Lovett v. St. Johnsbury Trucking

• Decision Date: 24 April 1991
• Docket Number: No. 90-5118,90-5118
• Citation: 931 F.2d 494
• Parties: , Bankr. L. Rep. P 73,926 Thomas G. LOVETT, Jr., Trustee for Transportation Systems International, Inc., Appellee, v. ST. JOHNSBURY TRUCKING, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 494

931 F.2d 494

59 USLW 2650, Bankr. L. Rep. P 73,926

Thomas G. LOVETT, Jr., Trustee for Transportation Systems International, Inc., Appellee, v. ST. JOHNSBURY TRUCKING, Appellant.

No. 90-5118.

United States Court of Appeals Eighth Circuit.

Submitted Dec. 10, 1990.

Decided April 24, 1991.

Jeffrey Firestone, Chicago, Ill., for appellant.

Stephen Grinnell, Minneapolis, Minn., for appellee.

Before WOLLMAN, Circuit Judge, HEANEY and FRIEDMAN, ^* Senior Circuit Judges.

FRIEDMAN, Senior Circuit Judge.

The principal issue in this case, here on appeal from the United States District Court for the District of Minnesota (Murphy, J.), is whether certain payments a bankrupt company made to the appellant within 90 days of the filing of the bankruptcy petition were made in the ordinary course of business and therefore did not constitute a preference recoverable by the trustee in bankruptcy under the Bankruptcy Code, 11 U.S.C. Sec. 547 (1988). The bankruptcy court held that the payments were not made in the ordinary course of business, and the district court affirmed. We reverse.

I.

The bankrupt, Transportation Systems International, Inc. (International), was a freight forwarder, consolidator and distributor. It did not own any trucks, but used the trucks of others to pick up and deliver freight. The appellant, St. Johnsbury Trucking (St. Johnsbury), is a common carrier of freight.

In October 1985, International and St. Johnsbury entered into a written transportation agreement under which International agreed to forward freight it collected in the geographical area it served to St. Johnsbury, and to deliver in that area freight that St. Johnsbury furnished to it. The consideration for these services was a percentage of the amounts collected from shippers. The agreement provided that each party would pay the other "on or before the 30th day after the shipment" had been delivered.

The parties operated under this agreement until June 10, 1987, when an involuntary bankruptcy petition was filed against International pursuant to 11 U.S.C. Sec. 303 (1988). Prior to that time, each party regularly and frequently paid by check its current indebtedness to the other. In the 12 months preceding the 90 days before the filing of the bankruptcy petition (the 90-day period), St. Johnsbury deposited 259 During the 90-day period, International paid St. Johnsbury $245,883.96 for services rendered under the agreement. Following the filing of the bankruptcy petition, the appellee Lovett, the bankruptcy trustee of International, brought suit in the United States Bankruptcy Court for the District of Minnesota against St. Johnsbury to recover that amount as a voidable preference under 11 U.S.C. Sec. 547(b). The trustee also sought to recover amounts receivable that St. Johnsbury allegedly owed to International. St. Johnsbury responded that those payments were made in the ordinary course of business and therefore were not recoverable by the trustee. St. Johnsbury also asserted that it was entitled to certain set-offs against the allegedly preferential payments and the indebtedness.

checks it received from International covering 720 invoices. St. Johnsbury deposited these payments, on average, 62 days after the date of invoice.

After trial, the bankruptcy court found that the payments during the 90-day period had not been made in the ordinary course of business and constituted a preference. It also found that the trustee was entitled to collect another $102,000.00 that St. Johnsbury owed International in accounts payable. The court further ruled that St. Johnsbury was entitled to a set-off of $148,456.33, which constituted amounts receivable from International when the bankruptcy petition was filed. The bankruptcy court accordingly entered judgment for the trustee against St. Johnsbury for $199,427.63 ($245,883.96 plus $102,000.00, minus $148,456.33).

