Carled, Inc., In re

Decision Date02 August 1996
Docket NumberNo. 94-4315,94-4315
Citation91 F.3d 811
Parties, 36 Collier Bankr.Cas.2d 732, 29 Bankr.Ct.Dec. 601, Bankr. L. Rep. P 77,123 In re CARLED, INC., Debtor. Frederick M. LUPER, Trustee, Plaintiff-Appellee, v. COLUMBIA GAS OF OHIO, INC., Defendant-Appellant.
CourtU.S. Court of Appeals — Sixth Circuit

Frederick M. Luper (argued), Columbus, OH, Ruth A. Hohl (briefed), Luper, Wolinetz, Sheriff & Neidenthal, Columbus, OH, for Appellee.

James R. Berendsen (argued and briefed), Theodore J. Gallagher, Columbia Gas Distribution Companies, Columbus, OH, for Appellant.

Rosemary E. Grieme (briefed), Cincinnati Gas & Electric Co., Cincinnati, OH, for Amicus Curiae.

Before: MARTIN, NORRIS, and MOORE, Circuit Judges.

MOORE, Circuit Judge.

Appellant Columbia Gas of Ohio, Inc. ("Columbia") appeals from the district court's order affirming the bankruptcy court's order holding that the Chapter 7 trustee Frederick M. Luper (the "Trustee") may avoid as preferential transfers under 11 U.S.C. § 547(b) payments made by Carled, Inc. (the "Debtor") to Columbia within the ninety days preceding the filing for bankruptcy. For the reasons that follow, we reverse.

I

The Debtor operated three restaurants in the Columbus, Ohio area. The Debtor obtained gas service from Columbia, a public utility operating in Ohio, for each of its restaurants for approximately one year. Before service was terminated in connection with the Debtor's bankruptcy proceeding, the Debtor had a total of sixty-nine monthly transactions on its three accounts with Columbia. Columbia's billing cycle is a forty-one day period that begins on the meter reading date and ends on the date that gas service could be terminated for nonpayment. Columbia sends invoices each month stating a "due date" approximately fourteen days after the delivery of the invoice. Of the Debtor's sixty-nine transactions with Columbia, only approximately five payments were made before the due date. Columbia sent termination notices to the Debtor on several occasions but never terminated the Debtor's service until the Debtor filed for bankruptcy. The Debtor took an average of thirty to thirty-two days to make payments on each of the three accounts over the life of the accounts. Except for one period of account realignment, 1 the Debtor always paid within the billing cycle. However, the Debtor frequently waited until it received a termination notice before paying its utility bill. According to Columbia, this is fairly typical of a substantial number of commercial customers.

II

Unless one of the exceptions from section 547(c) applies, section 547(b) of the Bankruptcy Code provides that the trustee may avoid certain transfers made in the ninety days preceding the petition for bankruptcy as "preferences" if five conditions are satisfied. 11 U.S.C. § 547. To qualify as a voidable preference, 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." Union Bank v. Wolas, 502 U.S. 151, 155, 112 S.Ct. 527, 529-30, 116 L.Ed.2d 514 (1991). It is undisputed that all of the elements required to establish a voidable preference under section 547(b) have been established in this case. See Luper v. Columbia Gas of Ohio, Inc., 170 B.R. 355, 357 (Bankr.S.D.Ohio 1994).

However, under section 547(c)(2) of the Bankruptcy Code, the trustee may not avoid any transfer 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) (emphasis added). Subsections (B) and (C) of section 547(c)(2) "comprise a subjective and objective component respectively." Logan v. Basic Distribution Corp. (In re Fred Hawes Org., Inc.), 957 F.2d 239, 244 (6th Cir.1992). "The subjective prong (subsection (B)) requires proof that the debt and its payment are ordinary in relation to other business dealings between that creditor and that debtor. The objective prong (subsection (C)) requires proof that the payment is ordinary in relation to the standards prevailing in the relevant industry." Id. Pursuant to section 547(g), the creditor bears the burden of proving the nonavoidability of a transfer under section 547(c)(2) by a preponderance of the evidence. Id. at 242.

