In re Sibilrud, Bankruptcy No. 02-32667.

• Decision Date: 19 April 2004
• Docket Number: Bankruptcy No. 02-32667.,Adversary No. 03-3227.
• Citation: 308 B.R. 388
• Parties: In re Robert K. SIBILRUD, Judy J. Sibilrud, Debtors. Randall L. Seaver, Trustee, Plaintiff, v. Allstate Sales & Leasing Corp., Defendant.
• Court: U.S. District Court — District of Minnesota

308 B.R. 388

In re Robert K. SIBILRUD, Judy J. Sibilrud, Debtors Randall L. Seaver, Trustee, Plaintiff, v. Allstate Sales & Leasing Corp., Defendant.

Bankruptcy No. 02-32667.

Adversary No. 03-3227.

United States District Court, D. Minnesota.

April 19, 2004.

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William L. Bodensteiner, Austin, MN, Stephen R. Erickson, Albert Lea, MN, for Debtors.

Thomas Egan, Apple Valley, MN, for Allstate.

Andrea Hauser, Burnsville, MN, for trustee.

ORDER FOR JUDGMENT

DENNIS D. O'BRIEN, Bankruptcy Judge.

This matter came before the Court for trial on the plaintiff Chapter 7 Trustee's complaint under 11 U.S.C. § 547(b) seeking to avoid the debtor's transfers of $2,000 to the defendant Allstate Sales & Leasing Corporation (Allstate). Andrea Hauser appeared on behalf of the Trustee, and Thomas Egan appeared on behalf of Allstate. At the conclusion of the trial, the Court took the matter under advisement.

Based on all the files, records and proceedings herein, the Court, now being fully advised in the premises, makes the following Order pursuant to the Federal and Local Rules of Bankruptcy Procedure. For the reasons fully set forth below, the Court rules in favor of the Trustee and orders judgment against Allstate.

I. FACTUAL BACKGROUND

Allstate is a franchise dealer for Peterbilt heavy duty and GMC (class 6) trucks, and provides parts and repairs for its buyers, mostly owner-operators and small fleet owners (owners of 1-5 trucks). The debtor Robert K. Sibilrud (Sibilrud), at and prior to the time of filing, managed the family farm and was also employed as an owner-operator truck driver. On or about July 25, 2000, Sibilrud was approved by Allstate for an open account which granted Sibilrud a line of unsecured credit for the maintenance and service by Allstate of the trucks he was using in his small trucking operation. The ordinary payment terms required payment for parts and services to be made on or before the tenth day of the month following the invoice date.

Until approximately June, 2001, Sibilrud was on-time in making payments for Allstate services on his trucks. Thereafter, he began to fall behind. By November, 2001, Sibilrud had an account balance of $23,860.19. For one truck, Allstate provided repairs and billed Sibilrud on September 25, 2001, in the amount of $2,098.04, and on October 31, 2001, in the amount of $11,347.30. At some point shortly thereafter, Allstate provided ongoing services on Sibilrud's trucks on a cash-on-delivery (COD) payment basis only.

In order to secure payment on Sibilrud's mounting balance, Allstate withheld his 1997 Peterbilt truck from Sibilrud based on the $2,098 and $11,347 invoices for services on that truck. On December 20, 2001, Allstate filed a lawsuit against Sibilrud in state court in Dakota County, Minnesota, to recover the debt. On January 8, 2002, Allstate gave notice of a mechanic's lien foreclosure sale against Sibilrud's truck to recover its lien of $15,695.34. On January 15, 2002, Allstate served Sibilrud with a 10-day garnishment notice. On January 25, 2002, Allstate obtained a judgment against Sibilrud for $24,458.29, and obtained a writ of execution. On January 30, 2002, Allstate served its notice of levy to collect the judgment.

Security State Bank of Mankato, however, also had an interest in Sibilrud's truck. To preserve its interest, the Bank issued a payment to Allstate and Sibilrud in the amount of $13,500 on January 31, 2002, in satisfaction and release of Allstate's mechanic's lien against the truck. The attendant reduction in the amount due on the Judgment, and the release of the truck back to Sibilrud, prompted Allstate to cancel the lien foreclosure sale. Allstate applied the $13,500 to Sibilrud's outstanding balance, specifically to invoices from June, September and October, 2001.

