Opinion
Bankruptcy No. 01-14231DWS, Adversary No. 02-0684.
July 2, 2004
MEMORANDUM OPINION
Before the Court are the cross-motions of the Plaintiff Lawrence Lichtenstein, the Chapter 7 Trustee (the "Trustee") of the Estate of Computer Personalities Systems, Inc. ("CPSI") and Defendant Aspect Computer Co. ("Aspect") for summary judgment (the "Trustee's Motion" and "Aspect's Motion," respectively, and collectively the "Motions") on the Trustee's Complaint. For the reasons stated herein, the Trustee's Motion is granted and Aspect's Motion is denied.
BACKGROUND
CPSI was formerly engaged in the business of retail computer sales generating business through direct retail store sales and television infomercials. CPSI was owned entirely by its principal and president, George Capell. Patrick Buttery was CPSI's Chief Financial Officer. On March 21, 2001 (the "Petition Date"), CPSI filed a voluntary Petition for Relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). On May 1, 2001, CPSI's case was converted to case under Chapter 7 of the Bankruptcy Code and the Trustee was appointed pursuant to § 701 of the Bankruptcy Code. Since his appointment, the Trustee has been performing the duties and responsibilities of a Trustee for the estate of CPSI as required by § 704 of the Bankruptcy Code.
On May 31, 2002, the Trustee filed a Complaint (the "Complaint") against Aspect initiating the instant adversary proceeding. In the Complaint the Trustee seeks the avoidance and recovery pursuant to 11 U.S.C. §§ 547 and 550 of two transfers in the amounts of $426,565.00 and $610,347.00 and totaling $1,036,912.00 made by Debtor to Aspect during the ninety-day period preceding the Petition Date (the "Transfers").
On or about July 2, 2002, Aspect filed its Answer and Affirmative Defenses (the "Answer") to the Complaint. Aspect's Affirmative Defenses aver that (1) the transfers were contemporaneous exchanges for new value given to the Debtor pursuant to 11 U.S.C. § 547(c)(1); (2) the transfers were made in the ordinary course of business pursuant to 11 U.S.C. § 547(c)(2); and (3) following the transfers Aspect provided subsequent new value to the Debtor in accordance with 11 U.S.C. § 547(c)(4).
On November 25, 2003, the Court conducted a pretrial status conference regarding the instant adversary proceeding at which time the parties indicated the issues were ripe for a determination by the Court on motions for summary judgment. The parties have agreed that the following essential facts are undisputed
UNDISPUTED FACTS
Prior to the Petition Date and at times material to this adversary proceeding, Aspect was a wholesale supplier of computer systems, components and accessories to CPSI, maintaining a principal place of business at 21 Worlds Fair Drive, Somerset, New Jersey 088873. Joint Pretrial Statement ¶ 6. Jonathan Chu is the chief executive officer of Aspect. Deposition of Jonathan Chu ("Chu Dep.") at 9.
Aspect's business relationship with CPSI commenced when Aspect began shipping goods to CPSI on January 7, 2000. Aspect's Interrogatory Answer ¶ 18. Aspect utilized a company called Zoom-Tek as a sales broker for the CPSI account relationship. Chu Dep. at 30. Brian Tsang was an employee of Aspect who was involved in managing the account relationship with Zoom-Tek and CPSI. Chu Dep at 62. Zoom-Tek was authorized to collect payments from CPSI on behalf of Aspect. Chu Dep. at 74. Bill Bisignano worked for Zoom-Tek and had authority to collect past due accounts on behalf of Aspect. Chu Dep. at 84.
Aspect sold goods to Debtor and the invoices reflecting these sales typically stated terms of net thirty days. Joint Pretrial Statement ¶ 7. Aspect would generate invoices for CPSI at the time of shipping, and delivery to CPSI would typically be done the same day. Chu Dep. at 66-67, 78; Deposition of Brian Tsang Tsang Dep. at 41. In 1999 and 2000, about half of Aspect's customers were on thirty day terms, which was the most favorable extension of credit. Chu Dep. at 39. In 2000, for those customers of Aspect who were on thirty day terms, approximately sixty percent paid within terms and about forty percent would pay one to seven days late. Chu Dep. at 88-89. CPSI, however, consistently paid its invoices late, averaging seventy-five days post-invoice. Certification of Jonathan Chu ("Chu Aff.) ¶ 19. CPSI normally paid Aspect by a check drawn on its bank account. Chu Dep. at 78.
Aspect has no formal policy as to how payments are applied to invoices. Chu Dep. at 51. Nor is there any consistent practice clear on this record. Mr. Chu's statements are inconsistent, stating both that application of payments is a ministerial function performed by Aspect's accounting software, which uses a "first in, first out" method to apply payments to the oldest invoices first, Chu Aff. ¶ 17, and that application of payments is something that can vary depending upon the salesperson for the account. Chu Aff. ¶ 16; Chu Dep. at 52-53, 56.
