IN RE SPW CORP., (Bankr.N.D.Tex. 1989)

a. 11/27/84 was the invoice and shipping date for $16,650.28 worth of parts and materials supplied to SPW Co. The shipping date is the date the obligation to pay is incurred.

b. The terms for payment as printed on the invoice are "10th Prox, No cash discount allowed" and "This invoice is due and payable in Dallas, Dallas County, Texas. Maximum legal interest rate will be charged if not paid 30 days after invoice date."

c. The 30th day following invoices was December 27, 1984. No interest was charged on this invoice.

d. The items described in the invoice were delivered and accepted.

A majority of the decisions have confined their inquiry to whether the manner and timing of the late payments at issue were consistent with the manner and timing of previous payments made by the debtor in its course of dealings with the creditor.

A minority of decisions recognize a significant distinction between the requirements of subparagraphs (B) and (C) of Section 547(c)(2) and hold that the late payments at issue must meetbothrequirements in order for the "ordinary course of business" exception to apply.

. . . this exception is directed primarily to ordinary trade credit transactions. These typically involve some extension of credit but are meant to be paid in full within a single billing cycle. [citations omitted]. Because the credit extended is meant to be extremely short-term, Congress likened payment of trade credit to payment of current expenses. . . . Since the foundation of this provision is the similarity of trade credit and current expenses, the scope of its protection is necessarily limited to trade credit which is `kept current' or other transactions which are paid in full within the initial billing cycle.

The main policy behind the ordinary course exception is to prevent preference laws from disturbing normal financial relations. This makes sense when one considers that the purpose of preference law is to discourage unusual action on the eve of bankruptcy that interferes with the bankruptcy distribution. Ordinary course transactions do not do this and, in fact, uphold the preference/bankruptcy policy of avoiding bankruptcy in the first place. If preference law applied to pre-bankruptcy ordinary course of business transactions, few creditors would extend credit to troubled debtors; and without credit, few troubled debtors could continue in business. Section 547(c)(2) encourages creditors to extend credit to financially troubled debtors. It strikes a balanceWest Page 680between the need to discourage unusual action and the troubled debtor's need to receive credit in order to continue in business and, hopefully, turn his troubles around.

It seems clear that late payments should not be considered `ordinary course' when the debtor normally pays on time. But what if the debtor has established a practice of paying several days (or weeks) after the due date? The court inEwaldhinted, in dicta, that it might be possible to prove that the debtor had established a practice of making late payments. But it is hard to argue that such a practice is according to ordinary business terms. The 547(c)(2)(C) requirement was, no doubt, put in to prevent protection when the terms of payment, though normal for the parties are not accepted practices for most businesses. Regularly accepting late payments is not normal for most business and not the kind of conduct Congress intended 547(c)(2) to protect. However, requiring payment exactly on the due date is too much; payments that are made within one or two days of the due date should be protected whether or not the debtor had an established practice of making payment one or two days late. This is not the kind of `unusual conduct' that Congress intended to be excluded from 547(c)(2) protection.

The first step is to decide whether each ordinary course requirement provides a subjective standard, an objective standard, or both an objective and a subjective standard, against which to measure the transaction in question. There is little double that Congress intended for potential 547(c)(2) transfers to be judged both objectively and subjectively. It would be difficult to `preserve normal financial relations' without relying primarily on the parties' past conduct. Of course, some transactions clearly were not intended to receive 547(c)(2) protection, no matter how ordinary they are to the parties. Thus, an objective standard is also needed. The question is: What standard does each element require?

The court inIn re Production Steelfelt that 547(c)(2)(B) provides a subjective standard, while 547(c)(2)(C) provides an objective standard. Section 547(c)(2)(B) states that the payment must be made in the `ordinary course of businessof thedebtor and the transferee [i.e., creditor].Given its focus on theparties'course of business, it is proper to consider it as setting out a subjective test. In contrast, the failure of section 547(c)(2)(C) to mention the parties when it speaks of ordinary business terms indicates that it is an objective standard. It could be argued that section 547(c)(2)(C) contains both an objective and a subjective element. However, the parties' `ordinary business terms' are easily included within their `ordinary course of business or financial affairs.' Any further distinction is unnecessary; having oneWest Page 681element focus subjectively on the transfer, while the other looks at it objectively is less confusing and leads to a clearer analysis.

The harder questions arise when the parties' previous dealings are not so exact. How much latitude should the court allow? In general, if the parties' past conduct varied, but had ascertainable, reasonable boundaries, then the court should consider any transaction that falls within those boundaries as ordinary. For example, assume that the debtor is an electrical contractor and the creditor is an electrical supply company. The debtor purchases supplies on credit as needed for each project he is working on. He pays for all supplies purchased for a project within two weeks of completion. Since some projects take only a few days and others may take months, the time between purchase and payment necessarily varies. Yet, any payment within two weeks of completing the project that the payment relates to should be considered ordinary.

Invoices rendered by D-FW Supply Co., Inc. after the 20th or 25th day of any given month typically will not be included in the customer's draw request for that month, and accordingly will be aged an additional 25 to 30 days before payment.

During my professional experience it is the known industry standard that sellers of plumbing parts and supplies to complete the heating, ventilating and air conditioning requirements of a commercial project expect payment within 35 to 75 days of the date of delivery to the purchasing subcontractors for the following reasons:

Once the plumbing parts and supplies are delivered to the job site it is billed to the general contractor as stored material or work completed.

It is standard for a subcontractor to be paid within 30 to 45 days of the billing to the general contractor. If an item is received for storage near the end of the billing cycle it may receive its funds as early as 30 — 45 days after shipment. If delivered at the beginning of the billing cycle the time frame for payment will be from 60 — 75 days after delivery.

. . . But, the combination of several minor problems is usually enough to deny protection. In the final analysis, it is the quality, not the quantity, of the negative factors that should determine whether aWest Page 683transaction receives section 547(c)(2) protection.