Brandt v. Repco Printers & Lithographics, Inc. (In Re Healthco International, Inc.)Brandt v. Repco Printers & Lithographics, Inc. (In Re Healthco International, Inc.)
Repco Printers & Lithоgraphies, Inc. (Repeo) asserts a right to retain a payment made to it by Healthco International, Inc.
I. BACKGROUND
We draw our account from the stipulated record, which is comprised of twenty-five uncontested statements of fact and thirteen exhibits (including various depositions and affidavits).
In better days, Healthco functioned as a major distributor of dental equipment and supplies. In August 1992, James Mills, chief executive officer of Healthco’s parent company, contacted Fred Zaegel, Repco’s owner, to explore a business relationship. Mills, who knew Zaegel both professionally and socially, proposed that Repco (headquartered in St. Louis) print Healthco’s produсt catalog. Zaegel agreed. From that time forward, Repeo handled virtually all of the diverse printing needs of Boston-based Healthco.
During this interlude, Repco extended credit to Healthco in accordance with standard printing industry practice: Repco would bill contemporaneously for each service, and would anticipate receiving payment in sixty days, on average, notwithstanding contrary credit terms expressed in its invoices. 1 For its part, Healthco customarily would accumulate invoices and then pay some (but not all) of the accumulation by mailing Repco a lump-sum company check. Over the period from the fall of 1992 until early April of the following year, Healthco paid one hundred fourteen Repeo invoices with sixteen different checks, totalling around $400,000.
Whenever Repeo’s cash flow ebbed, it was Zaegel’s practice to contact customers and solicit payment of outstanding invoices that were at least sixty days old. To this end, Zaegel called Healthco’s treasurer, Arthur Souza,- on four occasions. Each time, Souza arranged for a check to be cut shortly thereafter.
Despite these periodic payments, some of Repcо’s unrequited invoices were almost two hundred days old by late March. Zaegel tried to prompt Souza once again, but experienced difficulty in reaching him. Zaegel then called Healthco’s chief financial officer, James Moyle. Zaegel, who never before had made a dunning call to Moyle, politely informed him that Healthco was holding numerous Repeo invoices that were substantially ovеrdue. 2 At the conclusion of this five-minute conversation, Moyle stated that he would investigate the matter.
Moyle vouchsafed in his affidavit that he considered Repco to be “Healthco’s most pivotal vendor in the company’s effort to overcome its financial problems,” presumably because Repco was about to undertake the printing and distribution of Healthco’s quarterly catalog. He аsked Souza how much Healthco owed Repco and what was “the fastest way” to pay the debt. Souza replied that Healthco had in hand $235,558.64 in outstanding Repco invoices and that wire transfer would be the quickest payment method. Moyle directed Souza to wire the full amount. Repco received the funds on April 13, 1993. That payment satisfied in one fell swoop sixty-eight invoices ranging from brand new to two hundred days old.
Healthco sought the protection of the bankruptcy court on June 9, 1993. The firm’s ledgers disclosed that it had made only two other wire transfers in satisfaction of antecedent debts during the previous ninety days. The record confirms that Healthco’s
II. PROCEDURAL HISTORY
In due season, the trustee brought this adversary proсeeding seeking to recover the $235,558.64 payment. Repco defended on three grounds: (1) that Healthco was solvent at the time of the transfer, (2) that the transfer was “made in the ordinary course of business” within the meaning of
The parties cross-moved for summary judgment on this issue. After the bankruptcy court denied both motions, the parties submitted the issue on the stipulated record describеd above. On July 17,1996, the bankruptcy court dismissed the trustee’s complaint. The court’s two-paragraph rescript reads in its entirety:
A trial was scheduled in this matter for May 1, 1996. However, the parties filed a motion to submit the matter on stipulated facts and exhibits, which was granted on April 20,1996.
In consideration of said facts and exhibits, the complaint is dismissed by virtue of the ordinary course of business defense. A separate order will issue.
