In re Molded Acoustical Products, Inc., Civ. A. No. 92-3700

• Decision Date: 20 January 1993
• Docket Number: Adv. No. 89-1077.,Bankruptcy No. 89-20868T,Civ. A. No. 92-3700
• Citation: 150 BR 608
• Parties: In re MOLDED ACOUSTICAL PRODUCTS, INC., Debtor. FIBER-LITE CORPORATION, Appellant, v. MOLDED ACOUSTICAL PRODUCTS, INC., Appellee.
• Court: U.S. District Court — Eastern District of Pennsylvania

150 B.R. 608 (1993)

In re MOLDED ACOUSTICAL PRODUCTS, INC., Debtor FIBER-LITE CORPORATION, Appellant, v. MOLDED ACOUSTICAL PRODUCTS, INC., Appellee.

Civ. A. No. 92-3700, Bankruptcy No. 89-20868T, Adv. No. 89-1077.

United States District Court, E.D. Pennsylvania.

January 20, 1993.

COPYRIGHT MATERIAL OMITTED

Edmond M. George, Obermayer, Rebmann, Maxwell & Hippel, Philadelphia, PA, for debtor.

Charles J. Phillips, Reading, PA, for appellant.

MEMORANDUM

BRODY, District Judge.

Before me is the appeal of the bankruptcy court's order of May 21, 1992 entering judgment in the amount of $204,612.33 in favor of debtor/plaintiff Molded Acoustical Products, Inc. ("MAP") and against creditor/defendant Fiber-Lite Corporation ("Fiber-Lite"). This appeal arises from an adversary proceeding initiated by MAP to avoid and recover pre-petition and post-petition transfers arising from invoice payments by MAP to Fiber-Lite throughout the 90 day period immediately prior to its filing a voluntary bankruptcy petition.

I am being called upon by appellant Fiber-Lite to decide:

(1) whether a bankruptcy court abuses its discretion by allowing a debtor to amend its complaint immediately prior to trial to include a claim to recover a post-petition check transfer that is factually related to the pre-petition transfers alleged in the complaint after the statute of limitations on post-petition claims has run? I find that it did not.

(2) whether a bankruptcy court clearly errs when it finds that a creditor did not rebut the presumption of the debtor's insolvency when the creditor puts on no direct evidence of the debtor's solvency and relies solely on its speculative cross-examination of the debtor's accountant to rebut the presumption that the debtor was insolvent? I find that it did not.

(3) whether the bankruptcy court clearly errs when it finds that a creditor does not establish that the transfers were "according to ordinary business terms" when the creditor's only evidence that the transfers were "ordinary" by industry wide standards was evidence of its own collection practices with one other delinquent customer and its subsidiary? I find that it did not.

I. FACTS AND PROCEDURAL BACKGROUND.

Fiber-Lite is a company that sold and supplied fiberglass raw materials to appellee MAP for use in its fiberglass molding processes. On May 26, 1989, MAP filed a petition for reorganization under Title 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 101 et seq., ("the Code"). On November 27, 1989, in the course of its reorganization, MAP instituted an adversary proceeding pursuant to 11 U.S.C. §§ 547(b) and 550(a)(1) to avoid and recover certain allegedly preferential transfers made by MAP to Fiber-Lite within the ninety (90) days prior to MAP's filing of its voluntary Chapter 11 petition.¹

On November 11, 1991, three days before trial, MAP provided Fiber-Lite with copies of the canceled checks of the allegedly preferential transfers at issue. On the day before trial, counsel for Fiber-Lite raised the defense that Check No. 6497 in the amount of $41,670.93 and dated May 25, 1989 could not be avoided and recovered as a preferential transfer made prior to the initiation of the bankruptcy proceeding because the cancellation stamp indicated that, in fact, the check was not honored by the bank until four days after MAP filed its Chapter 11 petition. Fiber-Lite then denied MAP's request to stipulate to allow it to amend the complaint to include a claim for Check 6497 as an unauthorized post-petition transfer.²

At the November 14, 1991 trial before the Honorable Thomas Twardowski of the Bankruptcy Court of the Eastern District of Pennsylvania, MAP moved to amend its complaint to include a count pursuant to 11 U.S.C. § 549 to recover the amount of Check 6497 as a post-petition transfer. Fiber-Lite opposed the amendment to the complaint on the grounds that any claim for post-petition recovery of Check Number 6497 was time-barred by the two year statute of limitations set forth in 11 U.S.C. § 549(d)(1).

Judge Twardowski deferred ruling on the motion to amend until after the evidentiary hearing. At the trial, the parties stipulated that the amount of the pre-petition preferential transfers at issue, excluding Check 6497, was Four Hundred Fifty One Thousand Two Hundred Twenty Four Dollars and Seventy Four Cents ($451,224.74). (N.T. at 10.) The parties also stipulated that MAP received from Fiber-Lite and that Fiber-Lite invoiced MAP for "new product" — new value — in the amount of $269,328.04 which remained unpaid on the date that MAP filed its petition. (See Order of May 21, 1992 at ¶ 4.) The parties also stipulated that, post-petition, MAP had received stock from Fiber-Lite invoiced at $18,955.20 which remained unpaid. (Id. at ¶ 5.)

