Richard M. Hutson, II, Trustee for National Gas Di v. Branch Banking & Trust Company

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
FAYETTEVILLE DIVISION
IN RE:
NATIONAL GAS DISTRIBUTORS, LLC
DEBTOR
CASE NO.
06-00166-8-ATS
RICHARD M. HUTSON, II, TRUSTEE
Plaintiff
v.
BRANCH BANKING & TRUST COMPANY
Defendant.
BRANCH BANKING & TRUST COMPANY
Third-Party Plaintiff
v.
PAUL D. LAWING, JR. and
ANN H. LAWING
Third-Party Defendants.
ADVERSARY PROCEEDING NO.
S-06-00029-8-AP
ORDER ALLOWING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
SO ORDERED.
SIGNED this 31 day of July, 2006.
________________________________________
A. Thomas Small
United States Bankruptcy Judge
____________________________________________________________
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1The complaint also seeks to avoid two transfers of funds to
secure a letter of credit issued by BB&T and to recover funds from BB&T
from NGD's bank accounts. Fortunately, those issues have been resolved
and will be the subject of a separate order.
2In its answer, NGD did raise the defense under § 547(c)(2)(A)
that the transfers were "made in the ordinary course of business," but
that defense has not been pursued.
2
The matter before the court is the motion for summary judgment
filed by the plaintiff, Richard M. Hutson II, trustee for the chapter
11 debtor National Gas Distributors, LLC ("NGD"). The trustee seeks to
avoid and to recover, pursuant to 11 U.S.C. §§ 547 and 550,
preferential transfers aggregating $3,263,516.15 made by NGD to the
defendant, Branch Banking and Trust Company ("BB&T).1 BB&T's defense
under § 547(c)(2)(B) is that the transfers, two loan payments in the
amounts of $755,329.80 and $2,508,186.35, are not avoidable because
they were "made according to ordinary business terms."2 It is not
disputed that the two loan payments meet the requirements of § 547(b)
and may be avoided unless BB&T prevails on its "ordinary business
terms" defense under § 547(c)(2)(B).
The phrase "ordinary business terms" has been analyzed and
interpreted many times by many courts in connection with, and as a part
of, what has been known as the "ordinary course of business" defense
under § 547(c)(2). Section 547(c)(2), however, was amended by the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
("BAPCPA"), Pub. L. No. 109-8, 119 Stat. 23, § 409. That section now
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includes both an "ordinary course of business" defense under §
547(c)(2)(A) and a separate, independent "ordinary business terms"
defense under § 547(c)(2)(B).
Prior to BAPCPA, these two defenses were dual components of a
single defense. Now the phrase "ordinary business terms" included in
§ 547(c)(2)(B), is no longer part of the "ordinary course of business"
defense in § 547(c)(2)(A). So, although the words "ordinary business
terms" were not changed by BAPCPA, the context in which they appear in
§ 547(c)(2) has substantially changed. Whether the words "ordinary
business terms" acquired new meaning in their new context, and what
that meaning might be, are the primary issues before the court.
A hearing was held in Raleigh, North Carolina, on June 28, 2006.
This bankruptcy court has jurisdiction over the parties and
subject matter of this proceeding pursuant to 28 U.S.C. §§ 151,
157, and 1334, and the General Order of Reference entered by the
United States District Court for the Eastern District of North
Carolina on August 3, 1984. This is a "core proceeding" within
the meaning of 28 U.S.C. §§ 157(b)(2)(F), which this court may
hear and determine.
National Gas Distributors, LLC was a purchaser and distributor of
natural gas, propane and other energy commodities, and in January 2006
it became subject to a North Carolina state court receivership. NGD
filed a petition for relief under chapter 11 of the Bankruptcy Code on
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3The assets owned by Mrs. Lawing were subject to a management
agreement between Mrs. Lawing and BB&T (Managing Agency Agreement
originally numbered 50281200 and later renumbered 1152002505).
4
January 20, 2006. On January 24, at the request of the state court
receiver and without objection from the debtor, Mr. Hutson was
appointed chapter 11 trustee.
NGD, which is owned by Paul Lawing, had several ongoing credit
transactions with BB&T including a line of credit, a working capital
loan, and letters of credit. None of NGD's obligations to BB&T were
secured by NGD's assets, but all of the obligations were subject to the
guaranties of Mr. Lawing and his wife, Ann Lawing, and all of the
obligations were secured by assets owned by Mrs. Lawing.3 Two credit
facilities were paid with transfers that are the subjects of this
proceeding: the revolving line of credit, and the working capital loan.