In October and November 2000, Chu became concerned about the credit worthiness of CPSI. Chu Dep at 83. In November and December of 2000, CPSI was already over their total credit limit and had too many unpaid invoices that were aged beyond 30 days. Chu Dep at 122-123; Exhibit J to Trustee's Motion (E-mail dated 11/12/2000, from Bill Bisignano of Zoom-Tek to Patrick Buttery of CPSI noting receivables of $1.6 million over sixty days past due and $1 million over ninety days past due). At some point in November and/or December, Chu asked Zoom-Tek to obtain a personal guarantee from George Capell. Chu Dep. at 145-46; Exhibit M to Trustee's Motion (E-mail dated 12/08/2000, from Bisignano to Buttery: "A personal financial guarantee would get all the systems shipped in time for the holidays"). There is no evidence that Capell ever provided such a guarantee.
It is impossible to tell on this record how much over limit CPSI was. A letter dated November 30, 1999, from an Aspect employee named Kevin Chen to Patrick Buttery establishes business terms including a credit limit of $2.5 million and payment terms of 30 days net. Exhibit I to Trustee's Motion. While Chu confirms that Kevin Chen was an employee at the time, he expressed surprise at the limit, stating that he had never seen Exhibit I before and should have signed off on any such agreement. He stated his belief that the credit limit was $1.5 million. Chu Dep. at 70-71. Brian Tsang, who purportedly handled this account testified that the credit limit was $2.0 million. Tsang Dep. at 30.
Aspect had a policy that if a customer was over its credit limit, Aspect would require that further orders be paid for C.O.D. Chu Dep. at 46; Chu Aff. ¶ 7. Aspect asserts that it applied this policy to CPSI toward the end of 2000:
Despite this situation, CPSI still wanted to purchase more systems. On one hand, CPSI represented a large volume customer and . . . a potential source of profit for Aspect. On the other hand, the amount and age of the outstanding indebtedness rendered CPSI a substantial credit risk.
Consequently, in order to limit further exposure I, in conformance with Aspect's policy and practices, conditioned further shipments to CPSI upon a substantially contemporaneous delivery of a payment/check for approximately the same amount as the shipment. Thus, CPSI was essentially converted to a "C.O.D." customer.
Chu Aff. ¶ 8-9. Aspect concedes that this arrangement was not reduced to writing, though it has identified E-mails from Zoom-Tek employees to Buttery which support communication of such a policy. See Exhibit B to Aspect's Motion at EM-1 (E-mail dated 10/17/00: "This balance does not get smaller, only changes its age with new payments since they are against an equal amount of shipped systems."); EM-4 (E-mail dated 11/06/00: proposing delivery schedule with corresponding payments by CPSI required to take receipt of deliveries); EM-5 (E-mail dated 10/26/00: "Payment will be on a one to one basis, just as we have been doing). There is, however, no statement or correspondence from CPSI on this record which acknowledges its understanding of a change to the payment policy.
Indeed, there is no direct testimony from anyone on behalf of CPSI, and the parties agree that no such testimony is likely to be forthcoming. CPSI's two primary officers, George Capell and Patrick Buttery, have been the subject of an investigation by the United States Attorney and on August 6, 2003, a federal grand jury returned a forty-two count indictment alleging, among other things, a scheme to defraud Aspect and other computer vendors. At the hearing on the Motions, counsel informed the Court that Messrs. Capell and Buttery have invoked their Constitutional privilege against self-incrimination. Both Aspect and the Trustee have therefore relied upon various e-mails and attached documentation to and from the intermediary, Zoom-Tek, to establish CPSI's intent with regards to both the business relationship with Aspect and the Transfers at issue. Inexplicably neither party presents any testimony or affidavit from Mr. Bisignano in support of these e-mails. As neither has objected to use of these e-mails, I will consider any evidentiary objections waived. Ironically, it appears that a full record of what occurred would have been readily available from Zoom-Tek. See Exhibit N to Trustee's Motion (E-mail from Bisignano to Buttery and Capell: "We have documented the details of all the steps in our relationship to prevent our emotions from clouding the facts"). Moreover, a former CPSI employee, Lisa Weller, was copied on many of the e-mails proffered in the Motions, and to the Court's knowledge, Ms. Weller has neither been indicted nor claimed any privilege. Nevertheless, the summary judgment record is the only one which the parties contend would be presented at trial.
The Transfers are two checks written by the Debtor to Aspect which total $1,036,912.00. Check Number 1016, in the amount of $426,565, was received by Aspect on December 12, 2000. This check, however, was postdated December 22, 2000 and honored by the Debtor's bank on December 26, 2000. Joint Pretrial Statement, ¶¶ 16, 18. Check number 1426, in the amount of $610,347, was received by Aspect on December 15, 2000, though it was postdated January 4, 2001 and honored on January 8, 2001. Joint Pretrial Statement, ¶¶ 17, 19 (hereinafter, the "Transfer Checks"). There is no evidence that CPSI had ever paid by postdated checks in the past. Chu's recollection is that the idea came from either Zoom-Tek or CPSI. Chu Aff. ¶ 11. He concedes that it was uncommon for Aspect's customers to pay by postdated check and could not recall any other customer who had done so. Chu Dep. at 43.
