Union Bank v. Wolas
1991 U.S. LEXIS 7174, 116 L. Ed. 2d 514, 502 U.S. 151 (1991)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Payments on long-term debt may qualify for the 'ordinary course of business' exception under § 547(c)(2) of the Bankruptcy Code, and are therefore not automatically avoidable as preferential transfers.
Facts:
- On December 17, 1986, ZZZZ Best Co., Inc. borrowed $7 million from Union Bank under a revolving credit agreement.
- The loan's terms, outlined in a promissory note, required ZZZZ Best Co. to make monthly interest payments.
- During the 90-day period immediately preceding its bankruptcy filing, ZZZZ Best Co. made two interest payments to Union Bank totaling approximately $100,000.
- In that same 90-day period, ZZZZ Best Co. also paid Union Bank a loan commitment fee of about $2,500.
- On July 8, 1987, ZZZZ Best Co. filed a voluntary petition for Chapter 7 bankruptcy.
Procedural Posture:
- The bankruptcy trustee for ZZZZ Best Co. filed an adversary proceeding against Union Bank in the U.S. Bankruptcy Court to recover the interest and fee payments as voidable preferences.
- The Bankruptcy Court granted summary judgment in favor of Union Bank, finding the payments fell within the § 547(c)(2) exception.
- The U.S. District Court affirmed the Bankruptcy Court's judgment.
- The trustee appealed to the U.S. Court of Appeals for the Ninth Circuit.
- Relying on its recent holding in another case, the Ninth Circuit reversed, ruling that the ordinary course of business exception was not available for long-term debt.
- Union Bank, as petitioner, was granted a writ of certiorari by the U.S. Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the 'ordinary course of business' exception to a bankruptcy trustee's power to avoid preferential transfers, as defined in 11 U.S.C. § 547(c)(2), apply to payments made on long-term debt?
Opinions:
Majority - Justice Stevens
Yes. Payments on long-term debt may qualify for the ordinary course of business exception. The plain text of § 547(c)(2) contains no language distinguishing between long-term and short-term debt, focusing instead on whether the debt and the payments were made in the ordinary course of business for both parties and according to ordinary business terms. The legislative history further supports this interpretation, as Congress's 1984 amendment removed a 45-day time limit that had previously excluded most long-term debt payments from the exception. While applying the exception to long-term debt may seem to conflict with the bankruptcy policy of equal distribution among creditors, it serves the equally important policy of deterring a 'race to the courthouse' by encouraging creditors to maintain normal financial relations with a struggling debtor, which can ultimately benefit all creditors.
Concurring - Justice Scalia
Yes. The Court's opinion is correct, but the analysis of legislative history and policy was unnecessary. The statute's text is utterly devoid of any language that distinguishes between long-term and short-term debt. Given this clarity and the absence of any claim of a 'scrivener's error' that produced an absurd result, the plain text of the statute should have been sufficient to resolve the case.
Analysis:
This decision significantly clarified the scope of the Bankruptcy Code's 'ordinary course of business' exception, confirming that it is not limited to short-term trade credit. By rejecting policy arguments and pre-Code judicial doctrines in favor of the statute's plain text, the Court reinforced a textualist approach to bankruptcy law. This provides greater protection and predictability for institutional lenders, ensuring that regularly scheduled payments on long-term loans are not automatically clawed back if a borrower enters bankruptcy, so long as the payments meet the statutory criteria for being 'ordinary.'
