In re Laclede Steel Co.

• Decision Date: 02 January 2002
• Docket Number: BAP No. 01-6040EM.
• Citation: 271 B.R. 127
• Parties: In re LACLEDE STEEL CO., Debtor. Concast Canada, Inc., Appellant, v. Laclede Steel Co., Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

271 B.R. 127

In re LACLEDE STEEL CO., Debtor.

Concast Canada, Inc., Appellant, v. Laclede Steel Co., Appellee.

BAP No. 01-6040EM.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: November 30, 2001.

Filed: January 2, 2002.

COPYRIGHT MATERIAL OMITTED

Kenneth P. McKay, Pittsburgh, PA, for appellant.

Christopher J. Lawhorn, John G. Shively (on brief), St. Louis, MO, for appellee.

Before KOGER, Chief Judge, SCOTT and DREHER, Bankruptcy Judges.

SCOTT, Bankruptcy Judge.

Laclede Steel Co. and Concast Canada, Inc. had been engaged in business for many years. The formal terms of their dealings required that Laclede pay its obligations to Concast thirty days after invoicing. In the ordinary course of their dealings, however, they did not adhere to these requirements. Rather, the average time it took Laclede to pay its obligations to Concast, prior to the 90 day preference period, was 52 days, although at least one payment had been as late as 70 days past invoicing.

When Laclede met with financial difficulty, Concast did not exert any pressure for earlier payment. Rather, as it had done in the past, Concast waited for payment. The last payment prior to the filing of the chapter 11 case was made with four checks.¹ The checks were dated July 15 1998. They all cleared the bank on November 19, 1998, eleven days prior to the filing of the chapter 11 case. Nothing was unusual about this transaction except for one fact: the payments were 177 days beyond invoicing, a period that even Concast characterizes as "excruciatingly late."

When Laclede sought to avoid the payments as preferences, Concast defended on the basis that the payments were made in the ordinary course of business. At trial before the bankruptcy court, the parties disputed only whether the payments were ordinary as between the parties and whether the payments were made according to ordinary business terms. 11 U.S.C. § 547(c)(2)(B), (C). The bankruptcy court² concluded that, although late payments were ordinary within the context of the industry standards, the payment made 177 days beyond invoicing was not in the ordinary course of the business affairs of the debtor and the transferee. Concast appeals the decision of the bankruptcy court, arguing that the bankruptcy court improperly focused solely upon the fact that the payment was made so long after invoicing. We affirm the conclusions of the bankruptcy court.

We review the bankruptcy court's choice of the appropriate legal standard de novo inasmuch as that question is one of law. See Hartford Underwriter's Ins. Co. v. Magna Bank, N.A. (In re Hen House Interstate, Inc.), 150 F.3d 868 (8th Cir.1998), aff'd, 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). The court's application of the statute to the facts of the case, i.e., whether the payments were made in the ordinary course of business, is reviewed under the clearly erroneous standard. In re U.S.A. Inns of Eureka Springs, Arkansas, 9 F.3d 680, 685 (8th Cir.1993).

Section 547 permits the chapter 11 debtor in possession to avoid certain payments made within the ninety days prior to the filing of the bankruptcy petition. In this instance, the parties do not dispute that the payments were preferential as defined in section 547(b). Rather, the parties dispute the application of the ordinary course of business exception to the avoidance action. Section 547 provides in pertinent part:

(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.

11 U.S.C. § 547(c)(2).

Under this exception, the defendant has the burden of separately demonstrating the three prongs of the exception. Only the second prong is at issue in this appeal. Specifically, the bankruptcy court determined that the payment, constituting four checks, made 177 days after invoicing, was not in the ordinary course of business of the parties because the payment was not consistent with the prior payment patterns between the parties. See Lovett v. St. Johnsbury Trucking, 931 F.2d 494 (8th Cir.1991)(establishing that the cornerstone of the peculiarly factual analysis to be applied is consistency with the parties' prior business transactions). After a careful consideration of the arguments of the appellant and appellee, we conclude that the bankruptcy court was correct in its analysis of the law and its application of the law to the facts of this case.

