In re Udi Corp.

• Decision Date: 06 November 2003
• Docket Number: Bankruptcy No. 99-43232-HJB.,Adversary No. 01-4092.
• Citation: 301 B.R. 104
• Parties: In re UDI CORPORATION, Debtor. Gary Weiner, Chapter 7 Trustee, Plaintiff, v. A.G. Minzer Supply Corp., et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Massachusetts

Page 104

301 B.R. 104

In re UDI CORPORATION, Debtor Gary Weiner, Chapter 7 Trustee, Plaintiff, v. A.G. Minzer Supply Corp., et al., Defendants.

Bankruptcy No. 99-43232-HJB.

Adversary No. 01-4092.

United States Bankruptcy Court, D. Massachusetts.

November 6, 2003.

Mark Bluver, Steven Weiss, Shatz, Schwartz & Fentin, Springfield, MA, for Gary Weiner, Chapter 7 Trustee.

Rosemary Macero, Alison Blew, Macero & Associates, Boston, MA, for SOS Office Supply.

Steven Meuneir, Office of the U.S. Trustee, Worcester, MA, U.S. Trustee.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is a "Complaint to Avoid and Recover Preferential Transfers" (the "Complaint") filed by Gary Weiner (the "Trustee"), as trustee in bankruptcy of UDI Corporation (the "Debtor" or "UDI"), against various parties seeking to recover, pursuant to 11 U.S.C. §§ 547(b) and 550, alleged preferential transfers (the "Transfers") made to the Defendants of approximately $186,000.00. In their joint answer, the Defendants raise various defenses, including that the Transfers never constituted estate property. Instead, they assert the Transfers represented rebates which the Defendants earned from a third party and which merely passed through their agent, the Debtor, as a conduit, to them.

I. FACTS AND TRAVEL OF THE CASE

On May 13, 1999, an involuntary petition for relief under Chapter 7 of the Bankruptcy Code (the "Code") was filed against the Debtor in this Court. An Order for Relief entered shortly thereafter.

Prior to the petition date, UDI was a wholly owned subsidiary of Office Center Corporation ("OCC") and operated as a buyer of wholesale office products. The Debtor's business was to negotiate discount prices for office products with manufacturers and wholesalers on behalf of its members (the "Members"), who were thus joined as a "buying group." The Defendants, re-sellers and retail distributors of office products, were all Members of the Debtor's buying group. The Transfers at issue represented rebates from one of UDI's wholesalers, the S.P. Richards Company, which were sent to UDI for disbursal to eligible Members.

At all relevant times, including the period during which the Transfers occurred, written contracts (the "Membership Agreements") governed the relationship between UDI and the Members.¹ In the Membership Agreements, the Members and UDI stated their mutual intent to "organize a `buying pool' (the `Pool') in order to obtain discount prices from manufacturers, distributors and wholesalers." The recitals called for UDI to "act as the Pool's exclusive agent in negotiating contracts with manufacturers and wholesalers for the purchase of office products upon prices, discounts, terms and conditions favorable to the Members." To join, Members had to meet minimum purchase and creditworthiness requirements, put in place credit insurance or a letter of credit equal to their anticipated monthly purchase amounts, pay various fees, and agree to abide by certain standards established by a majority vote of the Members. In some cases, Members paid an initial fee, an annual fee, and an "Initial Retainage" equal to fifty percent (50%) of the Member's first year monthly volume discount received from two of the Pool's wholesalers/manufacturers.² In all cases, a Member would pay a fee equal to one percent (1%) of its monthly invoices. Under the Membership Agreement, a payment default entitled UDI to draw down on the Member's credit insurance or letter of credit to satisfy the invoice.

Under the Membership Agreement, certain aspects of UDI's management of the Pool, including the negotiation of "Preferred Buy Agreements" with designated suppliers, were contingent upon the prior approval of at least sixty percent (60%) of the Members. In exchange for this control over the operation of the Pool, Members agreed to satisfy their purchasing needs as much as possible from product lines available under the Preferred Buy Agreements. Members would place an order directly with a supplier, designating that they were a Member of UDI's Pool. Among other reasons, such designation was necessary for calculating a Member's eligibility to participate in year-end rebate programs offered by certain suppliers.

