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In re Affiliated Foods Southwest Inc.

Case No. 13-1721 (C.A. 8, Apr. 10, 2014)

This is an adversary proceeding commenced by Chapter 7 bankruptcy trustee Richard Cox to recover as avoidable preferences two payments that Momar, Inc. received from the debtor, Affiliated Foods Southwest, Inc., during the 90 days prior to Affiliated Foods filing a voluntary Chapter 11 petition (later converted to a Chapter 7 proceeding). At that time, Affiliated Foods was a wholesale food cooperative. Momar was a supplier of cleaning and sanitation products. Momar conceded that the payments were preferential transfers as defined in 11 U.S.C. § 547(b) and asserted affirmative defenses to preference liability, including the exception for transfers made in the ordinary course of business in 11 U.S.C. § 547(c)(2). Momar demanded a jury trial and refused to consent to trial by jury in the bankruptcy court.

Acknowledging Momar’s right to a jury trial, the bankruptcy court referred the case to the United States District Court for the Eastern District of Arkansas. See Langenkamp v. Culp, 498 U.S. 42, 45 (1990) (“a creditor’s right to a jury trial on a bankruptcy trustee’s preference claim depends upon whether the creditor has submitted a claim against the estate,” quotation omitted). In the district court, the trustee conceded that one of the two transfers was not an avoidable preference. The parties filed cross-motions for summary judgment on Momar’s claim that the second transfer -- a payment of $31,470.50 made on April 26, 2009, to satisfy a Momar invoice dated March 31, 2009 -- fell within the ordinary course of business exception in § 547(c)(2). The trustee appeals the district court’s1 grant of summary judgment excepting that second transfer. We affirm.

I.



“In general, an avoidable preference is a transfer of the debtor’s property, to or for the benefit of a creditor, on account of the debtor’s antecedent debt, made less than ninety days before bankruptcy while the debtor is insolvent, that enables the creditor to receive more than it would in a Chapter 7 liquidation. See § 547(b). If a transfer is avoidable under § 547(b), the creditor may escape preference liability by proving that it falls within one of the exceptions set forth in § 547(c).” In re Jones Truck Lines, Inc., 130 F.3d 323, 326 (8th Cir. 1997). This appeal concerns the often-litigated exception in § 547(c)(2) for transfers in the ordinary course of business.
 

 

Judge(s): James Loken
Jurisdiction: U.S. Court of Appeals, Eighth Circuit
Related Categories: Contracts , Employment , Energy / Utilities , Maritime , Property , Wills / Trusts / Estates
 
Circuit Court Judge(s)
Jane Kelly
James Loken
Roger Wollman

 
Trial Court Judge(s)
Kristine Baker

 

