Opinion
Case No. 01 B 24742, Adv. No. 03 A 01082.
April 18, 2008
MEMORANDUM OPINION
This matter comes before the court on the motion filed by Andrew J. Maxwell, as Trustee of the estates of marchFirst, et. al. ("Trustee") for summary judgment on his complaint against defendant, Space, LLC ("Space"). The complaint alleges that marchFirst, Inc. and its subsidiaries and affiliates (collectively, "Debtor") made a preferential transfer to Space as such transfer is defined under § 547(b) of the Bankruptcy Code, 11 U.S.C. §§ 101, et seq. For the reasons that follow, the motion is denied.
The court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and Fed.R.Bank.P. 7001 et seq. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (F) and (O) in which this court is empowered to enter final judgment. Venue is proper in this District pursuant to 28 U.S.C. § 1409(a).
Facts
The following facts are undisputed. On April 12, 2001 ("Petition Date"), the Debtor commenced its bankruptcy cases in the United States Bankruptcy Court for the District of Delaware ("Delaware Court") by voluntarily filing petitions for relief under Chapter 11 of the Bankruptcy Code. The Debtor moved to convert its cases to cases under Chapter 7 of the Bankruptcy Code and on April 26, 2001, the cases were converted. By order dated July 10, 2001, the Delaware Court transferred the cases to the United States Bankruptcy Court for the Northern District of Illinois. On July 16, 2001, the Trustee was appointed to serve as successor Chapter 7 trustee.
Space is an Illinois limited liability company engaged in the business of providing architecture and design services. Space first began providing such services to the Debtor in October of 1999. During the 90 days preceding the Petition Date the Debtor made one transfer to Space in the amount of $188,158.81 by Debtor's check no. 163890 dated February 2, 2001 ("Transfer"). The Transfer was made to or for the benefit of Space. The Transfer was made on account of antecedent debts, to pay 31 invoices issued between May 2000 and December 2000 by Space to the Debtor. By operation of § 547(f) of the Bankruptcy Code, the Debtor is presumed to have been insolvent during the 90 days preceding the Petition Date.
The parties disagree as to when payments were due to Space by the Debtor. The Trustee alleges that payment was due 30 days from the date of the Debtor's receipt of the invoice. In support, he refers to a "summary sheet" provided by Space to the Debtor listing all of the invoices and in which the following statement was made: "Historically, payments were never received according to our payment terms, which are 30 days. The collection period varied by project but typically took several months." The Trustee also submitted as an exhibit to his motion the Defendant's Answers to Trustee's First Set of Interrogatories ("Interrogatories"). In the Interrogatories, Space states that the average collection period for marchFirst was 85 days, and that historically the payment of invoices by marchFirst ranged from 45 to 300 days. Space further alleges that during the period 1999-2001 the national industry average for payment of invoices was 75 days. Finally, Space states that the national industry average in the architectural and design industry varies from 55 to 75 days but that collection from larger clients, like the Debtor, often exceeds the industry average.
The Interrogatories were verified by Bill Sheridan, the Finance Director of Space and therefore will be treated as testimony. Bankr.R.Civ.P. 7056, applying Fed.R.Civ.P. 56 to adversary proceedings. Subsection (e) (prior to a recent amendment, intended to be stylistic only according to the Advisory Committee Notes) provides that the "court may permit affidavits to be supplemented or opposed by . . . answers to interrogatories . . ."
Uncontested is the fact that the Transfer paid invoices issued not less than 40 and up to 260 days after the dates of Space's invoices. Twenty-five of the 31 invoices were paid at least 100 days after the dates of the invoices.
Discussion
Summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c), applicable to adversary proceedings by Fed.R.Bankr.P. 7056; Celotex v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552 (1986); Wade v. Lerner New York, Inc., 243 F.3d 319, 321 (7th Cir. 2001). A court must view the record in the light most favorable to non-movant, drawing all reasonable inferences in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2510 (1986); Wade v. Lerner New York, Inc., 243 F.3d at 321.
Fed.R.Civ.P. 56(e) , also provides that "[w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere . . . denials of the adverse party's pleading, but the adverse party's response . . . must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party."
This rule was amended after the filing of this adversary proceeding.
Section 547(b) of the Bankruptcy Code, which governs avoidable preferential transfers, requires that the Trustee demonstrate five elements to avoid a transfer: (1) the transfer was to a creditor; (2) for or on account of an antecedent debt owed by the debtor prior to the transfer; (3) made while the debtor was insolvent; (4) on or within 90 days before the Petition Date, and (5) that enables the creditor to receive more than it would receive if the case had already been a case under Chapter 7, the transfer had not been made and the creditor received what it would have received under the Bankruptcy Code. Pursuant to § 547(g) of the Bankruptcy Code, the Trustee has the burden of proving the avoidability of a transfer by a preponderance of the evidence. See Field v. Lebanon Citizens National Bank (In re Knee), 254 B.R. 710, 712 (Bankr. S.D. Ohio 2000).
