Union Bank v. Wolas

1991-12-11

Headline: Ruling allows payments on long-term loans to qualify as ordinary business, limiting trustees’ ability to claw back recent payments from banks and long-term lenders.

Holding: Payments on long-term debt may qualify for the ordinary course of business exception to the trustee’s power to avoid preferential transfers, and the Ninth Circuit’s contrary rule is reversed.

Real World Impact:

Makes it harder for trustees to recover recent payments to long-term lenders.
Protects banks and other long-term creditors when payments follow ordinary business practices.
Leaves final factual decisions about these payments to lower courts on remand.

Topics: bankruptcy law, creditor payments, long-term loans, trustee recoveries, bank lending

Summary

Background

A bankrupt company called ZZZZ Best borrowed $7 million from a bank in December 1986. The company filed for Chapter 7 in July 1987. In the 90 days before the filing it made two interest payments of about $100,000 and paid a $2,500 loan commitment fee. The bankruptcy trustee sued the bank to recover those payments as improper pre-bankruptcy transfers. The Bankruptcy Court and the District Court had sided with the bank, but a Court of Appeals later disagreed, prompting review by the Supreme Court.

Reasoning

The central question was whether payments on long-term loans can be protected as made in the “ordinary course of business.” The Court looked at the bankruptcy statute and found no language distinguishing short-term and long-term debt. The opinion notes Congress had removed an earlier 45-day limit in 1984 and concludes the plain text allows long-term payments to qualify. The Supreme Court reversed the Ninth Circuit’s contrary rule. The Court did not decide whether the particular payments in this case actually met the ordinary-course requirements.

Real world impact

The decision means banks and other long-term creditors can potentially keep recent loan payments if those payments fit normal business patterns. Trustees will have a narrower path to recover such payments, but each payment’s status still depends on factual findings by lower courts. Because the Court left the factual questions open, this ruling changes the legal rule but not the final outcome in this specific case.

Dissents or concurrances

Justice Scalia wrote a short concurrence agreeing with the opinion and stressing that the statute’s plain text made the result straightforward, lamenting unnecessary litigation over clear language.