Between December 14 and 21, Aspect issued made the following shipments to CPSI, totaling $1,410,856.00 (collectively the "December Shipments):
Date Invoice number Amount
Dec. 14, 2000 1100562-4 $ 23,210.00 Dec. 14, 2000 1100821 $ 75,648.00 Dec. 15, 2000 1100823 $160,752.00 Dec. 15, 2000 1100822 $ 75,648.00 Dec. 16, 2000 1100818 $ 67,520.00 Dec. 16, 2000 100123-2 $124,100.00 Dec. 16, 2000 1100822-2 $ 42,552.00 Dec. 19, 2000 1201021 $236,400.00 Dec. 21, 2000 1100560-2 $143,480.00
Dec. 21, 2000 1201021-2 $118,200.00 Dec. 21, 2000 1201020-2 $124,100.00 Dec. 21, 2000 1201020 $124,100.00 Dec. 21, 2000 1201019 $ 62,050.00 Dec. 21, 2000 1201018 $ 33,096.00
Joint Pretrial Statement ¶¶ 20-24. The relationship between the Transfers and the December Shipments is hotly contested. Aspect asserts that both it and CPSI intended that the Transfers were contemporaneous payment for the December Shipments consistent with the C.O.D. policy. Aspect proffers an e-mail dated December 12, 2000, which references checks that match the dates the Transfer Checks were received by Aspect:
We discussed one today and one Friday, we never discussed anything on Monday. If your [ sic] postdating checks what is the difference? We are making deliveries today based on these post dated checks. If we don't get them, what deal did we cut?
I know your [ sic] worried about us depositing them early. We won't deposit them until you give us the go ahead.
Exhibit B to Aspect's Motion at EM-8 (E-mail from Bisignano to Buttery).
The parties agree that a third check, No. 1266 for $698,499, was also postdated to January 10, 2001, though the record does not disclose when this check was provided. This check was subsequently dishonored pursuant to a stop payment order by CPSI and is not the subject of the Motions. Joint Pretrial Statement ¶¶ 25-27. While the Trustee points to this check to attack Aspect's ordinary course of business defense, I find it irrelevant and unnecessary for the Trustee's Motion. While Aspect's counsel argues in its memorandum that this check explains the large discrepancy between the Transfers and the December Shipments, Aspect's Mem. at 9, there is no record evidence connecting this check to the December Shipments.
The Trustee asserts that the Transfers were payments toward CPSI's past due account, and that the December Shipments were merely a continuation of a credit relationship. The Trustee relies upon spreadsheets produced by Aspect in discovery as well as attached to its proof of claim, which indicate that the Transfers were applied to old invoices rather than the invoices for the December Shipments. Exhibits H and T to Trustee's Motion. Moreover, there are also email communications between Zoom-Tek and CPSI in early December exchanging proposals regarding future payments, at least one of which matches the amount of Check No. 1016, which are applied to invoices older than the December Shipments. Exhibits O and P to Trustee's Motion. Notwithstanding Chu's testimony as to a C.O.D. arrangement, all of the December Shipment invoices contain a "payment details" box under which is checked "check (net 30)." Exhibit U to Trustee's Motion.
Subsequent e-mails, however, raise questions as to whether any such agreement was reached. Exhibits M and N to Trustee's Motion (referencing Chu's rejection of Buttery's proposals). Aspect's explanation of these spreadsheets is that they do not express any intent of Aspect or Chu, but represent "rote" and mechanistic application of payments by Aspect's accounting department and/or software. Chu Aff. ¶ 17.
DISCUSSION
A motion for summary judgment is governed by Federal Rules of Civil Procedure 56, applicable in this proceeding pursuant to Federal Rule of Bankruptcy 7056. Summary judgment, "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, and affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).
