In Re Zzzz Best Co., Inc., a California Corporation, Debtor. Herbert Wolas, Chapter 7 Trustee for the Estate of Zzzz Best Co., Inc. v. Union Bank

ZZZZ Best entered into an eight-month revolving credit agreement with Union Bank in December 1986. It made several payments of interest and loan commitment fees between December 1986 and July 1987, when the company filed for bankruptcy. The trustee, Wolas, tried to recover some of the payments for the benefit of the creditors as preferential transfers avoidable under 11 U.S.C. § 547 . The bank defended the payments as being made in the ordinary course of business, and thus protected from recovery under § 547(c)(2). Wolas replied they were not protected because ZZZZ Best had been operating a fraudulent “Ponzi” scheme and so had no “ordinary” course of business. The bankruptcy court found for the bank as a matter of law, and the district court affirmed. We reverse on the authority of In re CHG Int’l, Inc., 897 F.2d 1479 (9th Cir.1990), without reaching the “Ponzi” scheme issue.

In CHG Int’l we held that interest payments on long-term debt are not covered at all by the ordinary course of business exception. Id. at 1482, 1486 . Union Bank argues the revolving line of credit in this case is not “long-term” because it is for less than a year; however, one of the two loans at issue in…