Gulfcoast Workstation Corp. v. Peltz Ex Rel. Bridge Information Systems, Inc. (In Re Bridge Information Systems, Inc.) ( 2006 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
________________
No. 05-2984
________________
In re Bridge Information Systems, Inc., *
*
Debtor. *
*
_____________________________ *
*
Gulfcoast Workstation Corporation, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the Eastern
* District of Missouri.
Scott P. Peltz, Plan Administrator on *
behalf of Bridge Information Systems, *
Inc. *
*
Appellee. *
________________
Submitted: June 12, 2006
Filed: June 23, 2006 (Corrected 6/28/06)
________________
Before COLLOTON, JOHN R. GIBSON and GRUENDER, Circuit Judges.
________________
GRUENDER, Circuit Judge.
Scott P. Peltz (“Peltz”), the court-appointed plan administrator in the jointly
administered chapter 11 bankruptcy cases of Bridge Information Systems, Inc. and
certain of its affiliates (collectively, “Bridge”), filed an adversary proceeding against
Gulfcoast Workstation Corporation (“Gulfcoast”), seeking to avoid more than $2.155
million in alleged preferential transfers pursuant to Bankruptcy Code, 11 U.S.C. §
547. After a trial, the bankruptcy court1 found that the payments at issue were
preferential transfers and that Gulfcoast failed to establish a defense to the avoidance
of the payments. Gulfcoast appealed and the district court2 affirmed. For the reasons
discussed below, we also affirm.
I. BACKGROUND
On February 15, 2001 (the “Petition Date”), Bridge filed for chapter 11
bankruptcy relief. Prior to the Petition Date, Bridge and Gulfcoast, both computer
products resellers, bought and sold goods with one another on net-30 terms. As of the
Petition Date, Bridge owed to Gulfcoast over $1 million and Gulfcoast owed to Bridge
over $713,000. Gulfcoast commenced an adversary proceeding against Bridge,
seeking court authority to offset its prepetition debts owed to Bridge against the
prepetition amounts owed by Bridge to Gulfcoast.
On February 13, 2002, the bankruptcy court confirmed a joint plan of
liquidation and appointed Peltz as plan administrator. As plan administrator, Peltz
was authorized to pursue causes of action on behalf of the Bridge estates and their
creditors, including actions to recover preferential transfers pursuant to Bankruptcy
Code § 547.
1
The Honorable David P. McDonald, United States Bankruptcy Judge for the
Eastern District of Missouri.
2
The Honorable Henry E. Autrey, United States District Court Judge for the
Eastern District of Missouri.
-2-
On February 11, 2003, Peltz filed an adversary proceeding against Gulfcoast,
seeking to avoid $2,155,105.80 in alleged preferential transfers made by Bridge to
Gulfcoast in the 90 days prior to the Petition Date and to recover this amount from
Gulfcoast. At trial, Gulfcoast argued that these payments were subject to the ordinary
course defense provided under Bankruptcy Code § 547(c) and thus were excepted
from avoidance. Peltz argued that the ordinary course defense did not apply because
the transfers were not conducted pursuant to objectively ordinary business terms due
to the use of remittance advice notations by Bridge with its payments. Specifically,
when Bridge sent a payment to Gulfcoast, it included a remittance advice notation
specifying against which invoice Gulfcoast should apply the proceeds. Gulfcoast
complied with the remittance advice notations.
After a trial, the bankruptcy court found that Peltz established that the
payments were preferential transfers and that Gulfcoast failed to establish that the use
of remittance advice notations to direct the application of payments to specific
invoices was ordinary within the computer resale industry. As a result, the bankruptcy
court entered a judgment in favor of Peltz in the amount of $2,155,105.80.3
II. DISCUSSION
A preferential transfer is 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
3
The bankruptcy court consolidated for purposes of trial the still-pending setoff
adversary proceeding with the preferential transfer adversary proceeding. After the
trial, in a separate memorandum opinion, the bankruptcy court found that Gulfcoast
was entitled to offset its prepetition debt to Bridge against Bridge’s prepetition debt
to Gulfcoast and to a secured claim in the amount of $713,677 under Bankruptcy Code
§ 506(a). Peltz appealed the order on the setoff memorandum opinion to the district
court, which affirmed. Peltz did not further appeal the setoff issue.
-3-
insolvent; [and] (4) made...on or within 90 days before the date of the filing of the
petition . . .” 11 U.S.C. § 547(b) (in relevant part). On appeal, Gulfcoast does not
challenge the bankruptcy court’s finding that, in light of the undisputed evidence,
Peltz established that the transfers were preferential.