The party moving for summary judgment must overcome the initial burden of demonstrating the absence of a material question of fact. Celotex v. Catrett, 477 U.S. 317, 325 (1986). The substantive law will determine which facts are material. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). A court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Id. at 255. A court must find that the motion alleges facts which, if proven at trial, would require a directed verdict. 6 J. Moore, Moore's Federal Practice, ¶ 56.26 (2d ed. 1988). If so, the respondent "must set forth specific facts showing there is a genuine issue for trial," and may not "rest upon the mere allegations or denials of the pleading." Fed.R.Civ P. 56(e). If the non-movant's evidence "is merely colorable, or is not significantly probative, summary judgment may be granted. Anderson, 477 U.S. at 250. However, as it is the moving party's burden to demonstrate the absence of genuine issues of material fact, even if the opposing party fails to file contravening affidavits or other evidence that establishes a genuine issue of material fact, summary judgment must still be warranted and will be denied where the movant's own papers demonstrate the existence of material factual issues. Drexel v. Union Prescription Centers, Inc., 582 F.2d 781, 790 (3d Cir. 1978) ( citing Adickes v. S.H.Kress Co., 398 U.S. 144, 159-61 (1990) (citations omitted). See Maldonado v. Ramirez, 757 F.2d 48, 51 (3d Cir. 1985). The absence of a genuine issue for trial is evident where the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party. Mashusita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
In this case, both parties have moved for summary judgment. Aspect concedes that the Trustee has met his initial burden of showing that the Transfers are in fact preferential. 11 U.S.C. § 547(b), (g). As such, the Trustee's Motion should be granted and the Transfers set aside unless Aspect at least raises a material issue of fact that the Transfers fall within one of the "safe harbor" provisions of § 547(c). J.P. Fyfe, Inc. V. Bradco Supply Corp. (In re J.P. Fyfe, Inc), 891 F.2d 66, 69 (1989). The burden of showing such a safe harbor falls upon Aspect. 11 U.S.C. § 547(g). As is not uncommon in preference actions, Aspect claims applicability of all three exceptions to the Trustee's § 547 avoidance power, which I examine seriatim.
These sections provides in pertinent part:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of the petition; . . .
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title. . . .
(g) For the purposes of this section, the trustee has the burden of proving the avoidability of a transfer under subsection (b) of this section, and the creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the nonavoidability of a transfer under subsection (c) of this section.
A. The New Value Defense
Aspect asserts that the Transfers fall within the criteria of 11 U.S.C. 547(c)(4), which excludes from the Trustee's avoidance powers transfers followed by the creditor's exchange of "new value" to the debtor. As the Third Circuit Court of Appeals has noted:
This provisions provides that:
(c) The trustee may not avoid under this section a transfer —
(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor —
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor;
The three requirements of section 547(c)(4) are well established. First, the creditor must have received a transfer that is otherwise voidable as a preference under § 547(b). Second, after receiving the preferential transfer, the preferred creditor must advance "new value" to the debtor on an unsecured basis. Third, the debtor must not have fully compensated the creditor for the "new value" as of the date that it filed its bankruptcy petition.
New York City Shoes, Inc. v. Bentley Int'l (In re New York City Shoes, Inc.), 880 F.2d 679, 680 (3d Cir. 1989). The parties have conceded the first prong, that the Transfers are otherwise voidable. As to the second prong, there appears to be no dispute that the December Shipments are new value, but the problem faced by Aspect lies in the requirement that the the new value follow the preferential transfer. Here the new value was provided between December 14 and 21. While Aspect received the Transfer Checks on December 12 and 15, they were postdated December 22 and January 4, respectively. Thus, the new value conceivably precedes or follows the preferential transfer depending on when the Transfer Checks are construed to be transferred.
The parties have not addressed this issue and neither will I other than to note that the computer components shipped by Aspect fall under the plain meaning of "new value" as defined in § 547:
money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.
11 U.S.C. § 547(a) (emphasis added).
The Court of Appeals addressed this issue in NYC Shoes, supra, and that decision is binding upon this Court. In determining when to construe the transfer of postdated checks, the NYC Shoes court focused upon § 547(c)(4)'s purpose of encouraging creditors to continue to conduct business with a troubled enterprise on an ordinary basis. Id. at 683. The court noted that:
In most cases, absent a post-dated check or a request to hold the check, parties in a normal business transaction would, as the parties did here, treat a check as a cash transaction and extend new credit immediately upon receiving a check in payment of a prior debt rather than waiting until the check has cleared to send new goods. . . . There is no policy reason why a creditor who waits for a check to clear before shipping should get the benefit of the § 547(c)(4) setoff while a creditor who, doing what most business people do, ships on receipt of a check should be denied a setoff.
Id. ( quoting In re Almarc Manufacturing, Inc., 62 B.R. 684, 688 (Bankr. N.D. Ill. 1986) (emphasis in original)). As to post-dated checks, however, such a practice "is not business as usual" and "it does not seem reasonable for a creditor to rely on a postdated check as cash, since the postdated check is nothing more than a promise of money in the future." Id. ( citing In re Bob Grissett Golf Shoppes, Inc., 78 B.R. 787, 791 (E.D. Va. 1987)). As such, the court held that for the purposes of § 547(c)(4), there is a presumption that a postdated check is transferred on either the date on the face of the check or the date that the check clears the bank and not on the date of delivery of the check. Id. at 679. Following this presumption here, the Transfers were by checks postdated after the December Shipments. Thus, the new value precedes rather than follows the preferential transfer as required by 547(c)(4).
Because it made no difference to the result in that case, the court did not decide between the two possibilities of face date or honor date. Id. Similarly, as I find that the earlier face date would preclude Aspect's defense, I need not address the issue.