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elapsed 4/23/07 5/7/07 $23,872.10 13 days in § 547(c)(2). the trustee appeals the district court’s1 to receive more than it would in a chapter 7 liquidation. see § 547(b). if a transfer within the meaning of § 547(c)(2)(a) means that we need not address the “ordinary 3/31/09 4/26/09 $31,470.50 26 days momar was made in the ordinary course of business of the parties . . . under the the debtor ordinarily paid the creditor’s invoices, and whether the timing of the 680, 682-84 (8th cir. 1993). -3- activity,” the district court concluded that momar “demonstrated the requirements of because momar must satisfy only one of these requirements under the amended preference transfers during that year were made, on average, 48 days after the invoice. ____________ normal rules limiting the grant of summary judgment apply. see in re date to affiliated foods filing a voluntary chapter 11 petition (later converted to a chapter concern that this three-part test was unfair and created needless uncertainty: f.2d 741, 743 (8th cir.1979). therefore, like the district court, we will decide the 11 u.s.c. § 547(c)(2)(a) by a preponderance of the evidence [and] is entitled to to the preference period, affiliated foods made seven payments to momar, on 2 submitted: december 20, 2013 10/31/07 12/17/07 $22,399.10 47 days evidence” standard that is appropriate after trial but not for the grant of summary . . . such transfer was in payment of a debt incurred by the debtor in the the trustee argues the district court erred in considering this two-year period district court noted that these nine payments were made between 13 and 49 days after a 1997 report of the national bankruptcy review commission; see generally charles business terms” standard in amended § 547(c)(2)(b). lllllllllllllllllllllappellant incurred by the debtor in the ordinary course of [its] business” with momar. ii. lovett, 931 f.2d at 497 (quotations omitted). as we explained in lovett, and as the ____________ ___________________________ preference period, and 122 invoices paid during that period. 931 f.2d at 498. here, willingnesstotoleratethosedelayswasconsistentwithonepurposeofthebankruptcy rule 56 problem by submitting that issue to the district court on stipulated facts, rather pre-preference 1/22/07 2/26/07 $16,840.20 35 days ------------------------------ appeal from united states district court are undisputed. momar supplied cleaning and sanitation products on an as-needed this is an adversary proceeding commenced by chapter 7 bankruptcy trustee on this record, with a historical average of 35 days between invoice and payment and preference 12/31/08 2/16/09 $34,661.80 47 days have been reluctant to extend even short-term credit and might have required advance finding that the preferential transfer at issue, a payment made to a regular supplier 26 ship date considering this type of fact-intensive issue, what is appropriate in one case is not following invoicing. therefore, momar argues, the challenged payment’s 26-day the invoice date; that the seven pre-preference payments were made, on average, 35 -7- momar was a supplier of cleaning and sanitation products. momar conceded that the by contrast, affiliated foods and momar had an established relationship with regular ____________ 1 905-06 (8th cir. 1998) (change to expedited method of payment on the eve of the transfer at issue was made 26 days after the invoice, well within this overall ____________ richard l. cox, trustee range. based on this data, and the absence of evidence of “unusual collection and the creditor; “rather, the court must engage in a peculiarly factual analysis.” rev. 425, 440-45 (2005). amended § 547(c)(2) now provides that a creditor that in 2007 and 26 days for the april 2008 invoice at issue. there were increased delays payments were preferential transfers as defined in 11 u.s.c. § 547(b) and asserted the 90-day preference period was “an appropriate standard for determining the consistently longer delays -- 35-47 days -- than invoices in march and april -- 13 days demand for a jury trial, § 547(c)(2)(a) requires “a peculiarly factual analysis,” and the business; (ii) that it was “made in the ordinary course of business . . . of the debtor and a preferential transfer was made in the ordinary course of business between the debtor of the debtor and the transferee; or the remainder of the test is now disjunctive. the because we “held that the appropriate look-back period is one year” in lovett, 931 delay was within the ordinary course of business between the parties. received from the debtor, affiliated foods southwest, inc., during the 90 days prior dealings, but there were only nine transactions in the two years prior to the bankruptcy and the creditor in the period before, preferably well before, the preference period.” llllllllllllllllllllldebtor according to ordinary business terms.” the parties briefed both issues on appeal. trustee conceded that one of the two transfers was not an avoidable preference. the p. 56(a). however, on appeal, the trustee does not argue that the court committed 5/29/08 7/15/08 $26,631.20 47 days litigated exception in § 547(c)(2) for transfers in the ordinary course of business. healthcentral.com, 504 f.3d 775, 790-91 (9th cir. 2007). creditormustdemonstrate“someconsistencywithotherbusinesstransactionsbetween in the ordinary course” of momar’s business with affiliated foods, and was “made period invoice/ while the preferred creditor must still prove that the debt was incurred in the ordinary practice.” 