Judge Twardowski's order of May 21, 1992 entered judgment in favor of MAP and against Fiber-Lite in the amount of $204,612.33. The bankruptcy court's reasoning was as follows.

First, the court, citing the recent United States Supreme Court decision in Barnhill v. Johnson, ___ U.S. ____, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), held that Check 6497 was not recoverable as a pre-petition transfer because, for purposes of Section 547(b), a transfer by check is deemed to occur on the date that the check is honored by the bank. Finding that Check 6497 was a post-petition transfer undertaken without authorization of the court, Judge Twardowski granted MAP leave to amend its complaint to include a claim for the post-petition transfer of $41,670.93.

Second, Judge Twardowski found that MAP was insolvent on the date that it filed its voluntary petition and at all relevant times pursuant to 11 U.S.C. § 547(f) which sets forth a ninety-day pre-petition presumption of insolvency.

Third, Judge Twardowski found that Fiber-Lite did not establish by a preponderance of the evidence the existence of a "course of business" relationship between itself and MAP. Section 547(c) of the Code provides that the debtor may not avoid a preferential transfer if the transferee can establish (1) that the transfer was in the ordinary course of business, 11 U.S.C. § 547(c)(2)(A); (2) that the transfer was in the ordinary course of dealings between the two parties, 11 U.S.C. § 547(c)(2)(B); and, (3) that the transfer was according to the ordinary terms in the industry generally, 11 U.S.C. § 547(c)(2)(C). Although Judge Twardowski found that the first two elements were "clear here," he held that Fiber-Lite's "industry terms" evidence of its dealings with another company and its subsidiary was, in fact, evidence only of its dealings with one entity other than MAP, and, thus, was not sufficient evidence of the existence of an industry standard for 11 U.S.C. § 547(c)(2)(C) purposes.

Although Fiber-Lite had received preferential transfers, Judge Twardowski also found that, pursuant to 11 U.S.C. § 547(c)(4) which allows a transferee to save a preferential transfer from avoidance if it can establish certain statutory elements, Fiber-Lite was entitled to setoff the stipulated amount of "new value" outstanding as of the petition filing date — $269,328.04 — against the stipulated amount of pre-petition avoidable preferential transfers — $451,224.64. Fiber-Lite was also entitled to setoff the stipulated value of the post-petition stock transfer from Fiber-Lite to MAP — $18,995.20 — from the total avoidable amount of the unauthorized post-petition transfer — $41,670.93.

Fiber-Lite now appeals this adverse judgment in the total amount of $204,612.33 to this court pursuant to 28 U.S.C. § 1334(a). For the following reasons, I affirm the order of the bankruptcy court.

II. THE ORDER ON APPEAL.

A. Standard of review.

Fiber-Lite appeals both certain findings of fact and conclusions of law by the bankruptcy court. The findings of fact shall not be set aside unless clearly erroneous and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses. Bankruptcy Rule 8013. The legal conclusions of the bankruptcy court are subject to plenary review by this court. Goldberg v. New Jersey Lawyer's Fund, 932 F.2d 273, 277 (3rd Cir.1991).

The fact-finding of the bankruptcy court is reviewed under the "clearly erroneous" standard; a finding of fact is "clearly erroneous" when, "although there is evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been committed." In re Fred Hawes Organization, Inc., 957 F.2d 239, 242 (6th Cir.1992).

B. The bankruptcy court did not abuse its discretion in allowing MAP to amend its complaint to assert a claim for Check 6497 as a post-petition transfer.

Fiber-Lite first appeals Judge Twardowski's decision to allow MAP to amend its complaint to allege a claim to recover Check 6497 as a post-petition transfer. My review is of a discretionary decision by the bankruptcy court and my standard of review is abuse of discretion. Berkshire Fashions, Inc. v. M.V. Hakusan II, 954 F.2d 874, 886 (3rd Cir.1992) (citing Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)). A motion for leave to amend a complaint pursuant to Fed. R.Civ.P. 15(a), incorporated by Bankruptcy Rule 7015, should be freely granted at any stage of a case where the decision to allow amendment would prevent injustice and would cause no prejudice to the non-moving party. See Carey v. Beans, 500 F.Supp. 580, 582-83 (E.D.Pa.1980), aff'd, 659 F.2d 1065 (3rd Cir.1981).

Fiber-Lite argues that Judge Twardowski abused his discretion because the amendment "severely prejudiced Fiber-Lite" and "`rewarded' MAP's dilatory and non-responsive discovery practices,", specifically, MAP's failure to timely review the checks in its possession and MAP's delay in producing the canceled checks to Fiber-Lite until three days prior to trial. (Appellant's Brief at 9-10.) Any consideration of delay as a basis for denying leave to amend the complaint must be coupled with a...