The presumption that postdated checks are transferred at least as of the date of the check, however, is rebuttable by evidence that the parties treated the postdated checks as cash. In that case, the Transfers will be considered to be on the date the checks were delivered to Aspect. Id. On this record, Aspect has presented no rebutting evidence. To the contrary, Chu's own assertion belies such a treatment: "In my mind, payment by post-dated checks was acceptable because I thought it was a cash payment, just like an ordinary check, with the sole exception that the check could not be cashed for a few days." Chu Aff. ¶ 11 (emphasis added). His recognition that postdated checks could not be cashed immediately is contradictory to any belief that they are cash equivalents. A similar acknowledgment by the creditor inNYC Shoes was the basis of the court's finding that the creditor there did not view a postdated check as cash. 880 F.2d at 684. Moreover, Chu was worried about the large arrearage and requested through Zoom-Tek that George Capell personally guarantee payments, further calling into question his belief that any check provided by CPSI was as good as cash. Chu Dep. at 146.
More importantly, NYC Shoes requires proof that both parties treated the postdated check as cash to rebut the presumption. Id. at 684. There is no evidence on this record that CPSI intended the postdated checks to be treated as a cash transaction. Indeed, Aspect's own evidence indicates that CPSI was not considering postdated checks as cash equivalents. On December 12, 2000, the date that Aspect received Check No. 1016, Bill Bisignano of Zoom-Tek sent the following e-mail to CPSI's Patrick Buttery, which I have found refers to the Transfer Checks:
We discussed one today and one Friday, we never discussed anything on Monday. If your postdating checks . . . what is the difference? We are making deliverers [ sic] today based on these post dated checks. If we don't get them, what deal did we cut?
I know your [ sic ] worried about us depositing them early. We won't deposit them until you give us the go ahead. Exhibit B to Aspect's Motion at EM-8 (emphasis added). Buttery would only be concerned if CPSI had insufficient funds in the bank to cover the check, belying that CPSI considered the checks to be cash transactions.
I must also reject Aspect's assertion of its C.O.D. policy,i.e., its refusal to deliver new product without receipt of a check, as evidence that the parties treated the postdated checks as cash. As the Court of Appeals noted in NYC Shoes:
We also note that were we to hold that an inference can be drawn that the delivery of a postdated check was treated as a cash transfer simply because the creditor shipped merchandise after it received the check, we would be creating an exception that swallows the rule that we enunciated above. The issue of when to treat a postdated check as transferred for purposes of § 547(c)(4) only arises when the creditor acts as Bentley has in this case and ships goods after it receives a postdated check but before either the date on the check's face or the date that it clears the bank. If we held that the inference that Bentley suggests were proper, that inference could be drawn in every case.
880 F.2d at 685 n. 6.
Finally, Aspect argues that the presumption should not apply here in the first place, pointing to the following dicta in NYC Shoes preceding the court's application of the presumption:
That said, we concede that there may be individual cases in which a check is so slightly postdated, the solvency of the debtor is so patent or widely believed, or the intent of the parties is so explicit, that it becomes clear that the parties were treating the postdated check as cash. Id. at 684. Aspect points out that Check No. 1016 was postdated ten days from the date of receipt, and Check No. 1426 was postdated twenty days from the date of receipt. Distinguishing NYC Shoes, where the check was postdated more than thirty days, Aspect posits, without authority, that any check presented within the thirty-day presumption of a normal and customary transaction under the U.C.C. is only "slightly" postdated.
I must, however, agree with the Trustee that the focus of theNYC Shoes dicta relied upon by Aspect is whether the parties intended to treat the postdated check like cash. The three exemplars are merely evidence of such intent. I agree with NYC Shoes that there may be factual scenarios where a "slightly" postdated check might be indicative of intent to treat it as a cash equivalent, but the current record does not present such a scenario. As discussed above, all the record evidence belies an intent to treat the postdated checks as cash. Thus, I do not find the number of days that the checks were postdated to be dispositive.
B. Ordinary Course of Business
Aspect also contends that the Transfers were made in the ordinary course of business between Aspect and CPSI within the meaning of § 547(c)(2). To prevail on this defense, Aspect must prove that: (1) the Transfers were made in payment of a debt incurred by CPSI in the ordinary course of business between CPSI and Aspect; (2) the Transfers were made in the ordinary course of business between them; and (3) the Transfers were made according to "ordinary business terms" of the industry. 11 U.S.C. § 547(c)(2). E.g., APS Management Services v. ABX Enterprises, (In re APS Holding Corp.), 282 B.R. 795, 801 (Bankr. D. Del. 2002). The Trustee makes no assertion that the debt incurred by the December Shipments fails to meet the first prong, but rather that Aspect fails to make out the second and third prongs. The second prong is subjective and requires that the Transfers were ordinary in relation to the other business dealings of CPSI and Aspect, whereas the third prong is objective and requires that the Transfers were ordinary in respect to prevailing industry standards. Id. ( citing Fiber Lite Corp. v. Molded Acoustical Prods., Inc. (In re Molded Acoustical Prods., Inc.), 18 F.3d 217, 223-24 (3d Cir. 1994)).
