In re Moltech Power Systems, Inc.

• Decision Date: 27 June 2005
• Docket Number: Adversary No. 03-90048-LMK.,Bankruptcy No. 01-00335-LMK.
• Citation: 327 B.R. 675
• Parties: In re MOLTECH POWER SYSTEMS, INC., n/k/a Battery Park Industries, Inc., Debtor. Moltech Power Systems, Inc., n/k/a Battery Park Industries, Inc., Plaintiff, v. Tooh Dineh Industries, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Florida

327 B.R. 675

In re MOLTECH POWER SYSTEMS, INC., n/k/a Battery Park Industries, Inc., Debtor Moltech Power Systems, Inc., n/k/a Battery Park Industries, Inc., Plaintiff, v. Tooh Dineh Industries, Inc., Defendant.

Bankruptcy No. 01-00335-LMK.

Adversary No. 03-90048-LMK.

United States Bankruptcy Court, N.D. Florida, Gainesville Division.

June 27, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Stephen R. Leslie, Tampa, FL, for Debtor.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

LEWIS M. KILLIAN, JR., Bankruptcy Judge.

THIS MATTER came before the Court for hearing on May 5, 2005, upon the Motion for Summary Judgment filed by Plaintiff Moltech Power Systems ("Moltech"), the debtor-in-possession in the Chapter 11 case. Moltech seeks to avoid as preferences certain payments it made to creditor Tooh Dineh. 11 U.S.C. § 547(b). Tooh Dineh claims these payments cannot be avoided because they were made within the ordinary course of business. 11 U.S.C. § 547(c)(2). This Court has jurisdiction under 28 U.S.C. § 1334, and this is a core proceeding under 28 U.S.C. § 157(b)(2)(F).

FACTS

Tooh Dineh and Moltech started doing business together in August, 1999. As Moltech's supplier, Tooh Dineh procured electronic components and assembled electronic modules, which Moltech then used to manufacture batteries. The parties continued conducting business together until the end of April, 2001. On May 23, 2001, Moltech filed its Chapter 11 bankruptcy petition.

The uncontroverted facts upon which this opinion is based are reflected in the spreadsheet of payments and invoices provided by Tooh Dineh. According to this payment history, the amount of Moltech's payments to Tooh Dineh in the time before the preference period averaged $15,097, and ranged between $90 and $77,768; over 85% of Moltech's payments to Tooh Dineh were for less than $25,000. These payments were made an average of 47 days after the date of invoice, ranging between 26 and 109 days. 82% of the payments Moltech made to Tooh Dineh were made within 60 days. In addition, Moltech made payments to Tooh Dineh in "batches" (where more than one invoice is paid with one check) throughout the course of their business relationship. Before the preference period, average batch size was about three invoices and ranged from 1-10; 82% of payments had a batch size of three or less.

During the 90 days preceding the date of filing of the bankruptcy petition, Moltech made three payments to Tooh Dineh totaling $148,323.62. Moltech concedes that, after crediting Tooh Dineh for the amount subject to the contemporaneous exchange defense and the amount for new value, the amount of net preferences is $82,474. Moltech now seeks to avoid these payments as preferences under § 547(b). 11 U.S.C. § 547(b). In response, Tooh Dineh asserts the affirmative defense of § 547(c)(2), arguing that the payments were made in the "ordinary course of business." 11 U.S.C. § 547(c)(2). The issue is whether the challenged payments were in fact made in the ordinary course of business. For the reasons set forth herein, the motion for summary judgment will be granted because I find the challenged payments were not made in the ordinary course of business and, therefore, may be avoided.

DISCUSSION

Summary judgment is appropriate only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Bankr.P. 7056(c) (making Fed. R.Civ.P. 56 applicable in bankruptcy cases). No genuine issues of material fact remain unresolved in this case. "In reviewing a motion for summary judgment, the court must consider all the evidence in the light most favorable to the non-movant." Earley v. Champion Int'l. Corp., 907 F.2d 1077, 1080 (11th Cir.1990). Thus, the court will view the evidence in a light most favorable to non-movant Tooh Dineh. Accordingly, this court will rely upon the payment history chart provided by Tooh Dineh which represents the amount and date of all invoices and which has been attached as an appendix to this opinion.

The trustee or debtor-in-possession may avoid any transfer of property made to or for the benefit of a non-insider creditor within 90 days of filing for bankruptcy if the transfer was made while the Debtor was insolvent, on account of an antecedent debt, and enables the creditor to receive more than it would have in Chapter 7 liquidation. 11 U.S.C. §§ 547(b) and 1107. The purposes of the preference avoidance provision are to facilitate the policy of equal distribution among creditors and to frustrate extraordinary transactions which cause a race to the courthouse, inevitably resulting in dismemberment of the debtor. In re Marino, 193 B.R. 907 (9th Cir. BAP 1996). The parties do not dispute that the three challenged payments of March 5, 2001, March 22, 2001, and April 9, 2001 are preferential under § 547(b). However, the parties disagree as to whether these payments fall within the "ordinary course of business" exception. 11 U.S.C. § 547(c)(2).

