Nesse v. Trishco, Inc.

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Entered: September 21, 2006 Case 04-01970 Doc 42 Filed 09/21/06 Page 1 of 10

Date signed September 20, 2006

IN THE UNITED STATES BANK
DISTRICT OF MARY .

at GREENBELT _ a a

THOMAS J, CATLIOTA

In Re: * U. 8 BANKRUPTCY JUDGE

Maryland K.C. Incorporated * CaseNo. 02-22210-TJC
* Chapter 11
Debtor. *
SK AKOK KKK KK KOKA KK KR KKK KKK KK KKK KK KK *k
Janet M. Nesse, Chapter 11 Trustee *
*
*
Plaintiff *
Vv. * Adv.
Trishco, Inc. * Proc. 04-01970
*
*
Defendant. *

MEMORANDUM OF DECISION FINDING IN FAVOR OF PLAINITEF, TANET
NESSE, CHAPTER 11 TRUSTEE

Plaintiff Janet M. Nesse, the Chapter 11 Trustee for the bankruptcy estate of
Maryland K.C. Incorporated (the "Debtor"), filed a complaint against Trishco, Inc. (the
Defendant"), to Avoid and Recover a Preferential Transfer pursuant to 11 U.S.C. §§ 547
and 550. The Defendant filed an answer contending that the transfer was a non-avoidable
transfer made in the ordinary course of business pursuant to 11 U.S.C. § 547(c)(2). For
the reasons set forth below, the relief sought by the Plaintiff will be granted and a

judgment in favor of the Plaintiff will be entered.

