FOR THE NORTHERN DISTRICT OF CALIFORNIA
UNICOM COMPUTER CORP., No. 1-88-01593
UNICOM COMPUTER CORP.,
v. A.P. No. 1-90-0204
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
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
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 _______________________