Preferential transfers are subject to avoidance by the trustee. 11 U.S.C. §
547(b). When a preferential transfer is avoided, the transferee generally must
disgorge the amount of the transfer and return it to the debtor’s estate. 11 U.S.C. §
550(a). However, the Bankruptcy Code provides an “ordinary course” defense to
avoidance. A preferential transfer is excepted from avoidance if the transfer was: “(1)
in payment of a debt incurred by the debtor in the ordinary course of business or
financial affairs of the debtor and the transferee; (2) made in the ordinary course of
business or financial affairs of the debtor and the transferee; and (3) made according
to ordinary business terms.” 11 U.S.C. § 547(c)(2). Establishing the ordinary course
defense by a preponderance of the evidence is the transferee’s burden. Jones v.
United Sav. & Loan Ass’n (In re USA Inns of Eureka Springs), 9 F.3d 680, 682 (8th
Cir. 1993) (citations omitted).
The bankruptcy court held that Gulfcoast failed to establish the third prong of
the ordinary course defense. This prong is an objective test that requires the transferee
to prove that the business terms are in accordance with industry practice, not simply
that they are in accordance with the practice between the debtor and the transferee.
Id. at 684 (rejecting the district court’s misinterpretation of Lovett v. St. Johnsbury
Trucking, 931 F.2d 494 (8th Cir. 1991), and agreeing with the First, Third, Sixth,
Seventh and Eleventh Circuits that a transferee is required under Bankruptcy Code §
547(c)(2)(C) to produce evidence of an “independent, objective standard of the
practices of the relevant industry”). The bankruptcy court determined that Gulfcoast
did not show that its use of remittance advice notations to direct the
-4-
application of payments to specific invoices was within objectively ordinary business
terms.4
On appeal, Gulfcoast argues that the testimony of two of its own employees,
Thomas Pyla, the comptroller, and Bradley Whitsett, the general manager and vice
president, established that its use of remittance advice notations was according to
objectively ordinary business terms. A transferee may use its own employees or
officers to establish the third prong of the ordinary course defense. Id. at 685
(holding that the testimony of the transferee’s CEO was sufficient); St. Johnsbury
Trucking, 931 F.2d at 499 (holding that the transferee produced sufficient evidence
of the industry-wide practice regarding timing of payments through the
uncontroverted evidence of two of the transferee’s employees). However, to establish
the third prong of the ordinary course defense, the testimony of a transferee employee
cannot be evidence merely of the practice between the transferee and the debtor; it
must be “evidence of a prevailing practice among similarly situated members of the
industry facing the same or similar problems.” Eureka Springs, 9 F.3d at 685.
Gulfcoast points to no testimony in the record where its witness testified as to
the common industry-wide practice regarding the use of remittance invoice notations
to direct the application of payments to specific invoices, and our independent review
4
The practice of using remittance advice notations to direct the application of
payments to specific invoices, if outside the ordinary course of business, allows an
impending bankruptcy debtor to give preferential prepetition treatment to certain
creditors by disproportionately satisfying those creditors’ debts. For example, the
debtor could pay unusually large or late debts or pay an invoice that has not yet come
due–all of which Bridge did for Gulfcoast in the 90 days before Bridge filed for
bankruptcy relief. By doing so, the debtor favors one creditor over another in the last
days before all creditors become subject to the priority treatment rules of the
Bankruptcy Code and the pro rata distribution of the estate.
-5-
of the record reveals no such testimony.5 Pyla testified on issues relating to the
payment relationship between Gulfcoast and Bridge and, to a limited degree, to
Gulfcoast’s relationship with its other customers. However, he did not offer any
testimony on the industry-wide use of remittance advice notations to direct the
application of payments to specific invoices. Whitsett offered testimony on the issue
of industry-wide practices related to payment terms and delinquency, but likewise
offered no evidence on the use of remittance advice notations to direct the application
of payments to specific invoices in the computer resale industry. Although both
witnesses offered testimony on Gulfcoast’s relationship with Bridge as well as on
Gulfcoast’s relationship with others in the industry, this does not constitute objective
evidence of the industry-wide use of remittance advice notations to direct the
application of payments to specific invoices. It merely is evidence of Gulfcoast’s use
of remittance advice notations in this fashion. Cf. id. at 685 (holding that the
transferee met its burden under the third prong by providing evidence that not only
were 8-10% of its accounts on a pay schedule such as that of the debtor, but also that
“working with delinquent customers as long as some type of payment was
forthcoming was common industry practice”) (emphasis added); St. Johnsbury
Trucking, 931 F.2d at 499 (holding that the transferee met its burden under the third
prong by providing evidence that it “is ‘common’ within the trucking industry” for
payments to be made more than 30 days after invoice under a contract with net-30
terms) (emphasis added). As such, Gulfcoast did not meet its burden of showing that,
throughout the relevant computer resale industry, the use of remittance advice
notations to direct the application of payments to specific invoices was an ordinary
business term.
