Menotte v. Oxyde Chemicals, Inc. (In Re JSL Chemical Corp.)Menotte v. Oxyde Chemicals, Inc. (In Re JSL Chemical Corp.)
MEMORANDUM ORDER: 1) GRANTING IN PART TRUSTEE’S MOTION FOR SUMMARY JUDGMENT; AND 2) DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
This matter came before the Court upon Deborah C. Menotte, the Chapter 7 Trustee’s, (“Trustee”) Dispositive Motion for Summary Judgment (“Trustee’s Motion”), and Oxyde Chemicals, Inc.’s (“Defendant”) Motion for Summary Judgment (“Defendant’s Motion”). The parties filed a Joint Stipulation of Facts, as well as responses and replies to each other’s motions.
STATEMENT OF FACTS
JSL Chemical, Corp., (“JSL” or “Debt- or”), who was in the chemical supply business, filed for relief under Chapter 7 of the Bankruptcy Code on August 2, 2007 (“Petition Date”). The Defendant supplied chemicals to the Debtor. The Debtor and the Defendant’s business relationship began in January, 2004. During the course of their relationship, the Defendant issued thirty invoices to the Debtor. Of these invoices, twenty-seven were paid during the pre-preference period, one was paid during the preference period, and two remained unpaid as of the Petition Date. Although the Defendant extended credit to the Debtor on payment terms of net 30 days, the Debtor rarely paid the Defendant within 30 days of invoice.
On June 9, 2009, the Trustee initiated this adversary proceeding by filing a
Complaint to Avoid and Recover Preferential Transfers Pursuant to 11 U.S.C. § 5M and 11 U.S.C. § 550
(“Complaint”). The Trustee’s Complaint seeks to avoid and recover an alleged preferential payment of $79,343.35 made by the Debtor to the De
There is also no dispute that the Defendant was a diligent creditor who would often inquire as to the status of payments and request prompt remittance when payments were late. On October 11, 2006, Steve Stone, the Defendant’s Chief Financial Officer, sent an email to John Lagae, the Debtor’s President, stating that in order to maintain a credit line with the Defendant and not be placed on prepaid credit status, checks for outstanding invoices would have to arrive the following morning. On April 29, 2007, Mr. Stonе sent an email to Mr. Lagae which stated that the Defendant was placing the Debtor on “credit hold” until it received a response to its inquiry concerning outstanding invoices totaling approximately $112,000.00.
CONCLUSIONS OF LAW
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(F).
I. The Summary Judgment Standard
Federal Rule of Civil Procedure 56(c), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056(c), provides that “[t]he judgment sought should be renderеd if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); see also
Celotex Corp. v. Catrett,
In considering a motion for summary judgment, “the court’s responsibility is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party.”
Knight v. U.S. Fire Ins. Co.,
The Trustee’s Motion seeks to avoid and recover the alleged preference Payment.
II. § 547 Preferences
A. § 547(b)
The Trustee’s power to avoid preferences is designed to “discourage сreditors from ‘racing to the courthouse to dismember the debtor during his slide into bankruptcy,’ and to ‘facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor.’ ”
In re Issac Leaseco, Inc.,
To effect this policy, § 547(b) permits the Trustee to “ ‘avoid any transfer of the interest of the Debtor in property’ if five conditions are met.”
In re Globe Mfg. Corp.,
The parties do not dispute that the Defendant was a creditor of the Debtor, that the Payment was made on account of a previous debt within 90 days of the Petition Date, and that it enabled the Defendant to receive more than it would otherwise have received through a Chapter 7 distribution in this case. The Defendant also made no attempt to rebut the § 547(f) presumption that the Debtor was insolvent during the 90 day pre-petition period. Thus, the Court concludes that § 547(b)’s elements are satisfied and the Payment was indeed a preference. Consequently, the Trustee can avoid the Payment unless the Defendant shows, by a preponderance of evidence, that thе Payment falls under one of the exceptions stated in § 547(c).
Ellenberg v. Tulip Prod. Polymerics, Inc. (In re T.B. Home Sewing Ent., Inc.),
B. § 547(c) Ordinary Course of Business
The purpose of the ordinary course of business defense “is to leave undisturbed normal financial relations, be
In determining whether transfers are protected from avoidance based upon the ordinary course of business, courts consider: 1) the prior course of deаlings between the parties; 2) the amount of the payments; 3) the timing of the payments; and 4) the circumstances surrounding the payments.
