Tenth Circuit Confirms That a Single Payment on New Purchase Contract May Satisfy Ordinary Course Defense Under 11 U.S.C. § 547(c)(2)

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In Jubber v. SMC Electrical Products, Inc. et al. (In re C.W. Mining Co.), Case No. 13-4175 (Aug. 10, 2015), the Tenth Circuit Court of Appeals confirmed that a single payment made by a debtor within the 90-day preference period to a seller, with whom the debtor had never done business, may satisfy the elements to be a payment in the “ordinary course” and, thus, not subject to a preference claim by the trustee.

Prior to being forced into bankruptcy, C.W. Mining Company entered into a purchase contract with SMC Electrical Products for mining equipment which CW Mining planned to use to convert its continuous mining operation into a longwall mining system. The total amount of the purchase price was $1,064,036. The purchase contract contained a series of payment deadlines upon which a certain percentage of the purchase price would be due. CW Mining made the first payment of $200,000 to SMC on October 16, 2007. CW Mining’s creditors commenced an involuntary bankruptcy case on January 8, 2008. The trustee sought to recoup the $200,000 because it occurred less than 90 days before the petition. The bankruptcy court granted summary judgment in favor of SMC finding that the debt was incurred and the payment made in the ordinary course of business. The 10th Circuit BAP affirmed.

In affirming the BAP, the 10th Circuit began its opinion by considering the law surrounding the ordinary course exception of § 347(c)(2) and finding that a single, first-time transaction may satisfy the elements to be an “ordinary course” transaction. SMC Elec., Slip Op. at p. 8. The court rejected cases which have required that the debt be incurred and the payment made within the ordinary course between the debtor and the payee. Using a careful reading of the language of § 547(c)(2) the court concluded that a proper showing need only prove that the debt was incurred and the payment made in the ordinary course of the debtor and of the transferee. Id. at 7. Were it otherwise, the court reasoned that “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.” Id. at 8. Thus, the court concluded that a single transaction may satisfy the ordinary course exception if it can be proved that the debt was incurred in the debtor’s normal course of affairs (assuming the debtor was not sliding into bankruptcy) and if it can be proved that the payment was made in the ordinary course of the debtor’s and the payee’s affairs.

In looking at the reasons for incurring the substantial debt to SMC, the court found sufficient evidence establishing that CW Mining incurred the debt in the ordinary course of its business. While the court noted that there was evidence to suggest CW Mining was gambling on a risky business venture using a creditor’s money, the court ultimately concluded that the trustee failed to raise such evidence and had failed to argue that the risky, unprecedented nature of the transaction was something SMC had to disprove. Id. at 15-16. In short, “[t]he [trial]court was given no good reason to think that the debt was not incurred in the ordinary course of business.” Id. at 16.

As to the payment, the court found that evidence established the payment was made in CW Mining’s ordinary course of business. The payment was made pursuant to the terms of the purchase contract and was made two days before the due date. No facts suggested that SMC had engaged in collection activity prior to CW Mining making the payment. Thus, summary judgment finding the debt and the payment to be “ordinary course” under § 547(c)(2) was appropriate.

There are two important concepts from this opinion. First, the discussion regarding how to prove an “ordinary course” transaction even if the transfer is a first-time or single transfer between the debtor and the payee is instructive. The opinion persuasively refutes case law from other courts which has concluded that the first-time or single payments cannot be “ordinary course”. Second, the court’s evaluation of the transaction as part of the debtor’s ordinary course of business is very careful to distinguish between the debtor’s normal operations and the operations undertaken by a company sliding into bankruptcy. While the Tenth Circuit acknowledged that it should be deferential to the debtor’s business decisions, the court noted that certain decisions may involve particularly risky projects that are only justified because of the debtor’s tenuous financial position. Such conduct may not satisfy the ordinary course exception where the transaction only makes sense because the burden is, in effect, borne by the creditors and not the distressed debtor. However, if facts exist to show the debtor would have engaged in the same transaction, regardless of financial stress, then it may be more likely the transaction is ordinary course.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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