In re National Lumber and Supply, Inc.
| Decision Date | 30 June 1995 |
| Docket Number | BAP No. CC-93-1792-MeVO. Bankruptcy No. SA 90-02231 JB. Adv. No. SA 92-1717 JB. |
| Citation | 184 BR 74 |
| Parties | In re NATIONAL LUMBER AND SUPPLY, INC., Debtor. Richard A. MARSHACK, Chapter 7 Trustee, Appellant, v. ORANGE COMMERCIAL CREDIT, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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Michael G. Spector, Santa Ana, CA, for appellant.
Annie Verdries, Costa Mesa, CA, for appellee.
Before MEYERS, VOLINN and OLLASON, Bankruptcy Judges.
I
The Chapter 7 trustee appeals from a summary judgment in a preference action.
We REVERSE.
II
National Lumber & Supply, Inc. ("Debtor") was in the retail hardware and home improvement business. The Installers installed garage doors for National Lumber's customers. Orange Commercial Credit ("Orange") was in the business of purchasing or factoring accounts receivable. The Installers factored or assigned to Orange the receivables owing from the Debtor.
On April 3, 1990, the Debtor filed a petition under Chapter 11 of the United States Bankruptcy Code ("Code"). Within 90 days prior to the filing, the Debtor gave Orange 11 checks totalling $33,533. During this time period the Debtor also received services from The Installers with a total value of $21,935.
The case was converted to one under Chapter 7 on August 28, 1990 and Richard Marshack ("Trustee") was appointed Chapter 7 trustee. On August 21, 1992, the Trustee commenced an action against Orange under Section 547 of the Code.
Orange filed its answer on October 15, 1992. The answer did not specifically plead the ordinary course of business exception under Code Section 547(c)(2) or the new value exception under Section 547(c)(4). However, the following affirmative defense was pleaded: "As and for the fourth, separate and affirmative defense, this Answering Defendant alleges that the transfers of property referred to in Plaintiff's Complaint, if any, were authorized by the applicable Bankruptcy Code section."
The Trustee then posed the following interrogatory: "State each and every fact which tends to support your affirmative defense that the transfers of property referred to in the Trustee's Complaint were authorized by the applicable Bankruptcy Code section." In its response to the interrogatory, Orange objected on the basis that the interrogatory called for a legal conclusion.
The discovery cutoff date was April 2, 1993.
On May 27, 1993, the Trustee filed a motion for summary judgment or for summary adjudication of issues. In Orange's opposition, filed and served on June 7, 1993, for the first time it raised specific defenses under Code Section 547(c)(2) and (4). The Trustee, in its reply, asserted that the defenses should be deemed waived, and that in any event Orange had not produced evidence of the Section 547(c)(2) defense.
After a hearing, the bankruptcy court held that Orange had not waived its defenses. The court determined that transfers made within 45 days of invoicing were within the ordinary course of business and therefore excepted from avoidance under Section 547(c)(2), leaving $3,981 in liability. The court also concluded that Orange gave new value in the amount of $1,939 pursuant to Section 547(c)(4), the other subsequent advances of $17,493 having been repaid by unavoidable transfers. Judgment was entered in favor of the Trustee for $2,042 ($3,981 - $1,939), plus interest and $120 in costs.
The Trustee appealed.
III
A grant of summary judgment is reviewed de novo. In re Food Catering & Housing, Inc., 971 F.2d 396, 397 (9th Cir. 1992); In re Pioneer Technology, Inc., 107 B.R. 698, 700 (9th Cir. BAP 1988).
The bankruptcy court's decision on whether an affirmative defense is waived if not pleaded in the answer is reviewed for abuse of discretion. See In re Santos, 112 B.R. 1001, 1008 (9th Cir. BAP 1990).
IV
The Trustee asserts that Code Section 547(c)(2) and (c)(4), the ordinary course of business exception and the new value exception, are affirmative defenses which were waived when Orange did not plead them in its answer.
Affirmative defenses plead matters extraneous to the plaintiff's prima facie case, which deny the plaintiff's right to recover even if the allegations of the complaint are true. In re Rawson Food Service, Inc., 846 F.2d 1343, 1349 (11th Cir.1988); Federal Deposit Ins. Corp. v. Main Hurdman, 655 F.Supp. 259, 262 (E.D.Cal.1987). In a preference action under Code Section 547, the trustee may avoid a transfer of the debtor's interest in property when the transfer is: (1) to or for the benefit of a creditor; (2) on account of an antecedent debt; (3) made while the debtor was insolvent; (4) made within 90 days of the petition; and (5) one enabling the creditor to receive more than it would have had the transfer not been made and the case liquidated under Chapter 7 of the Code. Pioneer Technology, supra, 107 B.R. at 700. The ordinary course of business exception and the new value exception do not negate any of these elements; rather, they are matters extraneous to the prima facie case.1 "An avoidance that meets the conditions of section 547(b) can still be barred by section 547(c), which provides exceptions to the trustee's avoiding power." In re Wolf & Vine, 825 F.2d 197, 199 (9th Cir.1987). Therefore, the Section 547(c) defenses should be deemed affirmative defenses.
