Faith, Chapter 7 Trustee v. Inline Distributing Company

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NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
NORTHERN DIVISION
In re: ) Case No. 9:13-bk-12388-PC
)
)
NEWTON ENTERPRISES, ) Chapter 7
)
)
Debtor. ) Adversary No. 9:14-ap-01127-PC
)
)
JEREMY W. FAITH, )
CHAPTER 7 TRUSTEE, ) MEMORANDUM DECISION
Plaintiff, )
)
v. )
)
INLINE DISTRIBUTING CO., ) Date: May 11, 2015
) Time: 9:00 a.m.
) Place: United States Bankruptcy Court
) Courtroom # 201
Defendant. ) 1415 State Street
) Santa Barbara, CA 93101
Jeremy Faith, Chapter 7 Trustee (“Faith”) seeks a judgment against Inline Distributing
Co. (“Inline”) avoiding a pre-petition transfer by Newton Enterprises (“Debtor”) to Inline in the
amount of $10,179.30 as preferential under 11 U.S.C. § 547.1 Trial of this adversary proceeding
1 Unless otherwise indicated, all “Code,” “chapter” and “section” references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1330 after its amendment by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 (2005). “Rule”
references are to the Federal Rules of Bankruptcy Procedure (“FRBP”), which make applicable
FILED & ENTERED
JUN 03 2015
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	RUST
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was commenced and concluded on May 11, 2015. Having considered the parties’ joint pretrial
order, the evidentiary record and arguments of counsel, the court will enter a judgment in favor
of Inline based upon the following findings of fact and conclusions of law made pursuant to
F.R.Civ.P. 52(a), as incorporated into FRBP 7052.
I. STATEMENT OF FACTS
Debtor was a wholesale building material supplier that did business as Newton Building
Materials and Newton Supplies. Debtor filed a voluntary petition under chapter 7 on September
23, 2013. Faith is the duly appointed trustee in the case.
On June 30, 2013, the Debtor ceased doing business and began collecting accounts
receivable and liquidating assets to pay creditors. On August 2, 2013, within the 90-day period
preceding the petition date, Debtor issued Check # 31328 payable to the order of Inline in the
amount of $10,179.30 dated August 2, 2013 (the “Transfer”), in payment of the following Inline
invoices:
Invoice No. Invoice Date P.O Date Amount Pmt. Rec’d Days to Pay
597895-00 4/5/13 4/4/13 1565.00 8/7/13 124
597789-00 4/5/13 4/3/13 722.00 8/7/13 124
597788-00 4/5/13 4/3/13 2120.502 8/7/13 124
598248-00 4/9/13 4/8/13 735.80 8/7/13 120
598962-00 4/16/13 4/15/13 60.00 8/7/13 113
598852-00 4/16/13 4/15/13 4976.00 8/7/13 113
The check was drawn on the Debtor’s checking account at City National Bank. Debtor’s
Transfer to Inline was made over a month after the Debtor had closed its doors.
certain Federal Rules of Civil Procedure (“F.R.Civ.P.”). “LBR” references are to the Local
Bankruptcy Rules of the United States Bankruptcy Court for the Central District of California
(“LBR”).
2 Faith’s Exhibit # 3 did not include a copy of Invoice # 597788-00. However, the court assumes
that the amount of the invoice was $2,120.50 because the parties stipulated that the Transfer was
in payment of the five invoices.
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On August 8, 2014, Faith timely filed a complaint seeking to avoid the Transfer to Inline
as a preferential transfer pursuant to 11 U.S.C. § 547. Inline filed an answer to the complaint on
September 16, 2014. In the joint pretrial order, Faith and Inline stipulated that:
1. Faith has established all elements of his prima facie case pursuant to 11 U.S.C. §
547(b) for recover of the Transfer, and the burden now shifts to Inline to establish its ordinary
course of business defense.
2. Debtor ceased doing business on June 30, 2013, and began liquidating its assets to pay
creditors.
3. The disputed payment from Debtor to Inline was made within a 90-125 day range
after invoice.
4. Before the preference period, Inline was consistently compensated 90-125 days after
invoice.
5. Other customers of Inline also consistently compensated Inline 90-125 days after
invoice.
After a trial on May 11, 2015, the matter was taken under submission.
II. DISCUSSION
This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§
157(b) and 1334(b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F) and
(O). Venue is appropriate in this court. 28 U.S.C. § 1409(a). To the extent that the claim made
the basis of Faith’s complaint may constitute a “Stern claim,” the parties at trial nevertheless
expressly consented to the entry of a final judgment by the bankruptcy court.3
3 “Article III permits bankruptcy courts to decide Stern claims submitted to them by consent.
Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. ___, 2015 WL 2456619, *13 (May 26, 2015).
“Stern claims,” so named after the Supreme Court’s decision in Stern v. Marshall, ___ U.S., ___,
131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), “are claims ‘designated for final adjudication in the
bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a
constitutional matter.’” Mastro v. Rigby, 764 F.3d 1090, 1093 (9th Cir. 2014) (citation omitted).
