Official Plan Comm. v. Expeditors Intl. ( 1997 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 97-6015EMSL
In re: *
*
GATEWAY PACIFIC CORP. *
*
Debtor *
*
OFFICIAL PLAN COMMITTEE, ET AL. *
* Appeal from the United
Appellee * States Bankruptcy Court
* for the Eastern District
-v.- * of Missouri
*
EXPEDITORS INTERNATIONAL OF *
WASHINGTON, INC. *
*
Appellant *
*
Submitted: October 9, 1997
Filed: December 5, 1997
Before KRESSEL, WILLIAM A. HILL, and DREHER, Bankruptcy Judges.
DREHER, Bankruptcy Judge
This is an appeal from the bankruptcy court's1 decision that certain
payments made by Gateway Pacific Corp. (Debtor) to
1
The Honorable Barry S. Schermer, United States Bankruptcy
Judge, Eastern District of Missouri.
1
Expeditors International of Washington, Inc. (Expeditors) were avoidable
under § 547 of the Bankruptcy Code. The parties stipulated that the
payments were preferential under Bankruptcy Code § 547(b). On appeal is
the bankruptcy court's determination that Expeditors had not established
either the contemporaneous exchange for new value or the ordinary course
of business defenses under §§ 547(c)(1) or (c)(2), respectively.
I. FACTUAL BACKGROUND
Debtor was engaged in the business of selling tools under the name
of Buffalo Tool. Although Debtor's business was located in St. Louis,
Debtor imported most of its inventory from Asia. Debtor contracted with
Expeditors to act as its freight forwarder and customs broker. Expeditors
arranged for the shipping of Debtor's imports by finding a carrier and
purchasing space on air and ship lines and it advanced custom duties for
Debtor's imported shipments and secured their clearance through customs.
Debtor and Expeditors began doing business in the summer of 1993.
On October 5, 1993, Debtor submitted a credit application to Expeditors.
Expeditors approved the application and provided Debtor with a $25,000 line
of credit, which was later increased to $60,000. The credit agreement
provided that Debtor would make payment to Expeditors within fifteen days
of the date of any
2
invoice. Paragraph 15 of the agreement further provided that, to the
extent of sums due, Expeditors would have a "general lien on any and all
property (and documents relating thereto) of the Customer [the Debtor], in
its possession, custody or control or en route. . . ."
Expeditors generally made two to three shipments a week to Debtor.
Expeditors' fees and charges were typically $2-3,000 per shipment. These
shipments were always accompanied by an invoice which provided that
payments for Expeditors' services were due within fifteen days of the date
of the invoice. The invoices also included language similar to that found
in Paragraph 15 of the Credit Agreement. Notwithstanding these provisions,
Debtor almost never made payments on time and it regularly exceeded its
credit limit. As with virtually all of its other customers who were slow
in making payments, Expeditors regularly made telephone calls, usually
weekly, to Debtor, asking for payment. However, Expeditors imposed no
interest or late charges, started no collection actions, and made no
threats to withhold goods. Although Debtor routinely paid the invoices
late, it always paid each invoice in full. Expeditors viewed Debtor as a
"[l]ate, but dependable" and "slow pay, but steady pay" customer.
Eventually, a practice developed between the parties whereby Expeditors
would release goods to
3
Debtor soon after payment of a prior invoice. The amount of the goods
released by Expeditors generally exceeded the amount of Debtor's payment
on the earlier invoice. There was no evidence that the parties had ever
agreed to such a practice, nor discussed its implicit terms.
On August 31, 1995, Debtor filed a petition for relief under Chapter
11 of the United States Bankruptcy Code. At the time of filing, Debtor
still owed Expeditors over $40,000, a sum Expeditors admits was unsecured.
Pursuant to authority provided in the plan, the unsecured creditors'
committee (Committee) filed this action against Expeditors seeking to avoid
as preferences $96,797.30 that Debtor had paid to Expeditors during the
ninety days prior to filing. In response, Expeditors asserted three
defenses: contemporaneous exchange (§ 547(c)(1)); ordinary course of
business (§ 547(c)(2)); and new value (§ 547(c)(4)). The parties
stipulated that the Committee had made a showing that all payments were
preferential under § 547(b) of the Bankruptcy Code and that Expeditors was
the "initial transferee" under § 550(a); that $42,661.71 of that amount was
protected from avoidance by the new value defense under § 547(c)(4); and,
that, with respect to the ordinary course of business defense, the
requirement of § 547(c)(2)(A) had been met. This left for trial the
following two
4
questions: whether 1) twenty-eight payments made during the ninety days
prior to filing amounting to $54,135.592 were made in the ordinary course
of business or financial affairs of the parties and according to ordinary
business terms under § 547(c)(2)(B) and (c)(2)(C), respectively; and, if
not, whether 2) the payments were intended as, and were in fact, a
contemporaneous exchange for new value under § 547(c)(1).
The bankruptcy court determined that Expeditors had satisfied its
burden of proving that the payments were made according to ordinary
business terms within the meaning of § 547(c)(2)(C). The bankruptcy court
went on to hold, however, that twenty-four of the twenty-eight payments
made to Expeditors within ninety days prior to the filing but more than
fifty days after the date of invoice were not made in the ordinary course
of business and financial dealings between the parties. It further held
that Expeditors had failed to show that such payments to Expeditors were
intended by both the Debtor and Expeditors to be a contemporaneous exchange
for new value. Accordingly, the bankruptcy court entered judgment against
Expeditors for $40,577.31. This figure represented twenty-
2
This figure represents the difference between the amount
originally sought by the Committee ($96,797.30) and the amount
the Committee subsequently conceded was protected from avoidance
by the new value defense ($42,661.70).
5
four payments made by Debtor to Expeditors within the ninety days preceding
bankruptcy on invoices which were more than fifty days old.
II. ISSUES PRESENTED
Expeditors makes two arguments on appeal. First, it asserts that the
bankruptcy court erred in finding that payments made on invoices which were
more than fifty days old were not made in the ordinary course of business.
Second, it asserts that the bankruptcy court erred in finding that
Expeditors had failed to show that both Debtor and Expeditors intended the
payments be made in contemporaneous exchange for a release by Expeditors
of the lien which was referenced in the credit agreement.3
III. DISCUSSION
A. STANDARD OF REVIEW
Whether payments are made in the ordinary course of business between
the parties or intended as a contemporaneous exchange for new value are
questions of fact. Accordingly, the bankruptcy
3
The parties also briefed and argued the issue of whether the
exchanges were contemporaneous and whether Expeditors actually
had a lien on the goods in transit which could serve as "new
value". Because we uphold the bankruptcy court's finding that
Expeditors failed to prove a mutual intention for its
contemporaneous exchange for new value, we need not address these
arguments.
6
court's factual findings on these two questions will not be reversed unless
they are clearly erroneous. Jones v. United Savings and Loan Assoc. (In
re U.S.A. Inns of Eureka Springs, Ark., Inc.), 9 F.3d 680, 682-83 (8th Cir.
1993); Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991);
Tyler v. Swiss Am. Securities, Inc. (In re Lewellyn & Co., Inc.), 929 F.2d
424, 427-28 (8th Cir. 1991). "A finding is 'clearly erroneous' when
although there is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a mistake has
been committed." Anderson v. City of Bessemer, 470 U.S. 564, 573 (1985)
(quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948));
Martin v. Cox (In re Martin), 212 B.R. 316, 319 (B.A.P. 8th Cir. 1997);
Tri-County Credit Union v. Leuang (In re Leuang), 211 B.R. 908, 909 (B.A.P.
8th Cir. 1997); Bayer v. Hill (In re Bayer), 210 B.R. 794, 795 (B.A.P. 8th
Cir. 1997). Under the clearly erroneous standard, a reviewing court may
not reverse the trier of fact simply because it would have decided the case
differently. Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346, 1349 (8th
Cir. 1990) (citing Anderson, 470 U.S. at 573). Indeed, "when there are two
permissible views of the evidence, we may not hold that the choice made by
the trier of fact was clearly erroneous." Id.
7
B. SECTION 547(C)(2): ORDINARY COURSE OF BUSINESS
Section 547(c)(2) of the Bankruptcy Code renders unavoidable an
otherwise preferential 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;
(C) made according to ordinary business terms . .
. .
11 U.S.C. § 547(c)(2) (1994) (emphasis added). This provision is intended
"to protect recurring, customary credit transactions which are incurred and
paid in the ordinary course of business of the debtor and the transferee."
LAWRENCE P. KING ET AL., COLLIER ON BANKRUPTCY ¶ 547.04[2], at 547-47 (15th rev.
ed. 1997). See also S. REP. NO. 95-989, at 88 (1978), reprinted in 1978
U.S.C.C.A.N. 5787, 5874; H.R. REP. NO. 95-545, at 373 (1977), reprinted in
1978 U.S.C.C.A.N. 5963, 6329 ("The purpose of this 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 his creditors during the slide into bankruptcy.").
In order to fall within the protection of § 547(c)(2), a transferee must
prove, by a preponderance of the evidence, that all three statutory
elements of § 547(c)(2) are met.
8
11 U.S.C. § 547(g) (1994); Eureka Springs, 9 F.3d at 682. In this case, the
parties stipulated to the existence of the first statutory element and
there is no challenge to the bankruptcy court's finding on the third
element. This leaves for decision only § 547(c)(2)(B), proof that the
payments were made in the ordinary course of business or financial affairs
of the parties.
Section 547(c)(2)(B) is the subjective component of the statute,
requiring proof that the debt and its payment are ordinary in relation to
other business dealings between the creditor and the debtor. Eureka
Springs, 9 F.3d at 684 (citing Logan v. Basic Distrib. Corp. (In re Fred
Hawes Org., Inc.), 957 F.2d 239 (6th Cir. 1992)). "[T]he cornerstone of
[§ 547(c)(2)(B)] is that the creditor needs [to] demonstrate some
consistency with other business transactions between the debtor and the
creditor." Lovett, 931 F.2d at 497. In reviewing the bankruptcy court's
decision on this question, we must keep in mind that "there is no precise
legal test which can be applied in determining whether payments by the
debtor during the 90-day period were made in the ordinary course of
business; rather, th[e] court must engage in a 'peculiarly factual'
analysis." Eureka Springs, 9 F.3d at 682-83 (quoting Lovett, 931 F.3d at
497 (quoting In re Fulghum Constr. Corp., 872 F.2d 739, 743 (6th Cir.
1989))).
9
In this case, the parties agreed to use the nine months preceding the
preference period to establish the ordinary course of business between
them. Stipulated evidence demonstrated that, during the nine months
preceding the preference period, the median time elapsed between the date
of invoice and the date of payment was thirty-five days; during the
preference period, however, this number increased to fifty-four days. The
court noted that this was an increase of fifty-four percent, rendering the
payments made during the preference period significantly later than those
made during the preceding nine months. Specifically, the court noted that,
during the nine months preceding the preference period, only nine of
approximately 155 payments were more than fifty days old; twenty-four of
the twenty-eight challenged payments were at least fifty or more days old.
In other words, the bankruptcy court found that, during the preference
period, Debtor's pattern of late payment changed significantly in that
Debtor began paying invoices substantially later than during the preceding
nine months' time. Thus, even though there had always been a pattern of
late payments between the parties, the bankruptcy court found that payments
made on invoices which were more than fifty days old were much later than
payments made during the nine months preceding the preference
10
period so as to fall outside of the ordinary course of the parties'
business relationship.
Expeditors makes two basic arguments on appeal. First, it asserts
that it was ordinary for Debtor to make payments beyond the fifteen-day
time limit and normal for Expeditors to make calls asking for payment. It
further urges that the pattern of late payments was fairly consistent,
pointing to the fact that during the nine months prior to the preference
period Debtor paid invoices anywhere between fourteen and sixty-one days
after invoice, while during the preference period these figures were
twenty-five and eighty-one. According to Expeditors' more general view of
the statistical evidence, the pattern of payment and the type of collection
activity did not change significantly, with the result that it should have
prevailed on this defense. Second, Expeditors asserts that the bankruptcy
court's finding that the pattern of payment changed during the preference
period, with Debtor paying invoices significantly later than during the
pre-preference period, was without evidentiary support. It further argues
that the court's "inconsiderate devotion to statistical analysis" misled
it to select an arbitrary fifty-day benchmark, which was without support
in the record.
11
In response to this argument, the Committee argues that the
bankruptcy court applied the proper legal standard when it focused on
whether the pattern of payments was significantly different during the
preference period and that there was ample evidence to sustain the court's
finding that it did. The Committee further asserts that the fifty-day cut-
off selected by the court was not arbitrary, but rather was amply supported
by the agreed upon exhibits which showed that most payments made during the
nine months preceding the preference period were paid in fifty days or
less.
The bankruptcy court correctly viewed the Eighth Circuit opinion in
Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991) as
controlling. In Lovett, the lower courts had focused on the terms of a
written contract between the parties to determine that late payments made
during the preference period were not made in the ordinary course of the
parties' business under § 547(c)(2)(B). The Eighth Circuit reversed. In
reversing, the court emphasized that the analysis should focus, instead,
on "the time within which the debtor ordinarily paid the creditor's
invoices, and whether the timing of the payments during the 90-day period
reflected 'some consistency' with the practice." Id. at 498. The Lovett
court stated that the record showed not only that
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payments were late during both the pre-preference and preference periods,
but also that the length of delay between invoicing and payment remained
fairly constant in both time periods (sixty-two versus fifty-two days).
Thus, the court concluded that "[a]lthough it appears that payment
generally was made somewhat sooner in the 90-day [preference] period than
during the preceding 12 months, the difference was not sufficiently
significant to show that the payments during the 90-day period did not
follow the ordinary course of business reflected in the prior 12 months."
Id.
In this case, the bankruptcy court did precisely what the Lovett
court instructed. It recognized that a pattern of late payments can be
ordinary even if made in contradiction to stated contract terms requiring
earlier payment. It then looked to whether the pattern of late payments
had altered significantly during the preference period. Its finding that
Debtor had significantly changed its pattern of payment by making
substantially later payments during the preference period was supported by
stipulated exhibits. The bankruptcy court did not, as Expeditors urges,
establish a fifty-day "bright line" test; the fifty-day time frame was
based on documentary evidence showing that payments made during the nine
months preceding the preference period had consistently been made prior to
fifty days after the
13
date of the invoice. Thus, contrary to Expeditors' arguments, the
bankruptcy court applied the correct legal standard and made a factual
finding which was amply supported by the evidence. The bankruptcy court's
determination that Expeditors had not met its burden of establishing this
defense was not clearly erroneous.
B. SECTION 547(C)(1): CONTEMPORANEOUS EXCHANGE FOR NEW VALUE
Section 547(c)(1) provides:
(c) The trustee may not avoid under this section a transfer--
(1) to the extent the transfer was
(A) intended by the debtor and the creditor to or
for whose benefit such transfer was made to be a
contemporaneous exchange for new value given to the
debtor; and
(B) in fact a substantially contemporaneous
exchange.
11 U.S.C. § 547(c)(1) (1994). To establish a defense under § 547(c)(1),
Expeditors had the burden of showing, by a preponderance of the evidence,
that: (1) both parties intended the Debtor's payments during the preference
period to be a contemporaneous exchange for new value; (2) that the
exchange was in fact contemporaneous; and (3) that the Debtor received new
value in exchange for the transfers. Id. § 547(g); Lewellyn, 929 F.2d at
427. The existence of intent, contemporaneousness, and new value are
questions of fact. Lewellyn, 929 F.2d at 427 (citing Creditors' Committee
v. Spada (In re Spada), 903 F.2d 971, 975 (3d Cir. 1990)).
