Memorandum of Decision Re: Ordinary Course of Business

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re UNICOM COMPUTER CORP.,                                       No. 1-88-01593      Debtor. ___________________________/ UNICOM COMPUTER CORP.,      Plaintiff,    v.                                                                               A.P. No. 1-90-0204 INTERNATIONAL BUSINESS MACHINES CORP.,      Defendant. ______________________________/
Memorandum of Decision
     This is a preference action brought by the debtor in possession pursuant to section 547 of the Bankruptcy Code. The debtor alleges that approximately $731,000.00 paid to defendant International Business Machines Corporation during the 90-day period before bankruptcy should be returned to the estate.      Prior to bankruptcy, the debtor was in the business of purchasing computers and leasing them to users. Most of the computers it purchased were from IBM. The debtor would finance the purchase with loans from Leasetech, Inc. The funds from Leasetech were intended to fund specific computer purchases, but were paid to the debtor without restriction and deposited into the debtor's general account.      IBM raises three defenses to the action. First, it argues that all payments were in the ordinary course of the debtor's business. Second, it argues that there were substantially contemporaneous exchanges for new value. Third, it argues that the "earmarking" doctrine is applicable.      The "earmarking" doctrine does not appear in the text of the Bankruptcy Code. It is a court-made rule which states that there is no recoverable preference where a third party loans funds to the debtor with instructions to use the funds to pay off another creditor.      The court has serious doubt that such a doctrine exists at all in this circuit. The Ninth Circuit case cited by IBM, In re Sierra Steel, Inc., 96 B.R. 271 (9th Cir.BAP 1989), does not hold that the doctrine exists, but only that it was not applicable to the facts before it. While their may be some justification for applying the doctrine where the lender disburses loan funds directly to the old creditor, once the funds have been given to the debtor and deposited into its general account any such justification disappears. At that point, the debtor clearly obtained an interest in the funds significant enough to make their transfer subject to avoidance. Any other ruling would elevate court-made law over the clear meaning of a statute. Since the funds in question were deposited into the debtor's general account and could have been used by the debtor for any purpose with no more penalty than a breach of contract claim by the lender, the court finds the earmarking document inapplicable.      It is clear that under the contract the payments were intended to be contemporaneous with installation. However, IBM's policies did not conform to the contract and the payments were not in fact substantially contemporaneous. Accordingly, the defense set forth in section 547(c)(1) of the Code is not applicable.      The sole real issue in this case is whether the payments made to IBM were in the ordinary course of the debtor's business. The evidence was absolutely clear and uncontradicted that the debtor was contractually obligated to pay IBM when the computers were installed; that IBM had a written policy allowing purchasers 30 days after installation to pay, notwithstanding the contract; that the local office handling the debtor's account always allowed purchasers up until the last day of the month following the month of installation to pay, notwithstanding the contract and the written policy; and that even longer times were allowed if IBM failed to promptly notify the purchaser that an installation had been completed. IBM treated the debtor no differently during the 90 days before bankruptcy than it had prior to that time. IBM treated the debtor no differently than any other computer leasing company to whom it sold computers.      The case law most damaging to IBM is In re Powerline Oil Co., 126 B.R. 790 (9th Cir.BAP 1991). In that case, the contract called for payment by a certain date but the defendant argued that it had a standard policy allowing later payment. The court's decision is unclear; at one point (126 B.R. at 795), it states that "[defendant's] evidence that its standard practice was to begin the 30 day payment period upon the approval of the invoice should not be used to contradict the clear contract terms." At another point on the same page, it states that "failure to make payments within the time required by the contract creates a rebuttable presumption that the payment is non-ordinary, id., late payments can be within the ordinary course of business if they are a few days late and follow the prior practice of the parties."      The court believes that this latter statement of the law is the rule intended by the appellate panel. To the extent it is not, the court distinguishes Powerline Oil on grounds that in that case there was no evidence that the late payments followed prior practice of the parties and that the debtor in that case had held the checks for three weeks, due to its precarious financial condition, before sending them to the defendant.      The court finds that IBM has rebutted the presumption that the payments were non-ordinary because they were made outside contract terms. The actual terms enforced by IBM were clear, known well by both parties, and uniformly applied. The debtor was treated no differently from other like companies, and its treatment did not change during the 90 days prior to bankruptcy. The payments were as ordinary as this court has seen, and followed a pattern of dealing established well before the preference period. Only if the presumption discussed in Powerline Oil were unrebuttable would the debtor be entitled to judgment.      For the foregoing reasons, the debtor shall take nothing by its complaint which shall be dismissed, with prejudice. IBM shall recover its costs of suit.      This memorandum constitutes the court's findings and conclusions. Counsel for IBM shall forthwith submit an appropriate form of judgment.
Dated: September 24, 1991                                                                        _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy