In Re: Alghny Health ( 2005 )


Menu:
  •                                                                                                                            Opinions of the United
    2005 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    3-11-2005
    In Re: Alghny Health
    Precedential or Non-Precedential: Non-Precedential
    Docket No. 04-1200
    Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2005
    Recommended Citation
    "In Re: Alghny Health " (2005). 2005 Decisions. Paper 1454.
    http://digitalcommons.law.villanova.edu/thirdcircuit_2005/1454
    This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
    University School of Law Digital Repository. It has been accepted for inclusion in 2005 Decisions by an authorized administrator of Villanova
    University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
    NOT PRECEDENTIAL
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    No. 04-1200
    IN RE:
    ALLEGHENY HEALTH EDUCATION
    AND RESEARCH FOUNDATION, et al.,
    Debtors
    RISK MANAGEMENT ALTERNATIVES, INC., successor
    to United Creditors Alliance Corp.,
    Appellant
    v.
    WILLIAM J. SCHARFFENBERGER, as Chapter 11 Trustee of
    Allegheny Health, Education and Research Foundation
    ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE
    WESTERN DISTRICT OF PENNSYLVANIA
    (Dist. Court No. 03-CV-0074)
    District Court Judge: Terrence F. McVerry
    Submitted pursuant to LAR 34.1(a)
    January 18, 2005
    Before: ALITO, McKEE, and SMITH, Circuit Judges.
    (Opinion Filed: March 11, 2005)
    OPINION OF THE COURT
    PER CURIAM:
    Allegheny Health, Education and Research Foundation, Allegheny University of
    the Health Sciences, Allegheny University Medical Practices, Allegheny Hospitals, and
    Centennial and Allegheny University Hospitals-East (collectively, “the Debtors”) filed a
    voluntary petition for bankruptcy relief under Chapter 11 on July 21, 1998. William J.
    Scharffenberger, the Chapter 11 Trustee (“the Trustee”) of Allegheny Health, Education
    and Research Foundation, filed this action to avoid several transfers of money made to
    United Creditors Alliance Corporation (“United Creditors”) under the theory that the
    transfers were “preferential” under 11 U.S.C. 547(b). The Trustee also sought to recover
    the transfers from United Creditors pursuant to 11 U.S.C. §550(a)(1). Risk Management
    Alternatives, Inc. is the listed defendant only because it is the successor-in-interest to
    United Creditors; for the sake of simplicity we will therefore refer to both entities as
    United Creditors.
    On February 26, 2002, the Bankruptcy Court held a bench trial on all outstanding
    matters in the case. In a Memorandum Opinion and Order of the Court dated April 17,
    2003, the Bankruptcy Court held that five of the twelve payments, that is, those listed as
    Checks A, H, I, K and L on the table in the parties’ stipulations, were recoverable by the
    Trustee from United Creditors pursuant to §550(a)(1). The Bankruptcy Court also denied
    -2-
    United Creditors’ Motion for Reconsideration with prejudice.
    United Creditors filed a Notice of Appeal with the Bankruptcy Court. On
    December 24, 2003, the District Court entered its Memorandum Opinion and Order
    affirming the Bankruptcy Court Opinion.
    This appeal followed.
    I.
    We exercise plenary review over the Bankruptcy Court’s legal determinations and
    review the Bankruptcy Court’s factual findings for clear error. Duke Energy Royal, LLC
    v. Pillowtex Corp. (In re: Pillowtex, Inc.), 
    349 F.3d 711
    , 716 (3d Cir. 2003). A finding of
    fact is clearly erroneous when it has no credible evidence to support it or when it has no
    rational relationship to the evidence. Kool, Mann, Coffe & Co. v. Coffey, 
    300 F.3d 340
    ,
    353 (3d Cir. 2002).
    II.
