Healthco v. Repco Printers ( 1997 )


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    UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
    FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT

    _________________________


    No. 97-9005


    IN RE: HEALTHCO INTERNATIONAL, INC.,

    Debtor.

    _________________________

    WILLIAM A. BRANDT, JR., TRUSTEE,

    Plaintiff, Appellee,

    v.

    REPCO PRINTERS & LITHOGRAPHICS, INC.,

    Defendant, Appellant.

    _________________________

    APPEAL FROM THE BANKRUPTCY APPELLATE PANEL

    OF THE FIRST CIRCUIT

    _________________________

    Before

    Selya, Circuit Judge, _____________

    Coffin, Senior Circuit Judge, ____________________

    and Stahl, Circuit Judge. _____________

    _________________________

    Duane L. Coleman, with whom Larry E. Parres and Lewis, Rice ________________ _______________ ___________
    & Fingersh, L.C. were on brief, for appellant. ________________
    Daniel C. Cohn, with whom David B. Madoff and Cohn & ________________ _________________ _______
    Kelakos, LLP, were on brief, for appellee. ____________

    _________________________

    December 22, 1997

    _________________________













    SELYA, Circuit Judge. Repco Printers & Lithographics, SELYA, Circuit Judge. ______________

    Inc. (Repco) asserts a right to retain a payment made to it by

    Healthco International, Inc. (Healthco) shortly before Healthco

    commenced insolvency proceedings. The bankruptcy court agreed

    with Repco but the Bankruptcy Appellate Panel of the First

    Circuit (BAP) did not. Repco appeals. After ironing out a

    procedural wrinkle, we uphold the BAP's core determination that

    the disputed payment was not a transfer "in the ordinary course

    of business" within the meaning of 11 U.S.C. 547(c)(2)(1994).

    Nevertheless, because the BAP misgauged the posture of the case,

    we vacate its judgment and remand for further proceedings.

    I. BACKGROUND I. BACKGROUND

    We draw our account from the stipulated record, which

    is comprised of twenty-five uncontested statements of fact and

    thirteen exhibits (including various depositions and affidavits).

    In better days, Healthco functioned as a major

    distributor of dental equipment and supplies. In August 1992,

    James Mills, chief executive officer of Healthco's parent

    company, contacted Fred Zaegel, Repco's owner, to explore a

    business relationship. Mills, who knew Zaegel both

    professionally and socially, proposed that Repco (headquartered

    in St. Louis) print Healthco's product catalog. Zaegel agreed.

    From that time forward, Repco handled virtually all of the

    diverse printing needs of Boston-based Healthco.

    During this interlude, Repco extended credit to

    Healthco in accordance with standard printing industry practice:


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    Repco would bill contemporaneously for each service, and would

    anticipate receiving payment in sixty days, on average,

    notwithstanding contrary credit terms expressed in its invoices.1

    For its part, Healthco customarily would accumulate invoices and

    then pay some (but not all) of the accumulation by mailing Repco

    a lump-sum company check. Over the period from the fall of 1992

    until early April of the following year, Healthco paid one

    hundred fourteen Repco invoices with sixteen different checks,

    totalling around $400,000.

    Whenever Repco's cash flow ebbed, it was Zaegel's

    practice to contact customers and solicit payment of outstanding

    invoices that were at least sixty days old. To this end, Zaegel

    called Healthco's treasurer, Arthur Souza, on four occasions.

    Each time, Souza arranged for a check to be cut shortly

    thereafter.

    Despite these periodic payments, some of Repco's

    unrequited invoices were almost two hundred days old by late

    March. Zaegel tried to prompt Souza once again, but experienced

    difficulty in reaching him. Zaegel then called Healthco's chief

    financial officer, James Moyle. Zaegel, who never before had

    made a dunning call to Moyle, politely informed him that Healthco




    ____________________

    1Repco's invoices bore a net ten days legend. The record
    reflects, however, that this credit term was honored mainly in
    the breach; most of Repco's customers (and, indeed, the majority
    of firms purchasing services in the competitive printing
    industry) ignored this stricture.

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    was holding numerous Repco invoices that were substantially

    overdue.2 At the conclusion of this five-minute conversation,

    Moyle stated that he would investigate the matter.

    Moyle vouchsafed in his affidavit that he considered

    Repco to be "Healthco's most pivotal vendor in the company's

    effort to overcome its financial problems," presumably because

    Repco was about to undertake the printing and distribution of

    Healthco's quarterly catalog. He asked Souza how much Healthco

    owed Repco and what was "the fastest way" to pay the debt. Souza

    replied that Healthco had in hand $235,558.64 in outstanding

    Repco invoices and that wire transfer would be the quickest

    payment method. Moyle directed Souza to wire the full amount.