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FINDINGS OF FACT
The Debtor filed a petition under Chapter 11 of the Bankruptcy Code on October
22, 2002. On January 9, 2003, the Court entered an order appointing the Plaintiff as the
Chapter 11 Trustee pursuant to 11 U.S.C. § 1104. The Plaintiff filed this adversary
complaint on August 9, 2004, within the two year limitations period set forth in 11 U.S.C.
§546, seeking to avoid, pursuant to 11 U.S.C. §§ 547 and 550, a $15,260.00 payment
made by the Debtor to the Defendant, as described more fully below. The Defendant
filed an answer to the complaint asserting the ordinary course of business defense under
11 U.S.C. § 547(c)(2). The Court held a trial on the Complaint on July 26, 2006.
On February 25, 2002, the Debtor, acting as the general contractor on a helicopter
hanger/jet fuel system project for the United States Department of Interior, entered into a
subcontract (the “Subcontract”) with the Defendant, a mechanical contractor. The
Subcontract provided that the Defendant would perform certain mechanical contracting
work on the project, as described therein, for $123,490.00. The Subcontract further
provided that the Debtor would make progress payments, less ten percent (10%)
retainage, “for work satisfactorily performed no later than seven (7) days from receipt of
payment from Owner by [Debtor] for [Defendant’s] work.”(Exhibit A at 1). The
Defendant had not previously done any work for, or been a party to any contract with, the
Debtor.
Defendant started work on the Subcontract around the first of March, 2002, and
thereafter issued to the Debtor an invoice for work performed that month (the “March
Invoice”). Defendant performed additional work in April, 2002 and invoiced the Debtor
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for this work (the “April Invoice”). The Defendant did no work on the Subcontract in
May or June, 2002.
According to the testimony of Mr. Ron Manning, a part owner and Vice President
of the Defendant, the March Invoice and the April Invoice were paid by July 1, 2002.
Mr. Manning testified that he knew this because no amounts were outstanding when the
July work was performed. Mr. Manning further testified that he did not know when the
March Invoice and the April Invoice were actually paid, but he “assumed” these two
invoices were paid within thirty days or so after they were sent.
As stated above, the Defendant again worked on the Subcontract in July, 2002.
On July 31, 2002, Defendant invoiced the Debtor for the July work in the amount of
$15,260.00 (the “July Invoice”) (Exhibit B)1 . On or around September 11, 2002, the
Defendant deposited Check No. 24272 (Exhibit C) dated September 3, 2002, in the
amount of $15,260.00 from the Debtor in satisfaction of the July Invoice. No retainage
was withheld by the Debtor for the July Invoice.
Mr. Manning testified that he has been in the mechanical contracting business for
forty years, including twenty-three years with the Defendant. He testified that in his
experience it was customary for subcontractors to be paid within thirty to forty-five days
after invoice.
Mr. Manning further testified that the Federal government does not retain
amounts on payments to the contractor on government projects. Therefore, the contractor
does not retain amounts on payments to the subcontractor. He said the parties understood
from the inception of the Subcontract that the Debtor would not retain payments from the
1 Although the July 31, 2002 invoice is labeled “Invoice #02”, Mr. Manning testified that the reference to
“#02” was an error, and that the July 31 invoice was in fact the third invoice for the Subcontract.
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Defendant. He testified, however, that the Subcontract was a standard form contract that
included the boiler-plate provision that the Debtor would deduct from invoice payments
ten percent (10%) retainage, as described above.
CONCLUSIONS OF LAW
JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and
1334. This is a core proceeding pursuant to 11 U.S.C. § 157(b). Venue is proper
pursuant to 28 U.S.C. § 1409.
DISCUSSION
The Plaintiff brought this preference action pursuant to 11 U.S.C. § 547(b).2
Section 547 provides, inter alia, the following rules:
(b) 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
(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.
2 It is important to note that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(“BAPCPA”) made significant changes to Section 547. However, this case was filed on October 22, 2002,
well before the effective date of BAPCPA. See Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, Pub. L. No. 109-8 §1501, 119 Stat 23, 216 (2005). Accordingly the applicable statute and
related case law addressed herein are to pre-BAPCPA preference law.
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11 U.S.C. § 547(b). At trial, the Plaintiff proffered the facts necessary to establish the
prima facie elements of Section 547(b), and Defendant did not object to the proffered
facts. Based on the Plaintiff’s proffer and the lack of objection thereto, the Court
concludes that Plaintiff has met her burden of establishing the prima facie elements of a
preference under Section 547(b).
The Defendant, however, asserts that the payment on the July Invoice was within
the purview of the ordinary course of business defense under 11 U.S.C. § 547(c)(2).
Section 547(c) provides, in pertinent part, the following requirements:
(c) The Trustee may not avoid under this section a transfer -
(2) to the extent that 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). The Defendant has the burden of proving each of the elements of
Section 547(c)(2) by a preponderance of the evidence. Advo-System v. Maxway Corp.,
37 F.3d 1044, 1047 (4th Cir. 1994) (citing 11 U.S.C. § 547(g)).
"Those courts testing a transfer for ‘ordinariness’ under section 547(c)(2) have
generally focused on the prior conduct of the parties, the common industry practice, and,
particularly, whether payment resulted from any unusual action by either the debtor or
creditor." Harman v. First Am. Bank of Md. (In re Jeffrey Bigelow Design Group, Inc.),
956 F.2d 479, 486 (4th Cir. 1992) (quoting Collier on Bankruptcy Vol. 4 ¶ 547.10, at
547-50 to 51 (15th ed. 1990)). The “focus of [the] inquiry must be directed to an analysis
of the business practices which were unique to the particular parties under consideration."
Id., (quoting Waldschmidt v. Ranier (In re Fulghum Constr. Corp.), 872 F.2d 739, 743
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(6th Cir. 1989)). This inquiry is "peculiarly factual." Id. (quoting In re First Software
Corp., 81 Bankr. 211, 213 (Bankr. D. Mass. 1988)).
In order to prevail on an ordinary course of business defense, the Defendant must
establish all three elements under section 547(c)(2). Lubman v. C.A. Guard Masonry
Contr., Inc. (In re Gem Constr. Corp.), 262 B.R. 638, 654 (Bankr. D. Va. 2000) (citing
Bigelow 956 F.2d at 488). First, the Defendant must show that the debt was incurred in
the ordinary course of business or financial affairs of the Debtor and the Defendant. 11
