UNION BANK V. WOLAS : CASE SUMMARY
The Supreme Court in Union Bank v. Wolas 502 U.S. 151 (1991) held that payments on long-term debt may qualify for the ordinary course of business exception to preference avoidance. The statute contains no distinction between long-term and short-term debt.
FACTS OF THE CASE
ZZZZ Best Company, Inc. had borrowed money from Union Bank under a long-term lending arrangement. During the 90-day period preceding the company’s bankruptcy filing, ZZZZ Best made several interest payments to Union Bank in accordance with the terms of the loan agreement.
After the bankruptcy filing, the trustee sought to recover those payments as preferential transfers under Section 547(b) of the Bankruptcy Code. The trustee argued that the ordinary course of business defense contained in Section 547(c)(2) applied only to payments arising from short-term trade credit transactions and not to payments on long-term debt obligations.
Union Bank contended that the statutory language made no distinction between short-term and long-term debt and that the payments were made in the ordinary course of business according to the parties’ established lending relationship.
ISSUE BEFORE THE SUPREME COURT
The issue before the Supreme Court was whether the ordinary course of business exception under Section 547(c)(2) applies to payments made on long-term debt, or whether the exception is limited to payments arising from short-term trade credit transactions.
FINDINGS OF THE SUPREME COURT
Justice White, writing for the Court, focused on the language of Section 547(c)(2). The Court observed that the statutory text did not distinguish between long-term and short-term debt. Rather, the provision broadly protected transfers made in the ordinary course of business or financial affairs of the debtor and the creditor.
The trustee argued that the legislative purpose behind the preference provisions suggested a narrower interpretation limited to trade credit. The Court rejected this argument, emphasizing that when Congress has expressed its intent clearly through statutory language, courts should not impose additional restrictions based on perceived legislative objectives.
The Court further noted that Congress could have expressly limited the exception to trade credit transactions had it intended such a result. Because no such limitation appeared in the statute, the Court concluded that the ordinary course of business defense extends to qualifying payments on long-term debt.
The Supreme Court laid down the principle that the ordinary course of business exception under Section 547(c)(2) is not limited to trade credit transactions and may protect payments made on long-term debt obligations when the statutory requirements are satisfied.
SIGNIFICANCE OF THE JUDGMENT
The decision provided important protection for lenders and other creditors receiving regular payments on long-term loans before a debtor’s bankruptcy filing. It clarified that ordinary scheduled payments on long-term debt are not automatically subject to avoidance merely because they occur during the preference period. The ruling also reinforced the Supreme Court’s commitment to applying the Bankruptcy Code according to its plain language. Rather than narrowing the scope of the exception based on policy considerations, the Court adhered to the statutory text enacted by Congress.
Union Bank v. Wolas reflects the same textual approach later seen in decisions such as Toibb v. Radloff, where the Court declined to impose eligibility requirements not found in the Bankruptcy Code, and Law v. Siegel, where the Court held that equitable powers cannot override statutory provisions. Together, these cases emphasize the primacy of statutory text in bankruptcy interpretation.
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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.