    Repco received the funds on April 13, 1993. That payment

    satisfied in one fell swoop sixty-eight invoices ranging from

    brand new to two hundred days old.

    Healthco sought the protection of the bankruptcy court

    on June 9, 1993. The firm's ledgers disclosed that it had made

    only two other wire transfers in satisfaction of antecedent debts

    during the previous ninety days. The record confirms that

    Healthco's trustee in bankruptcy, William A. Brandt, Jr.,

    successfully challenged both of the other payments as voidable

    preferences.

    II. PROCEDURAL HISTORY II. PROCEDURAL HISTORY

    ____________________

    2The record indicates that Zaegel was unaware of Healthco's
    financial problems at this time; that he discussed the past-due
    invoices cordially with Moyle; and that he neither threatened to
    cut off printing services nor demanded an immediate payment.

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    In due season, the trustee brought this adversary

    proceeding seeking to recover the $235,558.64 payment. Repco

    defended on three grounds: (1) that Healthco was solvent at the

    time of the transfer, (2) that the transfer was "made in the

    ordinary course of business" within the meaning of 11 U.S.C.

    547(c)(2), and (3) that in all events Repco's services provided

    "subsequent new value" within the meaning of 11 U.S.C.

    547(c)(4). The parties stipulated that Repco had conferred new

    value in the amount of $31,977.38, reducing the trustee's claim

    against Repco to $203,581.26 and removing the "new value" issue

    from the case. The bankruptcy court then bifurcated the two

    remaining issues, reserving the solvency question for later

    adjudication and proceeding to tackle the applicability vel non ___ ___

    of Repco's "ordinary course of business" defense.

    The parties cross-moved for summary judgment on this

    issue. After the bankruptcy court denied both motions, the

    parties submitted the issue on the stipulated record described

    above. On July 17, 1996, the bankruptcy court dismissed the

    trustee's complaint. The court's two-paragraph rescript reads in

    its entirety:

    A trial was scheduled in this matter for May
    1, 1996. However, the parties filed a motion
    to submit the matter on stipulated facts and
    exhibits, which was granted on April 20,
    1996.

    In consideration of said facts and exhibits,
    the complaint is dismissed by virtue of the
    ordinary course of business defense. A
    separate order will issue.

    The trustee filed a timely notice of appeal and the

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    parties opted to have the appeal heard by the BAP (in lieu of the

    district court).3 For reasons that are not readily apparent, the

    parties mutually invited de novo review of the bankruptcy court's

    decision. The BAP accepted the invitation, determined that the

    wire transfer had not been made in the ordinary course of

    business, and ruled that the payment was "preferential, and

    subject to recovery by the Trustee under Section 547." Brandt v. ______

    Repco Printers & Lithographics, Inc. (In re Healthco), No. MW 96- ____________________________________ ______________

    026, slip op. at 12 (B.A.P. 1st Cir. 1997). This appeal ensued.

    III. STANDARD OF REVIEW III. STANDARD OF REVIEW

    Bankruptcy cases differ from most other federal cases

    in that the court of appeals does not afford first-instance

    appellate review. Rather, Congress has provided for intermediate

    review, conferring on district courts and federal bankruptcy

    appellate panels the authority to hear appeals from bankruptcy

    court decisions, but preserving to the parties a right of further

    review in the courts of appeals. See 28 U.S.C. 158. Whether ___

    such an appeal comes to us by way of the district court or the

    BAP, our regimen is the same: we focus on the bankruptcy court's

    decision, scrutinize that court's findings of fact for clear

    error, and afford de novo review to its conclusions of law. See ___

    Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497 (1st Cir. ______ ______ _____________
    ____________________

    3In this circuit, bankruptcy appellate panels have had a
    mixed history. After a short-lived experiment, the use of such
    panels was discontinued in 1983. The First Circuit Judicial
    Council revivified the BAP structure on July 1, 1996, giving
    interested parties the option of electing intermediate appellate
    review before a BAP panel rather than before a federal district
    court.

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    1997); Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st ______ _________________________

    Cir. 1994). Since this is exactly the same regimen that the

    intermediate appellate tribunal must use, we exhibit no

    particular deference to the conclusions of that tribunal (be it

    the district court or the BAP). See Palmacci v. Umpierrez, 121 ___ ________ _________

    F.3d 781, 785 (1st Cir. 1997).

