Gateway Pacific Corp., In re

• Citation: 153 F.3d 915
• Decision Date: 09 October 1998
• Docket Number: No. 98-1154,98-1154
• Parties: , Bankr. L. Rep. P 77,787 In re GATEWAY PACIFIC CORP., Debtor. OFFICIAL PLAN COMMITTEE, formerly known as Official Unsecured Creditors Committee, Appellee, Gateway Pacific Corp., doing business as Buffalo Tool, v. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC., Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 915

153 F.3d 915

33 Bankr.Ct.Dec. 183, Bankr. L. Rep. P 77,787

In re GATEWAY PACIFIC CORP., Debtor OFFICIAL PLAN COMMITTEE, formerly known as Official Unsecured Creditors Committee, Appellee Gateway Pacific Corp., doing business as Buffalo Tool, v. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC., Appellant.

No. 98-1154.

United States Court of Appeals Eighth Circuit.

Submitted June 8, 1998.

Decided Sept. 1, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied Oct. 9, 1998.

David A. Warfield, St. Louis, MO, argued, for appellee.

Thomas S. Hemmendinger, Providence, RI, argued (Mark A. Bertsch, on the brief), for appellant.

Before WOLLMAN and MURPHY, Circuit Judges, and FENNER, ¹ District Judge.

WOLLMAN, Circuit Judge.

Expeditors International of Washington, Inc. (Expeditors) appeals from the decision of the Bankruptcy Appellate Panel affirming the bankruptcy court's ² decision that certain payments made by Gateway Pacific Corporation (Debtor) to Expeditors were avoidable under the Bankruptcy Code, 11 U.S.C. § 547. We affirm.

I.

Debtor was engaged in the business of selling tools, most of which were imported from Asia. Expeditors contracted to act as Debtor's freight forwarder and customs broker. As part of these services, Expeditors procured shipment of the goods through air and shipping lines, advanced customs duties for Debtor's shipments, and secured customs clearance for the goods.

Debtor and Expeditors began their business relationship in the summer of 1993. Expeditors extended Debtor a $25,000 credit line, which was later increased to $60,000. On October 5, 1993, Debtor submitted a credit application to Expeditors that included the following provision: "[Expeditors] shall have a general lien on any and all property ... of [Debtor] in its possession, custody or control or en route, for all claims for charges, expenses or advances incurred by [Expeditors] in connection with any shipments of [Debtor]." The agreement further provided that Debtor would make payment to Expeditors within fifteen days of the date of any invoice.

Expeditors and Debtor continued their business relationship for approximately two years. During that time, Expeditors generally made two to three shipments to Debtor per week. Each shipment was accompanied by an invoice containing a fifteen-day payment term and a lien provision similar to the conditions of the credit agreement. Nevertheless, Debtor almost never paid within these terms. As it did with all of its slow-paying customers, Expeditors made regular telephone calls to Debtor seeking payment. In seeking payment, however, Expeditors assessed no interest or late charges, started no collection actions, and made no threats to withhold goods. Eventually, the parties developed a practice whereby Expeditors would release goods to Debtor after payment of a prior invoice. The amount of goods released generally exceeded the amount of payment.

On August 30, 1995, Debtor filed a petition seeking Chapter 11 bankruptcy protection. At the time of the filing, Debtor still owed Expeditors more than $40,000, a sum that Expeditors sought as an unsecured claim in the bankruptcy. The United States Trustee appointed an unsecured creditor's committee, which brought this action pursuant to 11 U.S.C. § 547(b) to recover $96,797.30 in transfers made from Debtor to Expeditors during the ninety-day period preceding the bankruptcy filing.

In response, Expeditors asserted three defenses: (1) ordinary course of business (11 U.S.C. § 547(c)(2)); (2) contemporaneous exchange (11 U.S.C. § 547(c)(1)); and (3) new value (11 U.S.C. 547(c)(4)). The parties stipulated that all of the payments were preferential under 11 U.S.C. § 547(b) and that $42,661.71 was protected from avoidance by the new value defense. That left the ordinary course of business and contemporaneous exchange defenses for trial.

The bankruptcy court rejected Expeditors' contemporaneous exchange defense and found that four of the twenty-eight preferential transfers were made in the ordinary course of business. See Official Unsecured Creditors Comm. v. Expeditors Int'l of Wash., Inc. (In re Gateway Pacific Corp.), 205 B.R. 164, 167-69 (Bankr.E.D.Mo.1997). Accordingly, the court entered judgment against Expeditors for $40,577.31. As indicated above, the judgment was affirmed by the Bankruptcy Appellate Panel. See Official Plan Committee v. Expeditors Int'l of Wash., Inc. (In re Gateway Pacific Corp.), 214 B.R. 870, 877 (8th Cir. BAP 1997).

II. Ordinary Course of Business

Applying the same standards as the Bankruptcy Appellate Panel, we review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. See Hartford Underwriters Ins. Co. v. Magna Bank, N.A. (In re Hen House Interstate, Inc.), 150 F.3d 868, 871 (8th Cir.1998).

Section 547(b) of the Bankruptcy Code provides that transfers made by the debtor during the ninety-day period preceding the filing of a petition for bankruptcy may be avoided in bankruptcy as a "preference." See 11 U.S.C. § 547(b). Avoidance may be prevented, however, if the 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). To prevail on this issue, Expeditors must prove the existence of the three statutory elements by a preponderance of the evidence. See 11 U.S.C. § 547(g); Jones v. United Sav. & Loan Ass'n (In re U.S.A. Inns of Eureka Springs, Arkansas, Inc.), 9 F.3d 680, 682 (8th Cir.1993). Because the parties agree that Expeditors has met the first and third requirements of this defense, we need decide only whether the bankruptcy court erred in finding that the transfers were not made in the ordinary course of business.

" 'There is no precise legal test which can be applied' in determining whether payments by the debtor during the 90-day period were 'made in the ordinary course of business'; 'rather, the court must engage in a 'peculiarly factual' analysis.' " 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)). The controlling factor is whether the transactions between the debtor and the creditor, both before and during the ninety-day period, were consistent. See Lovett, 931 F.2d at 497. "[T]he analysis focuses on the time within which the debtor ordinarily paid the creditor's invoices, and whether the timing of the payments during the 90-day period reflected 'some consistency' with that practice." Id. at 498.

The record reflects that during the time preceding the preferential period, as well as during the preferential period itself, Debtor consistently made tardy payments with company checks, paid the invoices in full, and was not penalized for its slow payments. When late payments were the standard course of dealing between the parties, they are also the ordinary course of business during the preference period. See id. at 498; In re of Tolona Pizza Products Corp., 3 F.3d 1029, 1032 (7th Cir.1993) ("[A] 'late' payment really isn't late if the parties have established a practice that deviates from the strict terms of their written contract"). After a detailed examination of Debtor's payment history, however, the bankruptcy court concluded that a major portion of the transfers made during the ninety-day period were not within the ordinary course of business. The stipulated evidence established that during the nine months preceding the preference period, the median time that elapsed between the date of invoice and the date of payment was thirty-five days. During the preference period this number increased to fifty-four days, or a 54% increase.

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