5
In its briefing and at oral argument, Gulfcoast suggested that it and Bridge
essentially were “the industry” and, thus, Gulfcoast’s testimony regarding its practices
with Bridge satisfied the “industry-wide” evidence requirement. However, we do not
need to decide whether the relationship between a transferee and the debtor alone can
constitute the “industry” for purposes of the third prong of the ordinary course defense
because Gulfcoast failed to present evidence at trial to support this claim on appeal.
-6-
Gulfcoast also argues that the bankruptcy court erred as a matter of law by
holding that, because Gulfcoast failed to establish that its use of remittance advice
notations was within ordinary business terms, it failed to establish the third prong of
the ordinary course defense. Gulfcoast claims that the bankruptcy court’s analysis
was “myopic,” focusing only on the parties’ use of remittance advice notations, rather
than recognizing that other parts of their transactions may have been conducted
according to objectively ordinary business terms. However, even if other terms of the
Gulfcoast-Bridge relationship were objectively ordinary, this does not mitigate the fact
that a key element of the relationship–the use of the remittance advice notations to
direct the application of payments to specific invoices–was not shown to be an
objectively ordinary business term. The bankruptcy court was not myopic, but was
properly focused on the issue of whether the use of remittance invoice notations to
direct the application of payments to specific invoices was outside ordinary business
terms for the industry.
Finally, Gulfcoast argues that the bankruptcy court erred in finding that
Gulfcoast abandoned its new value defense, another defense to avoidance available
under Bankruptcy Code § 547(c). The bankruptcy court held that Gulfcoast conceded
prior to trial that it could not produce sufficient evidence to establish a new value
defense and thus abandoned this defense. The district court affirmed, noting that the
only reference to a new value defense at trial was Gulfcoast’s acknowledgment that
the new value defense was the basis for its setoff claim asserted in a separate
adversary proceeding, which was accompanied by an assurance from Gulfcoast that
it would not seek to “double dip.”6
6
Double dipping occurs in this context when a creditor uses the debtor’s unpaid,
prepetition invoices both to offset the creditor’s prepetition liability to the debtor
under Bankruptcy Code § 553 and to establish new value to a preference action under
Bankruptcy Code § 547. Peltz objected to Gulfcoast’s initial efforts to double dip
through the concurrently pending setoff adversary proceeding. He argued it was
impermissible double counting, citing In re Comptronix Corp., 239 B.R. 357, 360
(Bankr. M.D. Tenn. 1999). Gulfcoast ultimately agreed not to attempt to double dip.
-7-
On appeal, Gulfcoast maintains that it never conceded that it could not establish
a new value defense and that the lower courts misconstrued Gulfcoast’s comments
regarding double dipping. However, we do not need to decide whether Gulfcoast
conceded pretrial that it could not establish the new value defense or that it otherwise
affirmatively waived the defense. Even if the bankruptcy court erred, the error was
harmless. A review of the record shows that Gulfcoast abandoned its new value
defense at trial by failing to offer any evidence of the defense.
To establish the subsequent new value defense, a transferee must establish that
the transfer “[was] to or for the benefit of a creditor, to the extent that, after such
transfer, such creditor gave new value to or for the benefit of the debtor [that was] not
secured by an otherwise unavoidable security interest . . . on account of which new
value the debtor did not make an otherwise unavoidable transfer to or for the benefit
of such creditor.” 11 U.S.C. § 547(c)(4). Although Gulfcoast asserted a new value
defense pretrial, it made no attempt to prove this defense at trial. Rather, it is clear
from the record that Gulfcoast’s defense at trial rested on its asserted ordinary course
defense. In fact, beyond Gulfcoast’s acknowledgment in its opening statement that
it would not seek to double-dip, it failed to address the new value defense at trial. No
Gulfcoast witness testified on the new value defense. Gulfcoast did not introduce into
evidence a subsequent advance rule chart, demonstrating the amount of each
subsequent new value advance to Bridge and the corresponding preferential transfer.
Although Gulfcoast argues on appeal that it provided such analysis in its pretrial
briefing, such information is not evidence in the trial court record. The only admitted
evidence to which Gulfcoast points in support of its purported new value defense is
merely a chart demonstrating unpaid invoices and the average number of days
between invoice and payment in the preference period–a chart used in support of
Gulfcoast’s asserted ordinary course defense–and copies of the correlating invoices.
As such, we affirm the bankruptcy court’s judgment on the ground that Gulfcoast
abandoned any new value defense it may have had by failing to pursue such defense
at trial. See Harman v. Cook, 191 F.3d 911, 921 n.9 (8th Cir. 1999) (citations omitted)
(holding that this Court “review[s] judgments, not opinions, and we may affirm on any
-8-
ground supported by the record, whether . . . that ground was urged below or passed
on by the district court”).
III. CONCLUSION
For the reasons discussed above, we affirm the bankruptcy court’s judgment.
______________________________
-9-