    The Trustee’s short delay in amending its complaint did not prejudice United
    Creditors. United Creditors was informed of the Trustee’s intent to pursue the additional
    payments within two weeks after the Trustee first learned of them; the Trustee moved to
    amend before the Bankruptcy Court had decided United Creditors’ summary judgment
    motion; and United Creditors itself acknowledged the existence of Checks K and L in its
    Motion for Summary Judgment.
    -3-
    III.
    The critical issue in this appeal is whether United Creditors was required to
    introduce evidence that the disputed payments were not unusual by the relevant standard
    of the industry. We find that United Creditors was so required and thus will affirm the
    Bankruptcy Court’s Opinion.
    United Creditors argues that Checks A, H, I, K and L were all subject to the
    “ordinary course of business” exception contained in 11 U.S.C. § 547(c)(2):
    (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[.]
    The Trustee admits that it cannot escape subsections (c)(2)(A) and (c)(2)(B), as the
    transfers were in payment of a debt incurred by the Debtors in the ordinary course of both
    the Debtors’ and United Creditors’s businesses, and the transfers were made and received
    in the ordinary course of the respective businesses. However, the Trustee argues that
    United Creditors has no affirmative defense because it cannot satisfy the third condition
    of the statute: the transfers were not “made according to ordinary business terms.” 11
    U.S.C. §547(c)(2)(C).
    United Creditors counters that the transfers were, in fact, made according to
    ordinary business terms because the transfers were ordinary in the context of its pre-
    -4-
    preference period relationship with the Debtors, and that the pre-preference period
    relationship was long enough to make industry standard evidence unnecessary. United
    Creditors bases its argument upon this Court’s opinion in Fiber Lite Corp. v. Molded
    Acoustical Products, Inc. (In re Molded Acoustical Products, Inc.), 
    18 F.3d 217
    (3d Cir.
    1994), which, United Creditors contends, abrogates the need for Section 547(c)(2)(C)
    proof beyond the parties’ payment history where the parties have had a long-standing and
    consistent relationship. In fact, Molded Acoustical does no such thing.
    Under Molded Acoustical, a creditor has no affirmative defense to a Section
    547(b) avoidance action unless the creditor proves that the preferential transfers in
    question were made “in harmony with the range of terms prevailing as some relevant
    industry’s 
    norms.” 18 F.3d at 226
    . When a creditor and a debtor have had “an enduring,
    steady relationship,” meaning that the terms of the relationship did not change
    “significantly” during the pre-petition insolvency period, then the creditor will be able to
    depart “substantially” from the range of terms prevailing as the relevant industry’s norms
    and still enjoy the protection of Subsection (C). 
    Id. Moreover, “[the
    longer] 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).” 
    Id. at 225.
    But while a creditor may, under the right circumstances, depart
    substantially from the relevant industry’s norm for credit terms, it is possible for even
    longstanding credit terms to “depart so grossly from what has been established as the
    -5-
    pertinent industry’s norms that they cannot be seriously considered usual and equitable
    with respect to other creditors.” 
    Id. at 226.
    In other words, “even when the
    debtor/creditor relationship has been well-settled prior to the debtor’s insolvency,” the
    relevant industry’s norm can never be wholly abandoned. 
    Id. The question
    of what constitutes the relevant “ordinary business terms” in a
    particular debtor/creditor relationship is peculiarly factual. There is no rigid rule
    applicable across all industries, or even across one industry in particular, as to how much
    credit terms in a relationship may vary from an industry’s norms after the relationship has
    existed for a given unit of time. Here, United Creditors could not prevail under
    §547(c)(2)(C) without presenting any evidence regarding the relevant industry’s norm
    given the Bankruptcy Court’s credible factual findings that (1) the number of days to pay
    varied dramatically throughout the Debtors’ relationship with United Creditors, (2) the
    relevant payment history was only ten months of a two-year relationship, and (3) the
    business terms United Creditors describes as “ordinary” depart grossly from the standard
    time to pay in the relevant industry.
    After considering all of the arguments raised on appeal, we therefore affirm the
    Order of the District Court.