In re Tennessee Chemical Co.
| Decision Date | 05 October 1993 |
| Docket Number | Adv. No. 90-1087.,Bankruptcy No. 1-89-01106 |
| Citation | 159 BR 501 |
| Parties | In re TENNESSEE CHEMICAL COMPANY, Debtor. Scott N. BROWN, Jr., Trustee in Bankruptcy, Plaintiff, v. SHELL CANADA, LTD., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
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David B. Kesler & Scott N. Brown, Jr., Brown, Dobson, Burnette & Kesler, Chattanooga, TN, for plaintiff.
Richard B. Gossett & Mark D. Hackett, Heiskell, Donelson, Bearman, Adams, Williams & Kirsch, Chattanooga, TN, for defendant.
The plaintiff is the bankruptcy trustee in the case of Tennessee Chemical Company. Before its bankruptcy, Tennessee Chemical paid Shell Canada for supplies and services. The trustee alleges that the payments were preferential transfers under Bankruptcy Code § 547(b). 11 U.S.C.A. § 547(b) (West 1993).
Shell Canada argues that the payments are protected by two of the preference exceptions found in § 547(c) — the exception for transfers in the ordinary course of business and the new value exception. 11 U.S.C.A. § 547(c)(2) & (c)(4) (West 1993). This memorandum is the court's findings of fact and conclusions of law. FED.R.BANKR. PROC. 7052.
Tennessee Chemical began buying molten sulfur from Shell Canada in 1986. In 1987 Shell Canada and Tennessee Chemical signed a contract for sulfur sales and purchases. The contract provided for delivery to Tennessee Chemical at Shell Canada's place of business by loading the sulfur in tank cars provided by Tennessee Chemical. The risk of loss passed to Tennessee Chemical at that time.
The sulfur contract required Tennessee Chemical to pay for sulfur within 30 days after the date of the invoice. The contract allowed Shell Canada to charge interest on overdue amounts.
Kathleen Downey was Shell Canada's administrator of sulfur contracts. She testified that Shell Canada did not make an invoice for each shipment or for all shipments in one day. It normally issued two invoices for each month — the first invoice for all shipments from the first to the fifteenth and the second invoice for all shipments from the sixteenth through the end of the month. The invoice for the second half of a month was received by Tennessee Chemical the next month.
However, in the three months before Tennessee Chemical's bankruptcy Shell Canada billed more frequently. It had been sending two or three invoices per month, but it began creating more invoices. An invoice might cover only two or three days of sulfur shipments. Ms. Downey said that Tennessee Chemical requested the quicker billing so that it would have a better idea of its financial position.
The molten sulfur was shipped from western Canada to Chicago, Illinois on the Canadian Pacific and the Soo Line railroads. Shell Canada had a contract with Canadian Pacific that gave it cheap shipping rates in Canada. Tennessee Chemical had a contract with CSX that gave it cheap shipping rates in this country. In January 1988, Tennessee Chemical and Shell Canada entered into a contract that allowed each one to ship goods under the other's railroad contract. Shell Canada didn't have this kind of agreement with any other sulfur customer.
Shell Canada paid Canadian Pacific and billed Tennessee Chemical for shipping that Tennessee Chemical did under Shell Canada's contract. Shell Canada's bills to Tennessee Chemical for shipping charges were debit notes instead of invoices.
For Shell Canada's own sulfur shipments, it figured the freight charges and billed Tennessee Chemical before receiving a bill from Canadian Pacific. Tennessee Chemical could also use Shell Canada's contract for non-Shell freight — products that Tennessee Chemical bought from other suppliers in Canada. For non-Shell freight, Shell Canada had to wait for a bill from Canadian Pacific before it could bill Tennessee Chemical for the freight charges.
Shell Canada subleased railroad tank cars to Tennessee Chemical and applied decals and stencils to tank cars for the benefit of Tennessee Chemical. The bills for these services were also debit notes instead of invoices.
In the spring of 1988 Tennessee Chemical asked if the payment terms for sulfur could be extended to 60 days. Shell Canada agreed to a temporary extension. The payment term would be 60 days for all shipments from late April through November 1988, but it would revert to 30 days for shipments after November 1988. Invoices issued in December 1988 for shipments in November allowed 60 days for payment.
