In re Air South Airlines, Inc., Bankruptcy No. 97-07229-W. Adversary No. 99-80256-W.

• Decision Date: 14 January 2000
• Docket Number: Bankruptcy No. 97-07229-W. Adversary No. 99-80256-W.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
• Parties: In re: AIR SOUTH AIRLINES, INC. Debtor. W. Ryan Hovis, Trustee, Plaintiff, v. Aerospace Solutions, Inc., Defendant.

247 B.R. 153 (2000)

In re: AIR SOUTH AIRLINES, INC. Debtor.

W. Ryan Hovis, Trustee, Plaintiff, v. Aerospace Solutions, Inc., Defendant.

Bankruptcy No. 97-07229-W. Adversary No. 99-80256-W.

United States Bankruptcy Court, D. South Carolina.

January 14, 2000.

COPYRIGHT MATERIAL OMITTED

Robert F. Anderson, Columbia, SC, for Plaintiff.

Gina L. Campano, Columbia, SC, for Defendant.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

THIS MATTER comes before the Court upon Aerospace Solutions, Inc.'s ("ASI" or "Defendant") Motion for Summary Judgment ("Motion") pursuant to Bankruptcy Rule 7056. After reviewing the pleadings in this matter and considering the evidence presented and arguments of counsels for the parties, the Court makes the following Findings of Fact and Conclusions of Law pursuant to Rule 52 of the Federal Rules of Civil Procedure, made applicable by Rule 7052 of the Federal Rules of Bankruptcy Procedure.¹

FINDINGS OF FACT

1. Air South Airlines, Inc. ("Debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on August 28, 1997. The case was subsequently converted to Chapter 7 and Plaintiff was appointed to act as Trustee.

2. On July 14, 1999, Plaintiff commenced this adversary proceeding seeking the avoidance of transfers in the amount of $21,350.00 pursuant to 11 U.S.C. § 547(b)² and S.C.Code § 27-25-10. ASI answered timely on September 15, 1999.

3. ASI is a corporation authorized to conduct business in South Carolina, and it engages in the sale of aircraft parts.

4. Debtor placed orders for goods with ASI and paid ASI's invoices as follows:

                Invoice/
                Shipment       Invoice   Date of    Date Check
                Date           No.       Check      Received       Amount
                02/19/97       7000      02/21/97   N/A            $11,000
                02/28/97       7048      02/25/97   N/A            $ 8,500
                05/23/97       9167      06/26/97   06/27/97       $ 4,000
                06/07/97       9205      06/12/97   06/16/97       $ 9,050
                07/01/97       9256      08/15/97   08/25/97       $ 2,500
                08/08/97       9369      08/11/97   08/18/97       $ 5,800
                

5. The preference period began ninety days prior to the filing of the voluntary Chapter 11 petition. The Trustee seeks the recovery of the four payments which were made between June 27, 1997 and August 18, 1997. The first two transactions, constituting payments of $11,000 and $8,500 respectively, took place outside the preference period.

6. ASI's common business practice with its customers was that the first order submitted by a new customer was subject to payment on a "C.O.D." basis. Thereafter, once references were checked, all orders that did not exceed $5,000 in value were subject to "Net 30" payment terms, pursuant to which the customer was to pay within 30 days. For orders in excess of $5,000, the payment terms were on "C.O.D." or "in advance" basis.

7. The payment terms for the four transactions in question were as follows:

                Invoice            Invoice
                Shipment Date      Number      Amount      Payment Terms
                05/23/97           9167        $4,000      Net 30
                06/07/97           9205        $9,050      Check Overnight
                07/01/97           9256        $2,500      Net 30
                08/08/97           9369        $5,800      Upon receipt
                

8. The average length of time a trade debt remained outstanding in the airline industry in 1997 was in the range of thirty-five to forty days.

