In re HL Hansen Lumber Co. of Galesburg, Inc.
| Decision Date | 16 October 2001 |
| Docket Number | Bankruptcy No. 00-81730. Adversary No. 00-8174. |
| Citation | 270 BR 273 |
| Court | U.S. Bankruptcy Court — Central District of Illinois |
| Parties | In re H.L. HANSEN LUMBER COMPANY OF GALESBURG, INC., Debtor. H.L. Hansen Lumber Company Of Galesburg, Inc., Plaintiff, v. G & H Custom Craft, Inc., Defendant. |
Sumner Bourne, Peoria, IL, for Plaintiff.
David A. Millage, Davenport, IA, for Defendant.
This matter is before the Court for decision after trial on the adversary complaint of the Debtor in possession, H.L. HANSEN LUMBER COMPANY OF GALESBURG, INC. (DEBTOR), pursuant to Section 547 of the Bankruptcy Code, to recover payments made to the Defendant, G & H CUSTOM CRAFT INCORPORATED (G & H). It is not disputed that G & H received four payments from the DEBTOR totaling $4,696.72 within ninety days prior to the bankruptcy filing. The parties agree that against this amount G & H is entitled to a setoff for subsequent new value in the amount of $2,166.73, pursuant to Section 547(c)(4). The only issue is whether the payments to G & H made during the preference period qualify for the "ordinary course of business" exception.
G & H manufactures custom-made laminated countertops. The DEBTOR operated a lumber and building supplies business and purchased such countertops from G & H on an open account basis. G & H invoiced the DEBTOR for each order. The payment terms printed on the invoices are "net 30 days," meaning full payment is due within 30 days. The parties had no other agreement as to payment.
Each of the invoices paid during the preference period was paid late, ranging from 24 to 81 days late. On Feb. 28, 2000, within the ninety-day period preceding the filing of the DEBTOR'S Chapter 11 petition on May 30, 2000, G & H received a check dated February 23, 2000, from the DEBTOR in the amount of $530.29, in payment of the following eight invoices:
Number of Days
Date of Between Date of
Invoice # Amount Invoice Invoice & Payment
5657 $ 10.00 12/10/99 80
5658 281.60 12/10/99 80
5676 10.00 12/25/99 65
5677 76.00 12/25/99 65
5678 59.20 12/25/99 65
5709 10.00 12/28/99 62
5710 40.00 12/28/99 62
FC 2239 43.49 12/31/99 59
On April 18, 2000, G & H received a check dated April 10, 2000, from the DEBTOR in the amount of $533.13, in payment of the following sixteen invoices:
Number of Days
Date of Between Date of
Invoice # Amount Invoice Invoice & Payment
5758 $ 10.00 1/13/00 96
5759 59.20 1/13/00 96
5760 10.00 1/13/00 96
5761 4.53 1/13/00 96
5782 10.00 1/27/00 82
5783 88.81 1/27/00 82
5784 115.86 1/27/00 82
5785 116.00 1/27/00 82
5786 10.00 1/27/00 82
5817 35.20 2/10/00 68
5818 10.00 2/10/00 68
5819 10.00 2/10/00 68
5849 10.00 2/24/00 54
5851 10.00 2/24/00 54
5852 10.00 2/24/00 54
5855 10.00 2/24/00 54
On May 3, 2000, G & H received a check dated April 20, 2000, from the DEBTOR in the amount of $2,202.19, in payment of the following six invoices:
Number of Days
Date of Between Date of
Invoice # Amount Invoice Invoice & Payment
5762 $907.13 01/13/00 111
5787 384.74 01/27/00 97
5820 486.03 02/10/00 83
5850 117.00 02/24/00 69
5853 144.56 02/24/00 69
5854 162.73 02/24/00 69
On June 5, 2000, G & H received a check dated May 10, 2000, from the DEBTOR in the amount of $1,431.11, in payment of the following five invoices:
Number of Days
Date of Between Date of
Invoice # Amount Invoice Invoice & Payment
5856 $339.87 02/24/00 102
5857 351.98 02/24/00 102
5858 578.71 02/24/00 102
5879 45.93 02/29/00 97
5880 114.62 02/29/00 97
Karen Hansen, the DEBTOR'S office manager, testified that the DEBTOR is on open account with all of its suppliers. Although she generally tried to comply with the G & H invoice terms by paying the account within thirty days, in the early months of 2000, it was sometimes forty-five days or more before the account might be paid. She testified that it was the DEBTOR'S practice to pay G & H's invoices in batches, grouping together a number of invoices and paying with a single check. According to her testimony, the DEBTOR did not change the way it did business with any of its suppliers prior to filing bankruptcy, though as the DEBTOR got closer to filing bankruptcy, the invoices were being paid with less frequency. She acknowledged that G & H was treated no differently than any of the DEBTOR'S other suppliers.
