In issuing its decision in Jubber v. SMC Electrical Products, Inc. (In re C.W. Mining Company), 2015 WL 4717709 (10th Cir. 2015), the Tenth Circuit joined the Sixth, Seventh and Ninth Circuits in holding that a first-time transaction between the debtor and a creditor may qualify for the ordinary course defense of § 547(c).1 In C.W. Mining the debtor purchased equipment from SMC with the intent of changing its mining operation from continuous mining to longwall mining. The debtor and SMC had never conducted business with each other before. The debtor paid SMC $200,000 on for the equipment within ninety days before filing bankruptcy. The bankruptcy trustee asserted the payment was a preference, but SMC contended the payment was made in the ordinary course. While noting that it construes preference defenses narrowly, the court reiterated that the ordinary course defense is “intended to leave undisturbed normal financial relations,” and a payment will be within the defense if it is in the ordinary course of both the debtor and the transferee. The court noted that several bankruptcy courts have held that first-time transactions cannot qualify for the defense, interpreting the statute as requiring the transaction to be in the ordinary course of business between the debtor and the transferee. The Tenth Circuit declined to follow these decisions and instead agreed with its sister circuits to decide the issue that a first-time transaction can qualify for the defense.
In reaching its conclusion, the Tenth Circuit looked to the language of the statute itself, and noted that it stated the defense refers to ordinary course of business or financial affairs of the debtor and the transferee, not to the business or financial affairs between the debtor and the transferee. The Tenth Circuit agreed with the Seventh Circuit’s analysis in Kleven that “the court can imagine little (short of the certain knowledge that its debt will not be paid) that would discourage a potential creditor from extending credit to a new customer in questionable financial circumstances more than the knowledge that it would not even be able to raise the ordinary course of business defense, if it is subsequently sued to recover an alleged preference.” Kleven, 334 F.3d at 643).
The court stated that it had previously defined “ordinary business terms” to mean “those used in ‘normal financing relations’: the kinds of terms that creditors and debtors use in ordinary circumstances, when debtors are healthy.” In re Meredith Hoffman Partners, 12 F. 3d. at 1553. As a result, the court said that determination of what is ordinary contemplate an examination of what is ordinary in the relevant industry, not what is ordinary in each party’s respective practices. Agreeing with the Ninth Circuit in Ahaza, the Tenth Circuit concluded that a “first-time debt must be ordinary in relation to this debtor’s and this creditor’s past practices when dealing with other, similarly situated parties.” In re Ahaza Sys., Inc., 482 F.3d at 1126.
The Tenth Circuit’s decision reached a balance between the justification for allowing an ordinary course defense for a first-time transaction and the general policy of the preference statute to discourage unusual action by either the debtor or its creditors during the debtor’s slide into bankruptcy.