Ed Boonstra was Shell Canada's manager of sulfur marketing and distribution. He testified that 30 days was Shell Canada's standard payment term for sulfur purchases. It was not unusual for Shell Canada to grant extended terms to off-shore customers, but it was unusual for a North American customer such as Tennessee Chemical. It had not been done within the last several years before granting the extension to Tennessee Chemical.
The change from 60 days back to 30 days in December 1988 meant that in January 1989 Tennessee Chemical would owe invoices from two months, instead of one.
The court has already mentioned Kathleen Downey, Shell Canada's administrator of sulfur contracts. She testified that Tennessee Chemical was Shell Canada's top sulfur customer in 1988 and was one of the top customers in 1987.
Ms. Downey testified that Tennessee Chemical regularly paid its bills a few days after the due date. She used the date Shell Canada received Tennessee Chemical's check as the date of payment.
On December 19 and 21, 1988 Shell Canada issued two invoices for sulfur shipped in December 1988. These seem to have been the first 30-day invoices issued after the payment terms reverted from 60 days to 30 days. The payment due dates were stated on the invoices as January 19 and 21, 1989 (31 days after the invoice dates).
On January 22 Ms. Downey noticed that Tennessee Chemical had not paid these two invoices. Tennessee Chemical regularly paid a few days late. Ms. Downey would sometimes, but not always, check with Tennessee Chemical to see why the payment was late. She decided to take action when these two invoices were not paid on time. She began watching the account daily, and she notified another Shell Canada employee, Bill Kennedy. Mr. Kennedy was manager of sulfur marketing for North America. He was the person with the most direct contact with Tennessee Chemical.
The evidence was unclear as to whether Tennessee Chemical exceeded its credit limit at this time or at any time. Ms. Downey, Mr. Kennedy, and Mr. Boonstra thought that the credit limit was not a problem or didn't recall it as being a problem. They all said that the problem was Tennessee Chemical's failure to make payments on time. Mr. Boonstra's boss, Cliff Paulson, agreed. Mandy Wahby was the credit manager-resources at the time. Only Ms. Wahby recollected any mention of Tennessee Chemical going over its credit limit. She thought that Ms. Downey had told her, in January 1989, that Tennessee Chemical was over its credit limit as the result of failing to pay some invoices when due.
Mr. Kennedy testified that he did not consider Tennessee Chemical a payment problem until Ms. Downey contacted him in January 1989. Mr. Boonstra also said that he did not consider Tennessee Chemical a payment problem until January 1989.
On February 2, 1989, Mr. Kennedy and Mr. Boonstra were at a meeting in New Orleans, Louisiana. They heard rumors that Tennessee Chemical was having serious financial trouble and might file bankruptcy. Mr. Kennedy checked with his sources in the industry and apparently did not like what he heard. He drafted a hot letter to Tennessee Chemical. Mr. Boonstra approved it. They faxed the letter to Shell Canada's offices in Calgary, Alberta.1 Mr. Kennedy considered Tennessee Chemical a severe problem at this time and intended the letter to "ruffle up" Tennessee Chemical.
The home office, including Shell Canada's in-house lawyers, re-drafted the letter and toned it down. The letter was sent to Larry J. Lawrence at Tennessee Chemical's office in Atlanta, with copies to W. Pittman and T. Kowalski. Mr. Boonstra's boss, Cliff Paulson, signed the letter; Mr. Paulson was vice-president for natural gas and sulfur marketing. The letter said:
Shell Canada sent the letter on February 2, the same day that it received the draft from Mr. Kennedy. Ms. Downey testified that when Shell Canada sent letters by fax, it was noted at the top of the letter. This letter does not contain such a notation or a fax machine's imprint showing when it was transmitted.
On Monday, February 6 Shell Canada sent Tennessee Chemical another letter demanding payment. This letter shows that it was faxed on February 6. Ms. Downey signed the letter on behalf of Mr. Kennedy. The letter was addressed to Wayne...
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