In re Hechinger Inv. Co. of Delaware, Inc.

• Decision Date: 07 June 2007
• Docket Number: No. 06-2166.,No. 06-2229.,06-2166.,06-2229.
• Citation: 489 F.3d 568
• Court: U.S. Court of Appeals — Third Circuit
• Parties: In re HECHINGER INVESTMENT COMPANY OF DELAWARE, INC., et al., Debtors. Hechinger Investment Company of Delaware, Inc. v. Universal Forest Products, Inc., Appellant No. 06-2166. In re Hechinger Investment Company of Delaware, Inc., et al., Debtors. Hechinger Investment Company of Delaware, Inc. v. Universal Forest Products, Inc. Hechinger Liquidation Trust, as successor in interest to Hechinger Investment Company of Delaware Inc., et al., Debtors in Possession, Appellant No. 06-2229.

489 F.3d 568

In re HECHINGER INVESTMENT COMPANY OF DELAWARE, INC., et al., Debtors.

Hechinger Investment Company of Delaware, Inc. v. Universal Forest Products, Inc., Appellant No. 06-2166.

In re Hechinger Investment Company of Delaware, Inc., et al., Debtors.

Hechinger Investment Company of Delaware, Inc. v. Universal Forest Products, Inc. Hechinger Liquidation Trust, as successor in interest to Hechinger Investment Company of Delaware Inc., et al., Debtors in Possession, Appellant No. 06-2229.

No. 06-2166.

No. 06-2229.

United States Court of Appeals, Third Circuit.

Argued: March 28, 2007.

Filed: June 7, 2007.

Kevin J. Mangan, Monzack & Monaco, Wilmington, DE, and Michael S. McElwee [Argued], Barnum, Riddering, Schmidt & Hewlett, Grand Rapids, MI, for Appellant/Cross Appellee Universal Forest Products, Inc.; and Hechinger Liquidation Trust, as successor in interest to Hechinger Investment Company of Delaware Inc., et al., Debtors in Possession.

Joseph L. Steinfeld, Jr. [Argued], Karen M. Scheibe, A.S.K. Financial, Eagan, MN, for Appellee/Cross Appellant Hechinger Investment Company of Delaware, Inc.

Before: RENDELL and CHAGARES,^* Circuit Judges.

OPINION OF THE COURT

RENDELL, Circuit Judge.

This case arises out of the bankruptcy proceedings of Hechinger Investment Company of Delaware, Inc. ("Hechinger"). Hechinger filed a complaint in the Bankruptcy Court against its creditor, Universal Forest Products ("UFP"), to avoid and recover preferential transfers from UFP, pursuant to 11 U.S.C. §§ 547 and 550. The Bankruptcy Court rejected UFP's defenses that the transfers were either contemporaneous exchanges for new value under Bankruptcy Code § 547(c)(1) or made in the ordinary course of business under § 547(c)(2), and denied UFP's motion for an adverse evidentiary inference against Hechinger on the ground of spoliation. It also denied Hechinger's motion for pre-judgment interest. The District Court affirmed. Both sides now appeal.

I.

UFP, a leading manufacturer of treated lumber products, began its business relationship with Hechinger some 15 years prior to Hechinger's June 11, 1999 bankruptcy filing. Prior to February 1999, Hechinger was one of UFP's biggest customers. However, Hechinger's financial condition worsened in 1999 and UFP became concerned about continuing to sell goods to Hechinger on credit.

On February 4, 1999, UFP and Hechinger had a meeting to discuss Hechinger's financial situation and possible solutions in order to allow the companies to maintain their business relationship during the upcoming spring season, when Hechinger's demand for lumber products was the greatest. Prior to this meeting, Hechinger had an open line of credit with UFP on terms of "1% 10 days, net 30, with a 7-day mail float." Under this arrangement, Hechinger could earn a 1% price reduction for invoices paid within the "discount period," namely, ten days plus a seven-day grace period for payments made by mail. App. 207. Hechinger had up to 30 days to pay in order for the payment to be considered prompt. Id. Hechinger paid UFP by check accompanied by remittance advices that matched each payment to particular previous invoices. During the three years prior to Hechinger's bankruptcy filing, Hechinger made most of its payments to UFP within the "discount period." App. 906. As of February 4, 1999, Hechinger's account reflected no amount past due, and $37,148 coming due within the next 30 days. App. 713.