In determining whether the Transfers were ordinary under § 547(c)(2)(B), that is as between Aspect and CPSI, relevant factors include:
(1) the length of time the parties have engaged in the type of dealing at issue; (2) whether the subject transfer was in an amount more than usually paid; (3) whether the payments were tendered in a manner different from previous payments; (4) whether there appears any unusual action by either the debtor or creditor to collect or pay on the debt; and (5) whether the creditor did anything to gain an advantage in light of the debtor's deteriorating financial condition.
Logan Square East. v. PECO Energy Co. (In re Logan Square East), 254 B.R. 850, 855 (Bankr. E.D. Pa. 2000). Based upon Aspect's own evidence, it is clear that the Transfers were not ordinary as to the parties. While the relationship between Aspect and CPSI was not long established, having commenced in January 2000, until October or November 2000, Aspect extended CPSI credit terms of net thirty-days. In practice, CPSI paid invoices on an average of seventy-five days after invoice. However, when Chu became concerned about CPSI being substantially over its credit limit, he testified that he changed the relationship to a C.O.D. basis. Indeed, he certifies that there were occasions when Aspect drivers returned without delivering merchandise because CPSI had no check available upon delivery. Chu Aff. ¶ 10. Check No. 1426, for approximately $610,000 was substantially larger than most payments, which ranged from $11,000 to $490,000. Exhibit C to Aspect's Motion. Finally, the Transfers were made by postdated checks, which Chu concedes was uncommon. Nor is there any history of prior payment by postdated checks.Compare Grant v. Swindal-Powell Company (In re L. Bee Furniture Co.), 206 B.R. 981, 988 (Bankr. M.D. Fla. 1997) (finding postdated checks to be ordinary under § 547(c)(2)(B) where there was a history of creditor accepting postdated checks).
This report appears to be a straight chronological listing of invoices and payments, with payments not allocated to any particular invoice.
Moreover, the three prongs of § 547(c)(2) are conjunctive,i.e., all three must be met. J.P. Fyfe, Inc. v. Bradco Supply Corp. (In re J.P. Fyfe, Inc), 891 F.2d 66, (1989). The objective standard under § 547(c)(2)(C) requires that Aspect prove the Transfers were made pursuant to "ordinary business terms,"i.e., within the range of terms that encompass the practices of firms similar in some general way to Aspect. Fiber Lite Corp, 18 F.3d at 224. Aspect has proffered no evidence as to the practices of other, similar companies and therefore cannot meet this prong as a matter of law. C. Contemporaneous Exchange for New Value
Finally, Aspect argues that the Transfers fall under the "contemporaneous exchange for new value" defense pursuant to § 547(c)(1). To successfully invoke this defense, Aspect must prove that: (1) it extended new value to CPSI; (2) the parties intended the new value and the Transfers to be contemporaneous exchanges; and (3) the exchanges were, in fact, substantially contemporaneous. APS Mgt. Services, Inc., supra, 282 B.R. at 800. Aspect must prove all three elements, but "'[t]he critical inquiry in determining whether there has been a contemporaneous exchange for new value is whether the parties intended such an exchange.'" Creditors' Committee v. Spada (In re Spada), 903 F.2d 971, 975 (3d Cir. 1990) ( quoting Matter of Prescott, 805 F.2d 719, 727 (7th Cir. 1986)). An agreement to pay past debt in exchange for new product does not fall within 547(c)(1). See McClendon v. Cal-Wood Door (In re Wadsworth Bldg. Components, Inc.), 711 F.2d 122, 125 (9th Cir. 1983); Off. Committee of Unsecured Creditors v. Seven D. Wholesale (In re Contempri Homes, Inc.), 269 B.R. 124, 128 (Bankr. M.D. Pa. 2001); Grogan v. Southwest Textiles, Inc. (In re Advance Glove Manufacturing Co.), 42 B.R. 489, 493 (Bankr. E.D. Mich. 1984) (where agreement was that debtor would pay for new product with excess payments applied to past debt, § 547(c)(1) defense was inapplicable to portion of payments that did exceeded corresponding shipment of new product).
Actually, Aspect's Motion makes a final argument that can be dealt with briefly, namely that a constructive trust should be placed upon the merchandise it sold to CPSI, which would offset the Trustee's preference claim. This defense, raised neither in Aspect's Answer to the Complaint or in the Joint Pretrial Statement has been waived. Fed.R.Bankr.P. 7008 (incorporating Fed.R.Civ.P. 8(c)). On a more substantive basis, "[i]n order to establish rights as a trust recipient, the claimant must be able to identify the trust fund or property, and where the fund or property has been mingled with the general property of the debtor, the claimant must sufficiently trace the property."Gantt, Inc. v. Bogan (In re Bogan), 302 B.R. 517, 523 (Bankr. W.D. Pa. 2003). Aspect has not sufficiently identified any property upon which the court could invoke a constructive trust.