14
Expeditors' theory of recovery on this issue was based on the course
of conduct which had developed between the parties whereby Expeditors would
carefully watch the Debtor's account (one of its largest) and delay the
release of goods until it received payment from Debtor on prior, overdue
invoices. Expeditors asserted that its invoices, the credit agreement, and
applicable law gave it a security interest in all goods in its possession,
and that when it released goods in its possession upon receipt of the
Debtor's payment of prior invoices, it provided a contemporaneous exchange
for new value. The issue of whether such a security interest actually
existed was hotly contested at trial, and even now on appeal. The
bankruptcy court decision focused elsewhere.
The bankruptcy court held that Expeditors had not met its burden of
proving that Debtor intended the payments to constitute a contemporaneous
exchange for new value. This conclusion was founded on the testimony of
a witness who had served as President, CEO, and CFO of the Debtor who
testified that Expeditors had never discussed any such claimed security
interest with him and that, even when he met with Expeditors to discuss the
account, Expeditors made no mention of such a claim. The bankruptcy court
further pointed out that no cross examination of this witness was conducted
to establish either that the Debtor knew of the existence of such
15
a security agreement or that the Debtor intended such an exchange. The
bankruptcy court reasoned: "[a] party cannot intend an exchange when one
does not know of the existence of the matter to be exchanged. In light of
this unrebutted testimony, Expeditors cannot prevail on this element of the
contemporaneous exchange defense . . . ."
Expeditors urges that it met its burden of proving that Debtor
intended to release Expeditors' security interest for payment on earlier
invoices. In support of this assertion, Expeditors points to two types of
evidence. First, it asserts that the Credit Agreement and several hundred
invoices which the parties exchanged contained language giving Expeditors
a possessory lien, under certain conditions, and that knowledge of the
content of these documents should be imputed to the Debtor corporation.
Second, it asserts that Debtor's intent to accept the release of a security
interest in return for payments on old invoices should be inferred from the
parties' course of conduct. Expeditors also urges that the witness called
by the Committee, while an officer of the Debtor, was not the Debtor's
employee closest to the transactions on a day to day basis.
16
All of this amounts to reargument of the evidence and the reasonable
inferences to be drawn therefrom; an argument that the bankruptcy court
should have accepted Expeditors' view of the record rather than that urged
by the Committee and adopted by the court. In this case the bankruptcy
court was free to credit the testimony of a responsible officer of the
company that the Debtor had not discussed a release of security arrangement
with Expeditors. From this the bankruptcy court could draw the reasonable
inference that the Debtor did not know of such release and that the Debtor
did not intend to make a contemporaneous exchange. The fact that the
parties spent considerable time at trial disputing whether Expeditors even
had such a lien belies such an intent. Moreover, Expeditors failed to
produce any evidence that both parties understood that Expeditors had such
a security interest, tried to enforce it, or withheld goods in order to
preserve its possessory lien, much less evidence that such an agreement
existed.
"The critical inquiry in determining whether there has been a
contemporaneous exchange for new value is whether the parties intended such
an exchange." Lewellyn, 929 F.2d at 428. Although the parties' course of
conduct is evidence of this intent, see id., such evidence is not the only
evidence in this case. In this case,
17
there was contrary evidence, from a knowledgeable witness, upon which the
court could reasonably find a lack of such intent on behalf of the Debtor.
"When a trial judge's finding is based on his decision to credit the
testimony of one of two or more witnesses, each of whom has told a coherent
and facially plausible story that is not contradicted by extrinsic
evidence, that finding, if not internally inconsistent, can virtually never
be clear error." Anderson, 470 U.S. at 575. Accordingly, we conclude that
the bankruptcy court's decision with respect to this element of the defense
was not clearly erroneous.
Based on the foregoing, the decision of the bankruptcy court is
AFFIRMED.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
18