In re Globe Manufacturing Corp., 08-11098.

CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)
Citation567 F.3d 1291
Docket NumberNo. 08-11098.,08-11098.
PartiesIn Re: GLOBE MANUFACTURING CORP., d.b.a. Globe Elastics Co., Inc., Debtor. Carrier Corporation, Plaintiff-Appellant-Cross-Appellee, v. Dennis J. Buckley, Litigation Trustee, Defendant-Appellee-Cross-Appellant.
Decision Date11 May 2009

R. Scott Williams, Haskell, Slaughter, Young & Johnston, P.A., Birmingham, AL, for Carrier Corp.

Larry D. Henin, Edwards, Angell, Palmer & Dodge, LLP, Stanley A. Bowker, Anderson, Kill & Olick, P.C., New York City, for Buckley.

Appeals from the United States District Court for the Northern District of Alabama.

Before MARCUS, ANDERSON and CUDAHY,* Circuit Judges.

CUDAHY, Circuit Judge:

Section 547(b) of the Bankruptcy Code authorizes a trustee to avoid certain property transfers made by a debtor within 90 days before bankruptcy. The Code makes an exception, however, for transfers made in the ordinary course of business.

In the present case, the bankruptcy trustee for Globe Holding and its subsidiary Globe Manufacturing (which we will refer to collectively as Globe), brought an action to recover payments made by Globe to Carrier Corporation, one of Globe's unsecured creditors, just prior to the filing of Globe's bankruptcy petition. Carrier argues both that these payments were not preferential and that the payments were not avoidable because they were made in the ordinary course of business. Following a trial, the bankruptcy court granted judgment for the trustee, but declined to award prejudgment interest. In re Globe Holdings, Inc., 366 B.R. 186 (Bankr. N.D.Ala.2007). The district court affirmed. We affirm as well.

I.

Prior to its dissolution, Globe manufactured spandex in its three textile plants, the oldest of which was located in Fall River, Massachusetts. About six months before it declared bankruptcy, Globe executed a contract for Carrier to install a commercial climate control system in its Fall River plant in exchange for approximately $ 1.25 million to be paid in six installments.

On January 13, 2001, Globe filed a voluntary Chapter 11 petition.1 During the 90-day period prior to the filing of Globe's petition, Globe had made two payments totaling $ 615,831 to Carrier. These two payments were made an average of 28 days late under the terms of the contract. (The other installment payments—two of which were made well before the preference period, and two of which were made by a third party—are not at issue here.)

At the time of its bankruptcy petition, Globe owed approximately $146 million in senior secured debt. The Bankruptcy Court approved the sale of substantially all of Globe's assets to a competitor for approximately $52 million, $42 million of which was paid to the senior secured lenders, leaving them with a deficiency of over $100 million on their secured claims. Subsequently, Globe's trustee filed a complaint against Carrier pursuant to Section 547(b) to recover the two payments that were made within 90 days of Globe's bankruptcy petition.

II.

We review the district court's decision to affirm the bankruptcy court de novo, which allows us to access the bankruptcy court's judgment anew, employing the same standard of review the district court itself used. See In re Issac Leaseco, Inc., 389 F.3d 1205, 1209 (11th Cir.2004); In re Club Assoc., 951 F.2d 1223, 1228 (11th Cir.1992). Thus, we review the bankruptcy court's factual findings for clear error, and its legal conclusions de novo. In re Club Assoc., 951 F.2d at 1228-29.

Carrier argues that the payments the trustee seeks to recover were not preferential because Carrier would have been able to become a secured creditor if it had not been paid, and that the payments are not avoidable because they were made in the ordinary course of business. Neither of these arguments has merit.

A.

The Bankruptcy Code authorizes bankruptcy trustees to "avoid any transfer of an interest of the debtor in property" if five conditions are met. In brief, the trustee must show that the payment was (1) to the creditor, (2) on account of a previous debt, (3) made while the debtor was insolvent, (4) made 90 days before the bankruptcy petition was filed and (5) effective in enabling the creditor to receive more than it would have received had the debtor's estate been liquidated under Chapter 7. 11 U.S.C. § 547(b).2

Only the last of these conditions is relevant here: to avoid a transfer, the trustee must show that the transfer enabled the creditor to improve its position vis-à-vis other creditors. § 547(b)(5); see generally Barash v. Pub. Fin. Corp., 658 F.2d 504, 509 (7th Cir.1981) ("Section 547(b)(5) is directed at transfers which enable creditors to receive more than they would have received had the estate been liquidated and the disputed transfer not been made."). Carrier argues that the two payments Globe made approximately two months before it declared bankruptcy did not improve its position because it could have become a secured creditor by exercising its right to perfect a lien on Globe's Massachusetts textile plant. This argument is wide of the mark for two reasons.

