Sacred Heart Hospital of Norristown v. E.B. O'Reilly Servicing Corp. (In Re Sacred Heart Hospital of Norristown)Sacred Heart Hospital of Norristown v. E.B. O'Reilly Servicing Corp. (In Re Sacred Heart Hospital of Norristown)
OPINION
A INTRODUCTION
The parties have properly confined the remaining issue in this proceeding to whether, in establishing a defense to an action to recover a preferential transfer under 11 U.S.C. § 547(c)(2), the defendant-creditor need prove that the payments were made “according to ordinary business terms” within the creditor’s entire industry, or merely the creditor’s dealings with parties in the debtor’s particular industry. Although the issue is not addressed directly in any of the authorities cited by the parties or known to us, it appears that the proper emphasis must be upon the creditor’s industry as a whole. Finding that the creditor’s evidence relating to payment terms in its entire industry is lacking in requisite specificity in the instant record, a preference judgment will be entered against the creditor.
B. PROCEDURAL AND FACTUAL HISTORY
The instant proceeding (“the Proceeding”) arises in what we hope are the waning days of the complex bankruptcy ease of SACRED HEART HOSPITAL OF NORRISTOWN d/b/a SACRED HEART HOSPITAL AND REHABILITATION CENTER (“the Debt- or”). The citations and descriptions of all of the prior reported decisions arising out of this case are collected in our last decision slated for Bankruptcy Reporter publication, an adversary proceeding against the Commonwealth’s Department of Public Welfare presently reported only at
The complaint filed in the Proceeding alleged that E.B. O’REILLY SERVICING CORP. (“the Defendant”), a heating, ventilation, and air conditioning contractor at the Debtor’s hospital, received two checks dated February 25, 1994, in the amounts of $4,230.00 and $4,603.90, respectively, during the preference period. At the trial conducted on August 14, 1996, after two continuances, the parties agreed that the Defendant had supplied unpaid invoices properly classifiable as “new value,” pursuant to 11 U.S.C. § 547(c)(4), totalling in value $5,046.00. Therefore, the parties agreed that $5,046.00 was deductible from the Debtor’s claim, leaving only $3,787.00 in issue. The Defendant conceded that payments in this amount were preferential. The only defense to the remaining claim was under 11 U.S.C. § 547(c)(2), i.e., that the payment in this amount could not be avoided because it was made “in the ordinary course of business.”
The only witness at the trial was Charles L. Powers, a long-time key employee of the Defendant who was also Director of a trade organization, the American Subcontractors Association (“the ASA”). Powers testified that the parties’ contractual relationship did not begin until January 1992. He indicated that the $4,603.90 check represented payments for a quarterly service charge of $4,230.00, invoiced on August 2, 1993, plus certain repair work invoiced on September 16, 1993. The $4,230.00 payment was for the quarterly service charge invoiced on November 1, 1993.
The terms set forth on each of the Defendant’s billings read as follows:
TERMS: NET ON BILLING. A FINANCING SERVICES CHARGE OF 1% PER MONTH OR A MINIMUM OF 50 CENTS PER MONTH ON THE OVERDUE BALANCE 30 DAYS BEYOND TERMS. 1
Powers testified that the Defendant did business with about twelve (12) other hospitals. Although no statistics or records were produced, he testified that they all generally delayed in paying billings until “90 to 150 days” after the dates of invoices. Powers further stated that, on the basis of his discussions with other ASA members, totalling about 200 in a radius of about 75 miles from the Philadelphia metropolitan area, which area includes, by his estimate, about 60 hospitals, he believed that other contractors generally were compelled to similarly wait between 90 and 150 days for payments from hospitals. However, in response to questioning from the court, Powers readily admitted that the Defendant’s other customers paid much more promptly.
The substance of the Defendant’s defense was, then, that the $3,787.00 payment in issue not offset by new value, made 116 days after the invoice for payment, was within the range of “ordinary business terms” between contractors and hospital creditors in its “industry.”
C. DISCUSSION
The instant proceeding presents a narrow issue of interpretation of subsection (C) of 11 U.S.C. § 547(c)(2), which reads in its entirety as follows:
(c) The trustee may not avoid under this section a transfer—
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(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 course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms; ...
It is established in this Circuit that § 547(e)(2)(C) presents an “objective” test regarding billing practices generally within the relevant industry, separate and distinct from the “subjective” test relating solely to dealings between the parties set forth in § 547(c)(2)(B).
See In re Molded Acoustical Products, Inc.,
Certain standards which we must apply the interpretation of the “objective” test set forth in § 547(c)(2)(C) are articulated at length in
Molded Acoustical Products, supra,
The preference provisions are designed not to disturb normal debtor-creditor relationships, but to derail unusual ones which threaten to heighten the likelihood of the debtor filing for bankruptcy at all and, should the contingency materialize, to then disrupt the paramount bankruptcy policy of the equitable treatment of creditors.... 2 Therefore, when the relationship in question has been cemented long before the onset of insolvency — up through and including the preference period — we should pause and consider carefully before further impairing a creditor whose confident, consistent, ordinary extension of trade credit has given the straitened debt- or a fighting chance of sidestepping bankruptcy and continuing in business.... On the other hand, where the relationship is of recent origin, a significant departure from credit terms normal to the trade bears the earmarks of favoritism and/or exploitation, and to countenance such behavior could be unfair (or could appear unfair) to the remaining creditors who exhibit the virtue of patience.
