In re Speco Corp., Bankruptcy No. 95-34619
| Decision Date | 17 February 1998 |
| Docket Number | Adversary No. 97-3076.,Bankruptcy No. 95-34619 |
| Citation | 218 BR 390 |
| Parties | In re SPECO CORPORATION, Debtor and Debtor in Possession. SPECO CORPORATION, Plaintiff, v. CANTON DROP FORGE, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
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Robert B. Berner, Arter & Hadden, Dayton, OH, Special Counsel for Plaintiff/Debtor.
Christopher J. Freeman, Fred H. Zollinger, Jr. & Co., Canton, OH, for Defendant Canton Drop Forge, Inc.
DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
This court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334, and the standing order of reference entered in this district. Proceedings to determine, avoid, or recover preferences are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(F). This Decision and Order constitutes the court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052(c).
This matter is before the court on Defendant Canton Drop Forge, Inc.'s Motion for Summary Judgment Adv. Doc. # 9-1 and Supplement to Motion Adv. Doc. # 13-1, Plaintiff/Debtor Speco Corporation's Memorandum in Opposition Adv. Doc. # 19-1, and Defendant's Reply Memorandum Adv. Doc. # 20-1. In considering this matter, the court has also reviewed Plaintiff/Debtor's Complaint to Avoid Preference and for Other Relief Adv. Doc. # 1-1, Defendant's Answer Adv. Doc. # 3-1, and the Preliminary Pretrial Statements of Plaintiff/Debtor Adv. Doc. # 6-1 and Defendant Adv. Doc. # 7-1.
Having considered the evidence and arguments presented by the parties in their pleadings and having conducted an independent examination of the legal issues in question, the court is prepared to render its decision in this matter.
The question before the court is whether five prepetition transactions between Plaintiff/Debtor and Defendant may be avoided as preferential transfers or whether the transactions were made in "the ordinary course of business." In order to make such a determination, it is necessary to examine both the nature of these transactions and that of the parties' previous transactions, as is shown by the evidence before the court.
Speco Corporation, the plaintiff in this adversary proceeding and the debtor in the bankruptcy case at bar ("Plaintiff/Debtor"), is a Delaware corporation with its principal place of business in Springfield, Ohio. On December 22, 1995, Plaintiff/Debtor petitioned for voluntary bankruptcy relief under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 101, et seq. (1994). Canton Drop Forge, Inc., the defendant in this matter ("Defendant"), is an Ohio corporation with its principal place of business in Stark County, Ohio. Defendant produces drop forged material made to customer specifications for customers in various industries.
In late 1991, Plaintiff/Debtor placed its first order with Defendant, and from there on continued to place orders with Defendant on a fairly regular basis. By its customary practice, Defendant would produce and ship each order shortly after the respective order was placed. After shipping each order, Defendant would issue an invoice to Plaintiff/Debtor setting forth the price that was agreed upon by the parties. The terms of the sale were "1/2 % 10, Net 30." This meant that if Plaintiff/Debtor paid for the shipment within 10 days after receiving the invoice, Plaintiff/Debtor would receive a one-half percent discount on the total invoice price. Otherwise, payment in full was due within 30 days after receiving the invoice.
Over the four-year period in which the parties conducted business, Plaintiff/Debtor and Defendant conducted 21 separate transactions in this manner, not including the five transactions at issue here. During this course of dealing, Plaintiff/Debtor never paid for the shipments within the requisite 30 days, instead paying on average 61 days past the invoice date, or an average of 31 days beyond the 30-day net payment requirement. During that time, the latest Plaintiff/Debtor ever made a payment was 79 days after invoice, or 49 days beyond the 30-day net payment requirement, and the earliest Plaintiff/Debtor ever made a payment was one payment made 49 days after invoice, or 19 days beyond the 30-day net payment requirement.