This provision provides:
(c) The trustee may not avoid under this section a transfer —
(1) to the extent that such transfer was —
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;
Construing the December Shipments as new value, the record before the court is simply too ambiguous for the Court to determine whether Aspect and CPSI intended a contemporaneous exchange of the Transfers for the December Shipments or whether the Transfers were merely payment of past debt in return for Aspect agreeing to ship new goods. Here there is evidence which supports both theories. From the Trustee's perspective: (1) The invoices for the December Shipments continued to state a payment term of thirty-days; (2) the Transfers do not match any particular December Shipment and in fact exceed the shipments by approximately $300,000; and (3) numerous spreadsheets, including those produced by Aspect and attached to its proof of claim, apply the Transfers to invoices other than the December Shipments.
Aspect's position is that Chu's testimony and the e-mails which support a change in the practice of the parties to a C.O.D. system place this case on all fours with Advance Glove, supra. In that case, there was a clear agreement of the parties whereby the debtor would pay for upcoming shipments of yarn, with extra payment towards past due amounts. There was also a corresponding change to the creditor's practice of allocating payments to specific invoices. 42 B.R. at 493. There is certainly a similar implication here. See Exhibit B to Aspect's Motion at EM1 (Zoom-Tek e-mail stating that new payments are applied against new shipments, with A/R remaining the same). However, I disagree that the alleged C.O.D. agreement is as clear as that inAdvance Glove, particularly in light of the countervailing evidence relied upon by the Trustee. I do, however, find that Aspect has at least raised an issue of fact as to whether the parties intended the Transfers to apply to the December Shipments.
Aspect contends that Contempri, supra incorrectly focused on application of the transfers rather than the parties' intent and that I should apply Advance Glove instead. Aspect's Reply Mem. at 9-12. It seems to me that how the Transfers were applied speaks to the parties intent, but in any case I find the two cases to be wholly consistent. The Contempri court found that, even though the determining factor as to amount of payment was an the amount of current materials shipped, the clear intent of the parties was to apply the payments to old invoices. 269 B.R. at 127-28. In short, the parties were not making contemporaneous exchanges for new value but were simply trying to keep the debtor's outstanding debt to a manageable level while continuing a credit arrangement. In contrast, Advance Glove involved clear intent to pay up front for new yarn shipments. The court merely found that the lack of evidence as to allocation of payments was not fatal. 42 B.R. at 493. Had the Advance Glove court found evidence that the payments were in fact applied to only old invoices, no doubt the court would have found the creditor's intent for a contemporaneous exchange to be lacking just as it inferred such a lack of intent for the portion of payments that exceeded the yarn shipments. Id.
Anticipating that the Court might find an intent to apply the Transfers to old invoices, Aspect advances an alternative argument that the December Shipments are new value in the form of new credit beyond CPSI's credit limit, citing to Unsecured Creditor's Committee v. Airport Aviation Services, Inc. (In re Arrow Air, Inc.), 940 F.2d 1463 (11th Cir. 1991), which recognized that "under appropriate circumstances, the new value exchanged for the transfer or payment may take the form of new credit." Id. at 1466. As discussed below, I have assumed Aspect's position that the Transfers were intended to be exchanged for the December Shipments. Thus, I need not address this alternative argument. Moreover, as Aspect notes, this new credit is one and the same as the December Shipments. Aspect's Mem at 18. Thus, my reasoning below is equally if not more applicable to this alternative theory, given my finding that the December Shipments were in fact credit transactions. See infra.
This issue of fact, however, is insufficient to avoid summary judgment for the Trustee. Even assuming that the parties intended the Transfers be in exchange for the December Shipments, the record does not support that they intended the exchange to be contemporaneous. The legislative history of § 547(c)(1) clearly states that checks generally shall be treated as contemporaneous for purposes of this section:
Normally, a check is a credit transaction. However, for the purposes of this paragraph, a transfer involving a check is considered to be "intended to be contemporaneous", and if the check is presented for payment in the normal course of affairs, which the Uniform Commercial Code specifies as 30 days, U.C.C. § 3-503(882)(a), that will amount to a transfer that is "in fact substantially contemporaneous."
S.Rep. No. 989, 95th Cong., 2d Sess. 88, reprinted in 1978 U.S.C.C.A.N. 5787, 5874; H.R. Rep. N. 595, 95th Cong., 1st Sess. 373, reprinted in 1978 U.S.C.C.A.N. 5787, 6329. The December Shipments occurred between December 14-21. The Transfer Checks were physically given to Aspect on December 12 and 15. Had the checks been so dated, the intent for contemporaneity would be more clear. The wrinkle here is that the checks at issue were postdated, something to which the legislative history is silent. However, "[p]ostdated checks are by their very nature not intended to be contemporaneous, nor do they intend to vest control over the timing of payment in the payee until that date in the future that the check is dated."Equipment Company of America v. Production Supply Co. Of Fla. (In re Equip. Co. Of Amer.), 135 B.R. 169, 171 (Bankr. S.D. Fla. 1991). While NYC Shoes, supra, did not involve § 547(c)(1), the court's statement that "postdating check's is not business as usual," seems equally applicable here, where the legislative intent of 547(c)(1) is also concerned with preserving normal business transactions.