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A. Standard Applicable to the Preferential Transfer Defense Under 11 U.S.C. § 547(c).
Section 547(c) of the Code states that a trustee may not avoid a preferential transfer “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.”
11 U.S.C. § 547(c)(2) (emphasis added). “Section 547(c)(2) is meant to protect ‘recurring,
customary credit transactions that are incurred and paid in the ordinary course of business of the
debtor and the debtor’s transferee.” Pereira v. United Parcel Serv. of Am, Inc. (In re Waterford
Wedgwood USA, Inc.), 508 B.R. 821, 827 (Bankr. S.D.N.Y. 2014). “The purpose of the
exception is to ‘leave undisturbed normal financial relations, because it does not detract from the
general policy of the preference section to discourage unusual action by either the debtor or [its]
creditors during the debtor’s slide into bankruptcy.” Id. (citation omitted); see Ganis Credit
Corp. v. Anderson (In re Jan Weilert RV, Inc.), 315 F.3d 1192, 1196 (9th Cir. 2003) (“A debtor
may not ‘prefer’ one creditor over another by selecting to pay one but not the other during the
debtor’s slide into bankruptcy.”). “A creditor bears the burden of proving the defenses by a
preponderance of the evidence.” Waterford Wedgwood USA, 508 B.R. at 827.
Section 547(c)(2)(A) is the subjective element that requires the creditor to establish “a
baseline of past practices between itself and the debtor,” and that the transfer was “ordinary in
relation to [these] past practices.” Sigma Micro Corp. v. Healthcentral.com (In re
Healthcentral.com), 504 F.3d 775, 790 (9th Cir. 2007). “Among the factors courts consider in
determining whether transfers are ordinary in relation to past practices are: (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.” Sulmeyer v. Pacific Suzuki (In re Grand Chevrolet, Inc.), 25 F.3d 728, 732
(9th Cir. 1994). These traditional factors are non-exclusive and other factors bearing on past
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practices may be relevant. See Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys., Inc.), 482
F.3d 1118, 1129 (9th Cir. 2007).
Payments made later than required by contract generally are not made in the ordinary
course of business. See Mordy v. Chemcarb, Inc. (In re Food Catering & Housing, Inc.), 971
F.2d 396, 398 (9th Cir. 1992) (“Delay is particularly relevant in taking a payment outside the
ordinary course of business exception”). But a late payment in conformity with the prior course
of dealing may be in the ordinary course. See Grand Chevrolet, 25 F.3d at 732 (“Other circuits
have held that late payments can fall within the ordinary course of business exception if the prior
course of conduct between the parties demonstrates that those types of payments were ordinarily
made late. We now join those circuits.” (citations omitted)).
According to Inline’s Exhibit C, Debtor and Inline had been doing business since at least
April 2, 2012. Faith and Inline stipulated that “[b]efore the preference period, Inline was
consistently compensated 90-125 days after invoice.” Through the testimony of Inline’s Credit
Manager, Brad Ratliff, Inline introduced largely uncontroverted evidence that: (1) Debtor
always paid invoices from Inline by check; (2) Debtor typically paid Inline’s invoices between
113 and 124 days from the date of invoice; (3) Debtor historically paid several invoices from
Inline by one check; (4) the payment of five invoices by Debtor to Inline with one check within
113 to 124 days from date of invoice was not unusual; (5) Inline did not put pressure on the
Debtor to pay the invoices at issue nor engage in any unusual activity to collect the amounts
owed by Debtor to Inline under the invoices; (6) Inline did not restrict the amount of credit
available to Debtor at any time between July 26, 2012 and August 7, 2013; (7) Inline was not
aware of the Debtor’s deteriorating financial condition; (8) Inline did not vary its credit terms
with the Debtor at any time between July 26, 2012 and August 7, 2013; (9) Inline did not
threaten to cut off the Debtor or refuse to supply the Debtor because of the time it was taking for
the Debtor to pay invoices due to Inline; (10) Inline received payments from the Debtor rather
consistently once or twice a month, maybe every other month, depending on the volume of
purchases; (11) it was ordinary and typical in the industry, and not unusual, for wholesale
building material suppliers of the Debtor’s size to pay invoices 113 to 124 days from date of
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invoice; and (12) Inline was not surprised when it received the payment from Debtor for the five
invoices at issue in August 2013. Debtor’s former bookkeeper, Mary Ellen Ledbetter, testified
on rebuttal that “Pat,” referring to Debtor’s president J. Patrick Newton, made the decision which
vendors to pay after the Debtor ceased operations. However, Ms. Ledbetter was unable to testify
as to the Debtor’s ordinary business practices before and after the Debtor closed its doors nor
whether there was any resulting change in such business practices with respect to the payment of
invoices.
The weight of the evidence supports a finding that there was nothing unusual about Inline
receiving payment from Debtor within 90 to 125 days after date of invoice, and there was no
evidence that Inline either took advantage of the Debtor’s deteriorating financial condition or
increased its efforts to collect invoices due from the Debtor. The five invoices at issue were paid
by check between 113 and 124 days after date of invoice. The Transfer was ordinary in relation
to past practices between Debtor and Inline.
