SUMMARY: The Ninth Circuit Court of Appeals recently ruled that creditors seeking to defend against preference actions by way of the ordinary course of business defense set forth in 11 U.S.C. 547 (c)(2) are entitled to a broader interpretation of the “ordinary business terms” prong of that defense. In re Weilert RV, Inc. v. Ganis Credit Corporation, 315 F.3d 1192 (9th Cir. 2003). This decision is important to creditors because it expands the availability of the ordinary course of business defense to defend against preference claims brought by debtors in possessionand bankruptcy trustees.
FACTS: On November 26, 1996, debtor Weilert RV (“Debtor”), a dealer in recreational vehicles, received from a trade-in sale a recreational vehicle subject to a lien held by creditor Ganis Credit Corp. (“Ganis”). The Debtor resold the recreational vehicle on January 30, 1997. Twenty-one days after the sale, Ganis received from the Debtor $37,005.33, representing full satisfaction of the Ganis lien. On January 27, 1999, the Debtor received another recreational vehicle from a trade-in sale, also subject to a lien held by Ganis. The Debtor resold the recreational vehicle on February 6, 1997. Forty-one days after the resale, Ganis received a payment from the Debtor of $11,299.26, representing full satisfaction of Ganis’ lien.
ANALYSIS: The Debtor filed for Chapter 11 bankruptcy protection on April 4, 1997, which was later converted to a Chapter 7 case. The trustee sought to avoid the Debtor’s payments of $37,005.33 and $11,299.26 to Ganis as avoidable preferences. In response, Ganis raised the ordinary course defense. The Bankruptcy Court focused on 547(c)(2)(C), the “objective” prong of the defense that requires payment to be ordinary in relation to prevailing business standards. The court heard evidence from an expert that the “ordinary business term” for payment of liens incurred from trade-in sales was to satisfy the lien between one and forty-five days after the resale of a recreational vehicle and that the average time for such payments was typically twenty days after resale. Using the 20-day figure as the industry standard for the amount of time it took for satisfaction of a lien in the industry, the court found that Ganis’ ordinary course defense was inapplicable, and that the transfers of $37,005.33 (21 days) and $11,299.26 (41 days) were avoidable. The Bankruptcy Appellate Panel affirmed the court’s decision.
On appeal, the Ninth Circuit reversed and found that the lower courts had erred in using the average figure of twenty days as the objective industry standard for when creditors received payment in satisfaction of their liens. The court pointed out that the evidence at trial indicated that payments to creditors for satisfaction of their liens were typically received within one to forty-five days after the sale of a vehicle, thus establishing the objective standard for business terms in the relevant industry, which in this case was the recreational vehicle industry. In determining the industry standard, the court noted that a review of a broad range of practices employed by debtors and creditors in the relevant industry was necessary, including practices that are ordinary for those under financial distress and not simply the average practices in the industry. Consequently, only those transactions “so unusual or uncommon” as to render them aberrations in the relevant industry would fall outside of the ordinary business terms prong required under 11 U.S.C. 547(c)(2)(C).
COMMENT: The Weilert decision is welcomed news for creditors who are being pursued on preference claims. This decision could assist creditor-defendants to more easily satisfy the expensive and often difficult task of proving industry-wide standards under the ordinary course of business defense. After making an initial showing, the creditor-defendant may be able to be persuaded the court to require that the debtor or trustee demonstrate why the payments received by the creditor were so unusual or uncommon in the industry. In any case, Weilert will give creditors a better chance to prevail at trial and certainly assist in settling preference claims on more reasonable and favorable terms.