Summary
finding that more frequent emails with an insistent tone from senior management during the preference period was not extraordinary
Summary of this case from Miller v. Direct Results Radio, Inc. (In re Diversified Mercury Commc'ns, LLC)Opinion
Case No. 17-01302-JJG-11 (Jointly Administered) Adv. Pro. No. 17-50281
2022-02-03
IN RE: HHGREGG, INC., et al., Debtors. Official Committee of Unsecured Creditors of Gregg Appliances, Inc., Plaintiff, v. Curtis International Ltd., Defendant.
Richard James Reding, Ask LLP, Eagan, MN, Joseph L. Steinfeld, Jr., Ask LLP, St. Paul, MN, for Plaintiff. Scott H. Bernstein, Skolnick Legal Group, P.C., Roseland, NJ, Scott Emery Blakeley, David Michael Mannion, Sean Lowe, Blakeley LLP, Irvine, CA, Joseph L. Steinfeld, Jr., Ask LLP, St. Paul, MN, for Defendant.
Richard James Reding, Ask LLP, Eagan, MN, Joseph L. Steinfeld, Jr., Ask LLP, St. Paul, MN, for Plaintiff.
Scott H. Bernstein, Skolnick Legal Group, P.C., Roseland, NJ, Scott Emery Blakeley, David Michael Mannion, Sean Lowe, Blakeley LLP, Irvine, CA, Joseph L. Steinfeld, Jr., Ask LLP, St. Paul, MN, for Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Jeffrey J. Graham, United States Bankruptcy Judge This matter comes before the Court on Plaintiff the Official Committee of Unsecured Creditors of Gregg Appliances, Inc.’s (the "Committee") Complaint to Avoid and Recover Transfers Pursuant to 11 U.S.C. §§ 547, 548, 549 and 550 and to Disallow Claim Pursuant to 11 U.S.C. § 502 (the "Complaint") against Defendant Curtis International Ltd. ("Curtis"). Having considered the evidence and testimony presented at trial on September 29, 2021, and incorporating relevant parts of the Order on Cross-Motions for Summary Judgment entered on April 23, 2021 (the "SJ Order"), the Court hereby enters the following Findings of Fact and Conclusions of Law .
FINDINGS OF FACT
1. On March 6, 2017 (the "Petition Date"), hhgregg, Inc., Gregg Appliances, Inc., and HHG Distributing LLC (together, "Debtors") each filed a voluntary Chapter 11 petition under the United States Bankruptcy Code.
2. On March 10, 2017, the United States Trustee appointed the Committee.
3. On May 2, 2017, the Court entered a Final Order (I) Authorizing Debtors in Possession to Obtain Post-Petition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363, and 364, (II) Granting Liens and Superpriority Claims to Post-Petition Lenders Pursuant to 11 U.S.C. §§ 364 and 507 ; and (III) Authorizing the Use of Cash Collateral and Providing Adequate Protection to Prepetition Secured Parties and Modifying the Automatic Stay Pursuant to 11 U.S.C. §§ 361, 362, 363, and 364 (the "Final DIP Order"). Pursuant to the Final DIP Order, the Committee has "the exclusive right, authority, standing and discretion to determine and initiate, file, prosecute, enforce, abandon, settle, compromise, monetize, assign, transfer, release, withdraw, or litigate to judgment" certain causes of action under chapter 5 of the Bankruptcy Code, including the instant avoidance action.
4. Debtors were a multi-region retailer that sold a selection of appliances, consumer electronics, home products, and computer tables in 220 brick-and-mortar stores in 19 states and online. Debtors also sold third-party service plans, in-home service, repair, delivery and maintenance.
5. Curtis is a Canadian company that distributes consumer electronics.
6. Curtis primarily sold Debtors entry-level televisions. Curtis and Debtors did business together for approximately ten years prior to the Petition Date.
7. From December 6, 2016, to March 6, 2017 (the "Preference Period"), Debtors made two transfers to Curtis in the aggregate amount of $750,656.83 (the "Transfers"). The Transfers consisted of two payments, the first in the amount of $500,547.29 on January 26, 2017, and the second in the amount of $250,111.54 on February 6. 2017. The Transfers paid 17 separate invoices (the "Invoices").
