Unsecured Creditors Committee of Sparrer Sausage Co. v. Jason's Foods, Inc.
826 F.3d 388
| 7th Cir. | 2016Background
- Sparrer Sausage (debtor) purchased meat from Jason’s Foods (supplier) from 2010 through its Chapter 11 filing on February 7, 2012.
- During the 90-day preference period before the petition, Sparrer paid Jason’s Foods 23 invoices totaling $586,658.10.
- The Unsecured Creditors Committee sued to avoid those payments under 11 U.S.C. § 547(b); Jason’s Foods conceded avoidability but asserted defenses under § 547(c)(2)(A) (ordinary-course) and § 547(c)(4) (new value).
- The bankruptcy court truncated the agreed historical period (Feb 2, 2010–Nov 7, 2011) to Feb 2, 2010–Apr 15, 2011, found a 16–28 day baseline, and held 11 payments (paid 14, 29, 31, 37, 38 days after invoices) preferential, totaling about $306,110.23.
- The court also found Jason’s Foods had supplied $63,514.00 of unpaid new value after some preference-period payments; it offset preference liability, and entered judgment for the Committee for $242,595.32.
- The district court affirmed; on appeal the Seventh Circuit reversed in part, holding only the 37- and 38-day payments were outside the ordinary course (total preference liability $60,679.00), and that new value offset eliminated any remaining liability.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the contested transfers are nonavoidable under § 547(c)(2)(A) (subjective ordinary-course) | Payments deviated from the parties’ established 16–28 day practice and thus were preferential | Historical payment practice supports payments within 8–38 days (or at least a wider baseline); many contested payments were consistent with past practice | Most contested payments (those at 14, 29, 31 days) were ordinary; only payments at 37 and 38 days fell outside the ordinary course and are avoidable |
| Proper historical period to use for baseline | Use truncated pre-distress period (court’s chosen Feb 2, 2010–Apr 15, 2011) to avoid skew from post-distress lateness | Use the parties’ stipulated full pre-preference period (Feb 2, 2010–Nov 7, 2011) | Truncation to Apr 15, 2011 was not clear error given evidence of increasing lateness after that date |
| Appropriate baseline methodology (average-lateness vs. total-range) | Narrow 16–28 day band (average ±6 days) identifies ordinary payments | Total-range or wider band (e.g., 8–38 days or average ± more days) better captures typical dealings | Use of average-lateness method was permissible, but applying an unexplained ±6-day band was erroneous and too narrow for this record |
| Whether Jason’s Foods’ new-value under § 547(c)(4) offsets preference liability | New value supplied after the transfers reduces/precludes recovery | Same — defendant asserted new-value offset | Jason’s Foods supplied $63,514.00 of unpaid new value, which fully offset its remaining preference liability after limiting avoidable payments to the 37- and 38-day invoices |
Key Cases Cited
- Kovacs v. United States, 614 F.3d 666 (7th Cir.) (standard of review: legal conclusions de novo, factual findings for clear error)
- In re Tolona Pizza Prods. Corp., 3 F.3d 1029 (7th Cir.) (ordinary-course defense compares preference-period payments to pre-preference norm)
- Kleven v. Household Bank F.S.B., 334 F.3d 638 (7th Cir.) (description of § 547(c)(2) ordinary-course inquiry)
- In re Globe Bldg. Materials, Inc., 484 F.3d 946 (7th Cir.) (new-value defense rationale and effect)
- In re Prescott, 805 F.2d 719 (7th Cir.) (creditor may offset preference liability by post-transfer new value)
- Jeffrey Bigelow Design Grp., Inc. v. Dir., 956 F.2d 479 (4th Cir.) (fact-specific nature of ordinary-course inquiry)