Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-01711/USCOURTS-ca10-88-01711-0/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 

---

PUBLISH 

FI LED 

United Statei; Court of Appeals 

Tenth Circuit 

UNITED STATES COURT OF APPEALS .HIL 2 5 1989 

ROBERT L. HOECKER 

Clerk 

TENTH CIRCUIT 

FIDELITY SAVINGS & INVESTMENT CO., 

Plaintiff-Appellant, 

v. 

NEW HOPE BAPTIST; ROBERT STONE; 

JEFFREY ALAN DIETERT, 

Defendants-Appellees. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

No. 88-1711 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE WESTERN DISTRICT OF OKLAHOMA 

(D.C. No. 86-0631-B and CIV-87-2515-A) 

Thomas P. Goreson (Stephen J. Moriarty with him on the brief) of 

Edwards, Roberts & Propester, Oklahoma City, Oklahoma, for 

Plaintiff-Appellant. 

Thomas J. Kenan, Kenan & Peterson, Oklahoma City, Oklahoma, 

(E. Elaine Schuster, Oklahoma City, Oklahoma, and Robert Inglish 

of Inglish and Inglish, Okmulgee, Oklahoma, with him on the brief) 

for Defendants-Appellees. 

Before LOGAN, BRORBY, and EBEL, Circuit Judges. 

PER CURIAM. 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 1 
This is an appeal from an order of the district court sitting 

as an appellate court in bankruptcy. The issue in this appeal is 

whether § 547(c)(2) of the Bankruptcy Code, 11 U.S.C. § 547(c)(2) 

(Supp. IV 1986), applies to a transfer unrelated to the payment of 

trade credit. Both the district and the bankruptcy courts ruled 

that such a transfer was within the terms of§ 547(c)(2), thereby 

granting summary judgment for the defendants. We affirm. 

I. Facts 

The plaintiff, Fidelity Savings & Investment Co., is an 

Oklahoma corporation engaged in the business of making small, high 

interest loans to consumers as permitted by Okla. Stat. tit. 14A, 

§ 3-508B (1983) and as regulated by the Oklahoma Department of 

Consumer Credit. To fund this business, Fidelity issued certain 

savings certificates, which were debt obligations of the 

corporation bearing interest at a rate of twenty-four to thirty 

percent per annum, with maturity dates of six months to two years. 

These certificates were registered as securities with the Oklahoma 

Securities Commission but fell within the single state exemption 

under federal securities law. In 1984, a number of the 

certificates were sold to small investors, including the 

defendants New Hope Baptist, Robert Stone, and Jeffrey Dietert. 

In 1985, Fidelity began experiencing financial difficulties, 

and the Oklahoma Securities Commission undertook an investigation 

of the corporation. The Commission found that Fidelity had 

violated the Oklahoma Securities Act, Okla. Stat. tit. 71 §§ 1-502 

2 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 2 
(1983), in that the corporation did·not comply with certain terms 

contained in its prospectus for the sale of the certificates. In 

particular, the Commission noted that the corporation was 

undercapitalized, that it had compensated its registered sales 

agent more than provided for in the prospectus, and that the 

corporation was insolvent due to its problems in collecting 

delinquent loans and its high overhead. In addition, it 

determined that the corporation had not followed generally 

accepted accounting practices in calculating its represented net 

worth. Based on these findings, on April 2, 1985, the Commission 

issued an 

securities. 

order revoking Fidelity's registration of its 

On June 11, 1985, Fidelity filed a voluntary petition 

for bankruptcy. 

Before Fidelity's filing, but within the ninety-day 

preference period prior to bankruptcy under 11 u.s.c. 

§ 547(b)(4)(A), the defendants' savings certificates reached 

maturity. As provided by the terms of the certificates, each 

defendant elected to receive a distribution from Fidelity 

representing the principal and accrued interest on the savings 

certificates, rather than renewing the certificates for an 

additional term. While the defendants were paid pursuant to the 

terms of their certificates, Fidelity did not pay certain other 

investors who had elected to receive a similar distribution. The 

certificates provided, however, that Fidelity could limit 

redemptions in any month to fifty percent of its net cash receipts 

during the previous month. 

