In re SPW Corp.
| Decision Date | 17 November 1988 |
| Docket Number | Adv. No. 387-8000.,Bankruptcy No. 385-31198 RCM-11 |
| Citation | 96 BR 683 |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
| Parties | In re SPW CORPORATION, Republic Contractors, Inc., Sharpe Mechanical, Inc., Wallace P & I Companies, Inc., Wallace Power & Industrial Co., Inc., Wallace Constructors, Inc., Sam P. Wallace Company, Inc., Brown-Olds Corporation, Sam P. Wallace Company of Louisiana, Inc., Elmwood Sheet Metal, Inc., Wallace International, Ltd., Sam P. Wallace Overseas Corporation, and Sam P. Wallace de Centro America, S.A., Debtors. ESTATE OF SPW CORPORATION (formerly Dale L. McCullough, Trustee, Plaintiff, v. A.P.V. EQUIPMENT, INC., et al., Defendants. |
E.P. Keiffer, Dallas, Tex., for plaintiff.
Britton B. Banowsky, Dallas, Tex., for defendant.
REVISED MEMORANDUM OPINION
This matter comes before the Court following the trial on an adversary action filed by the debtor in possession, SPW Corporation ("SPW") to recover a payment made to defendant, Carrier Corporation as preferential pursuant to 11 U.S.C. § 547. The following constitute the Court's findings of fact and conclusions of law as required by Bankruptcy Rule 7052. This Court has jurisdiction over the matter pursuant to 28 U.S.C. § 157(b)(2)(F) as a core matter.
The parties stipulated that the Court could pass on the credibility of the affidavits submitted into evidence. The parties made the following six stipulations regarding background facts.
1. National Mechanical ("NM") sold job # 6007, better known as Turtle Creek Center, to Republic Contractors, Inc. ("RCI"), on April 16, 1984. RCI assigned this project to Wallace Mechanical Corp. ("WMC") contemporaneously on the same day.
2. WMC, a subsidiary of SPW Corporation ("SPW"), is a subcontractor which performed the mechanical requirements on major commercial property developments. Such requirements generally include the plumbing, heating ventilation and air conditioning.
3. Carrier Corporation is a supplier of heating, ventilation and air conditioning equipment and has supplied such equipment to NM and WMC from 1982 through 1984. Attached as Exhibit A is a history of the transactions between Carrier and WMC from 1982 through 1984.
4. Invoice # 9002663 from Carrier Corporation to NM/WMC reflects the following information:
5. Carrier Corporation sent its notice of intent to lien, as a materialman under Texas law on January 22, 1988 and again on February 19, 1988.
6. SPW, by check #008632, paid Carrier Corporation the sum of $48,470. The check was dated February 27, 1985. It was deposited by Carrier Corporation on February 28, 1985 and was paid by WMC's bank on March 5, 1985. The total number of days from ship date to delivery of the check is 108 days, to payment 113 days. Debtor's bankruptcy petition was filed May 6, 1985.
SPW sought to recover $48,470 as a preferential transfer pursuant to 11 U.S.C. § 547. Since the parties stipulated that the elements of § 547(b) have been satisfied, the only remaining issue for the court to decide involves whether the transfer by SPW to Carrier falls within the "ordinary course of business" exception, contained in 11 U.S.C. § 547(c)(2)(A-C).
In order to satisfy this exception to recovery of a preferential transfer, a defendant bears the burden of proof to meet the three part test. See 11 U.S.C. § 547(g). First, a defendant must show the debt was incurred in the ordinary course of business. See 11 U.S.C. § 547(c)(2)(A). In this case the parties have stipulated that this condition has been met. Second, a defendant must prove the transfer was "made in the ordinary course of business or financial affairs of the debtor." See 11 U.S.C. § 547(c)(2)(B). Finally, the creditor must show that the payment was made "according to ordinary business terms". See 11 U.S.C. § 547(c)(2)(C).
In determining whether a transaction is made in the ordinary course of business and according to ordinary business terms, courts have generally taken two approaches. The court, in In Re Steel Improvement Co., 79 B.R. 681 (Bankr.E.D. Mich.1987), offers a good comparison of the two views.