Under separate agreements coordinated by UDI, Members could become eligible for year-end rebates based upon annual purchasing levels. The "UDI-I Fee Structure" explained that: "UDI remits the year-end wholesaler rebate back to the member." In the case of S.P. Richards, Members earned rebates when their annual purchases met pre-set levels established under an annually renewed contract undersigned by an officer of the Member, S.P. Richards, and UDI. In order to qualify for the rebates, the Pool was required to meet certain established benchmarks. For example, if the Pool collectively made ten million dollars of qualified purchases from S.P. Richards, it would be eligible for a one percent (1%) rebate; if the Pool collectively made 20 million dollars of qualified purchases, the rebate was two percent (2%), and so on up to a pre-set cap. SOS's president, David Shapiro ("Shapiro"), testified that the contract underlying the Transfers was representative of rebate contracts from prior years. That contract called for the rebate to be paid in February, 1999 based upon qualifying purchases made in the 1998 calendar year.

UDI's credit manager Lisa Demery ("Demery"), in her deposition that was admitted into evidence, testified that UDI received the S.P. Richards aggregate rebate check by March each year for disbursal to the qualifying Members; UDI received the check for calendar year 1998 on March 11, 1999. Typically, the check was accompanied by documentation from S.P. Richards indicating the amounts due each Member. Upon receipt, UDI deposited the rebate check into a local account; the company "lock box account" was reserved for invoice payments.³ Demery stated that during the period between receipt and disbursal, UDI extracted a fee from the aggregate amount, created spreadsheets confirming the amount owed to each Member, and prepared and mailed the checks.⁴ UDI disbursed the rebate checks to the Members between March 15-22, 1999.⁵ Shapiro testified that the manner and time frame in which SOS received the 1999 S.P. Richards rebate from UDI was the same as SOS's receipt of the rebate in previous years. Shapiro stated that he had no knowledge of the one percent (1%) fee that UDI took from the rebate, stating he had always assumed that he was receiving one-hundred percent (100%) of the rebate. The underlying contract between SOS, UDI, and S.P. Richards makes no mention of a fee to be paid to UDI from the rebate amount. In fact, nothing in the record indicates that any Members intended for UDI to take a fee from the rebates.

In 1997 and 1998, OCC and the Debtor sought to complete an initial public offering ("IPO"). However, by the end of the summer of 1998, the IPO efforts had failed. The costs associated with the IPO effort exceeded $10,000,000.00 and had been financed through a line of credit with First Union National Bank. By late 1998 the Debtor was in default with its loan obligations to First Union, and it was falling in arrears with its trade creditors and suppliers. By early 1999, an informal unsecured creditors committee had been established to attempt to negotiate terms for repayment of the Debtor's substantial trade debt. Several trial exhibits indicated that the Debtor's dire financial situation was widely known in the industry and to the Members. In fact, UDI sent several communiques to its Members addressing its financial viability including one declaring, inter alia, that the rebate checks for calendar year 1998 would be sent out per usual despite "rumors circulating in the industry that have not been favorable to us." Demery testified that unlike in prior years, when Members would call merely to inquire about the timing of the rebate, in 1999, Members' calls regarding rebates were often angry and even threatening. Shapiro testified that he made no inquiries beyond those he would typically make regarding the rebates. Further, he stated that at no time did he receive any special treatment regarding the Transfers. SOS was, however, one of only seven (7) Members out of roughly 1100 that UDI invited to become original participants in the IPO.

II. POSITIONS OF THE PARTIES

The Trustee complains that the rebates represent preferential transfers and seeks to avoid them under 11 U.S.C. § 547(b)⁶ and recover them for the benefit of the estate pursuant to 11 U.S.C. § 550(a).⁷ In support of this contention, the Trustee asserts that the Transfers constitute voidable preferences under § 547(b). He states that the Defendants were creditors with claims antecedent to the Transfers, and the Transfers represent payments to satisfy those antecedent debts. In addition, the Transfers occurred during the ninety (90) days prior to the commencement date and while the Debtor was insolvent. The Trustee argues that, since the Defendants all received one-hundred percent (100%) payment on their claims, they received more than if the Transfers had not been made and their claims allowed in the bankruptcy case.

The Defendants respond that the Transfers were never property of the estate as defined under § 541 of the Code,⁸ and regarding the Transfers, the Defendants were never creditors with claims against the estate. They contend that the Transfers represented rebates they earned from, and were owed by, S.P. Richards; UDI acted merely as an intermediary, a pass-through to process the rebates. The Defendants argue that their relationship with UDI is best understood as "that of agent-principal and trustee-beneficiary." The Defendants point to the terms of the Membership Agreement establishing the Debtor as their agent in the "negotiation of discount prices from wholesalers and to obtain discounts and other terms and conditions favorable to the" Defendants. ...