3 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 3 
On September 8, 1986, Fidelity1 instituted the instant 

action, seeking to recover the distributions to the defendants as 

preferences under § 547(b). Both Fidelity and the defendants 

filed cross motions for summary judgment, and the parties 

stipulated that the case was to be decided on the basis of these 

motions. The defendants admitted that the transfers met the 

elements of a preference under § 547(b) of the Bankruptcy Code but 

argued that the transfers were protected by the terms of 

§ 547(c)(2) in that they were transfers made in the ordinary 

course of business. Conversely, Fidelity asserted that the 

ordinary course of business exception was limited to payments for 

trade credit, and that the defendants could not establish that the 

transfers met the elements of § 547(c)(2) in light of the 

violations found by the Oklahoma Securities Commission. 

On November 9, 1987, the bankruptcy court granted the 

defendants' motions for summary judgment. It ruled that the 

transfers fell within the§ 547(c)(2) exception because they were 

made in payment of debts incurred by Fidelity in the ordinary 

course of its and the defendants' business or financial affairs, 

the transfers themselves were made in the ordinary course of 

Fidelity's business and in the ordinary course of the defendants' 

financial affairs, and they were made according to ordinary 

business terms. The court rejected Fidelity's arguments that the 

§ 547(c)(2) exception was limited solely to protecting transfers 

1 On July 15, 1985, the bankruptcy court approved a plan for 

the reorganization of Fidelity, whereby control of the corporation 

was vested in the holders of the savings certificates. 

4 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 4 
made to trade creditors, and that revocation of Fidelity's 

securities registration indicated that the transfers were not made 

in the ordinary course of Fidelity's business. The district court 

thereafter affirmed on appeal. Fidelity now contends that these 

rulings were in error. 

II. Application of Section 547(c)(2) to Transfers 

Not Made to Trade Creditors 

Fidelity's primary argument in this appeal is that 

§ 547(c)(2) is limited to protecting only short-term trade credit 

payments from avoidance as a preference and that payments on other 

obligations, such as those at issue in this case, were never 

intended to fall within the scope of the ordinary course of 

business exception. When reviewing an order of the district court 

sitting as an appellate court in bankruptcy, we apply the same 

standard of review as the district court. The bankruptcy court's 

findings of fact must be upheld unless clearly erroneous; its 

conclusions of law are subject to de novo review. Bartmann v. 

Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir. 1988); In re 

Mullet, 817 F.2d 677, 678-79 (10th Cir. 1987). Since the 

bankruptcy court's interpretation of§ 547(c)(2} is a matter of 

law, we review its conclusions de novo. 

Section 547(b) of the Bankruptcy Code provides that a trustee 

in bankruptcy may avoid a transfer made to or for the benefit of a 

creditor on account of an antecedent debt while the debtor was 

insolvent that enables the creditor to receive more than he would 

5 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 5 
receive if the transfer had not been made and the debtor's estate 

liquidated. 11 u.s.c. § 547(b)(l)-(7). Section 547(c) of the 

Code sets forth certain exceptions, however, to this power of the 

trustee. In particular, § 547(c)(2) provides, 

(c) 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 

financial affairs of 

transferee; and 

course of business or 

the debtor and the 

(C) made according to ordinary business terms[.] 

Id. § 547(c)(2). 

Fidelity's statutory argument is based on the fact that 

§ 547(c)(2), prior to its amendment in 1984, applied only to 

transfers made in payment of a debt incurred within forty-five 

days before the transfer. The forty-five day limitation had 

generally been interpreted as indicating Congress' intent to limit 

application of the ordinary course of business exception to 

payments for trade credit. See, e.g., Aguillard v. Bank of 

Lafayette (In re Bourgeois), 58 Bankr. 657, 659 (Bankr. W.D. La. 

1986). With the amendment of§ 547(c}(2) in 1985, however, the 

forty-five day limitation was removed. 2 Fidelity argues that this 

2 This amendment was enacted in the Bankruptcy Amendments and 

Federal Judgeship Act of 1984, Pub. L. No. 98-353, § 462(c), 98 

Stat. 333, 378, and applies to bankruptcy cases filed after 

October 8, 1984. See Reitmeyer v. Kalinsky, P.A. (In re Sounds 

Distrib.), 80 Bankr. 749, 751-52 (Bankr. W.D. Pa. 1987). 

