Cellmark Paper, Inc. v. Ames Merchandising Corp. (In Re Ames Department Stores, Inc.)Cellmark Paper, Inc. v. Ames Merchandising Corp. (In Re Ames Department Stores, Inc.)
OPINION AND ORDER
The appellant, Cellmark Paper, Inc. (“Cellmark”), appeals from a judgment entered by the United States Bankruptcy Court for the Southern District of New York (Gerber, J.), following a bench trial. The Bankruptcy Court found that the ap-pellee, Ames Merchandising Corporation (“Ames”), was entitled to recover as preferential transfers, pursuant to sections 547 and 550 of the Bankruptcy Code, four transfers totaling $1.9 million
1
made to Cellmark in the ninеty-day preference period preceding Ames’ August 20, 2001 bankruptcy filing. Cellmark was Ames’ principal supplier of paper used for pro
I.
When reviewing a decision of the Bankruptcy Court, this Court reviews the Bankruptcy Court’s conclusions of law
de novo
but accepts its findings of fact unless they are clеarly erroneous.
See
Fed. R. Bankr.P. 8013;
In
re
Halstead Energy Corp.,
II.
A.
Cellmark first challenges the Bankruptcy Court’s conclusion that the payments in question were preferential transfers under section 547(b) of the Bankruptcy Code. In particular, Cellmark disputes the Bankruptcy Court’s finding that Cellmark failed to rebut the statutory presumption of debtor insolvency. 2
“Insolvency is a question of fact, and the findings of the Bankruptcy Court in this regard will not be disturbed unless they are clearly erroneous.”
In re Roblin Indus., Inc.,
Cellmark does not appear to contest this finding but instead argues that the Bankruptcy Court erred as a matter of law in concluding that such evidence was insufficient. to rebut the presumption of insolvency. However, “book values are not ordinarily an accurate reflection of the market value of an asset[,]”
Roblin,
B.
Cellmark next contends that the Bankruptcy Court erred in concluding that Cellmark failed to establish the ordinary course of business defense to the preference statute. In order to establish this defense, Cellmark bore the burden of proving three elements by a preponderance of the evidence: (1) that the debt was incurred by the debtor in the ordinary course of business; (2) that the transfers were made in the ordinary course of business or financial affairs of the debtor and the transferee; and (3) that the transfers were made according to ordinary business terms. 11 U.S.C. § 547(c)(2); 11 U.S.C. § 547(g).
5
The Bankruptcy Court found, as a mixed question of law and fact, that the second element was not met — namely, that the transfers were not made in the ordinary course of business.
6
Ames,
The Bankruptcy Court’s conclusion that the transfers in question were not made in the ordinary course of business was correct and supported by the evidence as a whole. The Bankruptcy Court applied sevеral factors relied upon by courts in this Circuit in assessing whether a given transfer was made in the ordinary course of business, such as the prior course of dealings of the parties, the amount of the payment, the manner of the payment, and whether the payment was the result of any
The Bankruptcy Court also found evidence of favoritism by the debtor, noting that Ames had stopped using an automated accounts payable system during the preference period and instead had begun making individualized decisions about payment based on the identity of the vendor and thе needs of Ames’ business. Id. at 27, 34. These decisions, the Bankruptcy Court found, were influenced by the actions of Eugene Bankers, Ames’ Senior Vice President of Marketing and Advertising, who repeatedly inquired about the status of payments to Cellmark and made comments about the importance of Cell-mark being paid. Id. at 27-28, 34-35. Therefore, the Bankruptcy Court correctly concluded that, on balance, the relevant factors weighed against a finding that the transfers in question had been made in the ordinary course of business.
Cellmark, however, takes issue with several of the Bankruptcy Court’s factual findings. In particular, Cellmark contends that the Bankruptcy Court erred in finding that the explanations of Cellmark’s witnesses for the manual preparation of Invoice 70 were not credible and in finding that Invoice 70 had been manually generated for the purpose of obtaining early payment. However, there was plainly significant factual support for these conclusions.
First, as the Bankruptcy Court found, the explanation provided by two of Cell-mark’s witnesses for the manual preparation of Invoice 70 — namely, that Ames preferred to have a single invoice for each printing event, which could not always be accomplished through Cellmark’s computerized system
7
— was inconsistent with the deposition testimony of one of these witnesses and with documentary evidence indicating that Cellmark had sent multiple invoices per printing event to Ames in the past.
