Begier v. Krain Outdoor Advertising, Inc. (In Re American International Airways, Inc.)Begier v. Krain Outdoor Advertising, Inc. (In Re American International Airways, Inc.)
OPINION
The facts of this case require us to explore several issues which pervade the numerous proceedings brought before our court, like all bankruptcy courts, to avoid certain pre-petition transfers of a debtor as preferential transfers, pursuant to 11
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(1) When is a debt for an ongoing service to be paid in periodic installments “incurred,” per
We hold that a debt is incurred upon the earlier of (a) the date of receipt of service by the debtor, pro-rated to estimate the service received within the applicable 45-day period, if necessary; or (b) Any due date established by the parties’ contractual relationship;
(2) Is a “transfer,” per the prior
(3) What must a creditor do to successfully defend against a preference, per
Applying these holdings to the facts in issue, as set forth hereinafter, we rule as follows: (1) The debts for outdoor advertising in issue were “incurred” as of each date that service was provided,
i.e.,
in March, April, and May, 1984, prorated by the cost of each date of receipt of service; (2) The transfers of the Debtor occurred on the dates of delivery of the checks in issue, June 15, 1984; June 22, 1984; and July 13, 1984, respectively, and hence all dates on which the debts were incurred by the Debt- or were outside of the 45-day period set forth in
The underlying bankruptcy case was filed by the Debtor, AMERICAN INTERNATIONAL AIRWAYS, INC. (hereinafter “the Debtor”), under Chapter 11 of Title 11, U.S.C., on July 19, 1984. The instant adversarial proceeding was commenced on March 26, 1986, by Harry P. Begier, Jr., Esquire, the Trustee in Bankruptcy for the Debtor (hereinafter referred to as the “Trustee”), seeking to avoid three (3) payments by check made by the Debtor to the Defendant, KRAIN OUTDOOR ADVERTISING, INC. (hereinafter referred to as “Krain”), as being preferential, per
The parties stipulated to facts which establish all of the elements necessary to demonstrate that the Debtor’s рayments in issue constitute preferential transfers under
A trial of this proceeding took place on August 18, 1986, before the Honorable Emil F. Goldhaber, Chief Bankruptcy Judge of this court, who at that time was hearing all of the cases normally assigned to both Philadelphia judges. Prior to the commencement of testimony, the parties stipulated to certain facts which are incorporated below in our Findings of Fact. This case, being a matter originally assigned to Bankruptcy Judge William A. King, Jr., was transferred to the undersigned when he took the bench on August 27, 1986. On September 5, 1986, we ordered the Plaintiff to arrange for the preparation of the Nоtes of Testimony and for the parties to thereafter submit Proposed Findings of Fact and Conclusions of Law. They did so on October 6, 1986, and October 15, 1986, respectively.
FINDINGS OF FACT
1. Krain is a Pennsylvania corporation and is a creditor of the Debtor.
2. An agreement was entered into between an agent of the Debtor, Innovative Travel Group (hereinafter “ITG”), and Krain whereby Krain would provide outdoor advertising to the Debtor for three (3) “pair units” and two (2) “fixed units” at certain subject locations for a period of six (6) months, with services commencing January 1, 1984.
3. The only written memorialization of this transaction was a “confirmation” letter of November 18, 1983, from ITG to Krain, a copy of which was entered into evidence as Defendant’s Exhibit 1, which did not make any specific reference to when payments would be due for the services.
4. On December 30, 1983, ITG and Krain executed a further contract for an additional location not included in the original agreement, a copy of which was entered into evidence as Defendant’s Exhibit 3. (This contract is referred to hereinafter as “the 2nd contract.”). This transaction was memorialized by a contract which Krain’s President identified as a “standard form” used in the industry. (Transcript of Testimony, August 18, 1986 (hereinafter referred to as “T.”), at 35-36, 52-53). This contract states, inter alia, that “we [the Debtor] agree to pay you monthly, in advance,” for Krain’s service.
5. Since this is the only specific contract form signed by the pаrties, the terms of this form are found to apply to both of the parties’ contracts, i.e., the contract of November 28, 1983, as well as that of December 30, 1983.
6. Pursuant to the agreements, Krain posted advertising for the Debtor during the latter part of December, 1983, and the first few days of January, 1984.
7. In January, 1984, the Debtor expressed dissatisfaction with certain of the advertising provided in the November 28, 1983, agreement. 3
8. Shortly thereafter, in and around January, 1984, the parties had a number of discussions which modified the terms of the original contract and ultimately culminated in a modified agreement, which, for the purposes of this proceeding, were deemed, in relevant part, as follows:
*329 (a) Krain would provide outdoor advertising space for eight (8) months commencing March 1, 1984, utilizing three (3) of the original sign locations, but substituting certain alternate locations;
(b) No charges would be made for outdoor advertising space provided during the months of January and February of 1984 and outdoor advertising would be provided for eight (8) months, with the first month commencing March 1, 1984, and ending October 30, 1984, but payment would only be made by the Debtor for only six (6) months of the eight (8) months provided;
(c) Invoices previously rendered under the original agreement for the months of January and February, 1984, would be honored by the Debt- or, but as pertaining to the months of March and April, 1984, subsequent invoices would be rendered months.
(d) Payment for advertising services would be made for each month of the contraсt sixty (60) days after the commencement of the month in question.
9. Under the terms of the modified agreement, payment was due on May 1,1984, for services rendered in March, 1984; on June 1, 1984, for services rendered in April, 1984; on July 1,1984, for services rendered in May, 1984; and in the same fashion for the three (3) remaining months.
10. The Debtor failed to make any payments to Krain on May 1, 1984, or June 1, 1984, per the modified agreement.
11. Therefore, the Debtor and Krain arranged a meeting between Lawrence Krain, the President of Krain, and Edward T. Lack, Vice-President and Controller of the Debtor, on June 7, 1984.
12. As a result of that meeting, Krain agreed not to follow through with a threat to paint-out, relist and resell the signs which carried advertisements of the Debt- or, in exchange fоr weekly installment payments on the amounts due to Krain. (71, at 48, 50-51).
13. In a letter dated June 11, 1984, a copy of which was admitted into evidence as Exhibit D-4, Lack confirmed that the terms of the June 7, 1984, agreement were that the Debtor’s balance due to Krain was $42,-840.00, and that this would be paid in weekly installments of $7,140.00 each, beginning June 15, 1984.
14. On June 15,1984, the Debtor issued to Krain its check number OV6020 in the amount of $7,140.00, which constituted payment of the invoices dated in January, 1984, in the amount of $5,780.00, for services rendered between March 1 and March 31, 1984, on the initial contract, and $1,360.00 for services rendered on the 2nd contract between January 10, 1984, and February 9, 1984 (hereinafter referred to as “the first check”).
15. The first check was honored or paid by the Debtor’s bank on or аbout June 18, 1984.
16. On June 22, 1984, the Debtor issued check number OV6119 in the amount of $5,780.00 to Krain, representing payments against the invoice dated February, 1984, for services rendered during the period from April 1, 1984, through April 30, 1984 (hereinafter referred to as “the second check”).
17. The second check was honored or paid by the Debtor’s bank on or about June 17, 1984.
18. On July 13, 1984, the Debtor issued check number OV6352 to Krain in the amount of $5,780.00, against the invoice dated March, 1984, for outdoor advertising services rendered during the period from May 1, 1984, through May 31, 1984 (hereinafter referred to as “the third check”).
19. The third check was honored or paid by the Debtor’s bank on or about July 16, 1984.
20. At the time that the Debtor issued these three (3) checks it was insolvent.
21. These checks constituted payments of debts incurred in the ordinary course of business or financial affairs of the Debtor and Krain.
*330 22. The checks themselves were payments made in the ordinary course of the business or financial affairs of the Debtor and of Krain. 4
23. At no time prior to July 19, 1984, did Krain know or have reason to know that the Debtor was insolvent. On that date, the Debtor filed a petition under Chapter 11 of Title 11 of the United States Code for Relief under the Bankruptcy Act.
24. Krain’s President testified that he provided advertising services to the Debtor “subsequent to their filing” (T., at 51), but, because no date for termination of services is established, the Court has no evidentiary support to conclude that the services continued for any dates after July 19, 1984.
