Thе trustee of the bankruptcy estate of the U.S.A. Inns of Eureka Springs, Arkansas, Inc. (the “U.S.A. Trustee”) appeals the judgment of the district court holding that certain preferential payments made by the debtor to United Savings and Loan Association (“United”) in the ninety days preceding the debt- or’s bankruptcy filing were excepted from the trusteе’s avoidance power under the “ordinary course of business” exception of 11 U.S.C. § 547(c)(2).
Prior to bankruptcy, U.S.A. Inns of Eureka Springs, Arkansas (“U.S.A. Inns”) assumed liability under an existing promissory note in favor of United. The promissory note, in the original principal amount of $2,700,000, called for repayment in equal monthly installments in the sum of $27,-940.00, due on the 30th day of еach month. When U.S.A Inns filed bankruptcy, United’s claim against the debtor totaled $2,815,037.65 and was secured by collateral with a fair market value of $2,620,000.00. The U.S.A. Trustee brought suit against United to recover certain payments made by the debtor to United during the ninety days preceding the debtor’s bankruptcy filing. The debtor’s payments were irregular as to both time and amount, and were never in the amount of the full monthly installment.
1
The parties stipu
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lated to the preferential nature of the payments, conceding that the requirements of § 547(b) were satisfied, but contested whether the payments were excepted from avoidance as having been made in the ordinary course of business and aсcording to ordinary business terms under 11 U.S.C. § 547(c)(2). The bankruptcy court
2
held that United proved the transfers satisfied the requirements of subsections (c)(2)(A) and (c)(2)(B) in that the debts were incurred and the payments were made by the debtor in the ordinary course of business of the debtor and United. The bankruptcy court concluded, however, that United did not рroduce any evidence on the issue of whether the payments had been made according to ordinary business terms under 11 U.S.C. § 547(c)(2)(C) and thus had failed to prove one of the three essential elements of § 547(c)(2). The bankruptcy court granted judgment for the U.S.A. Trustee in the amount of $63,000.00.
See Jones v. United San & Loan Ass’n (In re U.S.A. Inns of Eureka Springs, Arkansas, Inc.),
On appеal, the United States District Court for the Western District of Arkansas
3
reversed the bankruptcy court’s decision holding that the bankruptcy court erred in requiring objective evidence of industry practice under § 547(c)(2)(C) and, in the alternative, that the bankruptcy court’s finding that United had produced no evidence sufficient to carry its burden under § 547(с)(2)(C) was clearly erroneous.
See Jones v. United Sav. & Loan Ass’n (In re U.S.A. Inns of Eureka Springs, Arkansas, Inc.),
Section 547(b) provides that transfers made by the debtor in the ninety days preceding the petition for bankruptcy may be avoided by the trustee in bankruptcy as a “preference.” However, the Bankruptсy Code permits the transferee of a preferential payment to prevent the avoidance by satisfying the three requirements set forth in § 547(c):
(c) the trustee may not avoid under this section a transfer—
(2) to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transfеree;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms.
11 U.S.C. § 547(c)(2).
For a payment to qualify under the exception of § 547(c)(2), the transferee must prove by a preponderance of the evidence the three statutory elements.
See
11 U.S.C. § 547(g). First, under subsection (c)(2)(A), the transferee must shоw that the debtor incurred the underlying debt in the ordinary course of business of the debtor and the transferee. The bankruptcy court held, and the parties do not dispute, that United satisfied this requirement. Second, under subsection (c)(2)(B), the transferee must show that the debtor made the transfer in the ordinary course of business or financial affаirs of the
debtor and the transferee.
This court has indicated that “ ‘there is no precise legal test which can be applied’ in determining whether payments by the debtor during
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the 90-day period were ‘made in the ordinary course of business’; ‘rather, th[e] court must engage in a “peculiarly factual” analysis.’ ”
4
Lovett v. St. Johnsbury Trucking,
On appeal, the district court reversed the bankruptcy court on the grounds that, first, the bankruptcy court erred in interpreting the requirements of § 547(c)(2)(C), and second, that the bankruptcy court’s finding that United failed to prove the payments were made according to ordinary business terms was clearly erroneous. The district court held that the bankruptcy court applied the wrоng standard under the law of this circuit in requiring an objective showing that the payments were made according to ordinary business terms of the industry in general. The district court stated that this circuit “effectively has ignored the distinction between subsection (c)(2)(B) and (c)(2)(C), con-eluding that both subsections were satisfied so long as the late payments were consistent with the course of dealings between
the debt- or and creditor.
”
In re U.S.A. Inns,
International’s payments to St. Johnsbury during the 90-day period were made “according to ordinary business terms” because the manner, form, and timing of these payments wеre consistent with the practice both parties followed previously. As noted, the record shows that International regularly and frequently sent St. Johnsbury checks covering a number of invoices for services rendered. The fact that most of the payments were not made within 30 days is, for the reasons given in Part II.B., not inconsistent with their hаving been “made according to ordinary business terms.”