931 f.2d at 498. this inquiry is not resolved simply by looking at the evaluate whether challenged transfers “conform to the norm established by the debtor mean days-to-pay of 44 days. because the challenged payment was made more richard cox to recover as avoidable preferences two payments that momar, inc. is avoidable under § 547(b), the creditor may escape preference liability by proving under subsection (c).” 11 u.s.c. § 547(g). the judgment of the district court is affirmed. foods was suffering, in the trustee’s own words, “severe cash flow problems.” in to have remained in business.” union bank v. wolas, 502 u.s. 151, 158-59 (1991). the view that the historical baseline should be based on a time frame when the debtor absent, as in this case and in lovett, “the analysis focuses on the time within which quickly than any payment in the previous year, the trustee argues, it was not made in -5- the trustee argues that the district court committed clear error because the 26- grant of summary judgment in the bapcpa amendment, congress responded to widespread creditor ___________________________ (summary judgment may be granted “if there is no genuine issue as to any material 1/31/08 3/7/08 $34,450.09 35 days business” with the debtor, or that it was made “according to ordinary business terms.” court ruled in the alternative that the preferential transfer in question was both “made acknowledging momar’s right to a jury trial, the bankruptcy court referred the average, 35.43 days after the invoice, with payment times ranging from 13 to 49 days case to the united states district court for the eastern district of arkansas. see amount in re: affiliated foods southwest inc. proves that: u.s.c. § 547(c)(2) (2003); see in re u.s.a. inns of eureka springs, ark., inc., 9 f.3d lllllllllllllllllllllappellees that the preferential transfer paid a debt incurred in the ordinary course of the debtor’s v. affirmative defenses to preference liability, including the exception for transfers made business dealings between momar and affiliated foods. specifically, the trustee payment cir. 1991). (a) made in the ordinary course of business or financial affairs j. tabb, the brave new world of bankruptcy preferences, 13 am. bankr. inst. l. lines, inc., 130 f.3d 323, 326 (8th cir. 1997). this appeal concerns the often- days after the invoice date; that the four payments made in the year prior to -4- in the ordinary course of business in 11 u.s.c. § 547(c)(2). momar demanded a jury statute, our conclusion that the transfer was “made in the ordinary course of business” filed: april 10, 2014 transfer -- a payment of $31,470.50 made on april 26, 2009, to satisfy a momar these circumstances, a two year look-back capturing all nine transactions is a far better thefactsregardingthecourseofdealingsbetweenmomarandaffiliatedfoods the bankruptcy abuse prevention and consumer protection act of 2005 between debtor affiliated foods and transferee momar. plain meaning of the statute suggests, “the cornerstone” of the inquiry is that the terms of any contract between the parties. “[a] ‘late’ payment really isn’t late if the ______________________________ f.3d at 498. this misreads our decision. we ruled only that twelve months preceding langenkamp v. culp, 498 u.s. 42, 45 (1990) (“a creditor’s right to a jury trial on a basis, sending products and invoices to affiliated foods every three to four months. trial rulings in case such as lovett v. st. johnsbury trucking, 931 f.2d 494, 500 (8th thus, it is more accurate to rely on the relationship between the parties. summary judgment in its favor as to this transaction.” before wollman, loken, and kelly, circuit judges. explained, “trade creditors and other suppliers of necessary goods and services might in the ordinary course of momar’s on-going business with affiliated foods, the preference period that were 36, 47, and 49 days after the invoice being paid, for a 7 proceeding). at that time, affiliated foods was a wholesale food cooperative. ordinary course of business between the parties” in that case. obviously, when ordinary course of business or financial affairs of the debtor and the district of arkansas. than on cross motions for summary judgment. cf. nielsen v. western elec. co., 603 without an ordinary course of business exception, the supreme court has 7/31/07 8/20/07 $24,667.80 20 days trial and refused to consent to trial by jury in the bankruptcy court. bankruptcy was not in the ordinary course of business). but when those factors are transactions between the parties in the two years prior to that filing: was financially healthy.” quebecor world (usa), inc., 491 b.r. 379, 387 (bankr. § 547(c)(2). pub. l. no. 109-8, § 409, 119 stat. 23, 106 (2005). the prior version the transferee”; and (iii) that it was made “according to ordinary business terms.” 