In re C.W. MINING COMPANY, Debtor. Gary E. Jubber, Trustee, Appellant, v. SMC Electrical Products, Inc.; Becker Mining America, Inc., Appellees.
No. 13-4175.
United States Court of Appeals, Tenth Circuit.
Aug. 10, 2015.
796 F.3d 983
Jeffrey L. Shields (Jacob D. Lyons, with him on the brief), Callister Nebeker & McCullough, Salt Lake City, Utah, for Appellees.
Before KELLY, LUCERO, and HARTZ, Circuit Judges.
HARTZ, Circuit Judge.
C.W. Mining Company, a coal-mining company, was forced into bankruptcy after creditors filed a petition for involuntary bankruptcy on January 8, 2008. Several months before the petition was filed, C.W. Mining had entered into its first contract with SMC Electrical Products, Inc.—an agreement to purchase equipment with a view toward greatly increasing coal production by converting its mining method from continuous mining to a longwall system. One payment for the equipment was a $200,000 wire transfer from C.W. Mining on October 16, 2007. Because this trans
I. DISCUSSION
A. Standard of Review
“In an appeal from a final decision of a bankruptcy court, we independently review the bankruptcy court‘s decision, applying the same standard as the bankruptcy appellate panel or district court.” Aviva Life & Annuity Co. v. White (In re Millennium Multiple Emp‘r Welfare Benefit Plan), 772 F.3d 634, 638 (10th Cir.2014) (brackets and internal quotation marks omitted). We review a bankruptcy court‘s construction of the Bankruptcy Code de novo. See Fid. Sav. & Investment Co. v. New Hope Baptist, 880 F.2d 1172, 1174 (10th Cir.1989) (per curiam). Because the bankruptcy court granted summary judgment to SMC, we also review the record de novo, examining the evidence in the light most favorable to the Trustee to determine whether SMC established that there was “no genuine dispute as to any material fact” and it was “entitled to judgment as a matter of law.”
B. Avoidance and the Ordinary-Course-Of-Business Exception
In general, a payment made by an insolvent debtor to a creditor on an antecedent debt made within 90 days before the filing of a bankruptcy petition is a preferential transfer, which the trustee may avoid so that it can include the value in the bankruptcy estate. See
But there are some exceptions to this avoidance power, one of which is the subject of this appeal. Under
This circuit construes the exception narrowly. See Jobin, 84 F.3d at 1339. And the transferee bears the burden of establishing the exception by a preponderance of the evidence. See
“[The ordinary-course-of-business] exception was intended to leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor‘s slide into bankruptcy.” Union Bank, 502 U.S. at 160, 112 S.Ct. 527 (internal quotation marks omitted). Although “[o]n the one hand, any exception for a payment on ac
The incurrence of the debt and the payment must be in the ordinary course of business for both the debtor and the transferee. See
Some courts have instead required the incurrence of the debt and the payment to be in the ordinary course of business between the debtor and the transferee. See, e.g., Fitzpatrick v. Cent. Commc‘ns & Elecs., Inc. (In re Tenn. Valley Steel Corp.), 203 B.R. 949, 954 (Bankr.E.D.Tenn.1996) (exception “requires proof that the debt and its payments are ordinary in relation to other business dealings between that creditor and that debtor“); Brizendine v. Barrett Oil Distribs., Inc. (In re Brown Transp. Truckload, Inc.), 152 B.R. 690, 692 (Bankr.N.D.Ga.1992) (“the better interpretation of the statute is that
But we agree with the three circuits that have addressed the issue, who have held that a first-time transaction can qualify for the exception. See Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys. Inc.), 482 F.3d 1118, 1125 (9th Cir.2007) (“We agree that first-time transactions may satisfy the requirements of [the exception].“); Kleven v. Household Bank F.S.B., 334 F.3d 638, 642 (7th Cir.2003); Gosch v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir.1990) (“Obviously every borrower who does something in the ordinary course of her affairs must, at some point, have done it for the first time.“). After all, the statute refers to the “ordinary course of business or financial affairs of the debtor and the transferee,” not between the debtor and the transferee.
With the “ordinary course of business” exception, Congress aimed not to protect well-established financial relations, but rather to “leave undisturbed normal financial relations, because [the exception] does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor‘s slide into bankruptcy.”
In re Ahaza Sys., Inc., 482 F.3d at 1125 (quoting Union Bank, 502 U.S. at 160, 112 S.Ct. 527). And we agree with the Seventh Circuit that “the court can imagine little (short of the certain knowledge that its debt will not be paid) that would discourage a potential creditor from extending credit to a new customer in questionable financial circumstances more than the knowledge that it would not even be able to raise the ordinary course of business defense, if it is subsequently sued to recover an alleged preference.” Kleven, 334 F.3d at 643 (quoting Warsco v. Household Bank F.S.B., 272 B.R. 246, 252 (Bankr.N.D.Ind.2002)).