25. Krain’s President tеstified that it was his policy to refund the full payment for a month if anything happened to a sign at any time prior to the end of a month. (T, at 53-54). However, this policy had no effect on the time that payments were due, i.e., in advance of the month in which services were provided.
CONCLUSIONS OF LAW
1. The requirements to establish preferential transfers by the Debtor here, set forth in
2. Because this case was filed prior to the effective date of BAFJA, the version of
3. The dates that the Debtor effected “transfers” to Krain, for purposes of former
4. The dates that the Debtor “incurred” the obligations for which the three (3) “transfers” dеscribed in paragraph three supra were the earlier of (a) the dates that services were received, pro-rated on a daily basis or (b) the due dates for payments pursuant to the parties’ modified agreement.
5. In this case, the earlier dates were the dates of receipt of services, and, by pro-rating as indicated above, it is concluded that all of the services except those rendered on May 30 and May 31, 1984, were rendered more than forty-five (45) days before the Debtor’s transfers were made to Krain.
6. Krain is therefore able to satisfy the requirement of
7. Krain met its burden of proving that it provided “new value” in the form of additional services to the Debtor from the date of the first preferential transfer of June 15,1984, until July 19,1984, per
8. Krain is therefore entitled to offset the preferential transfers to it by the Debtor, on the basis of
9. The preferential transfers of the Debt- or to Krain totalled $18,700.00.
10. The Debtor is entitled to judgment against Krain in the amount of $18,700.00 less $380.06, per
DISCUSSION
The first issue, and the one to which the parties have devoted by far the most attention, surprisingly from Krain’s vantage point, is whether the transfers of the Debt- or to Krain were exempted from considera
*331
tion of preferential status by the terms of
To determine whether
Our starting point is consideration of the policy of
The following is the classic statement of when a debt is incurred, for purposes of
the debt is incurred on the date that the debtor becomes liable for it — when a resource is consumed or a service performed — , not the date that the creditor chooses to bill the debtor. In re Emerald Oil Co.,695 F.2d 833 , 837 (5th Cir.1983).
Five (5) other Circuit Courts of Appeal have unanimously agreed with this interpretation of the Fifth Circuit Court of Appeals.
See In re White River Corp.,
Special difficulties arise when a contract exists which provides that certain payments must be made by a certain date or time, and when the service provided to the debtor is ongoing. Both of these elements are present here.
As
Emerald
makes clear, the courts refuse to allow the creditor to choose the date that the debt is incurred by when it chooses to invoice or bill the debtor for its services.
The issue of ongoing service is most difficult to resolve in the numerous cases involving utility services. The majority of those cases hold that the debt is incurred as soon as the service is used, not when the service is billed or even when the meter is read by the utility.
See Barash, supra,
After due consideration of the foregoing authorities, we believe that the proper rule to determine when a debt is incurred is to measure from the earlier of the date when services are provided or when the parties’ contract calls for payment. All of the cases express the general principal that the parties cannot set a later date on the time that the debt is incurred by contract, and, as the cases uniformly state, to so hold would be to allow the creditor to manipulate the circumstances to its benefit. However, if the parties agree to set an earlier date than that by which the services are supplied as the date that the debt is incurred, such as the agreement that rent is due on the first of the month accepted by the court in Advance Glove as the date that monthly rentals are incurred, there is no reason not to give such terms effect. We do note that this conclusion is somewhat inconsistent with the result reached by the court in White River that a rent debt is incurred on the fifteenth day of the month, when half of the serviсes for the month had already been rendered. However, we believe that it is the result most consistent with the general principle to which all of these cases purport to subscribe.
The utility cases do present a problem not presented by the rental cases, because use of utility services cannot be so accurately pro-rated as rentals. We believe that, if we were faced with the utility situation, we would nevertheless still attempt to pro-rate the usage by computing a daily rate from average billings and hence, to the best of our ability, estimate the value of services for which a billing debt was “incurred” by the crucial date.
In the instant rental situation, it is relatively easy to pro-ratе the rentals due. The daily rental rate, computed by multiplying the monthly rental rate of $5,780.00 by twelve (12) and dividing by three hundred and sixty-five (365), is $190.03, and that is the figure which we shall utilize in our calculations.