The line of credit was evidenced by a promissory note dated March
31, 2003, in the principal amount of $1,000,000. The line of credit
obligation was to mature on November 5, 2003, but the maturity was
extended to November 5, 2004, and later extended to November 8, 2005,
and then to December 23, 2005. On December 15, 2005, NGD transferred
$755,329.80 to BB&T to pay the balance outstanding under the line of
credit note.
The working capital loan was evidenced by a promissory note dated
September 27, 2004, in the principal amount of $2,500,000. The working
capital note was to mature on March 27, 2005, but the maturity was
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extended to August 5, 2005, and later extended to October 16, 2005, and
then to December 23, 2005. On December 19, 2005, NGD transferred
$2,508,186.35 to BB&T to pay the balance outstanding under the working
capital note.
On December 20, 2005, about the same time that NGD was paying the
line of credit and the working capital loan, NGD transferred $850,000
to BB&T to collateralize NGD's obligations with respect to two letters
of credit in the amounts of $600,000 and $250,000. As a result of
that transfer, BB&T released property owned by Mrs. Lawing that BB&T
held as collateral to secure NGD's liability regarding the letters of
credit. The trustee does not seek to recover the $850,000 transfer,
but the transfer is relevant to the course of dealing between NGD and
BB&T. The trustee, by letter dated February 10, 2006, made demand upon
BB&T to repay the transfers. Trustee Affidavit at ¶ 10.
For a transfer to be avoidable, it must satisfy the requirements
of § 547(b). Section 547(b) provides as follows:
Except as provided in subsection (c) and (i) of this
section, the trustee may avoid any transfer of an interest
of the debtor in property--
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the
debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made--
(A) on or within 90 days before the date of the filing
of the petition; or
(B) between ninety days and one year before the date of
the filing of the petition, if such creditor at the
time of such transfer was an insider; and
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(5) that enables such creditor to receive more than such
creditor would receive if--
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the
extent provided by the provisions of this title.
11 U.S.C. § 547(b) (2005).
It is not disputed that the payments of $755,329.80 and
$2,508,186.35 were transfers of the debtor's property made to or for
the benefit of BB&T on account of antecedent debts, while NGD was
insolvent, and within ninety days of date of NGD's bankruptcy petition.
It is also not disputed that the payments enabled BB&T to receive more
that BB&T would have received had the payments not been made and NGD
was a debtor in a case under chapter 7. The trustee has met his burden
of establishing the elements of § 547(b), and may avoid the two
payments unless BB&T can establish its defense under § 547(c)(2)(B).
11 U.S.C. § 547(c)(2) as amended by BAPCPA provides as follows:
(c) The trustee may not avoid under this section a transfer-
-
(1) . . .
(2) to the extent that such transfer was in payment of a
debt incurred by the debtor in the ordinary course of
business or financial affairs of the debtor and the
transferee, and such transfer was--
(A) made in the ordinary course of business or
financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.
The trustee concedes that the transfers were in payment of debts
that were incurred by NGD in the ordinary course of business of NGD
and BB&T, but disagrees that the payments were made according to
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"ordinary business terms." BB&T has the burden of proving all of the
elements of its defense, Advo-System, Inc. v. Maxway Corp., 37 F.3d
1044, 1047 (4th Cir. 1994), and in support of its defense that the
payments were made according to ordinary business terms, it submitted
the affidavit of BB&T Vice President Stephen G. Smith.
Mr. Smith, the BB&T loan officer who handled the NGD transactions,
stated that BB&T as a matter of routine practice extended the maturity
dates of the line of credit note and the working capital note and would
have extended the maturity date of December 23, 2005, for each of the
notes if requested by NGD. Smith Affidavit ¶ 12. At the time the
notes were paid, BB&T and NGD were discussing a $20,000,000 revolving
line of credit that would have paid the BB&T notes as well those with
another lender. Smith Affidavit ¶ 8. Mr. Smith states that neither
note was ever in default, and BB&T had no knowledge of NGD's financial
difficulties. Smith Affidavit ¶ 12. BB&T "did not demand, request, or
in any way suggest that the Line of Credit Note or the Working Capital
Note be paid," Smith Affidavit ¶ 12, and "BB&T made no attempts to
collect" on the notes. Smith Affidavit ¶ 15. According to Mr. Smith,
he was told by Mr. Lawing that the notes were paid in full as "part of
Mr. and Mrs. Lawing's end-of-the-year estate planning." Smith
Affidavit ¶ 9.