One court has said that if
Thus, as the Ninth Circuit said, “[A] first-time debt must be ordinary in relation to this debtor‘s and this creditor‘s past practices when dealing with other, similarly situated parties.” In re Ahaza Sys., Inc., 482 F.3d at 1126. (Of course, if the two parties have had an extended relationship, that could establish the ordinary course of business for each. See, e.g., Riske v. C.T.S. Sys., Inc. (In re Keller Tool Corp.), 151 B.R. 912, 914 (Bankr.E.D.Miss.1993); In re Morren Meat & Poultry Co., 92 B.R. at 740.)
Still, there are real teeth in the ordinary-course requirement. With respect to incurrence of the debt, the requirement must be read in light of the “general policy of the preference section to discourage unusual action by either the debtor or [its] creditors during the debtor‘s slide into bankruptcy.” Union Bank, 502 U.S. at 160, 112 S.Ct. 527 (internal quotation marks omitted). It follows that “if a party has never engaged in similar transactions[,] ... we consider more generally whether the debt is similar to what we would expect of similarly situated parties, where the debtor is not sliding into bankruptcy.... In [that] instance, the fact that a debt is the first of its kind for a party will be relevant but not dispositive.” In re Ahaza Sys., Inc., 482 F.3d at 1126 (emphasis added). When the new debt is very large and unprecedented, it may represent an expenditure (an incurrence of debt) that is being undertaken only because the debtor is sliding into bankruptcy. A failing business may engage in a desperate last-chance effort to try a risky scheme that just might work (and return the business to profitability) but that would not pose any risk to the business because it was clearly going to fail otherwise. There is a special incentive to invest in high-risk projects—even projects that would otherwise not make economic sense—because if the project succeeds, the company reaps the returns, but if the project fails, its creditors will bear the downside. See Barry E. Adler, A Re-Examination of Near-Bankruptcy Investment Incentives, 62 U. Chi. L.Rev. 575, 606 (Spring 1995) (“[T]he best justification for preference law is not that it deters collection from a static pool of assets, but that it deters an insolvent firm‘s investment in unduly risky projects.“); Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 Wash. U. L.Q. 1159, 1170-71 (Fall 1994).4
One case cited by the Trustee is instructive. In Harrah‘s Tunica Corp. v. Meeks (In re Armstrong), 291 F.3d 517, 520 (8th Cir.2002), the debtor “organized Ponzi schemes to defraud investors, embezzled funds from his elderly clients’ life savings to support his fraud, and then attempted to become solvent through check kiting and gambling.” (footnotes omitted). The
Armstrong is an extreme case. Its reasoning does not apply to the many ordinary-course business decisions that are in a sense gambles because no one can predict with certainty whether a change in practice will succeed. Courts should be deferential to a company‘s business decisions. But gambling need not be at a casino. And a debt incurred for an unduly risky project that can be justified only because the risk is borne solely by the company‘s creditors is not a debt incurred in the ordinary course of business.
As for the payment prong, courts commonly look to four factors to determine whether a payment was made in the ordinary course of business of the debtor and the transferee:
- length of time the parties were engaged in the type of dealing at issue;
- whether the amount or form of tender differed from past practices;
- whether the debtor or creditor engaged in any unusual collection or payment activities; and
- the circumstances under which the payment was made.
5 Collier on Bankruptcy, supra § 547.04[2][a][ii][B]; see, e.g., In re Ahaza Sys. Inc., 482 F.3d at 1129 (restating the fourth factor as “whether the creditor took advantage of the debtor‘s deteriorating financial condition” (internal quotation marks omitted)); Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int‘l, Inc.), 132 F.3d 104, 109 (1st Cir.1997) (court considers “the amount transferred, the timing of the payment, the historic course of dealings between the debtor and the transferee, and the circumstances under which the transfer was effected“); Jagow v. Grunwald (In re Allied Carriers’ Exch., Inc.), 375 B.R. 610, 616 (10th Cir. BAP 2007); Bohm v. Golden Knitting Mills, Inc. (In re Forman Enters. Inc.), 293 B.R. 848, 857 (Bankr.W.D.Pa.2003) (courts “consider whether the transfer was ordinary as between the debtor and creditor,” looking to “the time, the amount and the manner in which payment occurred“). For first-time transactions, however, “the court may refer solely to the written terms of the transaction to define the ordinary course of business between the parties.” 5 Collier on Bankruptcy, supra § 547.04[2][a][ii][B]. Absent other peculiar circumstances, a payment made shortly before or at the due date will satisfy the statutory requirement. See id. (“The vast majority of ordinary course of business cases deal with payments that are made later than the express written terms require.“).
We now examine how this law applies to the dealings between SMC and C.W. Mining.
In June 2007, C.W. Mining agreed to purchase used electrical equipment for longwall mining and related services from SMC. C.W. Mining and SMC had no prior relationship. It is undisputed that the equipment and services under the contract were “within the normal scope of products and services” provided by SMC. Aplt.App. at 168. C.W. Mining thought that changing from a continuous-mining method to a longwall system would increase its mining capacity by a factor of four to five. On July 9, SMC provided a quotation for the transaction that reflected the June agreement, and on September 18, SMC issued an invoice for the majority of the parts and services in the amount of $805,539.75.
The Trustee contends that the $805,539.75 debt was not incurred in C.W. Mining‘s ordinary course of business. He asserts that “SMC provided no evidence of the ordinary course of business of [C.W. Mining] aside from noting that [it] mined coal and purchased equipment from SMC used to mine coal,” Aplt. Br. at 15, and he contends that the bankruptcy court “should have required SMC to describe something of [C.W. Mining‘s] business history and current financial circumstances showing it was ordinary for [it] to incur large obligations for longwall equipment,” id.
In our view, however, SMC satisfied its burden of producing evidence that the debt was incurred in the ordinary course of C.W. Mining‘s business. The purchase was an arm‘s length transaction, and the undisputed purpose of the purchase was to assist in mining operations. The Trustee‘s one-page argument on the point in response to SMC‘s motion for summary judgment argued only that C.W. Mining had been using the continuous-mining method until the purchase; C.W. Mining had been sued two years earlier by Aquila, Inc., by far the largest creditor in the bankruptcy; C.W. Mining had never done business with SMC before; and the equipment was used and needed to be refurbished, yet C.W. Mining had not done refurbishing before. The gist of the argument was simply that this was a first-time transaction. As we have already said, that is not enough. Although there is evidence that could support an assertion that C.W. Mining was gambling with creditors’ money,5 the Trustee neither alerted the court to that evidence nor argued that such gambling was a possibility that SMC had the burden to disprove. The court was given no good reason to think that the debt was not incurred in the ordinary course of business. Absent exceptional circumstances not present here, we will not reverse on a ground inadequately presented to the trial court. See Mitchell, 218 F.3d at 1198-99.
2. Was the Payment to SMC Made in the Ordinary Course of Business?
The Trustee also contends that he may avoid the $200,000 payment to SMC under
SMC sent C.W. Mining a quotation for the proposed purchase that set a total price of $1,064,036.06 and contained the following payment terms:
- “Equipment shall be invoiced after completion of assembly and testing.” Aplt.App. at 158.
- “The invoice ... will be provided to the buyer on the date the initial factory testing is complete,” and “shall be recognized by the buyer as the payment term inception date.” Id.
- “All invoices are net thirty (30) days from date of invoice,” with a “1-1/2% per month late charge [to] apply on all delinquent accounts.” Id. (emphasis added).
The quotation further provided for the following “required” progress payments:
15%—Within 7 days of issuance of P.O. [purchase order]
25%—Upon issuance of submittals
25%—Upon release of manufacturing
25%—Upon completion of testing
10%—Upon completion of commissioning
Id.
On September 18, 2007, SMC issued an invoice to C.W. Mining for equipment and services in the amount of $805,539.75. The invoice had three entries:
| 25% of total due upon issuance of submittals | $268,513.25 |
| 25% of total due upon release of manufacturing | $268,513.25 |
| 25% of total due upon completion of testing | $268,513.25 |
Id. at 165. The invoice labeled the payment terms as “SPECIAL,” id., but the bankruptcy court determined that the designation reflected only that the customer “was to make progress payments as it received invoices,” id. at 287. On October 16, 2007, C.W. Mining sent the challenged $200,000 to SMC by wire transfer to be applied to the September 18 invoice.
The $200,000 payment was two days before the due date. It came from CW Mining‘s own bank account. And there is no evidence of collection activity by SMC.
We affirm the bankruptcy court‘s ruling on summary judgment that the $200,000 payment was made in the ordinary course of C.W. Mining‘s business.
II. CONCLUSION
We AFFIRM the judgment of the bankruptcy court.
Notes
Rosen v. Bezner, 996 F.2d 1527, 1530 n. 2 (3rd Cir.1993); accord Gray v. Manklow (In re: Optical Techs, Inc.), 246 F.3d 1332, 1335 (11th Cir.2001). To avoid any future uncertainty, this opinion has been circulated to all unrecused active members of this court and all agree that bankruptcy-court summary judgments are subject to de novo review on appeal. Insofar as Jobin and Fidelity Savings hold otherwise, they are hereby overruled.[B]ecause summary judgment may only be granted where there is no genuine issue of material fact, any purported “factual findings” of the bankruptcy court cannot be “factual findings” as to disputed issues of fact, but rather are conclusions as a matter of law that no genuine issue of material fact exists; such conclusions of law are, of course, subject to plenary review. Thus, when either a district court or an appellate court reviews a grant of summary judgment, the standard of review is plenary; any application of the “clearly erroneous” standard is, in itself, clearly erroneous.