11 judgment. see, e.g., anderson v. liberty lobby, inc., 477 u.s. 242, 250 (1986) loken, circuit judge. we are unwilling to increase the parties’ litigation expense on account of a course of the debtor’s business,2 submitted a claim against the estate,” quotation omitted). in the district court, the for the benefit of a creditor, on account of the debtor’s antecedent debt, made less than -9- excepting that second transfer. we affirm. 3 bankruptcy were made, on average, 42 days after the invoice; and that the two pre- a. our initial concern with this ruling is that momar never withdrew its creditor must prove that the transfer either was made in the “ordinary course of [its] no. 13-1721 payment instead, thus making it difficult for many companies in temporary distress district court in granting summary judgment applied a “preponderance of the ninety days before bankruptcy while the debtor is insolvent, that enables the creditor surveying these nine transactions, we observe a wide range of payment delays we should review the district court’s determination of “whether the payment to procedural issue neither has raised. the § 547(c)(2)(a) issue has been resolved at the in mid-2008, consistent with affiliated foods’ financial distress. momar’s -8- code’s preference rules, “to encourage creditors to work with troubled businesses.” united states court of appeals b. turning to the merits, “[t]here is no precise legal test” to determine whether for the eastern district of arkansas - little rock -2- 8/28/08 10/17/09 $29,089.00 49 days that it falls within one of the exceptions set forth in § 547(c).” in re jones truck momar incorporated i. the preferred creditor “has the burden of proving the nonavoidability of a transfer bankruptcy and difficult to prove in the context of preference litigation. paymentsduringthe90-day[preference]periodreflected‘someconsistency’withthat in concluding that the last payment, the preferential transfer at issue, was made -6- the ordinary course of business. momar responds by noting that in the two years prior received a preferential transfer, such as momar, will avoid preference liability if it contract.” in re tolona pizza prods. corp., 3 f.3d 1029, 1032 (7th cir. 1993); accord s.d.n.y. 2013) (adopting two-year period), and cases cited. transferee, and such transfer was -- tolona, 3 f.3d at 1032. to make a sound comparison, “[n]umerous decisions support rule 56 error. instead, the standard of review section of the trustee’s brief states that fact and if the moving party is entitled to judgment as a matter of law”); fed. r. civ. clearly erroneous standard,” the standard we applied in reviewing § 547(c)(2) post- benchmark. necessarily appropriate in the next case. the purpose of a look-back period is to but some recurring patterns. invoices sent in december and january were paid after parties have established a practice that deviates from the strict terms of their written invoice dated march 31, 2009 -- fell within the ordinary course of business exception required a creditor seeking to avoid preference liability to prove three elements: (i) (b) made according to ordinary business terms. preferential transfer cases that the seventh amendment right to jury trial must be in this case, the trustee does not dispute that the transfer at issue paid “a debt issue using post-trial standards. but we caution district courts and parties in future the honorable kristine g. baker, united states district judge for the eastern such as whether the preferential transfer involved an unusual payment method or “in general, an avoidable preference is a transfer of the debtor’s property, to or this is the first case requiring us to apply amended § 547(c)(2). the district lovett, 931 f.2d at 498-99. summary judgment stage in prior cases, and here the parties could have avoided this in re nat’l gas distribs., llc, 346 b.r. 394, 401 (bankr. e.d.n.c. 2006), quoting day delay in making the challenged payment was not consistent with the ordinary a range of 13 to 49 days, we cannot conclude that the district court clearly erred in transactions outside the preference period, all occurring at a time when affiliated (“bapcpa”) significantly amended the ordinary course of business exception in filing. the one-year look-back suggested by the trustee included only three days in re lgi energy solutions, inc., no. 12-3899, slip op. at 4 (8th cir. mar. 20, 2014).3 parties filed cross-motions for summary judgment on momar’s claim that the second the debtor and the creditor.” id. other factors may be relevant in a particular case, respected and therefore, unless a proper demand for jury trial has been waived, the for the eighth circuit in lovett, a one year look-back captured 720 invoices paid prior to the 90-day resulted from atypical pressure to pay. see in re spirit holding co., 153 f.3d 902, quiteoftenindustrystandardsareextremelydifficulttoascertainoutside days after the supplier’s invoice, was made “in the ordinary course of business” notes that affiliated foods made three payments to momar in the year preceding the bankruptcy trustee’s preference claim depends upon whether the creditor has payment the bankruptcy petition was filed may 5, 2009. the following is a list of all


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