In re Murray, Inc., BAP No. 07-8064.

• Decision Date: 24 July 2008
• Docket Number: BAP No. 07-8064.
• Parties: In re MURRAY, INC., Debtor. William Kaye, Plaintiff-Appellant, v. Agripool, SRL, Defendant-Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

392 B.R. 288

In re MURRAY, INC., Debtor.

William Kaye, Plaintiff-Appellant, v. Agripool, SRL, Defendant-Appellee.

BAP No. 07-8064.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: May 14, 2008.

Decided and Filed July 24, 2008.

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ARGUED AND ON BRIEF: Jeffrey P. Nolan, Pachulski, Stang, Ziehl & Jones, Los Angeles, CA, for Appellant.

ARGUED AND ON BRIEF: Randal S. Mashburn, Baker, Donelson, Bearman, Caldwell & Berkowitz, Nashville, TN, for Appellee.

ARGUED: Phillip G. Young, Jr., Bass, Berry & Sims, Nashville, TN, for Appellant.

ARGUED: John H. Rowland, Courtney H. Gilmer, Baker, Donelson, Bearman, Caldwell & Berkowitz, Nashville, TN, for Appellee.

Before: RHODES, SCOTT, and SHEA-STONUM, Bankruptcy Appellate Panel Judges.

OPINION

JOSEPH M. SCOTT, JR., Bankruptcy Judge.

William Kaye, Trustee of the Murray Liquidating Trust ("Trustee"), appeals an order of the bankruptcy court dismissing his adversary complaint against Agripool, SRL ("Agripool") to avoid certain payments as preferential transfers and recover $271,242.90 pursuant to 11 U.S.C. §§ 547 and 550. The bankruptcy court found that Agripool proved the ordinary course of business defense under 11 U.S.C. § 547(c)(2). For the reasons that follow, we reverse and remand.

I. ISSUES ON APPEAL

The issues presented by this appeal are whether the bankruptcy court erred when it (1) failed to draw an adverse inference that Agripool applied pressure upon the Debtor for payments because Agripool did not produce requested emails; and (2) found that Agripool met its burden of proof that the ordinary course of business defense applied and, as a result, dismissed the Trustee's complaint.

II. JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction to decide this appeal. The United States District Court for the Middle District of Tennessee has authorized appeals to the Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). The dismissal of the Trustee's complaint is a final order as it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted).

The bankruptcy court's conclusions of law are reviewed de novo. Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940 (6th Cir.2007). "Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination." Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800 (6th Cir. BAP 2007). The court's findings of fact are reviewed under the clearly erroneous standard. In re DSC, Ltd., 486 F.3d at 944. "A finding of fact is clearly erroneous `when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).

III. FACTS

Agripool, SRL ("Agripool") is a foreign company with its headquarters in Italy and manufacturing facilities in both Italy and Hungary. Agripool primarily manufactures parts for lawn and garden equipment, with an emphasis on bags which are attached to equipment for catching grass, leaves and snow. From 2003 to 2004, 75% of Agripool's revenues were derived from the manufacture of grass catcher bags for lawnmowers, and 99% of the products manufactured by Agripool in that time period were lawn and garden products.

Murray, Inc. ("Debtor") was a manufacturer of lawnmowers and snow blowers with its principal place of business in Brentwood, Tennessee. In 2003, Agripool and the Debtor began negotiations for Agripool to become a supplier of grass catcher bags for lawnmowers manufactured by the Debtor. The negotiations culminated with Agripool supplying the Debtor with polypropylene grass catcher bags for its 20 and 22 inch push mowers. The contractual terms for payment were 60 days from date of issuance of an invoice. Shipments took place by containership.

The first order for the bags was placed on October 23, 2003. Over the course of the parties' dealings, Agripool issued sixteen invoices to the Debtor, twelve before the preference period and four during the preference period. All payments by the Debtor, both prior to and during the preference period, were made by wire transfer. In July 2004, the Debtor placed an order for 200,000 bags for the 2005 season. As a result, Agripool was to be the exclusive provider of bags to the Debtor for the 2004-2005 season.