8. There is no evidence before the Court to suggest that the form of payment different from payments made by Debtors to Curtis prior to the Preference Period.
9. The quarter ending June 30, 2013, marked the last time that Debtors enjoyed positive "same store" sales. 10. In January of 2016, Debtors released sales figures and financial reports for the fiscal quarter ending in December 31, 2015 (the "Q4 Financials"). The Q4 Financials revealed that Debtors’ holiday sales were significantly below analysists’ expectations. Following the release of this information, several key vendors reduced or eliminated Debtors’ credit limit, the value of Debtors’ shares declined by approximately one-third. Debtors also replaced their then-CEO.
11. Reductions in Debtors’ credit limits with certain key vendors created a "liquidity crisis" in that Debtors were unable to purchases sufficient inventory which, in turn, reduced Debtors’ borrowing base.
12. Following this liquidity crisis, Debtors found it increasingly challenging to pay trade creditors on time. During the Preference Period, Kevin Kovacs—Debtors’ CFO—worked closely with Debtors’ accounts payable department and department heads for appliances, electronics and furniture to determine which vendors to prioritize on any given week.
13. As these conversations related to Curtis, Kovacs interacted with Matt Phillips, the head of Debtors’ electronics department.
14. Kovacs was in charge of authorizing all payments made to trade creditors during the Preference Period.
15. As of the Preference Period, Debtors owed a significant amount to Curtis, and Kovacs was aware of this fact.
16. As of the Preference Period, Debtors had decided not to purchase any further product from Curtis, as Debtors shifted away from entry-level televisions.
17. In early 2016, Curtis began to communicate with Debtors, primarily through email, in an effort to collect on outstanding and overdue invoices. Curtis had not previously engaged in such activity.
18. The frequency of these communications increased during the Preference Period and the tone in at least some of the emails was arguably more insistent.
19. Most of the emails during the Preference Period were sent to Debtors’ accounts payable department but several were sent or copied to Matt Phillips. Similarly, most of the emails during the Preference Period were from Curtis’ accounts receivable department but several were sent by, or copied to, Aaron Herzog, Curtis’ President.
20. Arguably the most insistent of the emails—sent by Curtis’ accounts payable department to Philips and copied to Herzog on January 20, 2017—states that Curtis’ bank "is all over us" because of its exposure to Debtors. The email also indicated that Debtors owed over $4 million to Curtis for past due invoices.
21. Kovacs believed that Phillips felt pressure to pay Curtis because of these emails. Kovacs himself testified that he authorized the Transfers because of the pressure that Phillips, in turn, exerted on him.
22. While some of the emails were insistent, they did not indicate that Curtis intended or threatened to escalate its collection efforts. Curtis did not alter or threaten to alter its credit or payment terms, reduce or threaten to reduce Debtors’ credit limit, withhold or threaten to withhold product, refer or threaten to refer Debtors’ indebtedness to a collection agency, or initiate or threaten legal proceedings.
23. On November 17, 2017, the Committee filed the Complaint.
24. On April 23, 2020, the Court issued the SJ Order, wherein the Court held that the Committee had established a prima facie case with respect to the Transfers under § 547(b). The Court further concluded that Curtis had established that the timing of the Transfers was, with the exception of one invoice in the amount of $29,224.65 (the "Outlier Invoice"), not outside the parties’ ordinary course of business for purposes of § 547(c)(2)(A). The Court, however, reserved for trial whether Curtis had engaged in any unusual collection activity that rendered all or part of the remaining Transfers extraordinary.
As set forth in the SJ Order, the Committee has conceded that Curtis is entitled to summary judgment in its favor as to the Committee's claims under §§ 548 and 549. The Court, however, preserved Committee's claims under §§ 550 and 502, as those claims are dependent on the Court's resolution of the Committee's claim under § 547.
CONCLUSIONS OF LAW
Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F). The parties have consented to the Court's entry of a final judgment.
Preferential Transfers and the Subjective Ordinary Course of Business Defense
Under § 547(b), pre-bankruptcy preferential transfers of debtor's property or payments by debtor made while insolvent may be recovered. To recover a payment as a preference, it must be proved that the payment was: (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt; (3) made while debtor was insolvent; (4) on or within 90 days before debtor filed its bankruptcy petition; and (5) enabled the creditor to receive more than it would have received had debtor not made the payment. Id .; In re Energy Co-op., Inc. , 832 F.2d 997, 999–1000 (7th Cir. 1987). As previously indicated, the Committee successfully established these elements on summary judgment and the Court incorporates that conclusion and the factual findings, as set out in the SJ Order, that support it into these Findings of Fact and Conclusions of Law .