Mr. Smith, who has been employed with BB&T for approximately 15
years and has been working in the banking industry for approximately 30
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8
years, states that he is "familiar with the standard and ordinary terms
used at BB&T and in the banking industry in general for commercial
loans, including line of credit loans and working capital loans." Smith
Affidavit ¶ 1. The following statements from Mr. Smith's affidavit are
in the nature of Mr. Smith's expert opinion regarding "ordinary
business terms":
! "The terms of the Line of Credit Note and the Working
Capital Note are typical of those normally extended to
similar businesses that borrow money from BB&T. The terms
of the Line of Credit Note and the Working Capital Note are
typical of those normally extended to similar businesses in
the banking industry." Smith Affidavit ¶ 6.
! "It is a customary practice within BB&T and in the banking
industry for a lender to execute modification agreements
extending maturity dates of promissory notes for borrowers.
The Line of Credit Note and the Working Capital Note and the
modifications to these notes were done on standard BB&T
documents and contain terms that are standard and ordinary
at BB&T and in the banking industry." Smith Affidavit ¶ 7.
! "When a promissory note becomes due, it is typical and
customary at BB&T and in the banking industry for a borrower
to pay the note in full on the maturity date or within
several weeks before the maturity date." Smith Affidavit ¶
13.
! "The payment of the Line of Credit Note on December 15, 2005
and the Working Capital Note on December 18, 2005 were made
within the terms of the Notes, as modified. These payments
were well within the standard terms and practice at BB&T, as
well as a standard practice in the banking industry in
general." Smith Affidavit ¶ 14.
These four statements capture the heart of BB&T's evidence in support
of its defense.
The trustee submitted an affidavit in support of his motion for
summary judgment that supports the requirements of § 547(b), but the
affidavit does not address BB&T's "ordinary business terms" defense.
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"[S]ummary judgment is proper 'if the pleadings,
depositions, answers to interrogatories and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law.'" Celotex Corp.
v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986). In
making this determination, conflicts are resolved by viewing
all facts and inferences to be drawn from the facts in the light
most favorable to the non-moving party. United States v.
Diebold, Inc., 369 U.S. 654, 82 S. Ct. 993 (1962). Summary
judgment should not be granted unless the moving party
establishes his right to judgment "with such clarity as to leave
no room for controversy." Portis v. Folk Constr. Co., 694 F.2d
520, 522 (8th Cir. 1982).
The trustee's entitlement to summary judgment depends on
whether BB&T has set forth sufficient evidence to establish its
"ordinary business terms" defense. In making that
determination, the court must first ascertain the meaning of
"ordinary business terms." As already mentioned "ordinary
business terms" has been interpreted by many courts as a part of
the "ordinary course of business" defense under § 547(c)(2).
However, that section was amended and reconfigured by BAPCPA.
The change was accomplished "by the simple expedient of changing
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an 'and' to an 'or,' but the defense "changed dramatically."
Charles J. Tabb, The Brave New World of Bankruptcy Preferences,
13 Am. Bankr. Inst. L. Rev. 425, 428 (2005). Prior case law
provides the answers to some of the "ordinary business terms"
questions, but after BAPCPA, those answers may no longer be
complete.
After the amendments made by BAPCPA, § 547(c)(2) is, in
effect, a new statute, and, as with any new statute, its
interpretation starts with the statute's plain meaning. United
States v. Ron Pair Enters., Inc., 489 U.S. 235, 243, 109 S. Ct.
1026, 1031 (1989); Lamie v. U.S. Trustee, 540 U.S. 526, 536, 124
S. Ct. 1023, 1031 (2004). Unfortunately, the phrase "ordinary
business terms" is so inclusive that a plain meaning analysis is
not helpful. Neither is the legislative history to the BAPCPA
amendments.
The legislative history regarding BAPCPA § 409 provides as
follows:
[S]ection 547(c)(2) of the Bankruptcy Code [is amended] to
provide that a trustee may not avoid a transfer to the
extent such transfer was in payment of a debt incurred by
the debtor in the ordinary course of the business or
financial affairs of the debtor and the transferee and such
transfer was made either: (1) in the ordinary course of the
debtor's and the transferee's business or financial affairs;
or (2) in accordance with ordinary business terms. Present
law requires the recipient of a preferential transfer to
establish both of these grounds in order to sustain a
defense to a preferential transfer proceeding. . . .