In February 2004, several hundred thousand of the Debtor's lawnmowers were recalled due to a product defect. As a result, the Debtor's owner missed its capital contribution which violated the Debtor's bank covenants and placed it in default. The Debtor's lender, GE Financing, then refused to extend its prior ceiling of credit resulting in limited funds for future ongoing operations. In April 2004, the Debtor missed its sales forecast by $30 million. By July 2004, large retailers of the Debtor's products learned of the Debtor's financial crisis and pulled its products for the 2005 sales year. In September 2004, the Debtor laid off 30% of its salaried work force. Agripool, however, was unaware of the Debtor's financial difficulties at this time. In August 2004, the Debtor made two payments to Agripool on four invoices totaling $271,242.90 which brought its balance current.

On November 8, 2004, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. The bankruptcy court confirmed the Debtor's liquidation plan on September 23, 2005. On October 14, 2005, the Trustee filed an adversary complaint against Agripool seeking to recover $271,242.90 in payments made between August 10, 2004, and November 8, 2004, the preference period, by the Debtor to Agripool in satisfaction of four invoices. Agripool responded to the complaint asserting the "ordinary course of business" defense under 11 U.S.C. § 547(c)(2).

The parties stipulated that the Trustee met his burden of proof as to each of the elements of 11 U.S.C. § 547(b) and that the sole issue to be determined was the applicability of the ordinary course of business defense set forth in § 547(c)(2). On June 11, 2007, the bankruptcy court held a trial at which the former Controller of the Debtor, the former Cash Management Manager of the Debtor, the Business Development Manager of Agripool, and experts for each side on the issue of "ordinary course of business" testified. On October 9, 2007, the bankruptcy court issued a memorandum opinion concluding that Agripool was entitled to the ordinary business defense and an order dismissing the Trustee's complaint. The Trustee's timely appeal followed.

IV. DISCUSSION

11 U.S.C. § 547(b) provides that the Trustee may avoid certain preferential transfers made in the ninety days preceding the petition for relief as preferences if five conditions are satisfied. A transfer must "`(1) benefit a creditor; (2) be on account of antecedent debt; (3) be made while the debtor was insolvent; (4) be made within 90 days before bankruptcy; and (5) enable the creditor to receive a larger share of the estate than if the transfer had not been made.'" Luper v. Columbia Gas of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir.1996) (quoting Union Bank v. Wolas, 502 U.S. 151, 155, 112 S.Ct. 527, 529-30, 116 L.Ed.2d 514 (1991)). The parties stipulated that all of the elements to establish a voidable preference under § 547(b) were satisfied.

Pursuant to 11 U.S.C. § 547(c) the transferee of a preferential payment may prevent avoidance 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.

11 U.S.C. § 547(c)(2). As the creditor, Agripool bears the burden of proving by a preponderance of the evidence that the preferential payments it received are not avoidable under § 547(c)(2). In re Carled, Inc., 91 F.3d at 813. The parties agree that the Debtor's debts to Agripool were incurred in the ordinary course of business as required by subsection (A). Therefore, only subsections (B) and (C) are in dispute and at issue in this appeal.

A. 11 U.S.C. § 547(c)(2)(B)—THE SUJECTIVE PRONG

Subsection (B) is a subjective component of the ordinary course of business defense which requires proof that the debt and the payment thereof are ordinary in relation to other business dealings between this particular creditor and debtor. In re Carled, Inc., 91 F.3d at 813. Whether a payment is made in the ordinary course of business is a factual determination which we will not set aside unless it is clearly erroneous. Yurika Foods Corp. v. United Parcel Serv. (In re Yurika Foods Corp.), 888 F.2d 42, 45 (6th Cir. 1989) (citing In re Fulghum Const. Corp., 872 F.2d 739, 742 (6th Cir.1989)). In a case such as this, we treat the evidentiary findings of the bankruptcy court as factual determinations subject to the clearly erroneous standard, and analyze the evidence to determine whether it supports the legal conclusions of the bankruptcy court as a matter of law. In re Carled, Inc., 91 F.3d at 813. While this is a factual determination, in reaching a decision on the issue, the Sixth Circuit Court of Appeals has instructed courts to consider factors including the history of the parties' dealings with one another, timing, the amount at issue, and the circumstances of the transaction. Brown...