Ledford v. Sears (In re Williams)

Citations: 5 B.R. 706; 2 Collier Bankr. Cas. 2d 1216; 1980 Bankr. LEXIS 4576; 6 Bankr. Ct. Dec. (CRR) 930Docket: Bankruptcy No. 3-80-00126; Adv. No. 3-80-0190

Court: United States Bankruptcy Court, S.D. Ohio; August 26, 1980; Us Bankruptcy; United States Bankruptcy Court

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A bankruptcy judge has reviewed a case concerning a preference avoidance complaint filed by the plaintiff trustee against Sears, Roebuck & Company. The parties agree on the facts and have submitted their case based on pretrial stipulations without citing precedent. The debtor, Donald Williams, purchased a fence from Sears in November 1977, incurring a total debt of $1,015.45, which included an installation charge. After making a deposit and subsequent payments, the debtor continued to pay approximately $28.00 monthly until August 1979. In early January 1980, the debtor made payments totaling $344.83, which cleared the account just before filing for bankruptcy on January 22, 1980, without listing Sears as a creditor.

The trustee argues that these payments constitute voidable preferences under 11 U.S.C. § 547(b) since they were made within 90 days before the bankruptcy filing and were for an antecedent debt. The debtor was presumed insolvent at the time, and Sears received more than it would have otherwise as it was not listed as a creditor. Sears contends that the payments were made in the ordinary course of business and should be exempt under 11 U.S.C. § 547(c)(2). However, the court found that the payments made in January 1980 were significantly higher than the debtor's usual payment pattern, indicating they were not part of the ordinary course of affairs. The account was not fully paid until 19 days prior to the bankruptcy filing, contrasting with the established payment history.

Sears contends that the debtors made a payment within the 45-day timeframe specified in 11 U.S.C. 547(c)(2)(B) following a charge incurred on November 17, 1979. The payment of $42.84 was made on January 2, 1980, which is within the timeframe calculated by excluding the initial charge date and considering January 1 as a holiday. However, the payment on January 3, 1980, for $80.00, fell outside this period. Despite this timing, the court finds that the payment does not satisfy the requirements of 11 U.S.C. 547(c)(2)(B) due to Ohio Revised Code 1317.071, which mandates that payments on revolving charge accounts first cover finance charges before addressing the principal debt. The Sears Charge Security Agreement reflects this, stating that payments are applied first to finance charges, then to the oldest debt. As a result, the payment on January 2 would be allocated to the balance due on the fence before addressing older debts from previous purchases. Therefore, the November 17 purchase would not be considered paid until the final payment on January 3, which is outside the 45-day period.

Even if the January 3 payment were applied to the November 17 purchase, the remaining amount owed would still be voidable by the trustee, along with applicable finance charges. The defendant argues that if the court finds the payment voidable, the lien on the fence should be reinstated due to a mistaken release, believing the account was paid in full. However, the court confirms that payments made by the debtors had already covered the entire cost of the fence, as evidenced by the account review, which showed sufficient payments had been made by April 11, 1980. By that date, the account reached a zero balance. The trustee's complaint filed on April 30, 1980, indicates that at the time of bankruptcy, the debtors owned the fence free of any security interest, meaning there is no lien to reinstate. The document also notes the common practice in the retail industry of establishing perpetual liens on revolving charge accounts, which is not advantageous for sellers.

Legislation similar to Ohio Revised Code 1317.071 has been adopted in many states, influenced by judicial experience and case precedents. The court concludes that even without such legislation, it would arrive at the same decision. The court orders that payments made by the debtors to Sears, Roebuck & Co. amounting to $344.83 on January 2 and 3, 1980, are deemed a preference of $312.83, along with finance charges on other purchases, which fall under the bankruptcy trustee’s avoidance powers pursuant to 11 U.S.C. 547(b). All criteria for a voidable preference are satisfied. Additionally, the court rules that the payments for a chain-link fence, fully paid before purchases made after March 9, 1979, do not allow Sears to reinstate its security interest in the fence. The court further determines that the payments do not fulfill the conditions of 11 U.S.C. 547(c)(2) and thus do not qualify as exceptions to 547(b). Consequently, the payment is avoided, and Sears is ordered to return $312.83 to the trustee, plus applicable finance charges, totaling $344.83.