The trustee filed a timely notice of appeal and the parties opted to have the appeal heard by the BAP (in lieu of the district court).
3
For reasons that are not readily apparent, the parties mutually invited de novo review of the bankruptcy court’s deeision. The .BAP accepted the invitation, determined that the wire transfer had not been made in the ordinary course of business, and ruled that thе payment was “preferential, and subject to recovery by the Trustee under
III. STANDARD OF REVIEW
Bankruptcy cases differ from most other federal cases in that the court of appeals does not afford first-instance appellate review. Rather, Congress has provided for intermediate review, conferring on district courts and federal bankruptcy aрpellate panels the authority to hear appeals from bankruptcy court decisions, but preserving to the parties a right of further review in the courts of appeals.
See
We now move from the general to the specific. The crucial issue in this adversary proceeding revolves around Repco’s access to the “ordinary course of business” defеnse under
This familiar standard is not diluted merely because parties proceed on a stipulated record. We long have held that a bankruptcy court’s factual findings are entitled to the deference inherent in dear-error review even when they do not implicate live testimony, but, rather, evolve entirely from a paper record that is equally available to the reviewing court.
See Boroff v. Tully (In re
Tully),
Notwithstanding the obvious applicability of the “clearly erroneous” standard to the case at hand, there is a rub. The parties both urged the BAP to review the bankruptcy court’s decision de novo and to resolve the issue of whether Healtheo’s transfer of funds to Repco escapes classificаtion as a preference without affording any special respect to the bankruptcy court’s factual determinations. The BAP yielded to this importuning. See In re Healthco, supra, slip op. at 5. What is more, the litigants are united in their insistence that we, too, should essay plenary, nondeferential review of the bankruptcy court’s decision.
Under these peculiar circumstances, we are tempted simply to honor the parties’ rеquest.
Cf. United States v. Taylor,
This is an interesting concatenation of events, but we need not decide whether we should hold the parties to the invited error; in this instance, аll roads lead to Rome because our choice between the two standards of review will not affect the outcome on appeal. In short, this case is sufficiently plain that, whether we bow to the parties’ wishes and afford de novo review or bow to convention and employ the more deferential “clearly erroneous” rubric, we, like the BAP, would be compelled to set aside the bankruрtcy court’s contrary determination.
IV. THE MERITS
In order to guard against favoritism in the face of looming insolvency, the Bankruptcy Code provides that certain payments made by the debtor within ninety days preceding the institution of bankruptcy proceedings are voidable as preferences.
See
(A) in payment of a debt incurred by the debtor in the ordinary course of business ... [between] the debtor and the' transferee;
(B) made in the ordinary course of business ... of the debtor and the transferee; and
(C) made according to ordinary business terms[.]
The statute itself is uninstructive as to the definition of the term “ordinary course of business.” Courts abhоr interpretive vacuums, and they have filled this one, articulating several factors that bear upon whether a particular transfer warrants protection under
The amount of the payment was uncommonly large; Healthco never before had made a lump-sum payment to Repco in an amount apprоaching $235,000.
6
Put another way, the payment was nearly ten times as, large as the average of the payments previously made by the debtor to Repco. Then, too, the timing of the payment was highly suspicious. It lumped old and new bills, and in the process, liquidated several invoices that were by accounting standards ancient (i.e., more than ninety days old) and several that were prepubescent (i.e., less than thirty days оld).
7
There were, moreover, virtually
The circumstances surrounding the wire transfer clinch the matter. Healthco owed money to hundreds of creditors. Of these, it paid only Repco, Kerr Manufacturing, and Clarke Industries in full by wire transfer during the preference period. All three of these businesses had detectаble links to Healtheo’s principals: Thomas Hicks, chairman and chief executive officer of the firm that owned Healthco Holding Co. (which, in turn, owned Healthco), was a director and beneficial owner of Kerr’s parent corporation; James Mills, chairman of Healthco Holding Co., chaired the board of Clarke’s parent company and served as its chief executive officer; and as mentioned above, Mills also had a longstanding relationship with Repco’s proprietor. Apart from these special relationships, there is no reasonable explanation for preferment of the three creditors. This is especially true of Repco; as Zaegel himself testified during his deposition, it is general industry custom to “pay the printer last.”