Ames,
Second, the Bankruptcy Court’s сonclusion that Invoice 70 had been manually generated for the purpose of obtaining early payment was also not clearly erroneous, in light of the unique aspects of the invoice’s timing and manner of payment and the court’s finding that no credible explanation for these unique features had been provided. Cellmark emphasizes that manually-generated invoices were also prepared after Amеs’ bankruptcy filing, which, according to Cellmark, demonstrates that the mere fact that Invoice 70 was manually prepared is not indicative of any motive of collection pressure. However, it was reasonable for the Bankruptcy Court to attach little weight to these additional invoices, given that they did not relate to the pre-preference or preference period and did not deviate as significаntly from the parties’ prior methods of payment as did Invoice 70.
Ames,
Cellmark further contends that the Bankruptcy Court erred as a matter of law in attaching too little significance to the court’s own finding that Cellmark did not engage in any collection pressure with respect to the transfers at issue.
Id.
at 28 & n. 16. However, the absence of crеditor pressure is only one factor to be considered, and the Bankruptcy Court concluded that “the other factors — the lump sum or partial payments, the manual preparation
of
the invoice, and the fact that the invoice was out of sequence ... outweigh [this] single factor on which Cellmark bases its entire ordinary course of business defense.”
Id.
at 34. This conclusion was not erroneous. Cellmark also asserts that the Bankruptcy Court should not have considered evidence of debtor favoritism by Ames but rather should only have analyzed whether Cellmark, the creditor, engaged in collection pressure with respect to the transfers at issue. However, Cell-mark does not cite any case holding that it is error for a Bankruptcy Court to consider both debtor and creditor behavior in analyzing the ordinary course of business defense, and, indeed, sevеral courts have done so.
See, e.g., In re Spirit Holding Co., Inc.,
Finally, Cellmark raises a host of other purported legal errors, аsserting that the Bankruptcy Court erred by attaching too little or too much weight to certain pieces of evidence and in relying upon certain factors that, according to Cellmark, are alone insufficient to defeat the ordinary course of business defense. However, the Bankruptcy Court did not rely on one factor or one piece of evidence in isolation in determining that the transfers were not made in the ordinary course of business but instead correctly concluded that the factors and evidence as a whole weighed in favor of such a finding.
Accordingly, the Bankruptcy Court did not err in finding that Cellmark failed to show by a preponderance of the evidence
III.
Cellmark next challenges certain discovery-related and evidentiary rulings of the Bankruptcy Court, as well as the Bankruptcy Court’s denial of its motion for a new trial. These rulings are reviewed for abuse of discretion.
Ball v.
A.O.
Smith Corp.,
A.
Cellmark first contends that the Bankruptcy Court abused its discretion by declining to deem admitted Cellmark’s requests for admissions concerning the absence of creditor pressure by Cellmark, despite Ames’ significant delay in responding to these requests. While Rule 36(a)(3) of the Federal Rules of Civil Procedure
8
provides that a rеquest for admission shall be admitted if not responded to within thirty days, a court retains discretion under Rule 36(b) to permit the withdrawal or amendment of such an admission “if it would promote the presentation of the merits of the action and if the court is not persuaded that it would prejudice the requesting party in maintaining or defending the action on the merits.” Fed.R.Civ.P. 36. The Bankruptcy Court found that deeming the requests admitted was not warranted because, while Ames’ responses to the requests had been untimely and insufficient, Cellmark suffered no prejudice “other than having to prove the entirety of its case on the merits.... ” (Hr’g Tr., 9, Apr. 13, 2009.) Moreover, the court found, admitting the requests would detract from a resolution of the case on the merits. (Hr’g Tr., 10, Apr. 13, 2009.) This conclusion was not an abuse of discretion.
9
See Garden City Boxing Club, Inc. v. Rice,
No. 04 Civ. 3100,
It was also not an abuse of discretion for the Bankruptcy Court to deny Cellmark’s motion for sanctions. A court has “broad discretion” in determining whether to impose sanctions for discovery abuses and any such sanctions “must be just and commensurate” with the abuse in question.
Biosafe-One, Inc. v. Hawks,
B.
Cellmark also contends that the Bankruptcy Court abused its discretion in making certain evidentiary rulings.
First, Cellmark contends that the Bankruptcy Court improperly restricted Cellmark’s ability to present rebuttal evidence. At both the close of trial and during a later status conference, Cellmark requested permission to present further testimony by one оf its witnesses, Mr. Spain, to rebut cross-examination indicating that Cellmark had issued multiple invoices per printing event in the past. The Bankruptcy Court allowed Cellmark to renew its arguments for such rebuttal evidence in its post-trial briefing. In its post-trial briefing, Cellmark presented an offer of proof with respect to the testimony of two proposed rebuttal witnesses — Mr. Spain and an additional witness not previously brought to the attention of the court — and also attached several exhibits not presented at trial and, according to Cellmark, not produced in discovery, including manually-generated invoices prepared after Ames’ bankruptcy filing. (Def.’s Post-Trial Mem. of Law (“Def.’s Post-Trial Mem.”) at 29-32
&
Ex. B,
In re Ames Dep’t Stores, Inc.,
Second, Cellmark argues that the Bankruptcy Court erred in allowing Ames’ witnesses to testify about statements allegedly made to them by Cellmark or Ames employees pertaining to alleged pressure by Cellmark. However, the Bankruptcy Court indicated that it would not consider the alleged statements for their truth and therefore those statements were not hearsay.
See
Hr’g Tr., 7-9, 12-13, July 29, 2009; Fed.R.Evid. 801(c). Moreover, the court indicated that, while it would admit the testimony, the рarties could argue its relevance. (Hr’g Tr., 7-9, 13, July 29, 2009.) Ultimately, the Bankruptcy Court did not find that any pressure was exerted by Cellmark.
Ames,
Finally, Cellmark claims that the Bankruptcy Court abused its discretion in denying Cellmark’s motion for a new trial. This motion was based exclusively on the propоsed testimony of Thomas Powell, a print buyer at Ames, who, Cellmark claims, would have corroborated Cell-mark’s witnesses’ explanations for why Invoice 70 was manually generated. However, the Powell affidavit proffered by Cellmark merely reiterated explanations that the Bankruptcy Court previously found to be unpersuasive and inconsistent with the documentary evidence — namely, that Ames preferred to receive a single invoice for each printing event. (Thomas E. Powell Aff. (“Powell Aff.”) at Ex. A ¶ 5,
In re Ames Dep’t Stores, Inc.,
CONCLUSION
The Court has considered all of the arguments of the parties. To the extent not specifically addressed above, thе remaining arguments are either moot or without merit. For the reasons explained above, the judgment of the Bankruptcy Court is affirmed. The Clerk is directed to close this case and to close all open motions.
SO ORDERED.
Notes
. Ames initially sought to recover all of the $6.7 million it transferred to Cellmark during the preference period. However, before trial, Ames voluntarily reduced its demand to the $1.9 million transferred to Cellmark immediately preceding the petition date.
. Debtor insolvency is one of five elements that must be satisfied for a payment to be recoverable as a preferential transfer. See 11 U.S.C. § 547(b).
. The decision of the Court of Appeals for the Second Circuit in Roblin is not to the contrary. In Roblin, the court did not hold that a debtor’s schedules based on the book value of assets were alone sufficient to demonstrate solvency or insolvency but instead held that such schedules сonstitute one piece of competent evidence from which inferences about insolvency can be drawn. See Roblin, 78 F.3d at 36 ("[W]hile book values alone may be inappropriate as a direct measure of the fair value of property, such figures are, in some circumstances, competent evidence from which inferences about a debtor's insolvency maybe drawn.” (citations omitted)).
. The Bankruptcy Court also noted that Ames' financial statements did not include $200 million of bond debt that Ames guaranteed to its corporate parent.
Ames,
. As the Bankruptcy Court noted, section 547(c)(2) of the Bankruptcy Code was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. However, because the amendments only apply to bankruptcy filings after October 17, 2005, and Ames filed for bankruptcy in 2001, the pre-amendment version of section 547(c)(2) applies.
See Ames,
. The parties did not dispute the first element, and the Bankruptcy Court assumed without deciding that the third element was met.
Ames,
. Cellmark claims that one of these witnesses — Dominick Merole, Cellmark's Credit Manager — never gave testimony to this effect at trial. However, in both Merole’s trial affidavit and on cross-examination at trial, he does state that Invoice 70 was manually generated because of the need to avoid multiple invoices per printing event. (Dominick J. Merole Aff. at ¶¶ 13-15,
In re Ames Dep’t Stores, Inc.,
. Federal Rule of Civil Procedure 36 is applicable in bankruptcy proceedings. See Fed. R. Bankr.P. 7036.
. The fact that Ames did not file a formal motion to withdraw the admissions does hot compel a contrary result. While some courts have refused to withdraw admissions in the absence of a formal motion, it was not an abuse of discretion for the Bankruptcy Court not to require such a motion in this case.
See, e.g., Kerry Steel, Inc. v. Paragon Indus., Inc.,