Whether a transaction comports with the standards for business conduct within an industry is a factual determination that 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). See also Fed.R.Bankr.P. 8013; Fred Hawes, 957 F.2d at 242. "A finding of fact is 'clearly erroneous' when, although there is evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been committed." Fred Hawes, 957 F.2d at 242 (citations omitted). Although the factual underpinnings of the bankruptcy court's decision must be upheld unless clearly erroneous, the application of the legal standard to the facts is a question of law that we review de novo. Hardin v. Caldwell (In re Caldwell), 851 F.2d 852, 857 (6th Cir.1988). Therefore, in the instant case, we must treat the bankruptcy court's evidentiary findings as factual determinations and analyze whether the evidence supports the bankruptcy court's legal conclusions as a matter of law.

III

Only subsection (C) of section 547(c)(2) is at issue in this appeal. The bankruptcy court and the district court held that although Columbia proved the first two elements of section 547(c)(2), it failed to prove that the Debtor's payments to Columbia in the ninety days preceding bankruptcy were "made according to ordinary business terms" under section 547(c)(2)(C). See Luper, 170 B.R. at 358; District Court Opinion, at 9.

To establish the third prong of the ordinary course of business exception, Columbia presented the following evidence relating to industry standards for billing for gas service. First, Columbia offered evidence about its own billing practices to show that its pattern of accepting late payments from the Debtor was not unusual. According to Columbia, a customer that failed to pay its bill by the "due date" stated on the invoice would suffer no "discernable consequences" (e.g., termination of service or adverse impact on credit rating) so long as the customer paid its bill within the forty-one day billing cycle described above. In addition, twenty percent of Columbia's customers paid their bills after the thirtieth day in the billing cycle, which begins on the meter reading date. Furthermore, ten percent of Columbia's commercial customers make their payments thirty days or more beyond the meter reading date. (Testimony of Roger Clark, Manager of Residential and Commercial Collections for Columbia Gas Distribution Companies, J.A. 240, 244).

Second, Columbia offered evidence about the billing practices of public utility companies with which it is affiliated in Kentucky, Maryland, Pennsylvania, and Virginia. Each of these companies have billing cycles that allow customers more than thirty days to pay for service even though they receive an invoice stating an earlier "due date." (J.A. 237-38). Furthermore, each of these affiliated companies were required to send termination notices that extended the total billing cycle to between thirty-six to forty-eight days. (Id.).

Third, Columbia introduced evidence about the billing practices of East Ohio Gas Company ("East Ohio Gas"), a gas utility operating in Ohio and serving approximately one million customers, including approximately 70,000 commercial customers. (J.A. 117-18). Arthur J. DeFazio, the Credit Manager of East Ohio Gas, testified that East Ohio Gas has a credit or billing cycle of approximately forty-four days, which is similar to Columbia's billing cycle. (J.A. 121). He also characterized the "due date" on the invoice as a "motivating factor" because when a customer missed the "due date" but paid before the end of a billing cycle, East Ohio Gas would take no action except to threaten termination of service. (J.A. 124-25). In addition, DeFazio testified that twenty-four percent of the customers of East Ohio Gas were delinquent, i.e., at least thirty days past due on their accounts and that it is ordinary for commercial customers to be more than thirty days late paying their utility bills before they are subject to termination of service. (J.A. 126, 134).

Finally, Columbia presented evidence about the difficulty of obtaining information from other utility companies (i.e., their competitors) relating to collection deficiencies because such information is not generally known or disseminated and is considered proprietary. (Clark Tr. at J.A. 241-42; DeFazio Dep. at J.A. 146-47).

IV

After a hearing, the bankruptcy court found that Columbia's evidence failed to establish that the transfer was made "according to ordinary business terms" under section 547(c)(2)(C). Although the bankruptcy court acknowledged that the deposition testimony of the representative from East Ohio Gas "established that it is common for a percentage of utility service invoices to be paid more than thirty (30) days after invoice," it found this proof deficient because "[t]he evidence did not show ... that any significant percentage of particular customers of a utility provider consistently and routinely pay outside a 30-day period." Luper, 170 B.R. at 358. The bankruptcy court found that to meet the third prong of the "ordinary course" defense, Columbia had to show more than the fact "that a percentage of its invoiced customers pay late." Id...