Jensen v. Raymond Bldg. Supply Corp. (In re Homes of Port Charlotte Florida, Inc.),
1. Lateness
“[U]ntimely payments are more likely to be considered outside the ordinary course of business and avoidable as preferences.”
Craig Oil,
In making their arguments, the Trustee and the Defendant used different methodologies to calculate a range, in numbers of days, for the timeliness of payments that was the ordinary course of the parties’ business. The Trustee noted the date of the invoice and the date of the Debtor’s check to show that 27 pre-preference payments were made in a range of between 34-50 days from the date of invoice. Using this approach, the Trustee asserts that the Payment is outside the range of pre-preference transactions since the Payment was made 59 days from the invoice date. The Trustee also calculated that JSL paid the Defendant’s invoices on the average of 38.75 dаys after issuance of the corresponding invoices. In making this calculation, the Trustee omitted an invoice dated September 15, 2005, because the check for that invoice was returned for insufficient funds. Although the check was later redeposited, the Trustee maintained that the lapsed time between the invoice and ultimate payment could not be precisely calculated.
The Defendant used a different methodology to show that the Payment was consistent with thе Debtor’s other ordinarily late payments during the pre-preference period. Whereas the Trustee’s calculations are based upon the invoice date and the check date, the Defendant’s calculations are based upon the invoice date and the date the check was delivered to, or received by, the Defendant. 2 In addition, The Defendant’s calculations include the insufficient funds check that was omitted from the Trustee’s calculations. As reflected on Defendant’s Exhibit “A”, a wire transfer payment was made on November 3, 2005 to cover the insufficient funds check. 3 The Defendant’s calculations using the date of delivery indicate that pre-preference payments were between 0-33 days late. 4 The preference Payment was 29 days late. The Defendant calculated that on average all payments were 11.8 days late.
Thus, the Trustee maintains that the Payment, issued 59 days after the invoice date, was outside the pre-preference range of payments which were issued between 30 and 50 days from the date of invoice, while the Defendant shows that the Payment, delivered 29 days late, was within the pre-preference range of payments which were delivered between 0 and 33 days late. “Courts of Appeal to have considered the issue are unanimous in concluding that a ‘date of delivery’ rule should apply to cheek payments for purposes of § 547(c).”
Barnhill v. Johnson,
“Courts have several mathematical tools at their disposal for establishing the ordinary course of business and comparing pre-preference transactions with preference transactions.”
Moltech Power,
2. Unusual Collection Activity
The Eleventh Circuit instructs: that § 547(c)(2) should protect those payments which do not result from ‘unusual’ debt collection or payment practices. To the extent an otherwise ‘normal’ payment occurs in response to such practices, it is without the scope of § 547(c)(2). Thus, whenever the bankruptcy court receives evidence of unusual collection efforts, it must consider whether the debtor’s payment was in fact a response to those efforts.
Craig Oil,
The pivotal question is whether the Payment to the Defendant was made in response to unusual collection efforts. “As with the aging of payments, courts normally conduct a comparative analysis, looking at collection efforts in both the preference and prе-preference periods.”
Felt Mfg.,
It is undisputed that the Defendant was a diligent creditor. The Defendant would often inquire as to the status of payments and request prompt remittance when payments were late. In its Exhibit “B”, the Defendant provided copies of numerous emails between the parties’ accounting departments inquiring about the status of payments. On April 29, 2007, Mr. Stone sent an email to Mr. Lagae stating that the Defendant was placing the Debtor on “credit hold” until it received a response to its inquiry concerning outstanding invoices totaling approximately $112,000.00. Mr. Lagae states in his affidavit that he authorized the Payment as a result of being placed on credit hold by the Defendant, and that he did not recall any other instances of the Defendant having placed JSL on credit hold. Nevertheless, the Defendant argues that this was not unusual collection activity. In support of this argument, the Defendant points to a pre-preference October 11, 2006 email, sent by Mr. Stone to Mr. Lagae, which stated that to maintain a credit line with the Defendant and not be placed on prepaid credit status, checks for outstanding invoices would have to arrive the following morning. In his affidavit, Mr. Stone characterizes both emails as similar “warnings”. However, the Court finds that the emails are substantively different. The October 11, 2006 email might properly be characterized as a warning, whereas the April 29, 2007 email flatly states: “JSL is currently being placed on credit hold till we hear a response.” Although the Defendant’s office manager routinely sent emails inquiring about payments, the Defendant’s Chief Financial Officer did not routinely send emails to the Debtor’s President informing him that the Debtor had been placed on credit hold. The Court finds that the Payment was made in response to this unusual collection activity. The Defendant’s additional argument that the April 29, 2007 email was sent during the pre-preference period has no bearing on the fact that the Payment was made during the preference period in response to unusual collection activity. Thus, the Defendant’s unusual collection activity, evidenced by Mr. Stone’s email, takes the Payment outside the protection of § 547(c)(2)(A).
III. Set Off & New Value
Alternatively, the Defendant argues that if the Court finds the Payment is an avoidable preference, the Defendant is equitably entitled to set off for two remaining unpaid invoices totaling $33,563.80. The Defendant cites no statutory authority fоr such set off, and the two cases cited by the Defendant are inapposite.
Capital Concepts Prop. 85-1 v. Mutual First Inc.,
The right of set off in bankruptcy is codified is 11 U.S.C. § 553. However, it is well settled that “a creditor may not defend against the receipt of otherwise voidable preferences by asserting the right of set-off under Section 68, but, to the contrary, must prove himself to be free of such.”
Shaw v. Walter E. Heller & Co.,
Notwithstanding, the Bankruptcy Code does protect transfers from avoidance to the extent that a creditor provides new value to the debtor as contemplated under § 547(c)(4). The § 547(c)(4) new value defense requires: 1) thаt the creditor must have extended the new value
after
receiving the challenged payments, 2) that the new value must have been unsecured, and 3) that the new value must remain unpaid.
In re Braniff,
IV. Prejudgment Interest
Finally, in addition to turnover of the Payment, the Trustee’s Complaint seeks prejudgment interest from the date of the Trustee’s demand for payment. Courts have discretion to award prejudgment interest as a matter of federal common law.
Globe Mfg.,
CONCLUSION
For the foregoing reasons, the Court finds that the preference Payment is subject to avoidance by the Trustee pursuant to § 547(b). Although the Payment was in the range of the Debtor’s ordinary course
ORDER
The Court, having reviewed the submissions of the parties, the stipulated facts, the applicable law, and being otherwise fully advised in the premises, hereby ORDERS AND ADJUDGES that:
1. The Trustee’s Motion is GRANTED in part. The Payment in the amount of $79,343.35 is avoided as а preferential transfer pursuant to 11 U.S.C. § 547(b). The Defendant shall turnover said amount to the Trustee within ten days of entry of this order. The Trustee’s Motion is DENIED to the extent that it seeks prejudgment interest.
2. The Defendant’s Motion is DENIED.
3. Pursuant to Federal Rule of Bankruptcy Procedure 9021, a separate final judgment shall be entered by the Court contemporaneously herewith.
Notes
. In order to establish an ordinary course defense prior to adoption of the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
("BAPCPA”), creditors had to establish
both
that the trаnsfer was made in the ordinary course of business and according to ordinary business terms. Under BAPCPA, creditors can prevail by showing
either
that the course of business
or
the business terms were ordinary.
Globe Mfg.,
.The Defendant date-stamped roughly half of the checks it received from the Debtor. For the remainder of the checks, the Defendant used the date of the check to calculate the range of timeliness of the Debtor's payments. To the extent that the Defendant's calculations used the check date rather than the date of receipt, the Defendant’s analysis is skewed in favor of the Trustee. The Defendant’s calculations are presented in a chart attached to Defendant’s Motion as Exhibit "A”. The Trustee stipulated that the contents of Exhibit "A” are correct.
. The Trustee’s Motion states that the check was "redeposited”, however the Trustee also stipulated to the accuracy of the contents of Defendant’s Exhibit "A” which shows that a wire transfer was issued to cover the insufficient funds check.
. During the course of the parties’ business relationship only two of thirty invoices issued by the Defendant were paid on time by the Debtor.
. Decisions of the former Fifth Circuit are binding in this Circuit.
Bonner v. City of Prichard,