6 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 6 
( 

amendment did nothing more than eliminate an arbitrary requirement 

that the trade credit payment be made within a certain period of 

time, and that it was not intended to broaden the ordinary course 

of business exception beyond its application to trade creditors. 

We do not read the ordinary course of business exception so 

narrowly. 

"In determining the scope of a statute, the court must begin 

with the statutory language itself." Wilson v. Stocker, 819 F.2d 

943, 948 (10th Cir. 1987). When the terms of the statute are 

clear, the statutory language is controlling absent exceptional 

circumstances. Id. As is apparent from the statutory language of 

§ 547(c)(2) quoted above, there is no express limitation that the 

transfer be in payment of trade credit. The words "trade credit" 

appear nowhere. The sole requirements of this exception are that 

the transfers in question be in payment of a debt incurred in the 

ordinary course of the debtor and the transferee, that the 

transfer itself be made in the ordinary course, and that it be 

made according to ordinary business terms. See WJM, Inc. v. 

Massachusetts Dep't of Public Welfare, 840 F.2d 996, 1010-11 (1st 

Cir. 1988). 

We are additionally persuaded by the legislative history 

relevant to the amendment of this section that§ 547(c)(2) was not 

intended to be restricted only to trade credit. While there was 

no explanatory statement in the Conference Report accompanying the 

bill enacting this amendment, the following statements of Senators 

DeConcini and Dole shed light on Congressional intent as to the 

scope of the ordinary course of business exception: 

7 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 7 
Mr. DeCONCINI: I know that the Senator from 

Kansas, along with the Senator from South Carolina, was 

the principal sponsor of this provision deleting 

subsection (c)(2) of section 547 of the code, and I 

would like to. clarify two points regarding the effect of 

this change. 

Am I correct that the elimination of the 45-day 

restriction in subsection (c)(2) of section 547 will 

relieve buyers of commercial paper with maturities in 

excess of 45 days of the concern that repayments of such 

paper at maturity might be considered as preferential 

transfers? 

Mr. DOLE: That is correct, assuming that the 

"ordinary course of business or financial affairs" and 

"ordinary business terms" requirements are met. 

Mr. DeCONCINI: Would there be any doubt that 

companies that have a need for short-term funds, and 

investors who wish to purchase short-term obligations, 

would both be acting in their respective "ordinary 

course of business or financial affairs" if they were to 

deal directly or indirectly with each other in the 

commercial paper market? And would not the payment of a 

commercial paper note at maturity be in accordance with 

"ordinary business terms"? 

Mr. DOLE: Those understandings are correct. The 

commercial paper market is an established market, and 

participants in it would presumably be acting in the 

ordinary course of their business or financial affairs 

and on the basis of ordinary business terms. 

130 Cong. Rec. 20,091 (1984). While the payments at issue in this 

case would not qualify as payments on commercial paper because of 

the terms of the certificates and restrictions on negotiability, 

they are certainly within the spirit of such instruments. 

Moreover, these statements, along with evidence that Congress also 

considered the effect of eliminating the forty-five day 

requirement on payments to consumer lenders, see L. Broome, 

Payments on Long-Term Debt as Voidable Preferences: The Impact of 

the 1984 Bankruptcy Amendments, 1987 Duke L.J. 78, 104-105, 

8 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 8 
unequivocally indicate that the§ 547(c)(2) exception has broader 

application than to just trade credit payments. 

We note that several courts have adopted the narrower 

interpretation of§ 547(c)(2) urged by Fidelity in this case. The 

leading case in support of this position is Aguillard v. Bank of 

Lafayette (In re Bourgeois), 58 Bankr. 657 (Bankr. W.D. La. 1986). 