At the February 4 meeting, UFP presented Hechinger with four different options to allow the business relationship of the parties to continue. Hechinger agreed to a $1 million credit limit for future purchases and its credit terms were reduced to "1%, 7 days, net 8," meaning that Hechinger could earn a 1% price reduction for invoices paid within the seven day "discount period," and had up to eight days to pay in order for the payment to be considered prompt. Hechinger also agreed to remit payments to UFP by wire transfer, instead of check. Hechinger wired payments in lump sum amounts of $500,000 or $1 million, prior to sending remittance advices to UFP. The changed terms of Hechinger's credit arrangements with UFP required Hechinger to make larger and more frequent payments to UFP because Hechinger placed orders for between $160,000 and $250,000 worth of product per day. Hechinger made a total of 22 wire transfers during the "preference period," which ran from March 13 to June 11, 1999. This equates to a wire nearly every 2.9 days. Hechinger usually made wire transfers in the amount of the credit limit, which was $1 million for most of this period.¹ The payments reduced the outstanding balance in Hechinger's UFP account and replenished Hechinger's $1 million line of credit, so that Hechinger could order additional goods from UFP.²

At the time that Hechinger made each wire transfer, it did not know which shipments were covered by the transfer. Hechinger sent remittance advices to UFP after making payments, in order to explain how UFP should match the payments to the invoices that UFP created. According to these remittance advices, some of Hechinger's payments during the preference period were "advance payments," meaning payments made prior to shipment of the goods. Hechinger's payments during the preference period were usually made up to ten days before shipment, to eight days after shipment, with the greatest concentration of payments occurring on the date of shipment. App. 905.

Hechinger filed for Chapter 11 bankruptcy protection on June 11, 1999. On June 5, 2001, Hechinger filed a complaint against UFP to avoid and recover preferential transfers under 11 U.S.C. § 547 and § 550. Hechinger originally sought to recover $16,703,604.57, the full amount of the payments made to UFP during the 90-day period prior to Hechinger's June 11, 1999 filing. Before trial, Hechinger conceded that $6,576,603.36 of these payments were advance payments and therefore, by definition, not recoverable under § 547 as payments for or on account of an antecedent debt. The parties also stipulated that the "net preference" at issue at trial, potentially subject to UFP's § 547(c)(1) and § 547(c)(2) defenses, was $1,004,216.03 and that Hechinger had established a prima facie case under § 547(b) that these transfers were avoidable. App. 39.

Prior to trial, UFP filed a spoliation motion with the Bankruptcy Court, asking the Court to draw an adverse inference against Hechinger because, prior to the filing of its complaint, Hechinger destroyed documents that might have helped UFP prove that Hechinger intended its preference period payments to be contemporaneous exchanges for new value under § 547(c)(1). The Court denied the motion, without discussion, in October 2004.

A trial in the Bankruptcy Court commenced on February 25, 2005, with the main issue being UFP's contention that $1,004,216 in payments were not avoidable based on § 547(c)(1) and § 547(c)(2) of the Bankruptcy Code. These sections provide that:

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

(1) to the extent that such transfer was —

(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange;

(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;

Accordingly, UFP urged that, although the payments may have been on account of antecedent debts, they were nonetheless not avoidable because they were contemporaneous exchanges for new value under § 547(c)(1), and, alternatively, because they were made in the ordinary course of business under § 547(c)(2).

The Bankruptcy Court entered judgment in favor of Hechinger on June 16, 2005 in the amount of $1,004,216. With respect to whether the transfers were intended as contemporaneous exchanges for new value under § 547(c)(1), the Court stated that "the nature of a credit relationship is inconsistent with the intent which is required in order to sustain the § 547(c)(1) defense." In re Hechinger Inv. Co. of Del., 326 B.R. 282, 289 (Bankr.D.Del.2005). It also concluded that the transfers were not made in the ordinary course of business between the parties under § 547(c)(2)(B) because the transfers were made under vastly different conditions from those that had previously governed the relationship of the parties. Id. at 292. The Court further found that the transfers were not made according to ordinary business terms under § 547(c)(2)(C) because the terms varied substantially from those normally employed by UFP with other customers similar to Hechinger. Id. at 293. Hechinger had requested prejudgment interest to compensate it in full for the "value" of the payments it recovered, but the Bankruptcy Court denied this request without any discussion. Id. at 294.

Both parties appealed the adverse rulings to the District Court. Challenging the Bankruptcy Court's rejection of UFP's contemporaneous exchange defense under § 547(c)(1), UFP argued that the Bankruptcy Court's ruling was grounded in an error of law regarding the nature of the transactions and the intent required under § 547(c)(1). The District Court disagreed, concluding that the Bankruptcy Court did not commit legal error in stating that "the § 547(c)(1) defense may not be applied to credit transactions." In re Hechinger Inv. Co. of Del., 339 B.R. 332, 336 (D.Del.2006). The District Court did not read this statement as a legal pronouncement that credit transactions are categorically excluded from § 547(c)(1). Rather, it understood this passage to signify that the Bankruptcy Court had found that the parties intended a credit, rather than a cash,...