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In re Energy Cooperative Inc.

decided: October 29, 1987.

IN RE ENERGY COOPERATIVE, INC., DEBTOR. ENERGY COOPERATIVE, INC., JAY A. STEINBERG, TRUSTEE, PLAINTIFF-APPELLANT,
v.
SOCAP INTERNATIONAL, LTD., DEFENDANT-APPELLEE



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 85-C-3577, Charles P. Kocoras, Judge.

Coffey, Ripple, and Manion, Circuit Judges.

MANION, Circuit Judge.

The district court granted summary judgment for defendant, SOCAP International, Ltd., in an adversary proceeding in which Jay A. Steinberg, bankruptcy trustee for the estate of the debtor, Energy Cooperative, Inc. (ECI), sought to recover a $1.6 million payment from ECI to SOCAP as an avoidable preference under 11 U.S.C. § 547(b). The trustee appeals that ruling. Because we find that ECI's payment to SOCAP was for an antecedent debt, and because the payment does not fall into the exceptions to the avoidable preference provision that SOCAP urges on appeal, we reverse the district court's grant of summary judgment for SOCAP, and remand for further proceedings.

I.

The relevant facts are undisputed. ECI owned and operated a petroleum refinery and SOCAP sold crude oil. In January, 1981, ECI agreed to purchase 80,000 tons of oil from SOCAP during each quarter of 1981. The contract required ECI to pay SOCAP by wire transfer within thirty days of the bill of lading date. The contract also required ECI to open an irrevocable letter of credit in SOCAP's favor at least ten days before the first day the oil was expected to be loaded; SOCAP would draw upon the letter of credit if ECI did not pay for the oil within thirty days.

On February 11, 1981, ECI nominated crude oil for SOCAP to deliver during March, 1981. On February 26, SOCAP informed ECI that based on the price formula the parties had agreed to, the oil would cost $39.75 per barrel. On March 3, SOCAP notified ECI that it would load the oil on March 16 for delivery to ECI. Under the contract, ECI was to open a letter of credit by March 6.

ECI never opened the letter of credit. Instead, on March 11, 1981, ECI repudiated the contract. ECI ostensibly repudiated the contract because of various market factors and because of its inability to obtain a letter of credit. Both parties agree, however, that ECI had a line of credit available from Continental Illinois Bank, and could have obtained the letter of credit; ECI just did not want to use its line of credit to secure payments to SOCAP.

Because ECI repudiated the contract, SOCAP never loaded any oil for or delivered any oil to ECI. On March 16, SOCAP notified ECI that it would hold ECI liable for any damages resulting from ECI's "breach of this agreement." In re Energy Cooperative, Inc., No. 85-C-1562, Mem. Op. at 2 (N.D.Ill. 1986) (hereinafter D.Ct.Op.). On March 20, ECI agreed to pay SOCAP approximately $1.6 million "'as compensation for ECI's breach.'" Id. ECI paid SOCAP the $1.6 million on April 16.

On May 15, 1981 (within 90 days from the date ECI paid the $1.6 million to SOCAP), ECI filed a voluntary petition for reorganization under Chapter 11 of the 1978 Bankruptcy Code. The trustee subsequently sought in the district court to recover as an avoidable preference the $1.6 million ECI paid to SOCAP.*fn1

The Bankruptcy Code's avoidable preference provision, 11 U.S.C. § 547(b), allows a bankruptcy trustee to recover certain transfers a debtor made before he filed a petition in bankruptcy. To avoid a transfer of property as a preference in this case, the trustee must show that the transfer (1) was "to or for the benefit of a creditor"; (2) was "for or on account of an antecedent debt"; (4) was made on or within 90 days before the debtor filed his bankruptcy petition; and (5) enabled the creditor to receive more than the creditor would have received if the debtor had not made the transfer. Id.

Not all transfers that meet § 547(b)'s criteria are avoidable. Section 547(c) provides six exceptions to the avoidable preference provision. SOCAP raised (among other affirmative defenses) two of the exceptions in the district court: the contemporaneous exchange exception, 11 U.S.C. § 547(c)(1), and the ordinary course of business exception, 11 U.S.C. § 547(c)(2). Section 547(c)(1) provides that the trustee may not avoid a transfer that the debtor and creditor intended to be a contemporaneous exchange for new value given to the debtor and that was, in fact, a substantially contemporaneous exchange. Section 547(c)(2) provides that the trustee may not avoid a transfer that was: (1) a payment of a debt incurred in the ordinary course of business of the debtor and creditor; (2) made no more than 45 days after the debtor incurred the debt;*fn2 (3) made in the ordinary course of business of the debtor and creditor; and (4) made according to ordinary business terms.

ECI filed a motion for partial summary judgment in the district court, seeking to strike SOCAP's contemporaneous exchange and ordinary course of business defenses. SOCAP also moved for summary judgment, alleging that as a matter of law ECI's payment to SOCAP was not for an antecedent debt, and that ECI's payment fell under either the contemporaneous exchange or the ordinary course of business defenses. The district court granted SOCAP's motion for summary judgment, and denied ECI's motion for partial summary judgment.

The district court reasoned the ECI never incurred a debt to SOCAP because SOCAP never delivered any oil under the contract. Thus, ECI did not pay SOCAP on account of an antecedent debt; rather, the court found that ECI paid SOCAP for present consideration. D.Ct. Op. 6-9.

Alternatively, the district court held that even if ECI's payment was for an antecedent debt, the payment fell under 11 U.S.C. § 547(c)(2), the ordinary course of business exception to the avoidable preference provision. The court found that ECI incurred a debt and made the payment in the ordinary course of its and SOCAP's business because they payment arose from the oil purchase agreement that ECI and SOCAP made in the ordinary course of their business and because the payment was one that "'a crude oil purchaser like ECI would ordinarily make if, like ECI, it wanted to continue as a participant in the international crude oil marketplace.'" Id. at 10 n.8 (quoting supplemental affidavit of Robert C. Oebser) (emphasis in the district court's opinion). The district court also found that ECI made the payment according to ordinary business ...


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