U.S.C. § 547(c)(2)(A). "This means that the incurring of the debt would be a logical and
ordinary action for these parties.” Id. at 654-55.
Second, the Defendant must prove that the Debtor made the transfer in the
ordinary course of business between the Debtor and the Defendant. 11 U.S.C. §
547(c)(2)(B). When determining whether a transfer took place in the ordinary course of
business between a debtor and a transferee, Courts look to the following factors:
(1) the length of time the parties were engaged in the transactions at issue;
(2) whether the amount or form of tender differed from past practices;
(3) whether the debtor or creditor engaged in any unusual collection or payment
activity; and
(4) whether the creditor took advantage of the debtor's deteriorating financial
condition.
Lubman, 262 B.R. at 655 (quoting Sulmeyer v. Pacific Suzuki (In re Grand Chevrolet,
Inc.), 25 F.3d 728, 732 (9th Cir. 1994)).
Finally, the Defendant must show that the transfer was made in accordance with
ordinary business terms. 11 U.S.C. § 547(c)(2)(C). In Advo-Systems, supra, the Court
of Appeals for the Fourth Circuit has set forth a sliding scale test to determine whether a
payment was made within ordinary business terms. The Court gave the following
guidance:
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…the extent to which a preference payment's credit terms can stray from the
industry norm yet still satisfy § 547(c)(2)(C) depends on the duration of the
debtor-creditor relationship. The more cemented (as measured by its duration) the
pre-insolvency relationship between the debtor and the creditor, the more the
creditor will be allowed to vary its credit terms from the industry norm yet remain
within the safe harbor of § 547(c)(2). A "sliding-scale window" is thus placed
around the industry norm. On one end of the spectrum, when the relationship
between the parties is of recent origin, or formed only after or shortly before the
debtor sailed into financially troubled seas, the credit terms will have to endure a
rigorous comparison to credit terms used generally in a relevant industry. Id. In
such a case, only those departures from [the] relevant industry's norms which are
not so flagrant as to be 'unusual' remain within subsection C's protection.
Advo-System, 37 F.3d at 1049 (internal citations and quotation marks omitted). The
same Court gave the following definition for “ordinary business terms”:
ordinary business terms refers to the range of terms that encompasses the
practices in which firms similar in some general way to the creditor in question
engage, and that only dealings so idiosyncratic as to fall outside that broad range
should be deemed extraordinary and therefore outside the scope of subsection C.
Id. at 1048 (quoting In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1033 (7th Cir. 1993)).
In the case at bar, the Defendant has failed to meet its burden of showing that the
payment was made in the ordinary course of business between itself and the Debtor.
Therefore, the Defendant has not met the second element of its ordinary course defense,
as set forth in Section 547(c)(2)(B).3
Mr. Manning testified that the Defendant had sent the March Invoice and the
April Invoice prior to the July Invoice that resulted in the alleged preferential transfer at
issue. Mr. Manning further testified that he did not know when these prior invoices were
paid; he only was certain that they were paid prior to July 1, 2002. Unfortunately for the
Defendant, neither the March Invoice nor the April Invoice was submitted in the record,
and no evidence was adduced as to when the invoices were issued or paid, other than Mr.
3 Because the Court finds and concludes that the Defendant has failed to establish that the transfer was in
the ordinary course of business between the Debtor and the Defendant, the Court need not consider the
Section 547(c)(2)(A) or (c)(2)(C) elements of the Defendant’s ordinary course defense.
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Manning’s testimony that they were paid by July 1, 2002 and his assumption that they
were paid timely.
While these prior invoices and payments fall outside the 90 day preference
window and are not subject to recovery by the Plaintiff, the facts surrounding the
payment of these two invoices are critical to a determination of whether the payment of
the July Invoice was in the ordinary course of business between the Defendant and the
Debtor. The record establishes that there were three invoices between the Defendant and
the Debtor, and that the Debtor made a payment on each of those invoices. Thus, in order
for the Court to determine whether the payment on the July Invoice was made within the
ordinary course of business between the Debtor and the Defendant, the Court needs
evidence establishing when the Debtor paid the March Invoice and the April Invoice.
Assuming the March Invoice and the April Invoice were each issued on the last
day of its respective month, similar to the July Invoice, the record establishes only that
the March Invoice was paid within 90 days of its issuance and the April Invoice was paid
within 60 days of its issuance. Both periods are substantially longer than the period for
payment of the July Invoice, which was thirty-four days by reference to the date of the
check and forty-two days by reference to the date of deposit. While the March Invoice
and the April Invoice may have been paid sooner than ninety and sixty days, respectively,
the Court has no way of making that determination.4
The burden is on the Defendant to establish all the elements of this defense. The
testimony of Mr. Manning showed that there was a payment history between the Debtor
4 Because of the significance of the timing on these payments to the Defendant’s ordinary course defense,
the Court will not accept Mr. Manning's “assumption” that the March Invoice and April Invoice were paid
timely. See Fed.R.Evid. 602 (Requiring that a witness must have personal knowledge of the subject of the
testimony).
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and the Defendant. Nonetheless, the Defendant failed to provide any evidence as to the
method and timing of these prior payments. Consequently, the Defendant cannot show
that the payment on the July Invoice was made within the ordinary course of business
between the Debtor and the Defendant because the Defendant has failed to establish what
was ordinary between the parties. Therefore the Defendant has failed to prove the
affirmative defense that the transfer was made in the ordinary course of business.
CONCLUSION
For the reasons stated above, the Court finds that the payment by the Debtor to the
Defendant in the amount of $15,260.00 by check dated September 3, 2002, constituted a
preference under 11 U.S.C. § 547(b). Moreover, the Court finds that the transfer is not
immune from recovery by the Plaintiff because the Defendant has failed to meet its
burden of establishing the affirmative defense of ordinary course of business.
Accordingly, this Court will enter a judgment in favor of the Plaintiff in the amount of
$15,260.00.
Copies To:
Plaintiff
Defendant
All Counsel
Chapter 11 Trustee
U.S. Trustee
END OF ORDER
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