Opinion ID: 559972
Heading Depth: 1
Heading Rank: 1

Heading: THE DISTINCTION BETWEEN 547(b) AND 547(c)

Text: 9 We previously held in another context that a transfer occurs on the date a check is delivered. Bernstein v. RJL Leasing (In re White River Corp.), 799 F.2d 631, 633 (10th Cir.1986). In re White River applies to section 547(c)(2), 1 the ordinary course of business exception to the preference provision. However, because the purpose and function of section 547(b) differ from those of section 547(c), In re White River and the legislative history upon which it relies 2 do not govern here. See, e.g., In re New York City Shoes, Inc., 880 F.2d 679, 681 n. 2 (3d Cir.1989) (because purposes of sections 547(b) and 547(c) are completely different, definition of transfer need not be same for both sections); Newton Exploration Co. v. Fredman (In re Nucorp Energy, Inc.), 92 B.R. 416, 417 (9th Cir.BAP 1988); Gold Coast Seed Co. v. Spokane Seed Co. (In re Gold Coast Seed Co.), 30 B.R. 551, 553 (9th Cir.BAP 1983); Bonapfel v. LaSalle-Deitch Co. (In re All American of Ashburn, Inc.), 95 B.R. 251, 252-53 (Bankr.N.D.Ga.1989); AMWC, Inc. v. General Elec. (In re AMWC, Inc.), 94 B.R. 428, 432 (Bankr.N.D.Tex.1988); Laird v. Bartolameolli (In re Newman Cos.), 83 B.R. 571, 572 (Bankr.E.D.Wis.1988); Chaitman v. Paisano Automotive Liquids, Inc. (In re Almarc Mfg., Inc.), 62 B.R. 684, 687 (Bankr.N.D.Ill.1986); Lancaster v. Morristown Block & Concrete Products (In re Compton), 55 B.R. 180, 182-83 (Bankr.E.D.Tenn.1985). See also 4 Collier on Bankruptcy p 547.16 at 547-71 n. 27 (15th ed. 1990) (check not necessarily transferred at same time under subsections (b) and (c)(1) of section 547). 10 The most important purpose of section 547(b) is to facilitate equal distribution of the debtor's assets among the creditors. H.R.Rep. No. 595, 95th Cong., 1st Sess. 177-78, reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6138. To accomplish this purpose, Congress has created an arbitrary time period consisting of the 90 days immediately preceding the filing of the bankruptcy petition. 11 U.S.C. Sec. 547(b)(4)(A). Creditors who receive payments on pre-existing debts before this time period begins may keep those payments. However, creditors who receive payments on pre-existing debts within the 90-day period must disgorge those payments so that they may be shared equally with other creditors. In a preference action, the ... contest ... is one between [the transferee] on the one hand, and all of the debtors' unsecured creditors on the other. Yellowhouse Machinery Co. v. Mack (In re Hughes), 704 F.2d 820, 822 (5th Cir.1983). 11 The general rules governing preferences are objective and technical. The intent or state of mind of the parties to a transfer is not material to the general question of whether that transfer is a preference. 4 Collier on Bankruptcy, p 547.01 at 547-12. The district court incorrectly reasoned that a date of delivery rule would effectuate the commercial expectations of the parties to the transfer. However, effectuating the commercial expectations of the parties is simply not a stated goal of the general preference provision, section 547(b). Nor will protecting the expectations of the parties advance the goals of section 547(b) in any way. In re Nucorp, 92 B.R. at 418. 12 Rather, section 547(b) is intended to promote the common good of all of an estate's creditors.... In re Hughes, 704 F.2d at 822 (emphasis in original). The creditors who receive preferential payments are those who extended credit without structuring the transactions to protect themselves against possible bankruptcy. Payment on these debts usually is not made with an eye toward a possible bankruptcy filing 90 days in the future. Thus, the intent of the parties as to when the transfer is deemed completed is irrelevant. 13 By contrast, the section 547(c) defenses carve out a group of exceptions to 547(b). The purpose of the section 547(c) defenses is to encourage trade creditors and other suppliers of goods and services to continue dealing with troubled businesses without fear of the trustee's avoidance powers. In re White River, 799 F.2d at 634. In order to do this, it is important to protect the ordinary commercial expectations of the parties. 14 For example, section 547(c)(1) prohibits the trustee from avoiding a transfer intended by the debtor and the creditor ... to be a contemporaneous exchange for new value given to the debtor, and which is, in fact, substantially contemporaneous. The purchase of goods or services for cash falls within this exception. In this context, it is important to consider that most people view the giving of a check as a cash transaction. A date of delivery rule for a check given as a contemporaneous exchange for new value conforms to popular expectations and to the legislative history of this section quoted above. The legislative history makes clear, however, that this is an exception to the general rule: 15 The first [547(c) ] exception is for a transfer that was intended by all parties to be a contemporaneous exchange for new value, and was in fact substantially contemporaneous. Normally, a check is a credit transaction. However, for the purposes of this paragraph, a transfer involving a check is considered to be intended to be contemporaneous, and if the check is presented for payment within the normal course of affairs ... that will amount to a transfer that is in fact substantially contemporaneous. 16 H.R.Rep. No. 595, 95th Cong. 1st Sess. 373, reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6329 (emphasis added). 17 Similarly, section 547(c)(2) states that a trustee may not avoid a payment of a debt incurred by the debtor in the ordinary course of business ... and made according to ordinary business terms. Under this section, a power company, for example, may continue to supply a financially troubled company on condition that the company continue to make regular and timely payments. In order to fit within this exception, a creditor must insist on timeliness. The intent of a creditor as to when a transfer takes place should therefore be considered for purposes of this defense. 18 It does not follow, however, that, because a date of delivery rule better serves the purposes of the section 547(c) defenses, such a rule should apply in all preference actions. Because, as we have discussed, a date of honor rule is consistent with the purposes of section 547(b), and because a date of honor rule is more consistent with the Uniform Commercial Code and with judicial economy, we believe a date of honor rule should apply for purposes of section 547(b). 19