In the instant case, as we find, at Finding of Fact 5, supra, the only contract setting forth the terms of payment, and hence the terms which we deem significant here, dictated that payments must be made “monthly, in advance.” We do agree, however, that the parties’ negotiations in January, 1984, had the effect of setting back the dates that the debts arising from all but the 2nd contract would ordinarily have been considered to have been incurred by sixty (60) days. Therefore, the three (3) payments in issue, being for services incurred in March (except for $1,360.00 payable for January services on the 2nd contract), April, and May, respectively, were not due until May 1, 1984 (except, again, for the $1,360.00 payment on the 2nd contract), June 1, 1984, and July 1, 1984.
However, this conclusion is not of great practical help to Krain’s case. The services were provided during March, April, and May, and therefore, utilizing the earlier of the dates that services were provided or that the parties’ contract required payment, obliges us to utilize the dates that services were provided as our reference point here.
The services paid for by the first check were rendered in March, much greater than forty-five (45) days before the mid-June date that the first check was drawn. The services paid for by the second check were rendered in Aрril, which was also clearly forty-five (45) days before this check was delivered or paid. However, the third check, paying for services rendered between May 1, 1984, and May 31, 1984, was delivered on July 13, 1984, and honored on July 16, 1984. This requires us to consider whether “payment,” for purposes of
*333
On this issue, we must distinctly part company with the Trustee and agree with Krain. While there is some split оf authority on the point, the vast majority of cases, as well as reason, supports the conclusion that the date of
delivery
of a check must be considered as the date of transfer for purposes of
A profitable starting point is notation of a case which, ironically, the Trustee cites in support of his position on this issue,
In re Fasano/Harriss Pie Co.,
Fasano/Harriss
is a profitable starting point because it discusses three (3) lines of cases, utilizing different reasoning, which have emerged, the first two (2) of which conclude that payment takes place upon delivery for purposes of
The first line of cases cites to the following statements made by the floor managers of the House (Representative Edwards) and Senate (Senator DeConcini), as a part of a joint explanatory statement on the application of
Contrary to language contained in the House Report, payment of a debt by means of a check is equivalent to a cash payment, unless the check is dishonored. Payment is considered to be made when the check is delivered for purposes ofsections 547(c)(1) and (2). 124 Cong.Rec. § 17414 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini); 124 Cоng.Rec. H11097 (daily ed. Sept. 28, 1978) (statement of Rep. Edwards).
The second line of cases relies upon a reference to
Finally, the third line of cases, dissenting from the conclusion of the first two (2) lines, reasons that, since there is an absence of legislative history to support the treatment of
Rejecting all of these lines of reasoning,
Fasano/Harriss
reaches the result that the date of delivery is significant because it is “in the normal course of affairs” to accept a check in payment
While we agree that the line of reasoning accepted by the
Fasano/Harriss
court is sound and tоtally consistent with the reasoning of our local district court in
Windsor, supra,
regarding the underlying purpose of
Rather, our examination of the complex trail of legislative history leads us to agree with the conclusion of the first line of cases that the legislative history of
In this analysis, we must start with the Report of the Committee of the Judiciary, House of Representatives, H.R.Rep. No. 595, 95th Cong., 1st Sess. 373 (1977) (hereinafter cited as “House Report”). The House Report accompanied the bill which eventually came to be enacted as the Bankruptcy Reform Act of 1978, and the purpose of the House Report was to explain the bill’s purpose and meaning, as set forth in the follоwing passage in 2 COLLIER ON BANKRUPTCY APPENDIX II-l to II-2 (15th ed. 1986):
The Report is an indication of what the authors of the bill had in mind when drafting it, what the Committee had in mind when reporting it favorably, and what the Members of the House had in mind when approving the legislation.... It does not, of course, reflect any subsequent developments in the legislative process.
What is significant and what apparently has been misunderstood by the cases refusing to accept the analysis of the first line of cases, is that the statement by Representative Edwards and Senator DeConci-ni is the most recent and reliable joint explanation, coming from the Managers of both Houses, which takes into account the compromises that were reached and the interpretаtions of the new language of the amended bill. In 3 COLLIER ON BANKRUPTCY APPENDIX,
supra,
at IX-I, it is said of such a passage: “It is similar in function and purpose to the Joint Explanatory Statement of Managers that accompanies a formal Conference Report of a Committee of Conference, and its effect should be the same.”