First, and most obviously, while Carrier could have taken steps to become a secured creditor, it did not do so. By its terms, the parties' contract is governed by Massachusetts law, under which a lien exists only following a proper recording of notice of the parties' contract. See Tremont Tower Condo., LLC v. George B.H. Macomber Co., 436 Mass. 677, 767 N.E.2d 20, 23 (2002); see also Admiral Drywall, Inc. v. Cullen, 56 F.3d 4 (1st Cir.1995) (noting that Massachusetts law does not recognize the existence of an equitable mechanic's lien). Thus, while a contractor "has a statutory right to ... a lien ... the lien itself does not exist until the contractor does something to assert that right." Tremont, 767 N.E.2d at 25. In the present case, Carrier admits that it took no steps to assert its right to a lien, stating that it "saw no need." (Carrier Reply at 2.) This admission vitiates its claim that Globe's payments immediately prior to its bankruptcy petition did not improve Carrier's position relative to other creditors.3

A second problem with Carrier's argument is that even if it had perfected a lien against Globe's Massachusetts plant, there would have been no equity to which the lien could attach. Under Massachusetts law, a mechanic's lien is subordinate to a duly registered mortgage. Mass. Gen. Laws ch. 254, § 7(a). In the present case, the sale of Globe's assets left Globe's senior secured lenders with a deficiency of over $100 million on their secured claims. Thus, there is no merit to Carrier's suggestion that it would have been paid in full even if the preferential payments had not been made.

B.

Carrier's argument that Globe's payments, even if preferential, are not avoidable because they were made in the ordinary course of business is somewhat more compelling, but also ultimately unavailing.

The version of the Code that was in effect at the time this action was commenced provided that a trustee may not avoid a payment on a debt that was incurred in the ordinary course of business, paid in the ordinary course of business and paid in accordance with ordinary business terms. Pub.L. No. 95-598, 11 U.S.C. former § 547(c)(2), 92 Stat. 2549, 2598 (1978) (amended 2005).4 The legislative history explains that section 547(c)(2) is intended to encourage normal credit transactions and the continuation of short-term credit dealings with troubled debtors so as to postpone, rather than hasten, bankruptcy to the extent that this result does not detract from the policy of the preference section of discouraging unusual action by either the debtor or its creditors during the debtor's slide into bankruptcy. S.Rep. No. 95-989, at 88, as reprinted in 1978 U.S.C.C.A.N. 5787, 5874; see also In re Milwaukee Cheese Wisconsin, Inc., 112 F.3d 845, 848 (7th Cir.1997) ("The exceptions in § 547(c) identify cases where there is little risk that the pre-bankruptcy payments will give rise to [a] race [to get one's debt repaid] and to the concomitant costly self-protection.").

The phrases "ordinary course of business" and "ordinary business terms" are not defined by the Code. Courts have interpreted the "ordinary course of business" requirement to be subjective in nature insofar as it requires courts to consider whether the transfer was ordinary in relation to the "other business dealings between that creditor and that debtor." In re Fred Hawes Org., Inc., 957 F.2d 239, 244 (6th Cir.1992); see also In re Issac Leaseco, 389 F.3d at 1210; In re Molded Acoustical Prods., Inc., 18 F.3d 217, 223-28 (3d Cir.1994). The "ordinary business terms" requirement, by contrast, is objective in nature, requiring proof that the payment is ordinary in relation to prevailing industry standards. See In re Issac Leaseco, 389 F.3d at 1210; see also Advo-Sys., Inc. v. Maxway Corp., 37 F.3d 1044, 1048 & n. 3 (4th Cir.1994) (citing cases interpreting the "ordinary terms" requirement). The creditor has the burden of proof with respect to both requirements. 11 U.S.C. § 547(g); In re Issac Leaseco, 389 F.3d at 1210.

The fact that the payments at issue here were not only preferential within the meaning of § 547(b) but also late makes it difficult to show that they were made in the "ordinary course of business." "[U]ntimely payments are more likely to be considered outside the ordinary course of business and avoidable as preferences." In re Craig Oil, 785 F.2d 1563, 1567-68 (11th Cir.1986); see also In re Fred Hawes, 957 F.2d at 244. As Judge Posner has explained,

It may seem odd that paying a debt late would ever be regarded as a preference to the creditor thus paid belatedly. But it is all relative. A debtor who has entered the preference period—who is therefore only 90 days, or fewer, away from plunging into bankruptcy—is typically unable to pay all his outstanding debts in full as they come due. If he pays one and not the others ......

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