Concast Canada, Inc. v. Laclede Steel Co. (In Re Laclede Steel Co.)Concast Canada, Inc. v. Laclede Steel Co. (In Re Laclede Steel Co.)
Lаclede Steel Co. and Concast Canada, Inc. had been engaged in business for many years. The formal terms of their dealings required that Laclede pay its obligations to Concast thirty days after invoicing. In the ordinary course of their dealings, however, they did not adhere to these requirements. Rathеr, the average time it took Laclede to pay its obligations to Con-cast, prior to the 90 day preference period, was 52 days, although at least one payment had been as late as 70 days past invoicing.
When Laclede met with financial difficulty, Concast did not exert any pressure for earlier payment. Rather, as it had done in the past, Concast waited for payment. The last payment prior to the filing of the chapter 11 case was made with four checks.
1
The checks were dated July 15,
When Laclede sought to avoid the payments as preferences, Coneast defended on the bаsis that the payments were made in the ordinary course of business. At trial before the bankruptcy court, the parties disputed only whether the payments were ordinary as between the parties and whether the payments were made according to ordinary business terms. 11 U.S.C. § 547(c)(2)(B), (C). The bankruptcy court 2 сoncluded that, although late payments were ordinary within the context of the industry standards, the payment made 177 days beyond invoicing was not in the ordinary course of the business affairs of the debtor and the transferee. Coneast appeals the decision of the bankruptcy court, arguing that the bankruptcy court improperly focused solely upon the fact that the payment was made so long after invoicing. We affirm the conclusions of the bankruptcy court.
We review the bankruptcy court’s choice of the appropriate legal standard
de novo
inasmuch as that question is one of law. See
Hartford Underwriter’s Ins. Co. v. Magna Bаnk, N.A. (In re Hen House Interstate, Inc.),
Section 547 permits the chapter 11 debt- or in possession to avoid certain payments made within the ninety days prior to the filing of the bankruptcy petition. In this instance, the parties do not dispute that the payments were preferential as defined in section 547(b). Rather, the parties dispute the application of the ordinary course of business excеption to the avoidance action. Section 547 provides in pertinent part:
(c) The trustee may not avoid under this section a transfer—
(2) to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary cоurse of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms.
11 U.S.C. § 547(c)(2).
Under this exception, the defendant has the burden of separately demonstrating the three prongs of the exception. Only the second prong is at issue in this appeal. Specifically, the bankruptcy court detеrmined that the payment, constituting four checks, made 177 days after invoicing, was not in the ordinary course of business of the parties because the payment was not consistent with the prior payment patterns between the parties.
See Lovett v. St. Johnsbury Trucking,
In
Lovett v. St. Johnsbury Trucking,
The Eighth Circuit Court of Appeals has been consistent in following this standard and in its application. Most recently, in
Gateway Pacific Corp. Unsecured Creditors’ Committee v. Expeditors International of Washington, Inc. (Gateway Pacific
Corporation),
While it is true that a number of decisions, including
Central Hardware Co. v. The Walkеr-Williams Lumber Co. (In re Spirit Holding),
Thus, while there may be four factors which may be analyzed, the case authority often focuses upon one of these factors and any significant alteration in any one of the factors may be sufficient to conclude that a payment was made outside the ordinary course of business. As in
Lovett,
the timing of the payments from the debtor to Concast appears to be the most significant of the factors. The other, separate factors regarding other conduct between the parties — whether the terms were changed, whether the creditor exerted any pressure for collection — have more weight in the analysis if the issue on timing is a close one. Thus, a court may conclude that a transfer, even though a few days later than was the practice during the pre-preference period, may be ordinary if there is no change in the collection methods.
See, e.g., Speco Corporation v. Canton Drop Forge, Inc. (In re Speco Corporation),
This analysis is similar to the sliding scale employed in
Fiber Lite Corp. v. Molded Acoustical Products, Inc. (In re Molded Acoustical Products, Inc.),
Laclede mаde a payment that was 177 days beyond the invoice date and 103 days beyond the longest it had ever delayed payment. While late payments may be ordinary between the parties, and, thus, consistent with prior practice, the payments during the preference period must fall within the normal rangе of lateness.
See In re CIS Corp.,
The fact that the debtor had a reason for the lateness of the payments does not render the payment ordinary between the parties. The debtor’s explanation that the check was not delivered because it could not be covered is not an unusual one. It is, however, the reason for the preference provision: to ensure that all creditors are treated equally, even during the “slide into bankruptcy” — the period during which the debtor is unable to cover its obligations. The fact that the debtor could not cover the check to Con-cast is not a justification which brings the payment within the ordinary course of business exception. Rather, it is simply the reason the payment is a рreference in the first place.
The fact that delay generally in the industry is an acceptable practice does not bring this payment within the ordinary course between the parties. That fact is not even relevant to this analysis under section 547(c)(2)(B), but, rather, is a factor to be considered in conjunction with the third prong of the test: whether the transaction was ordinary pursuant to terms in the industry.
In reaching the conclusion that the payments were not in the ordinary course between the parties, the bankruptcy court compared Laclede’s past payments to the preference payments. By comparing the history and the preference period payments the bankruptcy court was able to determine that there was a significant deviation in the practice and, thus, a lack of consistency. The fact that the bankruptcy court determined that the рayments were late — late beyond the normal conduct between the parties- — does not, as asserted by Concast, constitute a rejection of the appropriate standard. Rather, it was a application of the standard as articulated by the Court of Appeals for thе Eighth Circuit and one we cannot find was clearly erroneous. The Judgment is therefore affirmed.
Notes
. The payment was made by four separate checks, although they were all apparently sent together, each had the same date, and all cleared the bank on the same date. The parties do not indicate whether this was the usual course for the debtor to make payment
. The Honorable Barry S. Schermer, United States Bankruptcy Judge for the Eastern District of Missouri.
. The factors the courts consider have been articulated as: (1) the length of time the parties were engaged in the transactions at issue; (2) whether the amount or form of tender differed from past practices; (3) whether the debtor or the creditor engaged in any unusual collection or payment activity; and (4) whether the creditor took advantage of the debtor’s deteriorating financial condition.
In re Spirit Holding, Co.,