Opinion ID: 670790
Heading Depth: 1
Heading Rank: 3

Heading: the ordinary course exception

Text: 14 The district court held that the transfer on account of Vehicle 1 to Pacific fell within the ordinary course exception, Sec. 547(c)(2), 3 and was therefore not voidable as a preference. 15 To qualify for the ordinary course exception, a creditor must prove by a preponderance of the evidence that 1) the debt and its payment are ordinary in relation to past practices between the debtor and the creditor; and 2) the payment was ordinary in relation to prevailing business standards. In re Food Catering & Housing, 971 F.2d at 398. The trustee concedes that the debt to Pacific Suzuki was incurred in the ordinary course of business, but argues that the payment on account of Vehicle 1 was neither ordinary in relation to past practices nor in relation to prevailing business standards.
16 Among the factors courts consider in determining whether transfers are ordinary in relation to past practices are: 1) the length of time the parties were engaged in the transactions at issue; 2) whether the amount or form of tender differed from past practices; 3) whether the debtor or creditor engaged in any unusual collection or payment activity; and, 4) whether the creditor took advantage of the debtor's deteriorating financial condition. See In re Richardson, 94 B.R. 56, 60 (Bankr.E.D.Pa.1988). 17 It is undisputed that Pacific Suzuki and the debtor engaged in similar transactions for approximately six years. Further, the trustee does not dispute that the amount paid for the vehicles was not excessive and that the vehicles were often obtained with automobile purchase drafts. The trustee argues, however, that as a matter of law, the payment on account of Vehicle 1 was not ordinary because it was late--i.e. Pacific Suzuki received payment after the one day term called for in the purchase agreements and after the time period stated in the purchase drafts. 18 We have held that [d]elay is particularly relevant in taking a payment outside the ordinary course of business exception. In re Food Catering, 971 F.2d at 398. We have not, however, adopted a per se rule that late payments can never be ordinary. Other circuits have held that late payments can fall within the ordinary course of business exception if the prior course of conduct between the parties demonstrates that those types of payments were ordinarily made late. See Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir.1991); In re Yurika Foods Corp., 888 F.2d 42, 44 (6th Cir.1989). We now join those circuits. 19 Pacific Suzuki introduced uncontroverted evidence that from January 1988 until early April 1988 (prior to the 90 day preference period), nine transactions between Pacific Suzuki and the debtor involved 72 hour time drafts. None of the drafts were honored within 72 hours. On average, it took three weeks to honor the drafts. Thus, there was nothing unusual about Pacific regularly receiving late payments. There is also no evidence that Pacific took advantage of the debtor's deteriorating financial condition. 20 The purchase draft for Vehicle 1 was honored within three weeks. The transfer was ordinary in relation to past practices between the debtor and Pacific.
21 The trustee also argues that the payments to Pacific Suzuki were not ordinary in relation to prevailing business standards. The district court found that Pacific Suzuki introduced largely uncontested evidence from experts in the automobile finance industry that banks regularly take from two weeks to one month to honor a purchase draft, regardless of whether it is a sight draft, a 72 hour draft or any other kind of draft. The trustee has pointed to no evidence contradicting the district court's finding. Thus, the time it took for the 72 hour draft to be honored by Manilabank was not unusual in relation to prevailing business standards.