OCTOBER TERM, 1991
Syllabus
UNION BANK
v. WaLAS, CHAPTER 7 TRUSTEE FOR THE ESTATE OF
ZZZZ BEST CO., INC.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH
CIRCUIT
No.90-1491. Argued November 5, 1991-Decided December 11,
1991
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While § 547(c)(2), as originally enacted, was limited to payments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argument that Congress originally enacted § 547(c)(2) to codify a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
152
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, reversed and remanded.
STEVENS, J., delivered the opinion for a unanimous Court.
SCALIA, J., filed a concurring opinion,
post, p. 163.
John A. Graham argued the cause for petitioner. With him on the
briefs were Lesley Anne Hawes, Donald Robert Meyer, and Stephen
Howard Weiss.
Herbert Wolas, pro se, argued the cause for
respondent.
With him on the brief was
Terry A. Ickowicz. *
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, § 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 $7
million from petitioner, Union Bank (Bank).l On
*Briefs of
amici curiae urging reversal were filed for
the American Bankers Association by
John J.
Gill III
and
Michael F.
Crotty; for the American Council of
Life Insurance et al. by
Phillip E. Stano, Robert M. Zinman,
Richard E. Barnsback, Bruce Hyman, and
Christopher F.
Graham; for the California Bankers Association by
Robert
L. Morrison and
Kenneth N Russak; for the New York
Clearing House Association by
Richard H. Klapper, John L.
Warden, Robinson B. Lacy, and
Michael M. Wiseman; and
for Robert Morris Associates by
Raymond K. Denworth, Jr.
1 The Bankruptcy Court found that the Bank and Debtor executed a
revolving credit agreement on December 16, 1986, in which the Bank
agreed to lend the Debtor $7 million in accordance with the terms
of
153
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 totaling
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 Int'Z, 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.
a promissory note to be executed and delivered by the Debtor.
No. 8713692 (Bkrtcy. Ct. CD Cal., Aug. 22, 1988), App. to Pet. for
Cert. 12a. On December 17, 1986, the Debtor executed and delivered
to the Bank a promissory note in the principal sum of $7 million.
The promissory note provided that interest would be payable on a
monthly basis and would accrue on the principal balance at a rate
of 0.65% per annum in excess of the Bank's reference rate.
Ibid.
2 App. to Pet. for Cert. 14a. 3
Ibid.
4
In re ZZZZ Best Co., Inc., No. 88-6285,1989 U. S. Dist.
LEXIS 17500, *1 (CD Cal., Aug. 4, 1989).
154
Thus, the Ninth Circuit concluded, its holding in
CHG
Int'l, 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. 915 (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
5 In so holding, the Ninth Circuit rejected the Bank's argument
that the revolving line of credit in this case was not "long-term"
because it was for less than one year. 921 F. 2d, at 969. Because
we hold that the ordinary course of business exception applies to
payments on long-term as well as short-term debt, we need not
decide whether the revolving line of credit was a "long-term"
debt.
6Title 11 U. S. C. §547(b) provides:
"Except as provided in subsection (c) of this section, the
trustee may avoid any transfer of an interest of the debtor in
property-
"(1) to or for the benefit of a creditor;
"(2) for or on account of an antecedent debt owed by the debtor
before
such transfer was made;
"(3) made while the debtor was insolvent; "(4) made-
"(A) on or within 90 days before the date of the filing of the
petition; or "(B) between ninety days and one year before the date
of the filing of
the petition, if such creditor at the time of such transfer was
an insider; and
"(5) that enables such creditor to receive more than such
creditor would
receive if-
"(A) the case were a case under chapter 7 of this title; "(B)
the transfer had not been made; and
"(C) such creditor received payment of such debt to the extent
provided by the provisions of this title."
155
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 made 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. § 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 shortterm debt, such as commercial paper or
trade debt. Given
7 Nor does the definitional section of the Bankruptcy Code,
which defines the term "debt" broadly as a "liability on a claim,"
11 U. S. C. § 101(11), distinguish between short-term debt and
long-term debt.
156
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
(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
8 As enacted in 1978, § 547(c) provided, in relevant part:
"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 in the ordinary course of
business or financial affairs of the debtor and the transferee;
"(B) made not later than 45 days after such debt was
incurred;
"(C) made in the ordinary course of business or financial
affairs of the debtor and the transferee; and
"(D) made according to ordinary business terms." 92 Stat. 2598
(emphasis added).
9We use the term "presumably" because it is not necessary in
this case to decide whether monthly interest payments on long-term
debt were protected by the initial version of § 547(c)(2). Cf.
In re Iowa Premium Servo Co., Inc., 695
F.2d 1109 (CA8 1982) (en banc) (holding that interest
obligations are "incurred" when they become due, rather than when
the promissory note is signed). We refer to "most" instead of "all"
long-term debt
157
did not substitute a comparable limitation. See Bankruptcy
Amendments and Federal Judgeship Act of 1984, Pub. L. 98353, §
462(c), 98 Stat. 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 Int'Z, 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
payments because of the possibility that a debtor's otherwise
avoidable payment was made within 45 days of the date the long-term
loan was made.