Other circumstances associated with the challеnged transfer highlight the importance of Repco’s special relationship. Souza, Healtheo’s treasurer, testified that by February 1993 decisions about which creditors were to be paid when were being made by a committee of Healthco executives; yet Moyle overrode this mechanism to effect the Repco payment. At the same time, it was clear both from Zaegel’s kid-glove apрroach and from the competitive nature of the printing industry that Repco’s continued service did not hinge upon Healthco’s payment of all outstanding debt as celeritously as possible. Thus, Moyle’s claim that he directed the payment to be made because Repco was “pivotal” to Healtheo’s operations is entitled to very little weight.
We need go no further. The circumstantial evidenсe fully persuades us that the debtor deviated sharply from its customary business practices to favor a select trio of creditors, Repco included. This is precisely the type of preferment — taking care of a few well-connected vendors while playing hardball with the general multitude — that the drafters of the Bankruptcy Code intended to curtail.
See Lawson v. Ford Motor Co. (In re Roblin Indus.),
Repco’s other arguments are unconvincing and we reject them without elaboration. It suffices to say that the circumstances surrounding the challenged transfer amply evince its extraordinary nature. Therefore, we affirm the BAP’s determination that, contrary to the bankruptcy court’s view, the challenged transfer was not made in thе ordinary course of business.
Unlike the BAP, however, we do not believe that such a determination clears the way for judgment on the trustee’s claim. The bankruptcy court reserved the issue of Healthco’s insolvency — an essential element of the preference claim — and that issue remains open. Consequently, we must vacate the BAP’s judgment to that extent and remand to the BAP with directions that it, in turn, remand the causе to the bankruptcy court for further proceedings.
Affirmed in part, vacated in part, and remanded. No costs.
Notes
. Repco’s invoices bore a net ten days legend. The record reflects, however, that this credit term was honored mainly in the breach; most of Repco’s customers (and, indeed, the majority of firms purchasing services in the competitive printing industry) ignored this stricture.
. The record indicates that Zaegel was unaware of Healthco’s financial problеms at this time; that he discussed the past-due invoices cordially with Moyle; and that he neither threatened to cut off printing services nor demanded an immediate payment. '
. In this circuit, bankruptcy appellate panels have had a mixed history. After a short-lived experiment, the use of such panels was discontinued in 1983. The First Circuit Judicial Council revivified the BAP structure on July 1, 1996, giving interested parties the option of electing intеrmediate appellate review before a BAP panel rather than before a federal district court.
. To be sure, occasional statements of this court, if wrested from context, might appear to suggest de novo review in such circumstances.
See, e.g., Brewer v. Madigan,
. Of course, if a reviewing court determines that a bankruptcy court’s findings are too indistinct, it may decline to proceed further and remand for more explicit findings. This avenue was open to the BAP and it is equally open to us.
. To be sure, as Repco points out, the magnitude of the payment is attributable in some measure to a single invoice in the sum of $96,689.19. This circumstance does not contradict the conclusion that the payment was abnormal. The fact remains that Healthco remitted over $235,-000 in satisfaction of sixty-eight separate Repco invoices, thereby dwarfing earlier remittances as to both the number of invoices and the total dollars involved.
. As the BAP noted, roughly fifty pеrcent of the invoices satisfied by the wire transfer fell into one of these two categories. See In re Healthco, supra, slip op. at 10. By contrast, very old and very new invoices comprised no more than fifteen percent of any group of invoices previously paid.
. The other main goal of the preference provision — precluding the debtor “from trying to stave off the evil day by giving preferential treatment to his most importunate creditors,”
In re Tolona Pizza Prods. Corp.,