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4The Task Force on Preferences was formed in May 1995 by the
Unsecured Trade Creditor Committee of the American Bankruptcy
Institute, chaired by Joseph S.U. Bodoff of Boston. The reporter for
the task force was Charles J. Tabb, and the report of the task force,
11
E-2 Collier on Bankruptcy App. Pt. 10(b) at App. Pt. 10-355 (Alan N.
Resnick and Henry J. Sommer, eds., 15th ed. rev. 2005). The
legislative history emphasizes that "or" is to be read in the
disjunctive but otherwise imparts no insight into how the reconstructed
statute should be interpreted.
Although the BAPCPA legislative history is sparse, the development
of the proposal on which the amendments to § 547(c)(2) is based is well
documented. See Tabb, Bankruptcy Preferences, 13 Am. Bankr. Inst.
L. Rev. at 440-445.
Prior to the BAPCPA amendments § 547(c)(2) provided:
(c) The trustee may not avoid under this section a transfer-
(1) . . .
(2) to the extent 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 transferee;
(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) (1994).
Creditors were dissatisfied with several aspects of preference
law, including the uncertainty of the "ordinary course of business
defense," and an American Bankruptcy Institute task force was created
in 1995 to examine those concerns.4 Tabb, Bankruptcy Preferences,
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"Preference Survey Report," was published in May 1997. Tabb,
Bankruptcy Preferences, 13 Am. Bankr. Inst. L. Rev. at 425-426.
12
13 Am. Bankr. Inst. L. Rev. at 425. The task force's report made
four recommendations for changes to preference law including a
recommendation to "[c]larify the ordinary course of business defense."
American Bankruptcy Institute Task Force on Preferences, PREFERENCE
SURVEY REPORT (PART OF THE BANKRUPTCY REFORM STUDY PROJECT) (1997);
Tabb, Bankruptcy Preferences, 13 Am. Bankr. Inst. L. Rev. at 427.
The task force recommended that the ordinary course of business defense
could be clarified by more "objectification," and that recommendation
was adopted by the National Bankruptcy Review Commission ("NBRC").
Tabb, Bankruptcy Preferences, 13 Am. Bankr. Inst. L. Rev. at 427.
The NBRC recommendation was adopted by Congress and included in BAPCPA.
NBRC Recommendation 3.2.3 provided that "11 U.S.C. § 547(c)(2)(B)
should be amended to provide a disjunctive test for whether a payment
is made in the ordinary course of the debtor's business if it is made
according to ordinary business terms." Nat'l Bankr. Rev. Comm'n,
BANKRUPTCY: THE NEXT TWENTY YEARS, FINAL REPORT (1997); Tabb,
Bankruptcy Preferences, 13 Am. Bankr. Inst. L. Rev. at 427. The
NBRC report explained that
[t]he Recommendation adopts the view that the conduct
between the parties should prevail to the extent that there
was sufficient prepetition conduct to establish a course of
dealing. A disjunctive test telescopes the ordinary course
inquiry on the course of conduct between the parties. In
the event there is not sufficient prepetition conduct to
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5A recommendation made by Timothy M. Lupinacci in 1996 would have
more effectively achieved NBRC's stated intention. Mr. Lupinacci's
recommendation was that the statute be modified to provide under
section 547(c)(2)(B) that the transfer was "made in [the] ordinary
course of business or financial affairs of the debtor and the
transferee, or if no such course of affairs exists, such transfer was
made according to ordinary business terms." Timothy M. Lupinacci,
Analyzing Industry Standards in Defending Preference Actions: Equitable
Purpose in Search of Statutory Clarity, 5 J. Bankr. L. & Prac. 129, 168
(1996).
13
establish a course of dealing, then industry standards
should supply the ordinary course benchmark. Quite often
industry standards are extremely difficult to ascertain
outside bankruptcy and difficult to prove in the context of
preference litigation. Thus, it is more accurate to rely on
the relationship between the parties.
NBRC Report, G Collier on Bankruptcy App. Pt. 44 at App. Pt. 44-798
(Alan N. Resnick and Henry J. Sommer, eds., 15th ed. rev. 2005).