In addition to these 21 prepetition transactions, five additional transactions occurred within the 90-day preference period, as defined in 11 U.S.C. § 547(b)(4)(A). These transactions are summarized as follows:
Invoice Invoice Invoice Date Days Past Days
No. Date Amount Paid Invoice Late
98551 8/17/95 $ 5,820.00 11/8/95 83 53
98794 9/29/95 $11,696.00 12/14/97 81 51
98965 10/31/95 $36,654.00 12/19/95 49 19
98966 10/31/95 $ 3,920.00 12/19/95 49 19
98967 10/31/95 $ 4,480.00 12/19/95 49 19
See Affidavit of William D. Price, at ¶ 11 ().
These five transactions were paid an average of 62 days after invoice, or 32 days beyond the 30-day net payment requirement. As Defendant asserts, this is very similar to Plaintiff/Debtor's previous average payment of 61 days after invoice, or 31 days beyond the 30-day net payment requirement. In response, Plaintiff/Debtor alleges that such an averaging is deceptive, as of the five transactions in questions, the first two were made later than Plaintiff/Debtor's previous maximum days late, 79 days after invoice, or 49 days beyond the 30-day net payment requirement, and the remaining three were equal to Plaintiff/Debtor's previous minimum lateness, 49 days after invoice, or 19 days beyond the 30-day net payment requirement, which had occurred previously on only one other occasion.
In addition to the examination of the dates in question, the parties also scrutinize the method in which the payments were made. It was apparently Defendant's normal procedure to accept payments through a lock box at a local bank, not to accept payment directly from customers. William D. Price, Defendant's Chief Financial Officer, stated in his deposition that hand-delivered checks were not in his definition the ordinary course of business for Defendant. See Deposition of William D. Price, Nov. 12, 1997, at pp. 26-27 ().
Despite this mode of payment history, Plaintiff/Debtor offers evidence that the three payments made on October 31, 1995, just three weeks before Plaintiff/Debtor petitioned for relief in bankruptcy, were hand-delivered by Plaintiff/Defendant. Amongst the evidence presented by Plaintiff/Debtor is the affidavit by its Chief Financial Officer Philip Gassin that Speco had implemented an intentional preference plan prior to the filing of its bankruptcy petition. See Affidavit of Philip Gassin, Nov. 24, 1997, at ¶¶ 5-10 (). Mr. Gassin states that the payments to Defendant were made as part of this plan. Id. at ¶¶ 7-10. Plaintiff/Debtor also submitted the affidavit of its former Purchasing Manager Mike Brugler, who states that in accordance with Plaintiff/Debtor's plan, Mr. Brugler hand delivered three checks to Defendant on December 14, 1995. See Affidavit of Mike Brugler, Nov. 24, 1997, at ¶ 8 (). Mr. Brugler also stated that at the time he hand delivered the checks, he met with Mr. James Culp, an employee of Defendant, and informed him of Plaintiff/Debtor's financial conditions and plans. Id. The checks were recorded as received by Defendant on December 19, 1995. A copy of Mr. Brugler's Expense Report Form for the trip in question is also submitted in support of this assertion. See Exhibit 4 to Plaintiff/Debtor's Memorandum in Opposition Adv. Doc. # 19-1.
This evidence is contradicted by the deposition of James Culp, who on the dates in question was a sales engineer for Defendant who dealt with Plaintiff/Debtor. See Affidavit of James F. Culp, Nov. 24, 1997, at pp. 4, 10 (). Mr. Culp testified that Mr. Brugler never visited the Defendant in December of 1995. Id. at p. 12. In addition, Mr. Culp testified that he did not receive any hand-delivered checks from Mr. Brugler or any other of Plaintiff/Debtor's employees, and did not inform Mr. Culp of the Plaintiff/Debtor's financial condition or plans. Id. at pp. 12-19.
The Motion before the court is for summary judgment on the issue of voidable preferences and the ordinary course of business exception. The appropriate standard to be used by a trial court when considering a summary judgment motion is contained in Federal Rule of Civil Procedure 56(c), incorporated in bankruptcy by reference in Federal Rule of Bankruptcy Procedure 7056. Rule 56(c) states in part that a court must grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no issue as to any material fact and that the moving party is entitled to judgment as a matter of law." The initial standard under Rule 56 was addressed by the United States Supreme Court in Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), where the Court stated that:
In our view, the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to...
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