The sole issue reserved for trial relates to whether Curtis is entitled to the safe harbor provided by § 547(c)(2)(A) ’s "subjective" ordinary course of business defense. Section 547(c)(2) provides:
(c) The trustee may not avoid under this section a transfer—
(2) to the extent such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee and such transfer was—
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms ....
The ordinary course defense was designed to "leave undisturbed normal commercial and financial relationships and protect recurring, customary credit transactions which are incurred and paid in the ordinary course of business of both the debtor and the debtor's transferee." See Kleven v. Household Bank, F.S.B. , 334 F.3d 638, 642 (7th Cir. 2003) (citations omitted). These transactions are not considered "preferential," although they would otherwise fit comfortably within the statutory definition.
The creditor has the burden of proving that the debtor's payment to it qualifies for this protection by a preponderance of the evidence. See 11 U.S.C. § 547(g) ; Matter of Midway Airlines, Inc. , 69 F.3d 792, 797 (7th Cir. 1995). Determining whether a disputed transaction is consistent with the course of dealing between the respective parties is an inherently factual analysis. Cassirer v. Herskowitz (In re Schick) , 234 B.R. 337, 348 (Bankr. S.D.N.Y. 1999). To prevail on the defense, the defendant must establish a "baseline of dealing" so that the court may compare the transfers made during the preference period with the parties' prior course of dealings. Id .
In determining whether a transaction was subjectively ordinary under § 547(c)(2)(A), the Court should consider several non-exhaustive factors: (1) the length of time the parties were engaged in the transaction at issue; (2) whether the amount or form of tender differed from past practices; (3) whether the debtor or creditor engaged in any unusual collection or payment activity; and (4) whether the creditor took advantage of the debtor's deteriorating financial condition. Kleven , 334 F.3d at 642 (citing Barber v. Golden Seed Co. , 129 F.3d 382, 390 (7th Cir. 1997) ). This list is not an exhaustive list of factors. Others, in appropriate considerations, may be a better fit. Id .
The subjective ordinary course defense asks whether the payments the debtor made to the creditor during the preference period are consistent with the parties' practice before the preference period. In re Tolona Pizza Prods. Corp. , 3 F.3d 1029, 1032 (7th Cir. 1993). This inquiry is not governed by any " ‘precise legal test,’ " Lovett v. St. Johnsbury Trucking , 931 F.2d 494, 497 (8th Cir. 1991) (quoting In re Fulghum Constr. Corp. , 872 F.2d 739, 743 (6th Cir. 1989) ), but generally entails using the debtor's payment history to calculate a baseline for the companies’ dealings and then comparing preference-period payments to that baseline, cf. Kleven , 334 F.3d at 642–43. While "substantial deviations from established practices" are not protected, the ordinary-course defense "allow[s] suppliers and other furnishers of credit to receive payment within the course that has developed in the commercial relationship between the parties." In re Tenn. Chem. Co. , 112 F.3d 234, 238 (6th Cir. 1997).
In its SJ Order, the Court determined that, with one exception, the timing of the Transfers themselves did not render the Transfers extraordinary. In reaching that conclusion, the Court examined the two-year period immediately preceding the Preference Period, a period expressly proposed by the Committee (the "Historical Period"). The Court refrained from reaching any conclusion as to whether certain communications from Curtis to Debtor placed undue pressure on the Debtors, thereby rendering the remaining balance of Transfers outside the ordinary course of business.
In its opening argument at trial, the Committee suggested that the Court exclude from the Historical Period the 10-month period immediately prior to the Preference Period, arguing that Debtors were not financially healthy during that period because of its "liquidity crisis." The Court declines this request. In its SJ Order, the Court adopted—at the Committee's urging —the two-year period immediately prior to the Preference Period. The appropriate historical period was not identified as a factual issue reserved for trial, and the Court will not now adopt a different period from that used on summary judgment.
