In re Riscmanagement, Inc., Bankruptcy No. 00-16970-JNF.

• Decision Date: 05 February 2004
• Docket Number: Bankruptcy No. 00-16970-JNF.,Adversary No. 02-1390.,Bankruptcy No. 00-16969-JNF.
• Citation: 304 B.R. 566
• Parties: In re RISCMANAGEMENT, INC., Debtor. In re RISCsoft, Inc., Debtor, Harold B. Murphy, Chapter 7 Trustee, Plaintiff, v. Arrow Electronics, Inc. Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

304 B.R. 566

In re RISCMANAGEMENT, INC., Debtor.

In re RISCsoft, Inc., Debtor,

Harold B. Murphy, Chapter 7 Trustee, Plaintiff, v. Arrow Electronics, Inc. Defendant.

Bankruptcy No. 00-16970-JNF.

Bankruptcy No. 00-16969-JNF.

Adversary No. 02-1390.

United States Bankruptcy Court, D. Massachusetts.

February 5, 2004.

COPYRIGHT MATERIAL OMITTED

Andrew G. Lizotte, Esq., Hanify & King, P.C., Boston, MA, for plaintiff.

Jeffrey M. Galen, Esq., Warden, Gart & Galen, Encino, CA, for defendant.

MEMORANDUM

JOAN N. FEENEY, Chief Judge.

I. INTRODUCTION

The matter before the Court is the Motion for Summary Judgment filed by the Plaintiff, Harold B. Murphy, the Chapter 7 Trustee (the "Trustee" or the "Plaintiff") of the jointly administered estates of RISCmanagement, Inc. and its wholly owned subsidiary, RISCsoft, Inc. (collectively, "RISC"),¹ with respect to his Complaint to recover in excess of $575,000 in payments made to the Defendant, Arrow Electronics, Inc. ("Arrow"), on the ground that the payments are avoidable under 11 U.S.C. §§ 547(b) and 549(a)(1)(B). The Trustee also seeks summary judgment with respect to the defenses raised by Arrow under 11 U.S.C. § 547(c). Arrow, a distributor of electrical components, filed an Opposition to the Motion for Summary Judgment. The Trustee filed a Statement of Undisputed Material Facts and a Memorandum. Arrow also filed a Statement of Undisputed Material Facts in which it purportedly disputed some of the facts set forth in the Trustee's statement of facts, as well as a Memorandum. Both parties filed supplemental briefs following the hearing on the Trustee's Motion.

The issues presented are whether certain payments made by RISC to Arrow are recoverable as voidable preferential transfers and whether a postpetition transfer is voidable as having been unauthorized by the provisions of the Bankruptcy Code or this Court. Resolution of the issues depends, in part, on whether two escrow agreements executed by the parties during the preference period shield payments made by RISC to Arrow from RISC's general operating account as a result of a mistake made by RISC's customer, Genetics Institute, which sent its payments directly to RISC instead of to the address set forth in the escrow agreements.

II. FACTS

RISCmanagement, Inc. and RISCsoft, Inc. filed voluntary Chapter 11 petitions on October 19, 2000. Less than one year later, on August 8, 2001, the Court converted the cases from Chapter 11 to Chapter 7, and Harold B. Murphy was appointed interim trustee in both cases.

Within the 90 day preference period, which commenced on July 21, 2000, RISC made the following payments to Arrow:

                -------------------------------------------------------------------------------------
                                                                 CHECK       CHECK       INVOICE TO
                                                                 ISSUANCE    HONOR       PAYMENT
                CHECK NO.     INVOICE DATES       CHECK AMT.     DATE        DATE        AGING DAYS
                -------------------------------------------------------------------------------------
                22021         4/18/00-5/4/00      $ 15,000.00    7/24/00     7/25/002    82-98
                -------------------------------------------------------------------------------------
                20685         5/4/00-5/10/00      $ 20,000.00    7/31/00     8/3/00      85-91
                -------------------------------------------------------------------------------------
                20172         5/10/00             $ 10,000.00    8/7/00      8/9/00      91
                -------------------------------------------------------------------------------------
                22123         5/10/00-5/11/00     $ 10,000.00    8/21/00     8/23/00     104-105
                -------------------------------------------------------------------------------------
                22328         5/11/00-5/12/00     $ 20,000.00    9/19/00     9/21/00     132-133
                -------------------------------------------------------------------------------------
                22403         8/7/00-8/22/00      $286,741.98    9/21/00     9/28/003    37-52
                -------------------------------------------------------------------------------------
                16            8/7/00              $141,518.71    10/12/00    10/17/00    71
                -------------------------------------------------------------------------------------
                

The first five payments were term payments. The last two payments, as well as a postpetition payment in the amount of $73,147.65, which cleared RISC's financial institution on October 23, 2000, were related to two escrow agreements between RISC and Arrow dated July 21, 2000 and August 14, 2000 respectively.