In In re Bourgeois, the trustee sought to avoid certain payments 

made by the debtor to the defendant bank on certain long-term 

loans. After a careful analysis of the history of§ 547(c)(2), 

the court concluded that the ordinary course of business exception 

was always intended to exempt payments by the debtor for normal 

trade credit transactions, such as payments for employee wages, 

supplies, utilities, and rent. Id. at 659. It reasoned that the 

amendment eliminating the forty-five-day limit "was intended only 

to eliminate an artificial time limit, and no more[,]" so that the 

provisions of the Code would comport with normal trade credit 

cycles which often exceeded the forty-five day period. Id. It 

therefore held that the debtor's payments to the bank on its 

long-term loans were not covered under § 547(c)(2), because 

long-term loans "are not [within] the ordinary course of business 

of the debtor within the meaning of Section 547(c)(2).'' See also 

Ragsdale v .. Citizens & So. Nat'l Bank (In re Control Elec., Inc.), 

91 Bankr. 1010, 1016-17 (Bankr. N.D. Ga. 1988); Gosch v. Burns (In 

re Finn), 86 Bankr. 902, 906 (Bankr. E.D. Mich. 1988). But see 

Rinn v. MTA Employees Credit Union, Inc. (In re Butler), 85 Bankr. 

34, 36 (Bankr. D. Md. 1988)(holding that long-term loans are 

9 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 9 
"unquestionably" within a consumer debtor's ordinary financial 

affairs) • 

. As our discussion above indicates, we believe that In re 

Bourgeois and its progeny ignore the broad language of§ 547(c)(2) 

and the intent that this section apply to situations outside of 

the trade credit arena. We are not alone in this view. See, 

~, CHG Int'l, Inc. v. Barclays Bank PLC (In re CHG Int'l, Inc., 

87 Bankr. 647, 648 (Bankr. W.D. Wash. 1988)(that § 547(c)(2) 

applies to payments on long-term loans "is a logical 

interpretation of the plain language of the section •.. "); In re 

Magic Circle Energy Corp., 64 Bankr. 269, 273 (Bankr. W.D. Okla. 

1986)(mere fact that parties' restructured debt to be long-term 

does not preclude § 547(c)(2) protection); 4 Collier on 

Bankruptcy, § 547.10 n.4 (L. King 15th ed. 1989)(with elimination 

of forty-five day limit, payments on long-term obligations 

arguably can be excepted from preference treatment); D. Desimone, 

Section 547(c)(2) of the Bankruptcy Code: The Ordinary Course of 

Business Exception Without the 45 Day Rule, 20 Akron L. Rev. 95, 

129 (1986). 

We are mindful of the argument, however, that excepting 

payments on long-term obligations often will do little to augment 

the debtor's prebankruptcy resources. See, e.g., Lingley v. 

Stuart Shaines, Inc. (In re Acme-Dunham, Inc.), 50 Bankr. 734, 

741-42 (D. Me. 1985). Here, the obligations involved were for 

terms of one year or less. Therefore, we need not decide, and we 

do not decide, whether we agree with the cases cited above which 

infer that repayments of longer term loans that come due before 

10 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 10 
bankruptcy are excepted from treatment as a preference under 

§ 547(c)(2). 

In this case, we think the analogy to commercial paper 

discussed in the DeConcini-Dole exchange is close. The· payments 

on the savings certificates benefited Fidelity by enabling it to 

continue to raise funds through the sale of additional 

certificates and thereby fund further loans. Moreover, as these 

payments were a necessary part of Fidelity's daily business, they 

do not conflict with the original policy behind the ordinary 

course of business exception to ''leave undist~rbed normal 

financial relations" of the debtor. s. Rep. No. 989, 95th Cong., 

2d Sess. 88, reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 

5874. In summary, we see no barrier to the inclusion of payments 

on the certificates within the ordinary course of business 

exception, so long as the requirements of§ 547(c)(2) are met. 