On February 1, 2002, Allstate proceeded to record its judgment against Sibilrud in the county of his residence, Freeborn County. On the same day, at the suggestion of Richard Brown of W.D. Larson Companies,¹ Sibilrud executed a promissory note in the amount of $11,150 payable to Allstate in $1,000 monthly payments to start on February 20, 2002. On February 26, 2002, Sibilrud made a $1,000 payment to Allstate pursuant to the note. Allstate applied it against the note and equally against three outstanding invoices from June, 2001.² In March and April, 2002, Sibilrud obtained services from Allstate and paid for those services COD. However, he made no payments on the note.

On April 30, 2002, Allstate resumed aggressive collection efforts by filing for an order for disclosure from the Dakota County District Court. On May 8, 2002, Allstate served a notice of levy on Sibilrud's employer, Waymore Transportation, and obtained the order for disclosure on May 14, 2002. In order to prevent garnishment of his wages, Sibilrud made three payments on the note, each in the amount of $1,000, on May 31, 2002, June 21, 2002, and July 12, 2002. All three payments were applied by Allstate against the note and equally against various outstanding invoices from June, 2001. On July 26, 2002, Sibilrud and his wife filed a voluntary bankruptcy petition under Chapter 7.

II. DISCUSSION

On July 31, 2003, the Trustee brought this adversary proceeding under 11 U.S.C. § 547(b) to recover the $1,000 payments made by Sibilrud to Allstate on June 21 and July 12, 2002. Section 547(b) provides:

Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

See 11 U.S.C. § 547(b).

There is no dispute that Sibilrud's June and July 2002 payments to Allstate constitute preferential transfers under § 547(b). Allstate concedes that the record demonstrates each § 547(b) element with respect to those payments, but in defense raises the § 547(c)(2) exception. The payments, Allstate claims, were made in the ordinary course:

(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.

See 11 U.S.C. § 547(c)(2).

The burden is on the creditor claiming the § 547(c)(2) exception to show all three statutory elements by a preponderance of the evidence. See Harrah's Tunica Corp. v. Meeks (In re Armstrong), 291 F.3d 517, 526-527 (8th Cir.2002), citing Official Plan Comm. v. Expeditors Int'l of Washington, Inc. (In re Gateway Pac. Corp.), 153 F.3d 915, 917 (8th Cir.1998). Failure under any one of the three elements dooms the entire exception. See Central Hardware Co., Inc. v. Sherwin-Williams Co. (In re Spirit Holding Co., Inc.), 153 F.3d 902, 904 (8th Cir.1998).

"[T]he policies underlying the ordinary business exception are two-fold: (1) to encourage creditors to continue dealing with troubled debtors, and (2) to promote equality of distribution." Armstrong, 291 F.3d at 527, citing Union Bank v. Wolas (In re ZZZZ Best Co.), 502 U.S. 151, 161, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991). The legislative history of § 547(c)(2) indicates that the purpose of this section is "to leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor's slide into bankruptcy." Spirit Holding, 153 F.3d at 904, citing S.Rep. No. 95-989 at 88 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5874; H.R.Rep. No. 95-595 at 373 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6329.

The Court "must construe this exception narrowly, because it places one creditor on better footing than all the other creditors." Armstrong, 291 F.3d at 527, citing Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1339 (10th Cir.1996).

Debt Incurred in the Ordinary Course of Business

"The Bankruptcy Code defines `debt' as a `liability on a claim.'" Armstrong, 291 F.3d at 522, citing Laws v United Mo. Bank of Kansas City, N.A., 98 F.3d 1047, 1049 (8th Cir.1996) (citing 11 U.S.C. § 101(12)). "A debt is `antecedent' if it was incurred before the allegedly preferential transfer." Armstrong, 291 F.3d at 522, citing Jones Truck Lines, Inc. v. Cent. States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323, 329 (8th Cir.1997). "A debt is incurred `on the date upon which the debtor first becomes legally bound to pay.'" Id. (quoting In re Iowa Premium Serv., Co., 695 F.2d 1109, 1111 (8th Cir.1982) (en banc)).

The Trustee contends that the two payments in question were not to pay a debt incurred in the ordinary course of business between Sibilrud and Allstate, and that Allstate's defense fails under § 547(c)(2)(A). The Trustee claims that the payments were made on a promissory note executed in settlement of legal proceedings against Sibilrud, and as such not related to the formerly ordinary business relationship of truck driver and repairs provider between Sibilrud and Allstate.

Indeed, in addressing the fact that the automatic monthly statements on...