The escrow agreement dated July 21, 2000 provided the following:

This letter will confirm our agreement with respect to the payment of invoices issued by Gates/Arrow Distributing, Inc. ("Gates") through the placement of funds in escrow in accordance with the terms and conditions set forth herein.

This agreement is made in order to induce Gates to accept your purchase order or purchase orders and to deliver the products described therein to you so that you may, in turn, deliver products or services to your customer GENETICS INSTITUTE ("Customer"). Gates is not a party to your agreement with Customer (which agreement, being more particularly described on Exhibit A, is hereinafter referred to as the "Customer Agreement") and will not be obligated to perform under the Customer Agreement or otherwise incur any liability with respect to the Customer Agreement, unless such agreement is expressly incorporated into Gates's agreement with you.

All Gates invoices shall be due and payable to accordance with the terms set forth therein. Gates reserves the right to charge interest at a rate of 1.5% per month for all payments received beyond 30 days from the date of invoice.

All sums payable to you pursuant to the Customer Agreement shall be delivered directly to the Treasury Department of Arrow Electronics, Inc., at the following address, which shall serve as escrow agent for the transactions contemplated by this agreement (the "Escrow Agent").

P.O. Box 13410

Newark, NJ 07188-0410

By your signature below, you represent and warrant that the Customer Agreement states that Customer will deliver all such payments directly to the address set forth above. Any check or other payment instrument delivered to the Escrow Agent may be negotiated by the Escrow Agent who will hold the proceeds in an escrow account for the benefit of you and Gates (the "Escrow Fund"). The Escrow Fund may be withdrawn from escrow by written notification to the Escrow Agent signed by both you and Gates in accordance with the terms of the Agreement.

Upon Gates's delivery of the products specified in your purchase order and issuance of an invoice for such products, you agree to execute and deliver to the Escrow Agent written instructions, in the form attached hereto as Exhibit B, to pay to Gates from the Escrow Fund the amount specified on Gates's invoice.

You hereby further agree to pay the Escrow Agent the fees for its services as set forth in Exhibit B. These fees may be withheld by the Escrow Agent from the Escrow Fund prior to disbursement of funds as set forth herein.

The remainder of the Escrow Fund, after payment of Gates's invoice and the Escrow Agent's fees shall be delivered to you....

(emphasis supplied). Exhibit A to the Escrow Agreement contained a list of RISC purchase order numbers and corresponding numbers for Genetics Institute's purchase orders. Exhibit B to the Escrow Agreement provided the following:

Arrow Electronics, Inc.

25 Hub Drive

Melville, N.Y. 11747

Attn: Treasury Department

Re: Escrow Agreement between Gates/ Arrow Distributing, Inc. ("Gates") and RISCMANAGEMENT, INC ("Reseller") for Payments to be made by GENETICS INSTITUTE OR WYETH-AYERST PHARMACEUTICALS, INC.

Dear Ms. Leasure

Please be advised that the proceeds in the amount of $631,962.20 received from Customer under purchase order 013495-013493 are to be disbursed as follows:

                Total Received          $631962.20
                Reseller's proceeds     $192799.28
                Gates's proceeds        $438962.92
                Escrow Agent's Fee      $   200.00
                

($200.00 for a single disbursement of funds or $700.00 for up to 15 disbursements of funds over a period of up to 12 months)

Proceeds are to be paid to:

Gates/Arrow Distributing, Inc. and RISCMANAGEMENT, INC....

The August 14, 2000 Escrow Agreement contained identical language. Exhibit A contained a copy of Genetics Institutes' purchase order in the amount of $70,718.00. Exhibit B, however, was not attached.

The Trustee and Arrow submitted the deposition testimony of Dorothy A. Sullivan, the credit manager for Arrow's North American Computer Products division ("NACP") and Mark S. Barron, the Vice President of RISCmanagement to support their respective positions. Ms. Sullivan testified that prior to being promoted to her present position, she was the credit manager for Moca [sic], a unit of Arrow's NACP division. According to Ms. Sullivan, Arrow did business with RISC in two ways: through term transactions and through escrow transactions. She stated that Arrow would sell either hardware or service contracts to RISC on terms, i.e., net thirty days, or through escrow agreements.

With respect to the payments made by RISC, except for the payments relating to the escrow accounts, Ms. Sullivan admitted that RISC made payments to Arrow to satisfy past due invoices and that the transfers of RISC's property were for or on account of antecedent debts owed by RISC to Arrow before the transfers were made. Deposition Transcript at 11.

Ms. Sullivan also testified about the "days sales outstanding" for the unit of the NACP division which made sales to RISC, identified as "SBM."⁴ She stated that "[c]urrently they are running in the 50s to low 60s .. [but]... [i]t changes drastically from month to month." Id. at 18. She admitted, however, that the average number of days between the invoice date and the payment date was in the 50s to low 60s. When queried about what constituted an "ordinary...