Although the stated intention of the NBRC recommendation adopted
by Congress in BAPCPA was to limit the use of the "hard-to-prove
objective industry test" to those rare cases where "there was
insufficient pre-petition conduct between the parties to establish a
course of dealing," the statute clearly does not contain that
limitation. Tabb, Bankruptcy Preferences, 13 Am. Bankr. Inst. L.
Rev. at 442. "It [the objective industry standard] would appear to be
equally available even if the parties do have a course of dealing, yet
the transfer at issue does not conform to that course of dealing, but
nevertheless still might conform to the industry standard."5 Tabb,
Bankruptcy Preferences, 13 Am. Bankr. Inst. L. Rev. at 442.
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In sum, although the NBRC recommendation, upon which the new
statute is based, intended that the objective industry standard of
"ordinary business terms" should only be utilized where no course of
dealing between the parties has been established, the statute as
amended allows the objective "ordinary business terms" defense to be
used where a course of dealing existed and even where the transfers at
issue clearly deviated from that course of conduct.
While the NBRC Report explains the derivation of the statute, it
provides no guidance to the meaning of "ordinary business terms." For
that we turn to pre-BAPCPA case law.
To best understand how the statutory language should be
interpreted in its new capacity as a separate "stand alone" statutory
requirement rather than as a distinct but secondary requirement in a
series of others, it is helpful to review the development of the
extensive pre-BAPCPA case law interpreting "ordinary business terms."
Section 547(c)(2) of the Bankruptcy Code was enacted as part of
the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549
(1978). "During the first decade of the Bankruptcy Code, most courts
concentrated solely on the relationship between the debtor and the
creditor in determining whether the defendant had satisfied its burden
of proof under both subparagraphs (B) and (C) [of § 547(c)(2)]. Only
in the absence of a history between the parties did these courts look
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to transactions involving third parties." 5 Collier ¶ 547.04[2][a][i]
at 547-56.
Then, in the late 1980s to 1990s, developing precedent required
"an independent inquiry into whether the payment practice at issue
comport[ed] with industry standards." 5 Collier ¶ 547.04[2][a][i] at
547-56. The United States Court of Appeals for the Fourth Circuit in
Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044, 1048 (4th Cir. 1994),
"refuse[d] to say that Congress wrote a separate subsection for no
reason at all," and observed that subsection (C) must be analyzed
objectively because "the use of subsection B's subjective approach
under subsection C would render subsection C superfluous."
Courts endeavored to construe the second and third subsections in
a way that minimized overlap between them. The "march of the circuits
to the holding that [former] subparagraph (C) requires an independent
analysis of the standard of the industry was based partially upon a
principle of statutory construction that '[a]n interpretation of §
547(c)(2)(C) which focuses exclusively on the relationship between the
creditor and the debtor, would deprive subsection (c)(2)(C) of any
independent meaning because (c)(2)(B) already requires that the payment
be evaluated in the context of the ongoing relationship between the
debtor and the creditor.'" 5 Collier ¶ 547.04[2][a] at 547-56-7
(quoting Miller v. Florida Mining & Materials (In re A.W. & Assocs.,
Inc.), 136 F.3d 1439, 1442 (11th Cir. 1998)).
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The result of all this was that subsection (C) was perceived as
somewhat less important because it focused on objective, larger-scale
industry standards instead of the more immediate facts of the parties'
relationship, which were reserved for discussion under the umbrella of
subsection (B). The required division of focus regarding the two
prongs thus shaped the courts' development of the standard to be proved
under each as well as the comparative weight to be given to each in
differing cases. See, e.g., In re Molded Acoustical Prods., Inc., 18
F.3d 217, 224 (3d Cir. 1994) (significance of industry standards
depends in part on length and nature of relationship between debtor and
creditor).
In the Fourth Circuit, the "ordinary business terms" prong has
long been considered subsidiary to the "ordinary course of business"
prong. In the leading Fourth Circuit case, Advo-System, Inc. v. Maxway
Corp., 37 F.3d 1044, 1049-50 (4th Cir. 1994), the court concluded that
the weight to be given to subsection (C) depended in large part on the
length of the parties' relationship. The court adopted a "sliding
scale" approach developed by the Third Circuit Court of Appeals in In
re Molded Acoustical Prods., Inc., 18 F.3d 217, 226 (3rd Cir. 1994),
which in turn was derived in part from a decision of the Seventh
Circuit in In re Tolona Pizza Products, Corp., 3 F.3d 1029 (7th Cir.
1993).
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As the court explained in Advo-System: "At bottom, '[t]he most
important thing [as far as the preference statute is concerned] 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,
preferably well before, the preference period.'" Advo-System, 37 F.3d
at 1049 (quoting Tolona Pizza, 3 F.3d at 1032). Only in the absence of
an established history between the creditor and debtor did the industry
norm become "crucial," because only then was there "no baseline against
which to compare the pre-petition transfers at issue to confirm the
parties would have reached the same terms absent the looming
bankruptcy." Advo-System, 37 F.3d at 1049-50 (quoting Molded
Acoustical, 18 F.3d at 226). Where the prior history existed, the
industry norm was relevant but "less significant." Advo-System, 37
F.3d at 1050.
The yolk between the "ordinary course of business" defense and the
"ordinary business terms" components of § 547(c)(2) has been removed by
BAPCPA, and "ordinary business terms" has been released from the
controlling influence of the ordinary course of business subsection.
The "ordinary business terms" defense is now the equal of the "ordinary
course of business" defense, and that change affects pre-BAPCPA case
law construing the meaning of "ordinary business terms." See 5 Collier
¶ 547.04[2][a] at 547-58 (Cases "decided under former section
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547(c)(2)(C) . . . will be less instructive under the revisions
[because] many courts subordinated the importance of "ordinary business
terms" in those cases where the parties had an extensive history.");
see also, e.g., Advo-System, 37 F.3d at 1051-52.
Most courts agreed that an "ordinary business terms" analysis
under pre-BAPCPA § 547(c)(2) required an objective application of
industry standards. The objective analysis served two important
functions, according to the Court of Appeals for the Fourth Circuit:
"'One is evidentiary. If the debtor and creditor dealt on terms that
the creditor testifies were normal for them but that are wholly unknown
in the industry, this casts some doubt on his (self-serving) testimony
. . . . The second possible function of the subsection is to allay the
concerns of creditors that one or more of their number may have worked
out a special deal with the debtor, before the preference period,
designed to put that creditor ahead of the others in the event of
bankruptcy.'" Advo-System, 37 F.3d at 1048 (quoting Tolona Pizza, 3
F.3d at 1032).
Frequently, both the debtor and the creditor, especially where the
creditor was a trade creditor, were involved in the same or related
industries. E.g., Tolona Pizza, 3 F.3d at 1031 (debtor was pizza maker
and creditor was sausage supplier); In re Gulf City Seafoods, Inc., 296
F.3d 363, 366 (5th Cir. 2002) (debtor purchased, processed and resold
seafood, and creditor supplied the seafood). In some cases, the
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debtor and creditor are in entirely different industries, such as in
the present case where the creditor is a commercial lender and the
debtor was a distributor of natural gas commodities. To identify the
relevant standard, the relevant industry or industries must also be
determined.
At least one Circuit Court has held that it is the debtor's
industry that is the focus of the "ordinary business terms" analysis.
See In re Accessair, Inc., 314 B.R. 386, 394 (8th Cir. BAP 2004)
("Section 547(c)(2)(C) requires the transferee to demonstrate that the
debtor made the preferential transfer according to the ordinary
business terms prevailing within the debtor's industry."), aff'd, 163
Fed. Appx. 445 (8th Cir. 2006). But, the Court of Appeals for the
Fourth Circuit has held that the industry standard to be applied when
examining "ordinary business terms" is that of the creditor's industry.
Advo-System, 37 F.3d at 1048 (courts must "look to the norm in the
creditor's industry").
BB&T maintains, consistent with the court's ruling in Advo-System,
that the applicable industry standard is that of the banking industry.
According to BB&T, it is standard banking practice for a bank to
receive payment on a note shortly before the note matures. BB&T argues
that both the Line of Credit Note and the Working Capital Note matured
on December 23, 2005, and that payments received on December 15, 2005
(Line of Credit Note) and on December 19, 2005 (Working Capital Note)
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were according to "ordinary business terms." There are several
problems with that argument.
Notwithstanding the holding of the Court of Appeals for the Fourth
Circuit in Advo-System, the BAPCPA changes to § 547(c)(2) now require
an examination of more than just the standards of the creditor's
industry. Many courts have observed many times that the purpose of the
ordinary course of business defense is to "leave undisturbed normal
financial relations, because it does not detract from the general
policy of the section to discourage unusual action by either the debtor
or its creditors during the debtor's slide into bankruptcy." E.g.,
Union Bank. v. Wolas, 502 U.S. 151, 160, 112 S. Ct. 527, 532
(1991)(quoting H.R. Rep. No. 95-595, at 373, U.S. Code Cong. & Admin.