In rejecting St. Johnsbury's contention that the payments were made in the ordinary course of business, the bankruptcy court stated that "[f]or a number of reasons" it found St. Johnsbury's "proof" of "a history of payment receipts by the defendant in the year prior to the bankruptcy, and [an assertion] that late payments, usually 60 to 70 days after invoice, were ordinary and usual," to be "inadequate":

First, the transportation agreement itself defined the ordinary course of business between the parties, and it specified the terms governing those transactions. The agreement specifically provided that it could be modified only in writing; it further specifically provided that payments were to be made by the debtor within 30 days of the date of issue. Moreover, the debtor's officers and employees have testified that the debtor ran into significant financial problems in early 1986, and was delaying payments as much as possible to all creditors; that payments to the defendant were made because the defendant was insisting on the 30 day time period contained in the transportation agreement; that meetings were held and telephone conversations were engaged in during which the defendant insisted that payments be accelerated as much as possible; and that at some point in early 1987, representatives of the plaintiff and the defendant met, the defendant insisted on accelerated payments, and the defendant suggested that if payments were not made within 30 days the business relationship could be jeopardized. The evidence appears to show, therefore, that the ordinary course of business was for payments to in fact be made within 30-45 days of invoice and that the defendant never consented to payments on any other terms.

Lovett v. St. Johnsbury Trucking (In re Transportation Systems International, Inc.), Adv. No. 4-88-227 (Bankr.Minn. May 23, 1989) (Findings of Fact, Conclusions of Law and Order for Judgment).

The district court affirmed. Lovett v. St. Johnsbury Trucking (In re Transportation Systems International, Inc.), Civ.No. 4-89-834, slip op. (D.Minn. Jan. 26, 1990). It held that the bankruptcy court's conclusion that St. Johnsbury had "failed to meet" its burden of showing that the payments were made in the ordinary course of business "is not clearly erroneous. The evidence, including the written agreement and St. Johnsbury's reactions to the late payments, supports the finding that the payment of $245,883.96 by [International] to St. Johnsbury was not in the ordinary course of business." Id. at 5 (footnote omitted). The court also rejected two other grounds upon which St. Johnsbury challenged

the bankruptcy court's decision. Id. at 5-7.

II.

A. Under 11 U.S.C. Sec. 547(b), a bankruptcy trustee may avoid the transfer to a creditor of an interest in property by the debtor that is made (1) on or within 90 days before the date of the filing of the bankruptcy petition, (2) while the debtor was insolvent, (3) on account of an antecedent debt, and (4) which enables the creditor to receive more than it would have received in a bankruptcy liquidation. The bankruptcy court found that International's payments to St. Johnsbury during the 90-day period met these requirements and thus prima facie constituted a preference. Although St. Johnsbury challenges the factual bases for those findings, we cannot say they are clearly erroneous.

B. Section 547(c)(2) provides that a trustee cannot avoid under subsection (b) a transfer that was:

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

(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and

(C) made according to ordinary business terms;

11 U.S.C. Sec. 547(c)(2).

It is conceded that subsection (c)(2)(A) was met, since the payments were made to satisfy debts that International had incurred in the ordinary course of its business dealings with St. Johnsbury. The bankruptcy court found, however, that those payments were not made in the ordinary course of business or not made according to ordinary business terms, and therefore that St. Johnsbury had not substantiated its ordinary-course-of-business defense under section 547(c)(2). The court also stated, in its Conclusion of Law 4, that "[t]he transfers were not made in the ordinary course of business between the debtor and the defendant."

To the extent those determinations were factual findings--as the district court apparently viewed them--they are clearly erroneous because they rest in part on an erroneous legal assumption and because they fail to reflect uncontroverted evidence in the record showing the ordinary course of business between International and St. Johnsbury. To the extent they are legal conclusions, they are incorrect.

1. a. The first ground on which the bankruptcy court rested its decision was that "the transportation agreement itself defined the ordinary course of business between the parties, and it specified the terms governing those transactions," namely, payment within 30 days of delivery. The ordinary course of business, however, was the way the parties actually conducted their business dealings, not the conditions specified in the agreement that the parties in fact rarely followed (as shown below). The bankruptcy court's reliance on the provision in the agreement that payment would be made within 30 days was misplaced, and provides no support for that court's conclusion that the payments were not made in the ordinary course of business. Indeed, if all the payments within the 90-day period had been made within 30 days of delivery, presumably the bankruptcy court would have held that they were made in the ordinary course of business, even though such payments would have been a drastic departure from the previous practice and presumably would have preferred St. Johnsbury over the other creditors.

b. "[T]here is no precise legal test which can be applied" in determining whether payments by the debtor during the 90-day period were "made in the...