Section 547(c)(2)(B) is the objective element that requires the creditor to show that the
transfer comports with “terms employed by similarly situated debtors and creditors facing the
same or similar problems.” In re Kaypro, 218 F.3d 1070, 1074 (9th Cir. 2000). “If the terms in
question are ordinary for industry participants under financial distress, then that is ordinary for
the industry.” Id. To establish that a preferential transfer was made according to ordinary
business terms, the creditor must introduce competent evidence of the practice in the industry.
See In re Roblin Indus., Inc., 78 F.3d 30, 42-43 (2d Cir. 1996).
“’[O]rdinary business terms’ refers to the broad range of terms that encompasses the
practices employed by [similarly situated] debtors and creditors, including terms that are
ordinary for those under financial distress. Only a transaction that is so unusual or uncommon
‘as to render it an aberration in the relevant industry’ falls outside the broad range of terms
encompassed by the meaning ‘ordinary business terms.’” Jan Weilert RV, 315 F.3d at 1198.
According to the evidence, Debtor paid the five invoices at issue by check on August 2,
2013 – between 113 and 124 days from date of invoice. Debtor always paid invoices from Inline
by check within 90-125 days from the date of invoice, and Debtor’s payment of the five invoices
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at issue was no different. The parties stipulated that “[o]ther customers of Inline also
consistently compensated Inline 90-125 days after invoice.” The evidence established that
payment over 100 days from date of invoice was typical and not unusual in the industry.
Accordingly, the court finds that the business terms of the transaction were within the broad
range of terms ordinarily used within the construction industry.
Faith contends that the Transfer could not have been in the ordinary course of the
Debtor’s business because Debtor had ceased doing business over a month before the Transfer.
Faith argues “[t]he fact that Debtor closed its doors and shut down the business prior to making
the Transfer payment to [Inline] renders the payment outside the ordinary course of business[,]”4
citing In re Peninsula Roofing & Sheet Metal, Inc., 9 B.R. 257, 261 (Bankr. N.D. Mich. 1981)
and Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1567 (11th Cir. 1986).
Inline’s trial brief does not address this issue.
One might assume that the lack of an ongoing business at the time of a challenged
transfer would negate a defense under § 547(c)(2), but even the Eleventh Circuit in Craig Oil Co.
cited by Faith concluded that it does not. In Craig Oil Co., the court observed that:
Some courts have been more likely to find payments outside the ordinary course
if they are made after a business has ceased operations. See In re Penninsula
Roofing & Sheet Metal, Inc., 9 B.R. 257, 261 (Bankr. N.D. Mich.1981) (not in
ordinary course since “business was closed, insolvent and attempting to
dissolve”); Cf. Kallen v. Litas, 47 B.R. 977 (Bankr. N.D. Ill. 1985) (not in
ordinary course because services rendered after business destroyed by fire). But
see In re Ferguson, 41 B.R. 118 (Bankr. E.D. Va. 1984) (payment in ordinary
course even though farmer was closing his business). While we concur that
dissolution of the business may be relevant in determining what constitutes the
ordinary course of business, we do not conclude that factor alone controls this
case.
785 F.2d at 1567. Cessation of business operations is not dispositive, but merely one factor to be
considered in defining whether payment was made in the ordinary course of business. See, e.g.,
Buchwald v. Avista Energy, Inc. (In re N. Am. Energy Conservation, Inc.), 339 B.R. 75, 81
(Bankr. S.D.N.Y. 2006) (“[T]his court is in agreement with those jurisdictions which have found
4 Plaintiff and Trustee Jeremy W. Faith’s Trial Brief, 6:15-17.
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that despite the cessation of the debtor's business, the ordinary course of business exception is
available to the transferee.”); Continental Energy Assocs. Ltd. P’ship v. Olhanoski (Continental
Energy Assocs. Ltd. P’ship), 228 B.R. 96, 99 (Bankr. M.D. Pa. 1998) (“In determining whether
payment by cashier's check lies outside the ordinary course of business courts have considered
whether: (1) the debtor had not previously paid by cashier's check; (2) a significant number of
payments were overdue; (3) payments were made after the Debtor stopped doing business with
the creditor and after the Debtor ceased operations; (4) the payment was induced by the creditor's
request for assurance of payments; and (5) another creditor was attempting to push the debtor
into bankruptcy.” (quoting Matter of Sims Office Supply, Inc., 94 B.R. 744, 749 (Bankr. M.D.
Fla. 1988) (emphasis added)).
CONCLUSION
In sum, the Transfer by Debtor to Inline was in payment of a debt incurred by the Debtor
in the ordinary course of business of the Debtor and Inline, and the Transfer itself was made in
the ordinary course of business of the Debtor and Inline and made according to ordinary business
terms. Accordingly, the court will enter a judgment in favor of Inline on the claim made the
basis of Faith’s complaint.
A separate judgment will be entered consistent with this memorandum.
###
Date: June 3, 2015
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