In Lovett v. St. Johnsbury Trucking, 931 F.2d 494 (8th Cir.1991), the United States Court of Appeals for the Eighth Circuit articulated the general standard for determining whether a transaction is within the ordinary course of business. The court concluded that there was no particular test which was required to be applied, but, rather, the courts should engage is a "peculiarly factual analysis," the cornerstone of which is the consistency of the transaction in question as compared to other, prior transactions between the parties. Lovett, 931 F.2d at 497. In Lovett, as in this case, the timing of the payments was the determining factor in the analysis. The Court of Appeals concluded that, since the payments sought to be avoided were consistent with prior practice, the payments were made in the ordinary course between the parties, even though the creditor had insisted that the debtor accelerate the payments as much as possible. Thus, in Lovett, the Court of Appeals looked to the timing of the payments, and found that factor to be of overriding importance, to the exclusion of the fact that the creditor pressured the debtor for payment. Since the timing of the preferential payment was consistent with the timing of the payment in prior transactions, the ordinary course of business exception applied to preclude avoidance of the transfer under section 547(b).

The Eighth Circuit Court of Appeals has been consistent in following this standard and in its application. Most recently, in Gateway Pacific Corp. Unsecured Creditors' Committee v. Expeditors International of Washington, Inc. (Gateway Pacific Corporation), 153 F.3d 915 (8th Cir.1998), the Court of Appeals again indicated that the controlling factor was the consistency of prior practice between the parties during the pre- and preference periods. In Gateway, as in Lovett, the court focused upon the timing of the payments. It is noteworthy that in Gateway, as in this case, the transferee creditor argued that the other consistencies between the periods overcame the single inconsistency — the lateness of the payment in the preference period compared to earlier transactions. The Court of Appeals rejected this argument, stating that the significant change in the payment pattern was sufficient to remove the transaction from the ordinary course of business exception.

While it is true that a number of decisions, including Central Hardware Co. v. The Walker-Williams Lumber Co. (In re Spirit Holding), 214 B.R. 891 (E.D.Mo.1997), aff'd, 153 F.3d 902 (1998), articulate a four part test,³ neither the test nor its application is inapposite to the Eighth Circuit holdings in Gateway and Lovett. Indeed, a scrutiny of the case authority applying that test, including Spirit Holding, indicates that there is a general focus upon one of the factors and, if any one of the factors is compellingly inconsistent with prior transactions, the payment is deemed to be outside of the ordinary course of business between the parties. That was the result in Spirit Holding. In Spirit Holding, the parties agreed that virtually every element, including the timing of the payment of the disputed transaction, was consistent with prior transactions, with one exception: the debtor had substituted a wire transfer for the check on which payment had been stopped. Thus, the only inconsistency was the form of payment. In determining that the transfer was within the ordinary course of business between the parties, the bankruptcy court reasoned that the mere change in the method of payments was insufficient to render the payment not in the ordinary course, particularly when there was no unusual collection activity and the debtor had paid other creditors by wire transfer. The district court, however, reversed, concluding that the single factor, the replacement of the check by a wire transfer, was sufficiently inconsistent to remove the transaction from the exception. Spirit Holding, 214 B.R. at 898-99.

Thus, while there may be four factors which may be analyzed, the case authority often focuses upon one of these factors and any significant alteration in any one of the factors may be sufficient to conclude that a payment was made outside the ordinary course of business. As in Lovett, the timing of the payments from the debtor to Concast appears to be the most significant of the factors. The other, separate factors regarding other conduct between the parties — whether the terms were changed, whether the creditor exerted any pressure for collection — have more weight in the analysis if the issue on timing is a close one. Thus, a court may conclude that a transfer, even though a few days later than was the practice during the...