With all that said, we adopt the following rule of construction as an aid to resolving these problems: the more cemented (as measured by its duration) the pre-insolven-cy relationship between the debtor and the creditor, the more the creditor will be allowed to vary its credit terms from the industry norm yet remain within the safe harbor of § 547(c)(2).
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... When the relationship between the parties is of recent origin, or formed only after or shortly before the debtor sailed into financially troubled seas, the credit terms will have to endure a rigorous comparison to credit terms used generally in a relevant industry....
... Even when the debtor/creditor relationship has been well-settled prior to the debtor’s insolvency, should the creditor be unable to fit its terms within the sliding-scale window surrounding the established industry’s norm, the preferential transfer will not be deemed unavoidable by virtue of § 547(e)(2), although the terms of §§ 457(e)(2)(A) & (B) are fulfilled. That is to say, the parties’ longstanding credit terms, although consistent as between them, may depart so grossly from what has been established as the pertinent industry’s norms that they cannot be seriously considered usual and equitable with respect to the other creditors....
Applying the language of Molded Acoustical Products, we conclude that the parties’ relationship, involving invoices billed only in the 16-month period from June 30, 1992, to November 1, 1993, was “of recent origin,” as opposed to being “cemented long before the onset of insolvency.” See id. at 225. Therefore, “a rigorous comparison to credit terms generally in a relevant industry” is necessary. Id. Also, a payment 116 days after a bill’s invoice appears to depart “grossly” from the written contract terms, when the articulated terms are “net on billing” with finance charges commencing 30 days after billing. Id. at 226.
There is no question that the burden of proving each element of § 547(c)(2), and therefore that § 547(c)(2)(C) has been satisfied, lies with the Defendant.
See, e.g.,
11 U.S.C. § 547(g); and
Molded Acoustical Products, supra,
The parties’ briefs and our own research appears to support the conclusion that neither
Molded Acoustical Products
nor any other authority has directly addressed the issue of whether such evidence of “ordinary business terms” in the Debtor’s industry suffices to satisfy § 547(e)(2)(C). Although the issue is raised in the decision on which
Molded Acoustical Products
most expressly relies,
In re Tolona Pizza Products Corp.,
The analysis of the court in
Advo-System, Inc. v. Maxway Corp.,
The reasoning of
Advo-System
is adopted by a
post-Tolona Pizza
decision from the Seventh Circuit in
In re Midway Airlines, Inc.,
The Defendant cites several cases in support of its thesis that the focus of its evidence upon the Debtor’s industry is sufficient,
Roblin Industries, supra,
Initially, we note that the § 547(e)(2) defenses raised in Roblin Industries and Milwaukee Cheese were unsuccessful. Amd neither decision states specifically that an analysis of the debtor’s industry is permissible as an alternative to an analysis of the industry of the creditor.
Moreover, the language from Roblin Industries seized upon by the Defendant (“ ‘ordinary business terms’ must include those terms employed by similarly situated debtors and creditors facing the same or similar problems”) does not reflect that court’s decision to utilize the debtor’s industry as a touchstone. Id. Other passages in that same paragraph and later in that opinion, id. at 43, indicate that the Roblin Industries court’s focus is on the creditor’s industry.
In
U.S.A Inns
the debtor’s payments were designated as “irregular,” including no reference to the precise lengths of the delays in payments.
We note two other decisions,
In re Carled, Inc.,
In
St. Mary
we rejected a defendant electrical supplier’s attempt to confine its § 547(c)(2)(C) analysis to its hospital customers. The evidence reflected that the debtor’s payments in issue were between 77 to 122 days after the respective invoiced dates, and that at least one of the defendant’s other two hospital customers paid more promptly than the defendant.
None of the foregoing cases suggests that a preference defendant can succeed by confining his objective evidence of “ordinary business terms” to only the debtor’s industry. The cases that mention any distinction between emphasis on the debtor’s industry as opposed to the creditor’s industry appear
Not only was the pertinent evidence presented by the instant Defendant confined to the Debtor’s industry, but also it provided no indication of what percentage of the Defendant’s business is conducted with hospitals. Moreover, the evidence presented by the Defendant was totally lacking in specificity, consisting of merely broad estimates of a wide range of delay time in payments (90 to 150 days). Actual statistical evidence could conceivably establish that very few customers, even hospital customers, delay as long as 116 days in making payments. Compare St. Mary, supra.
Moreover, 116 days is, by any standard, and in any circumstance, a long time beyond the contract terms to delay in making a payment. It is well beyond the 45-day benchmark which prevailed under the pre-1984 version of § 547(c)(2).
See
former 11 U.S.C. § 547(e)(2)(B) (repealed).
Cf. In re Lila, Inc.,
We therefore conclude that the Defendant has not met its burden of proving the element referenced in § 547(c)(2)(C), and that therefore its only defense as to the $3,787.00 remaining preferential payment balance must fail.
Finally, we note that, while past decisions of this court have established that the Debtor is generally entitled to pre-judgment interest from at least the date of the filing of a proceeding challenging preferential payments, these rulings have been made in the absence of circumstances justifying denial of such interest.
See, e.g., Sacred Heart I,
at *1;
In re Samar Fashions, Inc.,
D. CONCLUSION
An Order consistent with the foregoing Opinion will be entered.
Notes
. Powers characterized these terms as “net 30 days,” which was not totally accurate. The terms are net due
on billing,
with finance charges due after 30 days. The Defendant did
. From a public policy standpoint, it might be argued that protecting a creditor which allows a debtor unusually liberal payment dispensations, which could save a debtor from bankruptcy, should be protected. However, this particular public policy is not recognized in § 547(c)(2).