    We now move from the general to the specific. The

    crucial issue in this adversary proceeding revolves around

    Repco's access to the "ordinary course of business" defense under

    11 U.S.C. 547(c)(2). A bankruptcy court's construction of this

    statute presents a question of law and thus engenders plenary

    review. See Fidelity Sav. & Inv. Co. v. New Hope Baptist, 880 ___ _________________________ _________________

    F.2d 1172, 1174 (10th Cir. 1989). A bankruptcy court's

    assessment in connection with whether the statutory defense

    appertains in a given case is a horse of different hue; the

    findings which collectively comprise such an assessment are

    factbound and thus engender clear-error review. See Yurika Foods ___ ____________

    Corp. v. United Parcel Serv. (In re Yurika Foods Corp.), 888 F.2d _____ ___________________ ________________________

    42, 45 (6th Cir. 1989). Here, the court's rendition of the

    statute is unexceptional and the only justiciable issue relates

    to whether the challenged transfer, as a factual matter, comes

    within the statutory sweep. Hence, the bankruptcy court's

    decision normally would be reviewable for clear error. This

    means, of course, that a reviewing court "ought not to upset

    findings of fact or conclusions drawn therefrom unless, on the

    whole of the record, [the appellate judges] form a strong,


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    unyielding belief that a mistake has been made." Cumpiano v. ________

    Banco Santander P.R., 902 F.2d 148, 152 (1st Cir. 1990). ____________________

    This familiar standard is not diluted merely because

    parties proceed on a stipulated record. We long have held that a

    bankruptcy court's factual findings are entitled to the deference

    inherent in clear-error review even when they do not implicate

    live testimony, but, rather, evolve entirely from a paper record

    that is equally available to the reviewing court. See Boroff v. ___ ______

    Tully (In re Tully), 818 F.2d 106, 109 (1st Cir. 1987) (citing _____ ___________

    Anderson v. City of Bessemer City, 470 U.S. 564, 574-75 (1985)); ________ ______________________

    see also RCI Northeast Servs. Div. v. Boston Edison Co., 822 F.2d ___ ____ _________________________ _________________

    199, 202 (1st Cir. 1987) (explaining that "findings of fact do

    not forfeit ``clearly erroneous' deference merely because they

    stem from a paper record").4 The soundness of this approach is

    confirmed by Rule 7052 of the Federal Rules of Bankruptcy

    Procedure, which expressly adopts Rule 52(a) of the Federal Rules

    of Civil Procedure. The latter rule, in its latest incarnation,

    ____________________

    4To be sure, occasional statements of this court, if wrested
    from context, might appear to suggest de novo review in such
    circumstances. See, e.g., Brewer v. Madigan, 945 F.2d 449, 452 ___ ____ ______ _______
    (1st Cir. 1991). Context provides a clearer perspective. In the
    cases in which we purposed to scrutinize a paper record de novo,
    there were no facts in dispute. Although a stipulated record ________________________________
    sometimes will indicate the absence of factual discord, that is
    far from universally true. See Vetter v. Frosch, 599 F.2d 630, ___ ______ ______
    632 (5th Cir. 1979) ("Many cases are tried on depositions,
    counter-affidavits, and stipulated records, where the parties
    know there are issues of fact which must be resolved, but are
    content to have them resolved on the basis of written, as opposed
    to oral, testimony and evidence."). Here, the existence of
    genuine factual issues is made manifest by the bankruptcy court's
    well-founded denial of the parties' cross-motions for summary
    judgment.

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    provides in pertinent part: "Findings of fact, whether based on ________________

    oral or documentary evidence, shall not be set aside unless ______________________________

    clearly erroneous, and due regard shall be given to the

    opportunity of the trial court to judge of the credibility of the

    witnesses." (Emphasis supplied).

    Notwithstanding the obvious applicability of the

    "clearly erroneous" standard to the case at hand, there is a rub.

    The parties both urged the BAP to review the bankruptcy court's

    decision de novo and to resolve the issue of whether Healthco's

    transfer of funds to Repco escapes classification as a preference

    without affording any special respect to the bankruptcy court's

    factual determinations. The BAP yielded to this importuning.

    See In re Healthco, supra, slip op. at 5. What is more, the ___ _______________ _____

    litigants are united in their insistence that we, too, should

    essay plenary, nondeferential review of the bankruptcy court's

    decision.