To the extent, if any, that subsection (c)(2)(C) requires comparison between the payment record of the particular debtor and the general practice in the industry regarding the time of payment, St. Johns-bury introduced testimony by two of its officials that it is “common” in the trucking industry — even when 30-day payment terms are required by contract — for payments “to be made over a 30-day period” (i.e., after 30 days from the date of the invoice) and that it is “[v]ery common” in the industry “that people pass the 30 day period.” In the absence of any contrary evidence, this was sufficient to carry whatever burden St. Johnsbury mаy have had on this issue.
Id. at 499.
On this basis, the district court found that under the Lovett decision no independent evidence of ordinary business terms within the industry is necessary to satisfy subsection (c)(2)(C).
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The district court’s interpretation of
Lovett
places that decision at odds with the decisions of at least three other circuits that require an independent, objective standard of the practices of the relevant industry be applied under (c)(2)(C).
See In re Tolona Pizza Prod. Corp.,
The two subsections of § 547(c)(2) under review comprise a subjective and objective component respectively. The subjective prong (subsection (B)) requires proof that the debt and its payment are ordinary in relation to other business dealings between that creditor and that debtor. The objective prong (subsection (C)) requires proof that the payment is ordinary in relation to the standards prevailing in the relevant industry.
Id.
at 244 (citations omitted). The Sixth Circuit panel found that “Congress clearly intended to establish sepárate, discrete, and independent requirements which a creditor would have to fulfill to prevent avoidance.... [and] to hold otherwise would not only ignore the clear language of the statute, but would effectively render subsections (B) and (C) superfluous to each other.”
Id.
Recently, the Seventh Circuit indicated that “the most important thing is not that the dealings between the debtor and the allegedly favored creditor conform to some industry norm but that they conform to the norm established by the debtor and the creditor in the period before ... the preference period,” but nonetheless, the court expressed its “natural reluctance to cut out and throw away one-third of an important provision of the Bankruptcy Code.”
See Tolona Pizza,
We feel these eases provide the propér interpretation of the statute. We do not read Lovett as requiring the law to be otherwise. We, therefore, disagree with the district court and endorse the bankruptcy court’s analysis as to the requirement of proving an objective industry practice under subsection (c)(2)(C). However, for reasons *685 we now set forth, we affirm the district court’s findings on the basis of the district court’s alternative holding.
Objective Evidence
The bankruptcy court, in holding that an objective standard of industry practice was required, reviewed the evidence and held that there was no evidence to sustain United’s burden of proof that the late payment practice between the debtor and the creditor was an industry-wide practice. In an alternative holding, the district court found that there was evidence similar to that presented in
Lovett,
proven by United, and that if an objective standard was required there was sufficient evidence to carry whatever burden United may have had on the issue of industry standards in ordinary business terms. Our standard of review is the same as that usеd by the district court. We review the bankruptcy court’s factual findings under the clearly erroneous standard.
In re Commonwealth Cos., Inc.,
We hold that the bankruptcy court’s finding that United had produced no evidence sufficient to carry its burden under subsection (c)(2)(C) was clearly erroneous. What constitutes “ordinary business terms” will vary widely from industry to industry. In this case, Benage testified that “probably eight to ten percent” of United’s accounts were on a similar pay schedule as U.S.A. Inns, but that working with delinquent customers as long as some type of payment was forthcoming was common industry practice. Subsection (c)(2)(C) does not require a creditor to establish the еxistence of some uniform set of business terms within the industry in order to satisfy its burden. It requires evidence of a prevailing practice among similarly situated members of the industry facing the same or similar problems. The legislative history reveals only that the purpose of § 547(c)(2) is to “discourage unusual action by either the debtor or his creditors during the debtor’s slide into bankruptcy.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 373 (1978),
reprinted in
1978 U.S.C.C.A.N. 5787, 6329. In light of the statute’s construction and its legislative history, we feel the focus of subsection (c)(2)(C) should be on whether the terms between the parties were particularly unusual in the relevant industry, and that evidence of a prevailing practice among similarly situated members of the industry facing the same or similar problems is sufficient to satisfy subsection (c)(2)(C)’s burden. We agree with the Seventh Circuit’s formulation that “ ‘ordinary business terms’ refers to the range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage, and that only dealings so idiosyncratic as to fаll outside that broad range should be deemed extraordinary and therefore outside the scope of subsection (C).”
Tolona Pizza,
On the basis of the above analysis, we find that the district court judgment should be affirmed.
Notes
. The parties stipulated that during the ninety day period prior to the filing of the bankruptcy *682 petition on October 10, 1990, the debtor made the following payments to United:
Date Amount
7/14/89 $ 6,538.45
7/21/89 6,461.55
7/26/89 7,000.00
8/01/89 1,845.37
8/01/89 11,154.63
8/08/89 2,642.19
8/17/89 7,357.81
8/18/89 966.30
8/18/89 5,233.70
8/25/89 3,800.00
9/01/89 10,000.00
Total $63,000.00
. The Honorable James G. Mixon, United States Bankruptcy Judge for the Western District of Arkansas.
. The Honorable H. Franklin Waters, Chiеf Judge, United States District Court for the Western District of Arkansas.
. The purpose of the ordinary course of business exception is reflected in its legislative history: "The purpose of this exception is to leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor’s slide into bankruptcy.” S.Rep. No. 989, 95th Cong., 2d Sess. 88 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5874; H.R.Rep. No. 595, 95th Cong., 1st Sess. 373 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 6329.