J.P. Fyfe, Inc. of Florida v. Bradco Supply Corp.

• Decision Date: 03 October 1989
• Docket Number: No. 89-5182,89-5182
• Citation: 19 BCD 1792,891 F.2d 66
• Parties: , Bankr. L. Rep. P 73,101 In the Matter of J.P. FYFE, INC. OF FLORIDA v. BRADCO SUPPLY CORPORATION, Appellant. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 66

891 F.2d 66

19 Bankr.Ct.Dec. 1792, Bankr. L. Rep. P 73,101

In the Matter of J.P. FYFE, INC. OF FLORIDA v. BRADCO SUPPLY CORPORATION, Appellant.

No. 89-5182.

United States Court of Appeals Third Circuit.

Submitted Under Third Circuit Rule 12(6)

Oct. 3, 1989.

Decided Dec. 8, 1989.

Michael M. Rosenbaum, Donald P. Jacobs, Suzanne M. Klar, Budd Larner Gross Picillo, Rosenbaum Greenberg & Sade, P.C., Short Hills, N.J., for appellant.

Carol Ann Slocum, Klehr, Harrison, Harvey, Branzburg, Ellers & Weir, Cherry Hill, N.J., for appellee.

Before SLOVITER, GREENBERG and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

The bankruptcy Trustee for the estate of J.P. Fyfe, Inc., of Florida (FOF) filed a complaint to set aside a preferential payment by the debtor, FOF, to Bradco Supply Corporation (Bradco) under 11 U.S.C. § 547. The bankruptcy court found for the Trustee and the district court affirmed. Bradco appealed, contending that the Fyfe payment qualifies under the "saving provision" of 11 U.S.C. § 547(c)(2) as a non-preferential payment made in the "ordinary course of business." We affirm.

I.

The bankrupt, FOF, a roof installation company, had over a period of years purchased roofing materials from Bradco. Bradco also supplied roofing materials to J.P. Fyfe, a related New Jersey corporation ^J. The two J.P. Fyfe companies are hereinafter collectively referred to as "Fyfes."

Fyfes' original terms of payment to Bradco were sixty day net payment with a two percent discount if Fyfes made payments by the tenth of the second month following purchase. These payment terms were typical of the terms offered to other commercial roofing contractors.

By October 1985, Fyfes' debt to Bradco for materials approximated $500,000. At that time, John Delage, an officer of the Fyfes, met with Barry Segal, the owner of Bradco, and Donald Hollingsworth, Bradco's credit manager, to discuss alternative payment arrangements. After explaining that Fyfes' bank had pulled their financing and that Fyfes had experienced problems on some jobs, Delage asked for ninety day payment terms rather than the present sixty days. Bradco agreed.

Fyfes did not, however, make any payment within the ninety day period. Thereafter, Delage and Hollingsworth again met to discuss the situation. Fyfes presented financial information which revealed that they had greater financial problems than Bradco had realized. Bradco initially told Fyfes that they would "cut off" deliveries to Fyfes. Bradco later relented when Fyfes stated that such action would jeopardize Fyfes' survival. Instead, the parties worked out a different payment arrangement.

After determining how much roofing materials Fyfes would need to complete their present jobs, Bradco offered to ship these materials provided Fyfes paid for these materials within sixty days. Bradco also agreed to defer Fyfes' past debt indefinitely. ¹ Bradco claims Fyfes agreed to make monthly payments, with a maximum of $130,000 per month, which Bradco would apply against bills for the current monthly deliveries of roofing supplies. The Trustee, however, claims that, under the new plan, Fyfes were required to make three monthly payments of $130,000 to Bradco, beginning January 31, 1986, and ending March 31, 1986.

In November and December of 1985, Bradco issued invoices to FOF aggregating $150,064, together with $9,426.27 in service charges. During the same time period, Bradco invoiced FNJ for an aggregate of $84,644.91, together with service charges in December of $2,127.93. On January 31, 1986, FOF paid Bradco $100,000. Hollingsworth directed Bradco's bookkeeping department to apply $35,000 of the FOF payment to the account of FNJ and the remaining $65,000 to the account of FOF. Hollingsworth claimed that he wasn't being "scientific" when he apportioned the $100,000 payment. Hollingsworth failed to inform Bradco's bookkeeping department of the arrangement to apply the payments to the November and December 1985 invoices and, as a consequence, Bradco's bookkeeping department, in keeping with its standard practice, credited the payments to the oldest invoice. Therefore, Bradco's bookkeeping department applied the payments to Fyfes' old debt of $500,000.