Daniel Sundholm, G & H's president and co-owner with his wife, testified that G & H had been in business for eighteen years. Prior to that time, he had worked for R & J Building Products for four and one-half years, a company engaged in the same line of business as G & H. Prior to that time, he had worked for his father's construction company for nine years. From his familiarity with the billing practices of various suppliers of the lumber yard business when he worked for R & J in the midseventies, Mr. Sundholm testified that all of the lumber yards doing business with R & J were set up on open account, and paid a number of invoices at one time. He stated that G & H does business with a number of lumber yards similar to the DEBTOR, as well as ones both larger and smaller, and each one is on an open account. According to Mr. Sundholm, doing business on an open account is the standard of the industry.
Mr. Sundholm testified that the late payments received from the DEBTOR did not cause him concern, because 99.9% of G & H's open accounts get behind more than 30 days. He stated that it is standard in the business to let an account go more than thirty days, adding that Lowe's, a large chain, always runs 120 days late. He acknowledged that the DEBTOR'S account was characterized as overdue and that finance charges were imposed in late 1999. His wife, Dorothy Sundholm, G & H's office manager, testified that it is "standard" for all their customers, including the DEBTOR and other lumber companies it does business with, to go over thirty days before paying invoices.
Steven Mueller, the owner of a distributing company and former employee of Mueller Lumber Co., a family owned business, where he had worked for twenty-five years, also testified for G & H. He stated that Mueller Lumber dealt with all of its suppliers on an open account, paying several invoices at one time. After reviewing the DEBTOR'S checks in payment of G & H's invoices, he concluded that its practice was similar to that of Mueller Lumber. While Mueller Lumber often got behind in paying its invoices in its early years, in the later years, before it was sold, it always paid its bills within the 30-day invoice period. Though he assumed that the majority of lumber companies do not pay within 30 days, he had no direct knowledge of that fact.
Although G & H stipulated that the elements of Section 547(b) were met with respect to four checks, including the check dated May 10, 2000, the evidence received at trial indicates that the "transfer" evidenced by the May 10, 2000 check occurred post-petition. In Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), the Supreme Court held that for purposes of determining whether a transfer was made within the preference period under Section 547(b), a transfer by check occurs when the check is honored by the drawee bank. According to Exhibit D admitted at trial, the DEBTOR'S check dated May 10, 2000, was not received by G & H until June 5, 2000, six days after bankruptcy, and, presumably, was not paid by the DEBTOR'S bank until a day or more thereafter. Notwithstanding that post-petition transfers are not avoidable as preferences under Section 547, based upon G & H's stipulation, the Court will treat this fourth payment as if the transfer occurred pre-petition.
The ordinary course of business defense is set forth at Section 547(c)(2) as follows:
11 U.S.C. § 547(c)(2). The creditor asserting the defense has the burden to prove each element by a preponderance of the evidence. 11 U.S.C. § 547(g); Matter of Midway Airlines, Inc., 69 F.3d 792, 797 (7th Cir.1995). If the creditor fails to prove any of the three elements, the defense is inapplicable.
The appropriate date to be used in determining whether a transfer by check was made in the ordinary course of business is not the same as that used for purposes of Section 547(b). The Supreme Court in Barnhill v. Johnson, supra, noted that a different rule had been applied under this provision, and that for purposes of Section 547(c), the proper date to consider is the date the check is received by the creditor. Recent cases have adhered to this rule, and that is the date the Court will use in analyzing the DEBTOR'S payment history. In re Air South Airlines, 247 B.R. 165 (Bankr.D.S.C.2000...
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