, executed a Promissory Note on May 14, 1999. The Note evidenced a loan from the defendant in the amount of $500,000 with a three year term, with the entire amount due on May 13, 2002. On May 10, 2002, the debtor notified the defendant that it would not be able to pay the entire amount due by May 16, 2002. However, debtor did agree to pay $250,000, and did so by wire transfer on May 15, 2002. With respect to the balance, debtor offered to pay $50,000 in two weeks, $50,000 a week after that, and the balance on June 13, 2002. Defendant requested financial statements and a personal guaranty from the debtor’s principal, but the debtor, then through its counsel, refused to provide them to defendant. Debtor did, however, pay to the defendant $50,000 on May 24, 2002 and another $50,000 on May 31, 2002. On June 27, 2002, the debtor filed a Chapter 7 bankruptcy petition and the trustee subsequently filed a lawsuit to recover the three payments made to the defendant within 90 days of the petition date.
The parties did not dispute that the payments were preferential transfers pursuant to §547(b). The defendant, however, raised the “ordinary course of business” affirmative defense of §547(c)(2). The court noted that the creditor must establish three elements for this defense: 1) the transfer must be made on account of a debt incurred in the ordinary course of business between the parties, 2) the payment must have been made in the ordinary course of business between the parties, and 3) the transaction was made according to ordinary business terms, or objective industry standards.
The first element was satisfied, as the loan was an arms-length transaction with a commercially reasonable interest rate and other terms, and the funds were used in the debtor’s business. The fact that it was the only note with a due date, and other notes executed by the debtor were demand notes, was a “distinction without a difference.”
With respect to the second element – that the transfers were in the ordinary course of the parties’ businesses – the court analyzed the $250,000 payment and the two $50,000 payments separately. With respect to the $50,000 payments, they were paid in a manner that suggested a restructuring of the debt. Moreover, attorneys for both sides were involved, financial statements and personal guaranties were requested and refused, and litigation was threatened. Thus, these payments failed the second element and partial summary judgment was granted the trustee.
With respect to the $250,000 payment, the court stated it was assumed that the payment of a promissory note according to its terms would fall within the ordinary court of the parties’ business. It would be at odds with the preference policy to find that a partial payment, such as the one at issue in this case, was an avoidable preference when a full payment would not be a preference. On this basis alone, the court found, the payment was within the ordinary course of business exception. However, the court also found that the tests of §547(c)(2) were satisfied. The payment was made without pressure from the defendant, and prior to the involvement of attorneys. The fact that it as three days late was not significant in light of the three year term. It was not fatal that this was the first transaction between the parties, and therefore no baseline of dealings, as otherwise first time lenders would not benefit from the defense. Finally, since the transaction was a straightforward promissory note, and “ordinary in every conceivable way,” it satisfied §547(c)(2)(C). The defendant was granted partial summary judgment with respect to this payment.