Section 547(c)(2) provides an affirmative defense to creditors that receive payments which would otherwise be voidable preferences if those payments were made in the ordinary course of business. The burden is on creditor Tooh Dineh to establish this defense. In re A.W. & Associates, Inc., 136 F.3d 1439, 1441 (11th Cir. 1998). The ordinary course of business exception has competing, yet complementary, objectives to the preference avoidance provision. In contrast to the provision allowing avoidance of preferences, the purpose of the ordinary course of business exception is to protect the normal, ordinary relationship between debtors and creditors engaged in recurring credit transactions. This exception was created to encourage creditors to continue to deal with troubled debtors without fear of having to disgorge payments, thus stalling bankruptcy and enabling the debtor to continue in business as a going concern, if appropriate. In re Issac Leaseco, 389 F.3d 1205 (11th Cir.2004); In re Molded Acoustical Products, Inc., 18 F.3d 217 (3rd Cir.1994); In re Furrs Supermarkets, Inc., 296 B.R. 33, 39 (Bankr.D.N.M.2003).

In order to find refuge in the ordinary course of business safe harbor, the creditor must prove: the debt was incurred by the debtor in the ordinary course of business; the payment was made in the ordinary course of business of the debtor; and, the transfer was made according to ordinary business terms. 11 U.S.C. §§ 547(c)(2)(A)-(C). This is a conjunctive test requiring the court to evaluate both the subjective business relationship as it existed between the parties, as well as objective industry standards in order to determine whether a given transaction was "ordinary." In re A.W. & Associates Inc., 136 F.3d 1439, 1442 (11th Cir. 1998).

The parties do not dispute that Moltech incurred the debt underlying the challenged payments in its ordinary course of business, so § 547(c)(2)(A) is satisfied. The parties disagree as to whether the other two prongs of the ordinary course of business test have been met; that is, whether the payments were consistent with the subjective course of dealings that existed between the parties (as required by § 547(c)(2)(B)), and whether the payments were made according to objective industry standards (as required by § 547(c)(2)(C)).

The subjective, or vertical, prong of the ordinary course of business test evaluates the relationship that existed between the parties themselves and is a factintensive inquiry by nature. Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir.1991); See In re A.W. & Associates, Inc., 136 F.3d 1439, 1441-42 (11th Cir.1998); In re Furrs Supermarkets, Inc., 296 B.R. 33 (Bankr.D.N.M.2003). In essence, whether a given transaction was within the subjective ordinary course of business that had developed between the parties is a broad, fact-based inquiry requiring historic examination of the parties' pre-preference period relations. These past relations are then compared to the subsequent business practices that occurred during the preference period to determine whether they were consistent with each other. In short, the question is whether the parties altered their credit arrangement. See In re Issac Leaseco, 389 F.3d 1205, 1210 (11th Cir.2004).

Under the subjective prong (§ 547(c)(2)(B)), the court will evaluate the parties' prior course of dealings, the amount of payments, the timing of payments, and the circumstances surrounding the payment. In re L. Bee Furniture Co., 206 B.R. 989, (Bankr.M.D.Fla.1997); In re Empire Pipe and Development, Inc., 152 B.R. 1012 (Bankr.M.D.Fla.1993); In re Speco Corp., 218 B.R. 390 (Bankr.S.D.Ohio 1998). Stated more formally, the court will consider (among other factors): (1) the length of time the parties were engaged in the transaction in issue; (2) whether the amount or form of tender differed from past practices; (3) whether the debtor or creditor engaged in any unusual collection or payment activity; and (4) the circumstances under which the payment was made. In re Johns-Manville Corp., 60 B.R. 612 (Bankr.S.D.N.Y.1986); In re A.W. & Associates, Inc., 196 B.R. 900 (Bankr.N.D.Fla.1996), rev'd on other grounds 136 F.3d 1439 (11th Cir.1998); In re Homes of Port Charlotte, 109 B.R. 489 (Bankr.M.D.Fla.1990) (citing In re Websco, Inc., 92 B.R. 1 (Bankr.D.Me.1988)); In re Furrs Supermarkets, Inc., 296 B.R. 33, 40-41 (Bankr.D.N.M.2003) (noting that some courts use a different fourth factor, which is, "whether the creditor took advantage of the debtor's deteriorating financial condition").

Thus, the court will examine the pre-preference period business practice that existed between the parties in order to establish the ordinary course of business. After the ordinary course of business has been established, the transactions during the...