The Trustee has demonstrated each and every element of this cause of action, and the parties' dispute focuses on Space's ordinary course of business defense. 11 U.S.C. § 547(c).
The court notes that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which amended this subsection, took effect after this case was filed and is therefore inapplicable.
The defendant bears the burden of proving an ordinary course of business defense by a preponderance of the evidence. Cassirer v. Herskowitz (In re Schick), 234 B.R. 337 (S.D.N.Y. 1999). "In order for a creditor to prevail using the ordinary course of business exception to 547(b), the creditor must show that the debt had been incurred in the ordinary course of business of both the debtor and the creditor; that the payment too, had been made and received in the ordinary course of their businesses; that the payment was made according to ordinary business terms. Matter of Tolona Pizza Products Corp., 3 F.3d 1029, 1031 (7th Cir. 1993).
In order to determine whether the payments were made and received in the ordinary course of these parties' business, "the court must make a factual inquiry into the prior dealings between the parties." Cassirer, 234 B.R. at 348. See also Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991) and In re Fulghum Construction Corp., 872 F.2d 739, 743 (6th Cir. 1989) ("the court must engage in a peculiarly factual analysis"). "[T]he cornerstone of this element of a preference defense is that the creditor need demonstrate some consistency with other business transactions between the debtor and the creditor."Lovett, 931 F.2d at 497, (citing In re Magic Circle Energy Corp, 64 B.R. 269, 273 (Bankr.W.D.Okla. 1986).
In this case, Space has raised an issue of fact with respect to whether the Transfer was made and received in the ordinary course of business for these two parties. The evidence consists of testimony that the average time for Debtor's payment to Space was 85 days after an invoice was issued and historically, the payment of invoices by marchFirst ranged from 45 to 300 days. The Transfer paid off invoices between 40 and 260 days after they were issued. At trial, the court would expect that documentary evidence of the parties' billing and payment history would be provided to substantiate the testimony of Mr. Sheridan. For the purpose of this motion, the testimony raises an issue of fact sufficient to defeat summary judgment.
The Interrogatories refer to an "aging analysis of all collections from marchFirst to Space" which was produced to marchFirst but not provided to the court on this motion.
With respect to the next element of this defense, "ordinary business terms" refers to a range of payment terms encompassing the practices of firms similar to that creditor. Tolona Pizza, 3 F.3d at 1033. It is therefore necessary for a creditor to present some evidence establishing the range of acceptable practices within the industry. In re Midway Airlines, 1995 WL 331053 (N.D.Ill. 1995) (unpublished opinion). Superior Toy Mfg. Co. Inc., 183 B.R. 826, 836 (N.D. Ill. 1995). The creditor against whom recovery is sought has the burden of proving the nonavoidability of a transfer under § 547(c). 11 U.S.C. § 547(g).
In Tolona Pizza, the testimony of the creditor's vice-president, Mr. Stiehl, was found to be sufficient to show what was ordinary course of business in the relevant industry. 3 F.3d at 1033. The bankruptcy court made a finding that Mr. Stiehl "has extensive experience in the meat-packing industry." Tolona Pizza Products Corp. v. Rose Packing Company, Inc. (In re Tolona Pizza Products Corp.), 1992 WL 220720, page 4 (N.D. Ill.). He "testified, based on his personal experience, that the company's sales terms were consistent with those used by others in the industry." In re Midway Airlines, Inc. 69 F.3d 792, 797 (7th Cir. 1995). He had "extensive experience in the industry." Id.
In In re Apex Automotive Warehouse, 245 B.R. 543 (Bankr. N.D. Ill. 2000), the court opined that a creditor "must present evidence of the actual practices of its competitors." Id. at 550.
Space's evidence on this issue is the written testimony of Mr. Sheridan, who stated that the national industry average from 1999-2001 was 75 days and that the national industry average for the architectural and design industry varies from 55 to 75 days. He also opined that "the collection period with some of larger sized clients [sic] has always exceeded the industry average, in large part because getting various approvals and signatures often delays the payment process." No basis is supplied for Mr. Sheridan's knowledge of the industry and the Interrogatories does not provide a range of payment periods that includes the longer payment periods of the Transfer.
Additional documentary evidence would be necessary for Space to mount a successful defense and Mr. Sheridan's authority to testify on the industry standards would have to be established. Nonetheless, with Mr. Sheridan's testimony, Space has raised issues of fact sufficient for the denial of summary judgment with respect to its defense that the Transfer was made in the ordinary course of business.
Conclusion
For the foregoing reasons, the Trustee's motion will be denied by separate order.