CONCLUSIONS OF LAW

1. Standard for Summary Judgment

ASI has requested summary judgment on the grounds that the payments were made in the ordinary course of business pursuant to § 547(c)(2). Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings under the Bankruptcy Code by Bankruptcy Rule 7056, provides that a party may move for summary judgment, and that such judgment "shall be rendered forthwith" if the evidence and pleadings "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56(c). When determining whether summary judgment should be granted, the court "does not try factual issues; rather, it determines whether there are any fact issues to be tried." Dunes Hotel Assoc. v. Hyatt Corp. (In re Dunes Hotel Assoc.), 194 B.R. 967, 976 (Bankr.D.S.C. 1995).

In order to prevail on a motion for summary judgment, the movant must show by means of pleadings, depositions, answers to interrogatories, admissions on file, and affidavits that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A motion for summary judgment shall be granted, "against a party who fails to make a showing sufficient to establish the evidence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." In re Dunes Hotel Assoc., 194 B.R. at 976 (citing Celotex Corp., 477 U.S. at 322, 106 S.Ct. 2548). After the movant has proved the absence of any genuine issue of material fact, "the burden of proof shifts and the party opposing summary judgment may not merely rely on his pleading but must set forth specific facts which controvert the moving party's facts and which show the existence of a genuine issue for trial." Id.

2. Preferential Transfers

Section 547(b) provides the trustee with the authority to avoid any pre-petition transfer which meets the requirements outlined in the section. Pursuant to § 547(g), the trustee bears the burden to prove all the requirements set forth in § 547(b). More particularly, § 547(b) provides in pertinent part:

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; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(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.

The avoidance power that trustees have pursuant to § 547(b) promotes equal distribution of the bankruptcy estate among the creditors by ensuring that all of those within the same class receive the same pro-rata share of the bankruptcy estate, while discouraging creditors "from attempting to outmaneuver each other in an effort to carve up a financially unstable debtor." Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044, 1047 (4th Cir.1994). There is no dispute that the transfers in this case fall within § 547(b)'s definition of preferential transfer;³ rather, the dispute in this case revolves around the applicability of the "ordinary course of business" exception set forth in § 547(c)(2).

Although certain transfers may fall within the requirements of § 547(b), the Bankruptcy Code provides several defenses to a preferential transfer recovery. One of those defenses, known as the "ordinary business defense," permits a transferee to prevent the trustee's avoidance of preferential transfers by satisfying the three requirements set forth in § 547(c)(2):

(c) The trustee may not avoid under this section a transfer —

. . .

(2) 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.

Preferential transfer law is designed to disturb only unusual debtor-creditor relationships which "disrupt the paramount bankruptcy policy of the equitable treatment of creditors." Fiber Lite Corp. v. Molded Acoustical Products, Inc. (In re Molded Acoustical Products, Inc.), 18 F.3d 217, 223 (3d Cir.1994). The ordinary business exception to preferential transfers "benefits all creditors by protecting payments received by those creditors who remain committed to a debtor during times of financial distress while at the same time affording a measure of flexibility to creditors in dealing with the debtor." Lawson v. Ford Motor Co. (In re Roblin Industries, Inc.), 78 F.3d 30, 41 (2d Cir. 1996); see also In re Molded Acoustical Products, Inc., 18 F.3d at 224; Energy Coop. v. SOCAP Int'l, Ltd. (In re Energy Coop., Inc.), 832 F.2d 997, 1004 (7th Cir. 1987) (section 547(c)(2) was intended to "protect recurring, customary credit transactions which are incurred and paid in the ordinary business of the Debtor and the transferee.").

In order to prevail under the ordinary course of business defense in this case, ASI bears the burden of proving that the debts, as represented by the invoices, were incurred in the ordinary course of the business affairs of Debtor and ASI; the payments were made in the ordinary course of the business of Debtor and ASI; and the transfers were in harmony with the range of terms prevailing in the relevant industry's norms. See § 547(g) ("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."); see, e.g. Campbell v. NationsBank (In re Rodwell Pontiac Cadillac GMC Truck, Inc.), 93-71381-W; 95-8003-W (Bankr. D.S.C.03/25/1996). The parties acknowledge that the debts were incurred in the ordinary course of the parties' business; thus, subsection A of § 547(c)(2) is satisfied. The issues that remain before this Court are whether ASI has met its burden under subsections B and C so that summary judgment may be...