News 1978, p. 6329); see also In re Jeffrey Bigelow Design Group, Inc.,
956 F.2d 479, 487 (4th Cir. 1992) (same). If the "ordinary business
terms" defense only requires examination of the industry standards of
the creditor, there would be no review or check on the debtor's
conduct.
Now that "ordinary business terms" is a separate defense, the
court must consider the industry standards of both the debtor and its
creditors. Furthermore, there are general business standards that are
common to all business transactions in all industries that must be met.
Based on the uncontroverted facts in this case, the transfers to BB&T
cannot meet those standards.
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BB&T contends that the payment of the two notes was consistent
with banking industry standards. However, the proffered evidence is
not sufficient to support that contention. BB&T's affidavit, which
states, for example, that "[w]hen a promissory note becomes due, it is
typical and customary at BB&T and in the banking industry for a
borrower to pay the note in full on the maturity date or within several
weeks before the maturity date," does not establish the industry
standard. Smith Affidavit ¶ 13. Such a statement is too general to
establish industry norms, or to support the "ordinary business terms"
defense. The Court of Appeals for the Fourth Circuit explained in
Advo-System, that a creditor may not characterize the industry norm "at
too high a level of generality," because generality would render the
subsection "virtually meaningless." Advo-System, 37 F.3d at 1051.
BB&T's general statement that a payment meets banking standards is not
sufficient.
The industry standards must be applied to the factual
circumstances of the transfer. It may be standard practice for
borrowers to pay loans close to the time that the loans mature, but is
it standard in the banking industry for a borrower with a multi-million
dollar enterprise to pay all of its corporate loans based upon the
owner's end-of-the-year personal financial planning, especially where
the corporation has not arranged for financing to continue the
business? If that conduct is standard within the banking industry, it
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is certainly not ordinary from the debtor's perspective and is not
consistent with sound business practice in general.
From BB&T's point of view, it did nothing out of the ordinary.
BB&T had no knowledge that NGD was having financial difficulties, did
not pursue any collection activity against NGD, and merely received
payment on its loans when those loans became due. The court must
accept those assertions as true, but that does not entitle BB&T to
prevail on its preference defense. The "ordinary business terms"
defense also involves consideration of the debtor's industry standards
and the standards applicable to business in general. When those
standards are examined, the conduct of the debtor in paying its loans
was not in accordance with "ordinary business terms." It is clear what
was going on here: NGD was going out of business and was paying off
those debts which Mr. and Mrs. Lawing guaranteed and for which Mrs.
Lawing's assets stood as collateral. These payments were not made
"according to ordinary business terms" and are not the type of
transfers that the "ordinary business terms" defense is designed to
protect. Consequently, BB&T may not prevail on its "ordinary business
terms" defense.
The change made by the BAPCPA amendments "substantially lightens
the creditor's burden of proof, by allowing the creditor protection
from preference recovery if the transfer meets industry standards,
regardless of whether it was in the ordinary course of business of the
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6See In re Cybermech, Inc., 13 F.3d 818, 822 (4th Cir. 1994) ("It
is well-settled that bankruptcy courts have discretion to award
prejudgment interest in § 547 preferential transfer actions, and to
compute that interest from the date of demand for the return of the
transferred funds."); In re H.P. King Co., Inc., 64 B.R. 487, 492
(Bankr. E.D.N.C. 1986) (court applies postjudgment rate when
determining prejudgment interest in preferential transfer cases).
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debtor and the creditor." Richard Levin & Alesia Ranney-Marinelli, The
Creeping Repeal of Chapter 11: The Significant Business Provisions of
the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79
Am. Bankr. L. J. 603, 637 (2005). Although the creditor's burden has
been lightened by BAPCPA, it still has some weight, and it has not been
lightened to the extent that BB&T can prevail in this proceeding. The
trustee is entitled to avoid and to recover from BB&T preferential
payments totaling $3,263,516.15 plus interest at the federal judgment
rate of 4.67% from the date of demand, February 10, 2006, until paid.6
Accordingly, the trustee's motion for summary judgment is GRANTED, and
a separate judgment will be entered.
SO ORDERED.
END OF DOCUMENT
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