III. Payments on the Savings Certificates as Within the 

Express Requirements of§ 547(c)(2) 

Fidelity asserts that, even if we construe the§ 547(c)(2) 

exception as generally applicable to the payments made to the 

defendants in this case, these payments did not meet the express 

requirements of§ 547(c)(2). To except a transfer from being 

avoided as a preference under the ordinary course of business 

exception, the creditor must prove three elements: (1) that the 

transfer was in payment of a debt incurred by the debtor in the 

11 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 11 
ordinary course of business or financial affairs of the debtor and 

the transferee, (2) that the transfer was made in the ordinary 

course of business or financial affairs ·of the debtor and the 

transferee, and (3) that 

ordinary business terms. 

the 

11 

transfer was made according to 

u.s.c. § 547(c)(2). Since the 

bankruptcy court's determination of these issues involves findings 

of fact, we will not disturb these findings unless they are 

clearly erroneous. Bartmann v. Maverick Tube Corp., 853 F.2d at 

1543. 

Based on the affidavits of the defendants, the affidavit of 

Mr. Greg Harrison, Fidelity's sales representative, and other 

materials supporting the motions for summary judgment, the 

bankruptcy court determined that each of the above requirements 

was met. First, it found that the debts represented by the 

savings certificates were incurred by Fidelity in the ordinary 

course of its business or financial affairs. We agree. Fidelity 

was in the business of making small, high interest consumer loans, 

and it was only able to do this by regularly borrowing money from 

small investors and then lending it out at higher interest rates. 

The incurrence of such debt was a regular part of its daily 

business, much like a bank or savings and loan institution. See 

In re Control Elec., Inc., 91 Bankr. at 1011 (incurrence of 

long-term loans could be considered within the ordinary course of 

business for a bank); In re Bourgeois, 58 Bankr. at 660 (same). 

While the use of long-term debt may not be in the ordinary course 

of business for many industries or individuals, in this case, we 

believe it was. See also Courtney v. Octopi, Inc. (In re Colonial 

12 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 12 
Discount Corp.), 807 F.2d 594, 600 (7th Cir. 1986)(undertaking 

long-term debt an ordinary part of real estate business). 

We also concur with the bankruptcy court's conclusions with 

regard to the remaining requirements under § 547(c)(2). The 

affidavits of the defendants each indicate that their investment 

in the savings certificates was a regular part of the management 

of their financial affairs. Mr. Harrison's affidavit likewise 

reveals that the redemption of the defendants' certificates was 

conducted in a regular manner, pursuant to the terms of the 

certificates, and without any indication thaf the corporation was 

having financial difficulties. Finally, payments on the 

certificates were according to ordinary business terms, exactly as 

provided for, and without acceleration or reduction in the payoff 

amount. 

Fidelity does not directly controvert these findings, but 

instead contends they were in error in light of the Oklahoma 

Securities Commission's suspension of Fidelity's securities 

registration for violations of the Oklahoma Securities Act. 

Fidelity relies on several cases which have denied § 547(c)(2) 

protection to transfers made by the debtor arising out of 

transactions which, from their inception, were designed to work a 

fraud. See, e.g., Graulty v. Brooks (In re Bishop, Baldwin, 

Rewald, Dillingham & Wong, Inc.), 819 F.2d 214, 216-17 (9th Cir. 

1987)(debtor operating a "Ponzi'' scheme); Henderson v. Allred (In 

re Western World Funding, Inc.), 54 Bankr. 470, 481 (Bankr. D. 

Nev. 1985)(same); Edmonson v~ Bradford-White Corp. (In re Tinnell 

Traffic Servs., Inc.), 41 Bankr. 1018, 1023 (Bankr. M.D. Tenn. 

13 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 13 
1984)(debtor made restitution of payments on fraudulent invoices). 

We see no indication of such a scheme in this case. 

Fidelity's funding of its loan operations through the sale of 

savings certificates was a legitimate form of capitalization, and 

there is no evidence of a "Ponzi scheme" or other inherently 

fraudulent operation. While the subsequent conduct of its 

business may have been deficient, these deficiencies were not so 

pervasive as to render the whole of Fidelity's operations outside 

of the ordinary course of business. See Merrill v. Abbott (In re 

Independent Clearing House Co.), 77 Bankr. 843, 875 (D. Utah 

1987). we therefore concur with the bankruptcy court's findings 

that these transfers met the express requirements of the ordinary 

course of business exception. 

The judgment of the United States District Court for the 

Western District of Oklahoma is AFFIRMED. 

14 

Appellate Case: 88-1711 Document: 01019743032 Date Filed: 07/25/1989 Page: 14