Id. at 683-684. (Emphasis added). In other words, under the first approach, courts only look at the parties' prior dealings. In contrast, the second view requires that a court examine the industry standards in addition to the parties' prior dealings.
In determining which approach to apply, the Court notes that several Circuit courts have considered issues involving the ordinary course of business exception. See In re Continental Commodities, 841 F.2d 527 (4th Cir.1988); WJM, Inc. v. Massachusetts Dept. of Welfare, 840 F.2d 996 (1st Cir. 1988); Matter of Xonics Imaging, Inc., 837 F.2d 763 (7th Cir.1988); In re White River Corp., 799 F.2d 631 (10th Cir.1986); In re Craig Oil, 785 F.2d 1563 (11th Cir.1986). Although SPW argues that four Circuits have adopted the minority view, an examination of the cases reveals that the issue is not as clear cut as SPW contends. Only one of the decisions discusses and applies as a separate test "ordinary business terms" by finding that late payments are outside the meaning of this phrase. See Craig Oil, 785 F.2d at 1563. Only one of the decisions discuss the split of authority in the area. See Xonics, 837 F.2d at 766. However, even the Xonics court does not choose which path to follow because the parties stipulated that the transfer was according to ordinary business terms. In another case, the Tenth Circuit holds that subpart (C) is satisfied without discussing the conflicting interpretations of the phrase. In re White River, 799 F.2d at 631. In Continental Commodities, the Bankruptcy Court finds the "ordinary business term" condition is satisfied but the Seventh Circuit never discusses the issue. 841 F.2d at 527. Finally, the First Circuit holds that the ordinary course of business exception consists of "three distinct elements", however they find that the transfer in question is not "ordinary" under 547(c)(2)(B) thus never reaching the issue of ordinary business terms. WJM, 840 F.2d at 1010.
Turning to the language of the statute, the court finds the inclusion of subpart (C) into the Code significant. The legislative history provides little guidance. The purpose of the ordinary course of business exception 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." H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 373 (1977), reprinted in 5 U.S. Cong.Code & Admin. News 5787, 6329 (1978) (the "House Report"). The Eleventh Circuit has also delved into the purpose of the ordinary course of business exception.
... this exception is directed primarily to ordinary trade credit transactions. These typically involve some extension of credit but are meant to be paid in full within a single billing cycle. citations omitted. Because the credit extended is meant to be extremely short-term, Congress likened payment of trade credit to payment of current expenses. . . . Since the foundation of this provision is the similarity of trade credit and current expenses, the scope of its protection is necessarily limited to trade credit which is `kept current\' or other transactions which are paid in full within the initial billing cycle.
In re Craig Oil Co., 785 F.2d at 1567, citing among others, Barash v. Public Finance Corp., 658 F.2d 504, 511 (7th Cir. 1981), cf., In re Air One, Inc., 80 B.R. 145, 147-48 (Bankr.E.D.Mo.1987), In re Southern Commodity Corp., 78 B.R. 626, 628 (Bankr.S.D.Fla.1987). Also see, 2 Norton Bankruptcy Law & Practice, § 32.19 (1988) and In re Bourgeois, 58 B.R. 657 (Bankr.W.D.La.1986). In DeSimone, Section 547(c)(2) of the Bankruptcy Code: The Ordinary Course of Business Exception Without the 45 Day Rule, 20 Akron Law Review 95 (1986) ("DeSimone Article"), it is stated:
The main policy behind the ordinary course exception is to prevent preference laws from disturbing normal financial relations. This makes sense when one considers that the purpose of preference law is to discourage unusual action on the eve of bankruptcy that interferes with the bankruptcy distribution. Ordinary course transactions do not do this and, in fact, uphold the preference/bankruptcy policy of avoiding bankruptcy in the first place. If preference law applied to pre-bankruptcy ordinary course of business transactions, few creditors would extend credit to troubled debtors; and without credit, few troubled debtors could continue in business. Section 547(c)(2) encourages creditors to extend credit to financially troubled debtors. It strikes a balance between the need to discourage unusual action and the troubled debtor\'s need to receive credit in order to continue in business and, hopefully, turn his troubles around.
Other courts have found the...
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