To continue reading

Request your trial
68 cases
  • In re Roberds, Inc., Bankruptcy No. 00-30194.
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio
    • October 7, 2004
    ...of a transfer under section 547(c)(2) by a preponderance of the evidence. Id. at 242. Luper v. Columbia Gas of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir.1996). In determining what is "ordinary," the Sixth Circuit has explained Whether a payment is made in the ordinary cours......
  • In re Condon, 06-8021.
    • United States
    • Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit
    • January 12, 2007
    ...(application of legal standards and allocation of the burden of proof are conclusions of law)); Luper v. Columbia Gas of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir. 1996) ("Although the factual underpinnings of the bankruptcy court's decision must be upheld unless clearly er......
  • Williams v. McNabb (In re McNabb), Case No. 16–10010
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Tennessee
    • May 5, 2017
    ..." Baumgartner–Novak v. Eckman (In re Eckman ), 447 B.R. 546, 549 (Bankr. N.D. Ohio 2010) (citing Luper v. Columbia Gas of Ohio, Inc. (In re Carled, Inc. ), 91 F.3d 811, 815 (6th Cir.1996) (citing S. Rep. No. 989, 95th Cong., 2d Sess. 88, reprinted in 1978 U.S.C.C.A.N. 5787, 5874)). Because ......
  • Suhar v. Agree Auto Servs., Inc. (In re Blakely)
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio
    • June 18, 2013
    ...No. 06–6082, 2006 WL 3064087, *2, 2006 Bankr.LEXIS 2955, *6 (Bankr.N.D.Ohio Oct. 23, 2006) (citing Luper v. Columbia Gas of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir.1996)). The Trustee bears the burden of proving avoidability under § 547(b) by a preponderance of the eviden......
  • Request a trial to view additional results
5 books & journal articles
  • Chapter 1 INTRODUCTION
    • United States
    • American Bankruptcy Institute Preference Defense Handbook: The Circuits Compared
    • Invalid date
    ...v. Expeditors Int'l Inc. (In re Gateway Pacific Corp.), 153 F.3d 915, 917 (8th Cir. 1998); Luper v. Columbia Gas Inc. (In re Carled Inc.), 91 F.3d 811, 813 (6th Cir. 1996); Lawson v. Ford Motor Co. (In re Roblin Indus. Inc.), 78 F.3d 30, 39 (2d Cir. 1996); Advo-System Inc. v. Maxway Corp., ......
  • Appendix I ORDINARY COURSE CIRCUIT COMPARISON
    • United States
    • American Bankruptcy Institute Preference Defense Handbook: The Circuits Compared
    • Invalid date
    ...v. Shell Canada Ltd. (In re Tennessee Chemical), 112 F.3d 234 (6th Cir. 1997). __________ Luper v. Columbia Gas Inc. (In re Carled Inc.), 91 F.3d 811 (6th Cir. 1996). Evidence of the creditor and debtor's own practices is insufficient evidence of "industry standards." An example of the type......
  • Chapter 2 Background: The Bankruptcy Code and the Ordinary Course of Business Defense
    • United States
    • American Bankruptcy Institute Understanding Ordinary: Ordinary Course Defenses to Bankruptcy Preference Actions
    • Invalid date
    ...Inc., 444 B.R. at 363 (citing In re Fred Hawes Org. Inc., 957 F.2d 239, 245-46 (6th Cir. 1996).[44] Id. (citing In re Carled Inc., 91 F.3d 811, 818 (6th Cir. 1996).[45] See Blakeley & Callahan, supra note 37.[46] In addition to the cases referenced below, the following cases also offer sign......
  • Chapter 3 THE "ORDINARY COURSE OF BUSINESS" DEFENSE UNDER § 547(c)(2)
    • United States
    • American Bankruptcy Institute Preference Defense Handbook: The Circuits Compared
    • Invalid date
    ...the parties unless substantial deviations from the established practices occur."51 2. Luper v. Columbia Gas Inc. (In re Carled Inc.), 91 F.3d 811 (6th Cir. 1996). The court began its ordinary-course-of-business analysis by noting that "[s]ub-sections (B) and (C) of section 547(c)(2) 'compri......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT