In the Matter of Emerald Oil Co., Debtor.william C. Sandoz, Trustee, Plaintiff-appellee Cross-appellant, v. Fred Wilson Drilling Company, Defendant-appellant Cross-appellee, 695 F.2d 833 (5th Cir. 1983)

A bankruptcy trustee sues to avoid a transfer made to a creditor by the debtor when insolvent within ninety days of the debtor's filing of a voluntary petition in bankruptcy. Section 547(b) of the Bankruptcy Code of 1978, 11 U.S.C. § 547(b) (1978). The creditor defends, relying upon section 547(c) (2) of the Code, 11 U.S.C. § 547(c) (2) (1978); this section excepts from avoidability, inter alia, the debtor's payment of an "ordinary course of business" debt made not later than 45 days after the debt was "incurred". The creditor contends that the debt was "incurred" no earlier than the date of the invoice it sent to the debtor for contractual work after completion thereof. The bankruptcy court held that, instead, the debt was "incurred" for purposes of section 547(c) (2) no later than the date upon which the contractual work was completed, when the debtor then became obligated to pay for it. We affirm.

We also affirm the bankruptcy court's grant of summary judgment in favor of the trustee on the issue of insolvency, holding that the opposing party's speculative testimony (that the debtor may have been solvent) of the nature shown did not sufficiently rebut or meet the statutory presumption of the debtor's insolvency, section 547(f) of the Code, 11 U.S.C. § 547(f), so as to require the trustee to produce further evidence to prove the debtor's insolvency at the time the transfer was made.

The creditor Wilson appeals to this court from the bankruptcy court's judgment in favor of Emerald's trustee for $244,497, the amount of the payment (transfer) thus avoided, as having been made more than 45 days after the debt was incurred and while the debtor Emerald was insolvent.¹  It contends: (I) that the bankruptcy court erred in finding that the debt was incurred earlier than the date upon which the invoice was sent, and (II) that the bankruptcy trustee did not prove that the debtor was insolvent at the time of the present transfer, one of the requisite conditions for setting aside a transfer as preferential, section 547(b) (3) (quoted in note 2 infra) .

I. Date that the debt was "incurred".

Section 547(b) provides that the bankruptcy trustee may avoid and reclaim for the estate any preferential transfer made by the debtor, while insolvent, within 90 days of the debtor's filing of a petition in bankruptcy.²  However, section 547(c) (2) provides that such a transfer may not be avoided insofar as it was the payment of a debt that was incurred in the ordinary course of business and that was made not later than 45 days after the debt was "incurred."³  The creditor Wilson primarily relies upon this latter provision as excepting from avoidability Emerald's payment of March 3.

The relevant dates are:

January 3, 1980--Wilson's contractual oil well-drilling work for the debtor Emerald completed;

January 17, 1980--Wilson invoiced Emerald for the work;

February 15, 1980--90th day before Emerald filed its petition in bankruptcy--preferential transfers after this may be avoided under 547(b);March 3, 1980--Emerald paid Wilson for the work;⁴ 

May 16, 1980--Emerald filed its petition in bankruptcy.

Thus, Emerald's payment of March 3rd to Wilson may be reclaimed by the trustee if the debt was incurred on January 3rd (sixty days earlier), the date the work was completed; but it may not be reclaimed if the debt was incurred on January 17th (45 days earlier), the date that Wilson invoiced Emerald for the contract work.

The term "incurred" is not defined in the Bankruptcy Code of 1978. The exception to the trustee's powers to avoid preferential transfers created by section 547(c) (2)--which applies to payments made "in the ordinary course of business" of debts "incurred in the ordinary course of business", if the payment was made "not later than 45 days after the debt was incurred "--had no counterpart in the prior bankruptcy statute. The "ordinary course of business" exception was designed to replace the former judicially-created "current expense" doctrine, whereby current expenses were not regarded as antecedent debts, so that payment thereof was not preferential. Barash v. Public Finance Corp., 658 F.2d 504, 510-11 (7th Cir. 1981); Kaye, Preferences Under the New Bankruptcy Code, 54 Am.Bankr.L.J. 197, 201-02 (1980). Payment within forty-five days was regarded as the normal trade credit cycle for goods or services furnished during a month, billed at the end thereof, with payment to be received within no more than fifteen days from billing. Barash, supra, 658 F.2d at 511; Levin, An Introduction to the Trustee's Avoiding Powers, 53 Am.Bankr.L.J. 173, 186-87 (1979).

The commentators early noted that troublesome issues may arise in the judicial interpretation of the date that a debt is "incurred". See, e.g., 4 Collier on Bankruptcy p 547.38, at 547-121 (15th ed. 1982); Kaye, supra, 54 Am.Bankr.L.J. at 203-05. While conceding that the date of invoicing is not necessarily excluded as a statutory test, and while suggesting that inequitable results may follow if the term "incurred" is interpreted literally, they concluded that the more logical view, and one more in view with congressional intent insofar as expressed, is that the debt is incurred on the date that the debtor becomes liable for it--when a resource is consumed or a service performed--, not the date that the creditor chooses to bill the debtor. Id. Further, the interpretation that a debt is "incurred" on the date that the debtor becomes liable to pay it is in accord with the Bankruptcy Code's definitions of "debt" ("liability on a claim"), section 101(11), and of "claim" (as including "contingent, unmatured and disputed rights to payment"), section 101(4).