Several courts have agreed. The court in In re Fisher, 100 B.R. 351, 355 (S.Ohio 1989), amended 101 B.R. 507 (S.Ohio 1989), held that the ordinary course of business exception is an affirmative defense which must be pleaded. The court explained that Section 547(c) is never called in issue unless a preference is found to exist. Thus to suggest that the defenses contained in Section 547(c) are mere exceptions, as opposed to affirmative defenses, is an argument premised more on semantics than substance. 100 B.R. at 356. Similarly, in In re Ajayem Lumber Corp., 143 B.R. 347, 353 (S.D.N.Y.1992), the court refused to consider Section 547(c)(4) as a defense to the preference action because it had not been pleaded as an affirmative defense.
Without citing any authority, Orange maintains that the preference exceptions should not be considered affirmative defenses because they involve subsections of the same section of the statute giving the Trustee the right to recover. The cases we found on this issue hold otherwise. In First National Bank of Lincolnwood v. Keller, 318 F.Supp. 339 (N.D.Ill.1970), the defendant was a former bank president and director accused of allowing loans in excess of the bank's lending limit, in violation of the National Banking Act, 12 U.S.C. § 84. At trial, the defendant sought to assert 12 U.S.C. § 84(c)(6), an exception to that statute. The court determined that the exception was an avoidance or affirmative defense which the defendant had waived by failing to plead in his answer. 318 F.Supp. at 345. As stated in Rachbach v. Cogswell, 547 F.2d 502 (10th Cir.1976): "A claim of exemption from the operation of a remedial statute is an affirmative defense which must be specifically pleaded." 547 F.2d at 505.
Orange argues that its affirmative defense that any transfers "were authorized by the applicable Bankruptcy Code section" encompassed the Section 547(c)(2) and (c)(4) arguments. Allowing such broad pleading would eviscerate Fed.R.Civ.P. 8(c), which requires that "in pleading to a preceding pleading, a party shall set forth affirmatively . . . any . . . matter constituting an avoidance or affirmative defense."2 The court in Tancredi v. Dive Makai Charters, 823 F.Supp. 778, 785 (D.Haw.1993), rejected a similar argument. In that case, the defendants had included in their answer a catch-all statement that they intended to rely upon any matter constituting an avoidance or affirmative defense pursuant to Rule 8(c). The court stated that although absolute specificity in pleading is not required, fair notice of an affirmative defense is required. 823 F.Supp. at 785-86. See also U.S. v. Continental Illinois Nat. Bank and Trust, 889 F.2d 1248, 1255 (2nd Cir.1989) () The Tancredi court held that because the defendants' general statement was insufficient to provide such notice or prevent unfair surprise to the opposing party, the defense would be disallowed. 823 F.Supp. at 786. Especially in light of the fact that Orange refused to answer the Trustee's interrogatory concerning the bases for its affirmative defenses, the catch-all provision in Orange's answer should not be deemed to have raised the Section 547(c)(2) and (c)(4) defenses.
Our holding that Orange did not raise the affirmative defenses in its answer does not necessarily mean that Orange was precluded from asserting the defenses in subsequent pleadings. Although an affirmative defense not raised in the answer or responsive pleading is generally waived, such a determination is left to the trial court. Santos, supra, 112 B.R. at 1008. Here the affirmative defenses were not raised in the answer, but the bankruptcy court nevertheless allowed Orange to assert the defenses in its opposition to the summary judgment motion.
In the absence of a showing of prejudice, an affirmative defense may be raised for the first time at summary judgment. Camarillo v. McCarthy, 998 F.2d 638, 639 (9th Cir.1993); Rivera v. Anaya, 726 F.2d 564, 566 (9th Cir.1984). The Trustee argues that it was prejudiced by the inadequate pleading because the discovery cutoff date elapsed over two months before the defenses were first raised in response to the summary judgment motion. Yet the Trustee never asked the court for an extension of the discovery cutoff date or a continuance to review the defenses asserted. The Trustee had the...
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