In re SPW Corp.
| Citation | 96 BR 676 |
| Decision Date | 05 January 1989 |
| Docket Number | Adv. No. 387-8000.,Bankruptcy No. 385-31198 RCM-11 |
| 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, and including D-FW Supply Company, Inc., Defendants. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas |
E. P. Keiffer, Dallas, Tex., for plaintiff.
Martin Lowy, Dallas, Tex., for defendant.
This is a preference action tried November 7, 1988, involving issues under § 547(c)(2), the ordinary course of business exception. The following constitutes the Court's findings of fact and conclusions of law under Bankruptcy Rule 7052. The parties stipulated to the following facts.
A. Stipulation of Fact
1. Sam P. Wallace Company, Inc. ("SPW Co.") was a merit subcontractor which performed the mechanical requirements on major commercial property developments. Such requirements generally included the plumbing, heating, ventilation and air conditioning.
2. D-FW Supply Company, Inc. ("D-FW Supply") was and is a supplier of pipes, fittings, and other materials used in the construction of fire control systems for commercial projects, and had supplied such materials to SPW Co. from before 1983 until and through April, 1985, and post-petition.
3. Invoice # 50285 from D-FW Supply is the only invoice at issue in this action. It reflects the following information:
4. By Check No. 46853, SPW Co. paid D-FW Supply the sum of $16,592.78 and designated that the payment was for invoice No. 50285. The check was dated 2/19/85. It was delivered and deposited by D-FW Supply on February 25, 1985. The total number of days from shipment to delivery and deposit was ninety days.
5. The parties' dealings between themselves encompassed invoices which were generally paid within 45 to 75 days from their date. The average number of days elapsed from invoice to payment was sixty days. These figures, as between the parties, are consistent with the standards in the industry as a whole.
6. D-FW Supply supplied material to the Debtors during the ninety day preference period on the same basis as it had before the ninety day period. None of the time frames from shipment to payment, which, in any way, fall into this ninety day time frame, are used to calculate the range or the average stated in No. 5 above.
7. The account between the parties was never reduced to zero. The account is an open account, however, all payments by SPW Co. designated which invoices were paid. D-FW Supply abided by and credited the account according to such designations. A balance remains due to D-FW Supply.
8. No unusual collection measures or pressures were applied by D-FW Supply to obtain payment of the invoice at issue in this action. No notices of intent to claim a lien or lien notices were filed by D-FW Supply to obtain payment of the invoice at issue in this action.
The parties further stipulated that SPW Co. has proven all the elements required to recover a preference under § 547(b). Debtor filed bankruptcy on May 6, 1985.
The parties submitted their case on affidavits and stipulated that the Court could treat the affidavits as live testimony, i.e., with determinations of credibility, etc.
Jerome James, president of D-FW Supply ("James"), prepared exhibits A and B to his affidavit.
Exhibit A to the James affidavit is a summary of all invoices from D-FW Supply paid by SPW Co. during the period from January, 1984, through and including January, 1985, immediately prior to the payments at issue in this action. Exhibit A reflects the shipping and invoicing dates as shown on D-FW Supply's file copies of the invoices, and the amounts paid and dates of deposit as shown on D-FW Supply's file copies of SPW Co.'s check stubs. Exhibit A includes a total of 327 invoices, on which total payments of $600,635.02 were made by SPW Co. The average number of days between the date of shipment and date of payment for all of the invoices shown on Exhibit A is 67.5 days.
Exhibit B to the James affidavit is a sub-summary of the invoices listed on Exhibit A which includes only those invoices paid seventy-five or more days after the date of shipment reflected on the invoices. Exhibit B includes 102 invoices on which SPW Co. paid a total of $124,388.28.
SPW sought to recover $16,592 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.Code Cong. & 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...
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