10 Because payments to a commercial paper purchaser within 90
days prior to bankruptcy may be preferential transfers under §
547(b), a purchaser could be assured that the payment would not be
avoided under the prior version of § 547(c)(2) only if the
commercial paper had a maturity of 45 days or less. Commercial
issuers thus complained that the 45-day limitation lowered demand
for commercial paper with a maturity in excess of 45 days. See
Hearings on S. 3023 before the Subcommittee on Judicial Machinery
of the Senate Committee on the Judiciary, 96th Cong., 2d Sess.,
8-27 (1980) (statements of George Van Cleave, partner, Goldman,
Sachs & Co., and James Ledinsky, Senior Vice President, A. G.
Becker & Co.).
11 Trade creditors stated that normal payment periods in many
industries exceeded 45 days and complained that the arbitrary
45-day limitation in § 547(c)(2) deprived these trade creditors of
the protection of the ordinary course of business exception to the
trustee's power to avoid preferential transfers. See,
e. g.,
Hearings on Bankruptcy Reform Act of 1978 before the Subcommittee
on Courts of the Senate Committee on the Judiciary, 97th Cong., 1st
Sess., 259-260 (1981) (statement of Vyto Gestautas on behalf of the
National Association of Credit Management).
158
1984 amendment to redress particular problems of specific
short-term creditors, it remains true that Congress redressed those
problems by entirely deleting the time limitation in §547(c)(2).
The fact that Congress may not have foreseen all of the
consequences of a statutory enactment is not a sufficient reason
for refusing to give effect to its plain meaning.
Toibb v.
Radloff, 501
U. S. 157, 164 (1991).
Respondent also relies on the history of voidable preferences
prior to the enactment of the 1978 Bankruptcy Code. The text of the
preference provision in the earlier Bankruptcy Act did not
specifically include an exception for payments made in the ordinary
course of business.12 The courts had, however, developed what is
sometimes described as the "current expense" rule to cover
situations in which a debtor's payments on the eve of bankruptcy
did not diminish the net estate because tangible assets were
obtained in exchange for the payment. See
Marshall v.
Florida Nat. Bank of Jacksonville, 112 F.2d 380, 382 (CA5
1940); 3 Collier on Bankruptcy , 60.23, p. 873 (14th ed. 1977).
Without such an exception, trade creditors and other suppliers of
necessary goods and services might have been reluctant to extend
even short-term credit and might have required advance payment
12 Section 60 of the 1898 Bankruptcy Act, as amended and
codified in 11 U. S. C. § 96 (1976 ed.), provided in relevant
part:
"(a)(1) A preference is a transfer, as defined in this title, of
any of the property of a debtor to or for the benefit of a creditor
for or on account of an antecedent debt, made or suffered by such
debtor while insolvent and within four months before the filing by
or against him of the petition initiating a proceeding under this
title, the effect of which transfer will be to enable such creditor
to obtain a greater percentage of his debt than some other creditor
of the same class.
"(b) Any such preference may be avoided by the trustee if the
creditor receiving it or to be benefited thereby or his agent
acting with reference thereto has, at the time when the transfer is
made, reasonable cause to believe that the debtor is insolvent.
Where the preference is voidable, the trustee may recover the
property .... "
159
instead, thus making it difficult for many companies in
temporary distress to have remained in business. Respondent argues
that Congress enacted § 547(c)(2) in 1978 to codify that exception,
and therefore the Court should construe § 547(c)(2) as limited to
the confines of the current expense rule.
This argument is not compelling for several reasons.
First, it is by no means clear that § 547(c)(2) should be
construed as the statutory analogue of the judicially crafted
current expense rule because there are other exceptions in § 547(c)
that explicitly cover contemporaneous exchanges for new valueP
Those provisions occupy some (if not all) of the territory
previously covered by the current expense rule. Nor has respondent
directed our attention to any extrinsic evidence suggesting that
Congress intended to codify the current expense rule in §
547(c)(2).14
The current expense rule developed when the statutory preference
provision was significantly narrower than it is today. To establish
a preference under the Bankruptcy Act, the trustee had to prove
that the challenged payment was made at a time when the creditor
had "reasonable cause to believe that the debtor [was] insolvent."
11 U. S. C. § 96(b) (1976 ed.). When Congress rewrote the
preference provision in the 1978 Bankruptcy Code, it substantially
enlarged the trustee's power to avoid preferential transfers by
eliminating the reasonable cause to believe requirement for
transfers made within 90 days of bankruptcy and creating a
presumption of insolvency during that period. See 11 U. S. C.