At trial, Curtis emphasized that it began sending emails to Debtors in early 2016, i.e. , before the Preference Period. Curtis also emphasized that beyond the emails, Curtis neither took nor threatened any additional action to collect on Debtors’ large outstanding balance. Debtors countered with testimony from Kovacs that he authorized the Transfers because of pressure from Matt Phillips, pressure that Phillips exerted because of Curtis's repeated emails. The Court finds this largely self-serving testimony to be insufficient to defeat Curtis’ ordinary course of business defense. The evidence before the Court reflects that Curtis’ began emailing Debtors in an effort to collect a sizeable overdue balance almost a year before the Preference Period. For that reason alone, the Court is inclined to find the Preference Period emails to be within the ordinary course of Debtors’ business with Curtis.
Admittedly, the emails’ frequency and tone changed during the Preference Period. But the Court finds such changes to be insignificant. In this regard, the Court is guided by Roberds, Inc. v. Broyhill Furniture (In re Roberds) , 315 B.R. 443, 458 (Bankr. S.D. Ohio 2004). There, the court offered a framework for examining creditor conduct for purposes of the ordinary course defense, with some activities categorized as "potentially ordinary" and others as "potentially not ordinary." Under the former category, the Roberds court included communications that express "increased concern for payment according to existing terms—even if such concern has never been previously expressed." Under the court's framework, more frequent communications or communications from more senior management as compared to the pre-preference period do not render such communications extraordinary. Id .
Activities deemed by the Roberds court as "potentially not ordinary" are noticeably absent here. These include creditor changes to the debtor's existing or future credit terms, credit limit, shipment terms, product amount or to the method and/or timing of payment. Id . Certainly, a referral to a debt collector or legal action would also be highly suspect. Curtis not only did not take any of the above actions but it also did not threaten to do so, even subtly. Just as in the Historical Period, Curtis’ emails to Debtors’ during the Preference Period were relatively benign and, in the Court's view, do not rise to the level of "unusual collection activity." Compare Menotte v. Oxyde Chem., Inc. (In re JSL Chem. Corp.) , 424 B.R. 573 (Bankr. S.D. Fla. 2010) (email from creditor's CFO stating that debtor has been placed on credit hold constitutes unusual collection activity); Lightfoot v. Ameilia Mar. Serv., Inc. (In re Sea Bridge Marine, Inc. ), 412 B.R. 868, 874 (Bankr. E.D. La. 2008) (emails and letter where creditor threatened legal action constitute unusual collection activity); Esser v. First Fed. Fin. Serv. (In re Carini) , 245 B.R. 319, 324 (Bankr. E.D. Wis. 2000) (repeated and numerous telephone calls from creditor to debtor threatening to refer debtor to creditor's attorney for collection absent payment constituted unusual collection activity); Schwinn Plan Comm. v. AFS Cycle & Co., Ltd. (In re Schwinn Bicycle Co.) , 205 B.R. 557, 565-67 (Bankr. N.D. Ill. 1997) (communications where creditor made clear that future product would not be shipped absent at least partial payment of past due amounts deemed outside the ordinary course of business); In re Molded Acoustical Prods., Inc., 18 F.3d 217 (3d Cir. 1994) (payments were outside of the ordinary course because of pressure creditor placed on debtor to make larger payments as condition to future shipments).
Conclusion
Curtis, both prior to and during the Preference Period, sent Debtors emails regarding payment of unpaid invoices. Curtis neither took nor threatened any other collection activity. Following Roberds , this frequent but benign activity in itself does not rise to the level of extraordinary conduct rending the Transfers avoidable. The emails were, simply put, ordinary. Thus, with the exception of the Outlier Invoice, the Court finds that the balance of the Transfers fall within § 547(c)(2)(A) ’s safe harbor and are not avoidable.
The Committee is entitled to relief under §§ 547, 550 and 502 as to the Outlier Invoice. The Committee is additionally entitled to pre-judgment interest with respect to the Outlier Invoice. The Court will conduct an evidentiary hearing, to be set by separate notice, to determine the appropriate time frame for such interest, with due consideration to be given to any delay attributable to the pandemic, and to determine an appropriate interest rate. The parties are strongly encouraged in the meantime to consider stipulating to an appropriate amount. Once this issue is resolved, the Court will issue a Judgment consistent with these Findings of Fact and Conclusions of Law.