Check No. 1016, for $426,565 was dated December 22 and honored on December 26, 2000. This amount of product, however, had already been shipped by December 16, 2000. Payment was thus, at the earliest, one week following delivery. Check No. 4126 was even more distant, having been dated January 4, 2001, two weeks after the final December Shipment. Though not involving postdated checks, a similar situation was present in Southern of Rocky Mount, Inc. v. Evans (In re Southern of Rocky Mount, Inc.), 1986 WL 20614 (Bankr. E.D.N.C. 1986), where the practice between creditor and debtor was for the creditor to deliver soybeans and get a check one week later. Despite the testimony of both parties that it was their intent to treat the transactions as cash and not credit transactions, the court held: "If two parties agree that payment will be made one week after a debt is incurred, that is not a contemporaneous exchange for new value." Id. at * 3. By their acts of postdating and accepting postdated checks, CPSI and Aspect essentially agreed that payment for the December Shipments would be made one and two weeks following delivery. Thus, even under Aspect's asserted facts, the parties' acts speak louder than words. The Transfers were not intended to be contemporaneous exchanges for new value, but rather they were credit arrangements, albeit short ones (one to two week terms).
The parties' actions also preclude a finding that the exchange of the Transfers and the December Shipments was in fact "substantially contemporaneous" as required by § 547(c)(1)(B), the third, conjunctive prong. As noted by one court:
If the sole test is the intention of the parties as required in 11 U.S.C. § 547(c)(1)(A), then it would be necessary for the Court to conduct extensive factual inquiries into situations which would lend themselves to collusion and the fabrication of evidence, and perhaps render the preference section inoperable against all but the most flagrant violations. The purpose of adding the requirement of 11 U.S.C. § 547(c)(1)(B) is to avoid the inherent evidentiary difficulties of 11 U.S.C. § 547(c)(1)(A) by requiring that the parties' conduct bears out their alleged intentions.
Foreman Industries, Inc. v. Broadway Sand and Gravel (Matter of Foreman Industries, Inc.), 59 B.R. 145, 153 (Bankr. S.D. Ohio 1986). Relying upon the legislative history quoted earlier, Aspect argues that even a postdated check, if presented for payment within the U.C.C.'s thirty-day rule, is in fact substantially contemporaneous. I respectfully disagree. There is a difference between an endorsee presenting a check for payment in the normal course of business and a check which is issued in the first place in an irregular manner. Compare Ray v. Security Mutual Finance Corp. (In re Arnett), 731 F.2d 358, 362 (6th Cir. 1984) ("the legislative history reveals that even a 30-day delaybetween receipt and negotiation of a check does not preclude a substantially contemporaneous exchange") with NYC Shoes, 880 F.2d at 683 ("postdating checks is not business as usual").
In Stewart v. Barry County Livestock Auction, Inc. (In re Stewart), 274 B.R. 503 (Bankr. W.D. Ark. 2002), the debtor issued a personal check contemporaneously with an exchange of product. The check was subsequently dishonored and followed by a cashiers check two weeks later. While the parties may have intended a contemporaneous transaction by original presentation of a check, the court found that "[w]hen the checks were dishonored by the bank, the transactions became credit transactions and created an antecedent debt." Id. at 512.Accord Goger v. Cudahy Foods Co. (In re Standard Food Services, Inc.), 723 F.2d 820, 821-22 (11th Cir. 1984) ("when the check bounced the transaction became a credit transaction. . . . the [subsequent] cashier's check satisfied preexisting debt). By analogy, even assuming CPSI and Aspect intended the Transfers to be contemporaneous exchanges, by agreeing to postdated checks the December Shipments in fact were credit transactions which created an antecedent debt that was satisfied only when the checks became payable one and two weeks later. CONCLUSION
Aspect cites Dorholt v. Linguist, (In re Dorholt, Inc.), 239 B.R. 521 (8th Cir. B.A.P. 1999), aff'd 224 F.3d 871 (8th Cir. 1999), for the proposition that even a sixteen day delay can still constitute a substantially contemporaneous transfer under § 547(c)(1)(B). Even assuming that Dorholt could be applied to find contemporaneity on these facts, I have already determined above that there was no intent that the exchange be contemporaneous as required under § 547(c)(1)(A). Aspect is required to satisfy both elements to survive the Trustee's Motion. Thus, Dorholt alone does not help Aspect here.
Given that the parties agree that the Transfers are preferential under 11 U.S.C. § 547(b) and that Aspect cannot demonstrate the applicability of the defenses asserted under § 547(c) on the uncontested facts, the Trustee is entitled to judgment in his favor on his Motion. For this same reason, Aspect's Motion must be denied. The Transfers shall be avoided.
An Order consistent with this Memorandum Opinion shall be entered.