On February 28, 1986, FOF paid Bradco $130,000. In the same manner as he directed the January payment, Hollingsworth directed that $30,000 of the February payment be applied to the FNJ account and $100,000 to the FOF account. The bookkeeping department, however, again applied this payment against Fyfes' old debt of $500,000. Hollingsworth intended that both the January and February payments be applied to the invoices issued to the Fyfes in November and December 1985. On May 16, 1986, Fyfes filed a voluntary petition in bankruptcy.

II.

The bankruptcy court found that Bradco had failed to prove that FOF made the payment of $130,000 "in the ordinary course of business." Although noting that FOF had intended that the January and February payments apply to the November and December invoices, the court emphasized that Bradco had set up its computers to apply incoming payments to the oldest invoices. The court stated "[the] [o]nly inference I can draw from that is that's the way it is usually done."

The bankruptcy judge found that Hollingsworth's testimony revealed that Bradco treated the Fyfes' accounts as special cases. The judge inferred from that testimony that Bradco went out of its way to keep the Fyfes "afloat." He noted that a smaller client would not have received the same generous treatment. The court also noted that, under the new arrangement, Bradco would no longer deal with Fyfe on an open account basis. Bradco had also informed Fyfes that it would file liens and notices in the event of nonpayment on the new shipments. The court found this new arrangement "was clearly intended to control the account to a greater extent than it had ever been controlled." Therefore, the court concluded that the $130,000 payment made to Bradco in February of 1986, did not qualify as a payment made "in the ordinary course of business" under subsection (c)(2) of section 547 and was avoidable as preferential transfer.

On appeal, the district court affirmed the bankruptcy court's determination that the February payment did not qualify under the ordinary course of business exception of Section 547(c)(2). 96 B.R. 474. The district court stated that the determination of what is "in the ordinary course of business" involved the application of a "subjective test"; the court must ask "whether 'the transfer [was] ordinary as between the debtor and the creditor?' " The court explained that under Section 547, the arrangement "need not have been common; it only need be ordinary. A transaction can be ordinary and still occur only occasionally."

Applying the above standard, the district court thought it significant that Bradco had "hammered" out its deal with FOF in conjunction with the efforts of a competitor. Bradco had told FOF that it would accept the same or similar terms for future dealings as Allied Roofing Products, one of FOF's major suppliers. The district court found there was no evidence that such criteria were within the past course of dealing between Bradco and FOF. The court also held that the deferment of Fyfes' half-million dollar debt, the imposition of a ceiling on their monthly purchases, and the treatment of their accounts as no longer open accounts demonstrated that the new arrangement and the subsequent payments were not made in the ordinary course of business. Although acknowledging that Bradco's actions "were taken in a good-faith attempt to avoid 'killing the golden goose' of appellee's business," the court concluded that section 547(c)(2) did not "grant awards for such attempts--it only protects normal, customary business dealings."

On appeal, Bradco claims that the district court erred in disqualifying the $130,000 February payment by FOF as a preferential payment under section 547(c)(2) and abused its discretion by affirming the bankruptcy court's imposition of prejudgment interest. Because Bradco did not raise the prejudgment interest issue in the district court, ² we only consider the issue of whether the disputed payment qualifies as a payment made in the ordinary course of business under 11 U.S.C. § 547(c)(2).

III.

In reviewing this appeal, we first examine the district court's review of the bankruptcy court's decision to determine if the district court employed the proper standards of review. The district court may set aside the bankruptcy court's factual findings only if the findings are clearly erroneous. See Bankr.Rule 8013. The bankruptcy court's legal conclusions, however, are subject to the district court's plenary review. Universal Minerals Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.1981). Employing the same standards of review as does the district court, we review the bankruptcy court's findings and conclusions of law to determine whether the district court erred in its application of the proper standards of review. See Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir.1988).

The Trustee and Bradco stipulated below that the payment at issue qualifies as a preferential transfer under 11 U.S.C. § 547(b). ³ The Trustee is therefore entitled to set aside the transfer unless it falls "within one of the statutory safe harbors for otherwise preferential transfers." In re Jet Florida Sys., Inc., 861 F.2d 1555, 1557-58 (11th Cir.1988). Bradco claims, however, that it finds such safe harbor in the exception contained in section 547(c)(2). Section 547(c)(2) provides in pertinent part:

(c) The trustee may not avoid under this section a transfer--

* * *

* * *

(2) to the extent that such transfer was--

(A) in payment of a debt incurred in the ordinary course of business ... affairs of the debtor and the transferee;

(B) made in the ordinary course of business ... of the debtor and the transferee; and

(C) made...