WASHINGTON -- In a case involving the liquidation of ZZZZ Best Co., the Supreme Court broadened the ability of creditors to keep long-term-loan payments made by companies that later go bankrupt.
The justices said Union Bank of San Francisco may be able to keep two interest payments totaling $100,000 that ZZZZ Best made in the months before it declared itself insolvent under Chapter 7 of the federal bankruptcy code. A lower court will make the final determination.
The case raised the question whether a debtor company such as ZZZZ Best may recover payments made on long-term loans shortly before it files for protection from creditors.
Law on Short-Term Loans
Federal law clearly establishes that creditors may keep loan payments on short-term loans in cases where the payments are deemed by a bankruptcy judge to have been made "in the ordinary course of business."
This rule is meant to encourage lenders to do business with financially troubled companies. But there was uncertainty whether creditors could keep payments made on long-term debt.
The Supreme Court, in a unanimous opinion written by Justice John Paul Stevens, said creditors could not automatically be barred from keeping such payments.
The high court reversed a decision of a federal appeals court in San Francisco.
The case will now be sent back to the lower court to determine whether ZZZZ Best payments to Union Bank, a subsidiary of the Bank of Tokyo, were made in the ordinary course of business and can be retained by the bank.