    Under these peculiar circumstances, we are tempted

    simply to honor the parties' request. Cf. United States v. ___ _____________

    Taylor, 54 F.3d 967, 971 (1st Cir. 1995) (warning that "[t]he ______

    problem with wishes is that they sometimes come true") (citing

    Aesop). For one thing, the bankruptcy court's failure to

    articulate any particularized factual findings not only

    contradicts the rules of practice, see Fed. R. Bankr. P. 7052 ___

    (adopting Fed. R. Civ. P. 52(a)'s requirement that "the court

    shall find the facts specially"), but also makes clear-error




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    review exceptionally difficult.5 For another thing, the parties

    invited the BAP to indulge in de novo review and, at oral

    argument in this court, they continued to urge that we follow

    that course. Declining to do so would risk "plac[ing] a premium

    on agreeable acquiescence to perceivable error as a weapon of

    appellate advocacy." Dedham Water Co. v. Cumberland Farms Dairy, ________________ _______________________

    Inc., 972 F.2d 453, 459 (1st Cir. 1992) (quoting Merchant v. ____ ________

    Ruhle, 740 F.2d 86, 92 (1st Cir. 1984)). _____

    This is an interesting concatenation of events, but we

    need not decide whether we should hold the parties to the invited

    error; in this instance, all roads lead to Rome because our

    choice between the two standards of review will not affect the

    outcome on appeal. In short, this case is sufficiently plain

    that, whether we bow to the parties' wishes and afford de novo

    review or bow to convention and employ the more deferential

    "clearly erroneous" rubric, we, like the BAP, would be compelled

    to set aside the bankruptcy court's contrary determination.

    IV. THE MERITS IV. THE MERITS

    In order to guard against favoritism in the face of

    looming insolvency, the Bankruptcy Code provides that certain

    payments made by the debtor within ninety days preceding the

    institution of bankruptcy proceedings are voidable as

    preferences. See 11 U.S.C. 547(b). This rule is not ironclad. ___

    ____________________

    5Of course, if a reviewing court determines that a
    bankruptcy court's findings are too indistinct, it may decline to
    proceed further and remand for more explicit findings. This
    avenue was open to the BAP and it is equally open to us.

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    Thus, the Code holds harmless transfers made by the debtor during

    the ninety-day preference period if certain criteria are

    satisfied. Specifically, a bankruptcy trustee may not annul a

    preference-period transfer to the extent that the transfer was

    (A) in payment of a debt incurred by the
    debtor in the ordinary course of business . .
    . [between] the debtor and the transferee;
    (B) made in the ordinary course of business .
    . . of the debtor and the transferee; and
    (C) made according to ordinary business
    terms[.]

    11 U.S.C. 547(c)(2). The rationale behind this carve-out is

    clear: because "the general policy of the preference section

    [is] to discourage unusual action by either the debtor or his

    creditors during the debtor's slide into bankruptcy," the

    ordinary course exemption promotes the corresponding

    congressional desire "to leave undisturbed normal financial

    relations." H.R. Rep. No. 595 (1977), reprinted in 1978 _________ __

    U.S.C.C.A.N. 5963, 6329.

    The statute itself is uninstructive as to the

    definition of the term "ordinary course of business." Courts

    abhor interpretive vacuums, and they have filled this one,

    articulating several factors that bear upon whether a particular

    transfer warrants protection under section 547(c)(2). These

    factors include the amount transferred, the timing of the

    payment, the historic course of dealings between the debtor and

    the transferee, and the circumstances under which the transfer

    was effected. See In re Yurika Foods, 888 F.2d at 45; First ___ ___________________ _____

    Software Corp. v. Curtis Mfg. Co. (In re First Software Corp.), ______________ _______________ ___________________________


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    81 B.R. 211, 212 (Bankr. D. Mass. 1988). After considering the

    record evidence in light of these factors, we are firmly

    convinced that the transfer from Healthco to Repco was

    extraordinary and that the bankruptcy court clearly erred in

    finding otherwise. We explain briefly.

    The amount of the payment was uncommonly large;

    Healthco never before had made a lump-sum payment to Repco in an

    amount approaching $235,000.6 Put another way, the payment was

    nearly ten times as large as the average of the payments

    previously made by the debtor to Repco. Then, too, the timing of

    the payment was highly suspicious. It lumped old and new bills,

    and in the process, liquidated several invoices that were by

    accounting standards ancient (i.e., more than ninety days old)

    and several that were prepubescent (i.e., less than thirty days

    old).7 There were, moreover, virtually no significant

    similarities between the challenged payment and the antecedent

    course of dealings between the parties. For example, the

    disputed transfer marked the first occasion that Healthco

    ventured to pay all its outstanding Repco invoices, the first
    ____________________

    6To be sure, as Repco points out, the magnitude of the
    payment is attributable in some measure to a single invoice in
    the sum of $96,689.19. This circumstance does not contradict the
    conclusion that the payment was abnormal. The fact remains that
    Healthco remitted over $235,000 in satisfaction of sixty-eight
    separate Repco invoices, thereby dwarfing earlier remittances as
    to both the number of invoices and the total dollars involved.

    7As the BAP noted, roughly fifty percent of the invoices
    satisfied by the wire transfer fell into one of these two
    categories. See In re Healthco, supra, slip op. at 10. By ___ _______________ _____
    contrast, very old and very new invoices comprised no more than
    fifteen percent of any group of invoices previously paid.

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    time that Healthco wired funds to Repco, and the first time that

    Healthco's chief financial officer interceded to effectuate a

    payment to Repco. Inasmuch as the hallmark of a payment in the

    ordinary course is consistency with prior practice, see WJM, Inc. ___ _________

    v. Massachusetts Dep't of Pub. Welfare, 840 F.2d 996, 1011 (1st ____________________________________

    Cir. 1988), this string of "firsts" is telling.

    The circumstances surrounding the wire transfer clinch

    the matter. Healthco owed money to hundreds of creditors. Of

    these, it paid only Repco, Kerr Manufacturing, and Clarke

    Industries in full by wire transfer during the preference period.

    All three of these businesses had detectable links to Healthco's

    principals: Thomas Hicks, chairman and chief executive officer

    of the firm that owned Healthco Holding Co. (which, in turn,

    owned Healthco), was a director and beneficial owner of Kerr's

    parent corporation; James Mills, chairman of Healthco Holding

    Co., chaired the board of Clarke's parent company and served as

    its chief executive officer; and as mentioned above, Mills also

    had a longstanding relationship with Repco's proprietor. Apart

    from these special relationships, there is no reasonable

    explanation for preferment of the three creditors. This is

    especially true of Repco; as Zaegel himself testified during his

    deposition, it is general industry custom to "pay the printer

    last."

    Other circumstances associated with the challenged

    transfer highlight the importance of Repco's special

    relationship. Souza, Healthco's treasurer, testified that by


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    February 1993 decisions about which creditors were to be paid

    when were being made by a committee of Healthco executives; yet

    Moyle overrode this mechanism to effect the Repco payment. At

    the same time, it was clear both from Zaegel's kid-glove approach

    and from the competitive nature of the printing industry that

    Repco's continued service did not hinge upon Healthco's payment

    of all outstanding debt as celeritously as possible. Thus,

    Moyle's claim that he directed the payment to be made because

    Repco was "pivotal" to Healthco's operations is entitled to very

    little weight.

    We need go no further. The circumstantial evidence

    fully persuades us that the debtor deviated sharply from its

    customary business practices to favor a select trio of creditors,

    Repco included. This is precisely the type of preferment

    taking care of a few well-connected vendors while playing

    hardball with the general multitude that the drafters of the

    Bankruptcy Code intended to curtail. See Lawson v. Ford Motor ___ ______ __________

    Co. (In re Roblin Indus.), 78 F.3d 30, 40 (2d Cir. 1996) ___ ______________________

    (explaining that "equality of distribution among creditors of the

    debtor" is one goal of the preference provision) (quoting

    legislative history).8

    Repco's other arguments are unconvincing and we reject

    them without elaboration. It suffices to say that the
    ____________________

    8The other main goal of the preference provision
    precluding the debtor "from trying to stave off the evil day by
    giving preferential treatment to his most importunate creditors,"
    In re Tolona Pizza Prods. Corp., 3 F.2d 1029, 1032 (7th Cir. __________________________________
    1990) is not implicated here. See supra note 2. ___ _____

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    circumstances surrounding the challenged transfer amply evince

    its extraordinary nature. Therefore, we affirm the BAP's

    determination that, contrary to the bankruptcy court's view, the

    challenged transfer was not made in the ordinary course of

    business.

    Unlike the BAP, however, we do not believe that such a

    determination clears the way for judgment on the trustee's claim.

    The bankruptcy court reserved the issue of Healthco's insolvency

    an essential element of the preference claim and that issue

    remains open. Consequently, we must vacate the BAP's judgment to

    that extent and remand to the BAP with directions that it, in

    turn, remand the cause to the bankruptcy court for further

    proceedings.



    Affirmed in part, vacated in part, and remanded. No Affirmed in part, vacated in part, and remanded. No _________________________________________________ __

    costs. costs. _____






















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