The subsequent decisional interpretations are in accord with the view that a debt is "incurred" for purposes of section 547(c) (2) (i.e., the "ordinary course of business" exception), on the date that the debtor becomes obligated to pay for the services or goods. Barash v. Public Finance Corp., supra, 658 F.2d at 511; In re Valles Mechanical Industries, Inc., 20 B.R. 350, 352-53 (Bkrtcy.N.D. Ga. 1982); In re Keeling, 11 B.R. 361, 362 (Bkrtcy.D.C.Minn.1981); In re Ray W. Dickey & Sons, Inc., 11 B.R. 146, 147 (Bkrtcy.N.D. Tex. 1980); In re McCormick, 5 B.R. 726, 731 (Bkrtcy.N.D. Ohio 1980). Under this rationale, Valles Mechanical and Dickey, supra, expressly rejected the present creditor's contentions that the date of invoicing, rather than the date of the obligation, should be regarded as the date the debt was "incurred".

In our view, for purposes of the "ordinary course of business" exception to avoidability created by section 547(c) (2), a debt is incurred when the debtor becomes obligated to pay it, not when the creditor chooses to invoice the debtor for his work or goods. This view is in accord with the most logical meaning of the statutory language in the light of statutory definitions in the Code as a whole, as well as with the apparent general Congressional intent in creating the exception. Although literal application of the statutory language may have consequences possibly unforeseen by Congress in some circumstances, the present circumstance is not one of them. The date of invoicing rather than the date of debt-obligation would leave to the creditor the discretion to determine the date the obligation was incurred, creating the possibility not only of inequality of treatment of similarly-situated creditors (depending on the vagaries of their billing practices), but also the opportunity for a particular creditor, who foresees that his debtor is approaching bankruptcy, to secure preferential treatment for himself by the timing of his bill. Our view, moreover, is in accord with the prior decisions of the relatively few courts that have considered the issue.

The creditor Wilson also contends that the plaintiff trustee did not carry its burden of proving that the debtor Emerald was insolvent at the time the March 3 payment was made. Under section 547(b) (3) (quoted in note 2 supra), a trustee may avoid a transfer as preferential only if "made while the debtor was insolvent."

When Emerald filed its petition in bankruptcy on May 16, 1980, it listed assets of $178,800 and liabilities of over four million dollars. The creditor Wilson points out that this circumstance, after it had become evident that several drilling contracts would end in disastrous losses, does not necessarily indicate that Emerald was insolvent at the time the present payment of March 3, 1980 was made.

Section 547(f) of the Bankruptcy Code provides that, for purposes of avoiding a preferential transfer, "the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition [in bankruptcy]." However, as expressly indicated in the legislative reports and in legislative amendments clarifying the application of the Federal Rules of Evidence to bankruptcy proceedings,⁵  the intent of the presumption was to be governed by Fed.R.Evid. 301; thus, to require the party against whom directed (here, the creditor Wilson) to come "forward with evidence to rebut or meet the presumption", but not to shift the burden of proof or nonpersuasion to him, which burden remains against the party (here, the trustee) who had the original burden to prove insolvency in order to avoid a transfer as preferential.⁶ 

In the present instance, at the hearing before the bankruptcy court on the issue of insolvency, the trustee rested on the presumption. The creditor Wilson then presented as its witness a certified public accountant who had not inspected Emerald's accounts or records or the working papers of the trustee's accountant who had conducted an extensive audit of the failing business. (This latter circumstance was brought out by the examination and cross-examination of Wilson's expert. When Wilson rested upon the testimony of its accountant witness, the trustee relied upon the statutory presumption of insolvency and did not tender the testimony of his accountant.)

The effect of the testimony of Wilson's accountant was to criticize the trustee's accountant as possibly having improperly employed the "percentage of completion" of ongoing contracts method of accounting.⁷  He opined that therefore certain of Emerald's assets (ongoing drilling contracts) may have been undervalued. As we read his testimony, he did not at any time attempt to testify that in fact Emerald's assets exceeded its liabilities on the date of Wilson's payment; only that the analysis of the other accountant may have improperly so concluded.

Under the Bankruptcy Code definitions, an individual or corporate debtor is "insolvent" when "the sum of such entity's debt is greater than all of such entity's property, at a fair valuation." Section 101(26) of the Code, 11 U.S.C. § 101(26). We agree with the bankruptcy court that the present evidence offered by the creditor, which at most indicated a potential error in accounting methods relied upon by the trustee, did not constitute any evidence sufficient to cast into doubt the statutory presumption of insolvency, i.e., that the debtor's assets exceeded its liabilities.

In the absence of "evidence to meet or rebut the presumption", Fed.R.Evid. 301, the trustee was entitled to rely upon the presumption of insolvency in his favor. Wilson's accountant testified that the trustee's accounting methods may have undervalued assets, without pointing out which assets and without affording a reasonable basis to conclude that in fact the debtor's assets may have been greater than his liabilities at the time of the transfer. This testimony therefore does not constitute evidence that meets or rebuts the presumption, so as to require the trustee under Fed.R.Evid. 301 to offer further evidence of the debtor's insolvency in order to meet his burden of proof as to it. To hold that any sort of speculative showing by the party opposed to the presumption would cause it to disappear, no matter how tenuous the claim of possible solvency, would in our view resurrect the mischief (see note 5 supra) that was intended to be cured by the 1978 Code's creation through section 547(f) of the statutory presumption of insolvency.

The bankruptcy court did not err, therefore, in granting summary judgment after the creditor Wilson rested on its accountant's testimony, in the face of the court's indication that this evidence by itself was insufficient to meet or rebut the statutory presumption.

Conclusion

For the reasons noted, we AFFIRM the judgment of the bankruptcy court avoiding the debtor's payment to the creditor as a preferential transfer and, consequently, awarding judgment in favor of the trustee and against the creditor in such amount.

AFFIRMED.