13 Thus, for example, § 547(c)(I) exempts a transfer to the
extent that it was a "contemporaneous exchange for new value given
to the debtor," and § 547(c)(4) exempts a transfer to a creditor
"to the extent that, after such transfer, such creditor gave new
value to or for the benefit of the debtor .... "
14 In fact, the legislative history apparently does not even
mention the current expense rule. See Broome, Payments on Long-Term
Debt as Voidable Preferences: The Impact of the 1984 Bankruptcy
Amendments, 1987 Duke L. J. 78, 97.
160
§§ 547(b), (c)(2), (f); H. R. Rep. No. 95-595, p. 178 (1977). At
the same time, Congress created a new exception for transfers made
in the ordinary course of business, 11 U. s. C. § 547(c)(2). This
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."
H. R. Rep. No. 95595, at 373.
In light of these substantial changes in the preference
provision, there is no reason to assume that the justification for
narrowly confining the "current expense" exception to trade
creditors before 1978 should apply to the ordinary course of
business exception under the 1978 Code. Instead, the fact that
Congress carefully reexamined and entirely rewrote the preference
provision in 1978 supports the conclusion that the text of
§547(c)(2) as enacted reflects the deliberate choice of
Congress.15
III
The Bank and the trustee agree that § 547 is intended to serve
two basic policies that are fairly described in the House Committee
Report. The Committee explained:
"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
15 Indeed, the House Committee Report concludes its discussion
of the trustee's avoidance powers with the observation that the
language in the preference section of the earlier Bankruptcy Act
was "hopelessly complex" and had been "subject to varying
interpretations. The bill undoes the numerous amendments that have
been heaped on section 60 during the past 40 years, and proposes a
unified and coherent section to deal with the problems created by
prebankruptcy preferential transfers." H. R. Rep. No. 95-595, p.
179 (1977). Respondent's assumption that § 547(c)(2) was intended
to preserve pre-existing law is at war with this legislative
history.
161
the distribution of the assets of the bankrupt estate. The
purpose of the preference section is two-fold. First, by permitting
the trustee to avoid prebankruptcy transfers that occur within a
short period before bankruptcy, creditors are discouraged from
racing to the courthouse to dismember the debtor during his slide
into bankruptcy. The protection thus afforded the debtor often
enables him to work his way out of a difficult financial situation
through cooperation with all of his creditors. Second, and more
important, the preference provisions 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. The operation of the preference section to deter 'the race
of diligence' of creditors to dismember the debtor before
bankruptcy furthers the second goal of the preference section-that
of equality of distribution." Id., at 177-178.
As this comment demonstrates, the two policies are not entirely
independent. On 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. On 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.
Respondent places primary emphasis, as did the Court of Appeals,
on the interest in equal distribution. See
In re CHG Int'Z,
897 F. 2d, at 1483-1485. When a debtor is insolvent, a transfer to
one creditor necessarily impairs the claims of the debtor's other
unsecured and undersecured creditors. By authorizing the avoidance
of such preferential transfers, § 547(b) empowers the trustee to
restore equal status to all creditors. Respondent thus contends
that the ordinary course of business exception should be limited to
short-term
162
debt so the trustee may order that preferential long-term debt
payments be returned to the estate to be distributed among all of
the creditors.
But the statutory text-which makes no distinction between
short-term debt and long-term debt-precludes an analysis that
divorces the policy of favoring equal distribution from the policy
of discouraging creditors from racing to the courthouse to
dismember the debtor. Long-term creditors, as well as trade
creditors, may seek a head start in that race. Thus, even if we
accept the Court of Appeals' conclusion that the availability of
the ordinary business exception to long-term creditors does not
directly further the policy of equal treatment, we must recognize
that it does further the policy of deterring the race to the
courthouse and, as the House Report recognized, may indirectly
further the goal of equal distribution as well. Whether Congress
has wisely balanced the sometimes conflicting policies underlying §
547 is not a question that we are authorized to decide.
IV
In sum, we hold that payments on long-term debt, as well as
payments on short-term debt, may qualify for the ordinary course of
business exception to the trustee's power to avoid preferential
transfers. We express no opinion, however, on the question whether
the Bankruptcy Court correctly concluded that the Debtor's payments
of interest and the loan commitment fee qualify for the ordinary
course of business exception, § 547(c)(2). In particular, we do not
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, whether the payments were made in the ordinary course of
business, or whether the payments were made according to ordinary
business terms. These questions remain open for the Court of
Appeals on remand.
163
The judgment of the Court of Appeals is reversed, and the case
is remanded for further proceedings consistent with this
opinion.
It is so ordered.
JUSTICE SCALIA, concurring.
I join the opinion of the Court, including Parts II and III,
which respond persuasively to legislative-history and policy
arguments made by respondent. It is regrettable that we have a
legal culture in which such arguments have to be addressed (and are
indeed credited by a Court of Appeals), with respect to a statute
utterly devoid of language that could remotely be thought to
distinguish between long-term and short-term debt. Since there was
here no contention of a "scrivener's error" producing an absurd
result, the plain text of the statute should have made this
litigation unnecessary and unmaintainable.
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