Id. See Young Supply Co. v. McLouth Steel Corp.,
The following excerpt is particularly instructive to this endeavor:
The best method of using the legislative history to aid in interpretation is to begin with the most recent statement of authority and delve backward through the legislative process. Thus the following authorities should be consulted in this order:
1. floor statement of Congressman Don Edwards, October 6,1978, on final passage of H.R. 8200;
2. floor statement of Senator DeCon-сini, October 5,1978, on passage of the final Senate amendment in the nature of a substitute to H.R. 8200;
3. floor statement of Congressman Don Edwards, September 28, 1978, on passage of the House Amendment to the Senate amendment in the nature of a substitute to H.R. 8200;
4. floor statement of Senator DeCon-cini, September 7, 1978, on initial passage of the Senate amendment in the nature of a substitute to H.R. 8200;
5. Senate Report of the Finance Committee to accompany S. 2266 filed by Senator Long on August 10, 1978;
6. Senate Report of the Judiciary Committee to accompany S. 2266 filed by Senator DeConcini on July 14, 1978;
8. floor statement of Congressman Don Edwards, October 27, 1977, on consideration of H.R. 8200;
9. House Report of the Judiciary Committee tо accompany H.R. 8200 as reported filed by Congressman Don Edwards, September 8, 1977....
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... In any event it is important to remember that only the statements listed in items one and two above refer to the new bankruptcy law as enacted. Every other source, items three through nine, interprets an earlier version of the final legislative product. K. Klee, Legislative History of the New Bankruptcy Code, 54 THE AMERICAN BANKR.L.J. 275, 294-95 (1980) (footnotes omitted).
Klee then goes on to state as follows:
When step one or two of the legislative history contains an explanation, it is a *335 mistake to rely unquestionably on legislative history from step eight or nine because the language of the statute may have been amended. Stated in a different way, the more recent legislative history is usually more accurate than the older history in describing the сode. Id. at 296.
Thus, we conclude that the statement made by both Representative Edwards and Senator DeConcini is extremely significant in interpreting
As was noted in
Fasano/Harriss, supra,
at 876, “
Furthermore, our conclusion is supported by the vast weight of authority, including the only two (2) Court of Appeals decisions to address the issue.
See White River, supra,
We have discussed this subject at some length because the result which we have reached is at variance with that reached by Chief Judge Emil F. Goldhaber of this court, while sitting in New Jersey in
In re Staveco Electrical Construction, Inc.,
On the other hand, there is no perceptible difference between the policies contained in the various sections of
Our agreement with Krain that, for purposes of
It is now necessary that we turn to analysis of the application of
Analysis of
Happily, the courts which have interpreted
Thus, in interpreting
We hold that
Somewhat unfortunately for Krain, the burden is clearly upon it to establish the elements of
Therefore, we believe that Krain has stated a defense pursuant to
Notes
.
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor—
(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 insolvent;
(4) made—
(A)on or within 90 days before the filing of the petition; ...
(5)that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under Chapter 7 of this title.
(B) The transfer had not been made; and
(C) Such creditor received payment of such debt to the extent provided by the provisions of this title.
. These provisions, in the form that they existed prior to BAFJA, which apply because the underlying bankruptcy case was filed prior to the BAFJA effective date, were as follows:
*328 (c) The trustee may not avoid under this section a transfer—
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(2) to the extent that such transfer was—
(A) in payment of a debt incurred in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made not later than 45 days after such debt was incurred;
(C) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(D) made according to ordinary terms; ...
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(4) 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—
(A) not secured by an otherwise unavoidable security interest; and-
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor; ...
. The parties’ Stipulation, as transcribed by Krain in its Brief, states that the Debtor expressed dissatisfaction with the advertising in June, 1984, but this is obviously an error.
. This finding might be questioned, in light of the fact that the modifications in the parties’ first contract, as are set forth in paragraph eight (8) supra, require payments be made sixty (60) days after the service were originally payable, which does not seem so "ordinary.” However, the parties stipulated to this fact, and we are therefore unwilling to revise it.
. See page 17 infra for this calculation.