Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almd-2_05-cv-00730/USCOURTS-almd-2_05-cv-00730-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BA

---

IN THE DISTRICT COURT OF THE UNITED STATES FOR THE

MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

IN RE: )

)

TERRY MANUFACTURING )

COMPANY, INC., )

)

Debtor. )

IN RE: )

)

TERRY UNIFORM COMPANY, )

LLC, ) CIVIL ACTION NO.

) 2:05cv730-T

Debtor. ) (WO)

J. LESTER ALEXANDER, )

III, etc., )

)

Appellee, )

)

v. ) 

) 

BONIFAY MANUFACTURING, )

Inc., )

)

Appellant. )

OPINION

Appellant Bonifay Manufacturing, Inc. challenges a

decision of the United States Bankruptcy Court for the

Middle District of Alabama, holding that payments

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 1 of 17
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received by Bonifay from Terry Manufacturing Company,

Inc. were preferential under 11 U.S.C.A. § 547(b) and

could be avoided by J. Lester Alexander, III, the trustee

of Terry’s bankruptcy. The court’s appellate

jurisdiction has been invoked pursuant to 28 U.S.C.A.

§§ 158(a) and 157(b)(2)(F). After carefully reviewing

the record and the briefs of the parties, the court

concludes that the judgment of the bankruptcy court

should be affirmed, although the court departs slightly

from the bankruptcy court’s reasoning.

I. STANDARD OF REVIEW

This district court “functions as an appellate court

in reviewing the bankruptcy court’s decision.” In re

Sublett, 895 F.2d 1381, 1383 (11th Cir. 1990) (citing 28

U.S.C.A. § 158(a)). Accordingly, the bankruptcy court’s

“[f]indings of fact, whether based on oral or documentary

evidence, shall not be set aside unless clearly

erroneous, and due regard shall be given to the

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 2 of 17
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opportunity of the bankruptcy court to judge the

credibility of witnesses.” Fed. R. Bankr. P. 8013; see

also Fed. R. Bankr. P. 7052. 

In contrast to the deference given to factual

findings, this court examines the bankruptcy court’s

legal conclusions de novo. In re Club Associates, 951

F.2d 1223, 1228-29 (11th Cir. 1992) (noting that courts

hearing appeals from the bankruptcy court may “freely

examine[] the applicable principles of law to see if they

were properly applied”). Similarly, this court may

“freely examine[] the evidence in support of any

particular finding to see if it meets the test of

substantiality.” Id. (internal quotations omitted). 

II. FACTUAL BACKGROUND

Bonifay, a sewing contractor, and Terry began their

business relationship in 1986, when Terry hired Bonifay

to produce shirts. Since then, Terry has represented

anywhere from 30 to 35 % of Bonifay’s annual business.

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 3 of 17
1. Trial transcript, pp. 31-33, 39-40.

2. Id., pp. 33-34.

3. Defendant’s Trial Exhibits 2 & 4.

4. Trial Transcript, pp. 36-37, 40.

4

Bonifay relies heavily on Terry for its continued

existence in light of the economic downturn in the

domestic garment industry in the mid-1990s.1

During the course of their relationship, Terry had a

history of making its payments late. Although the

invoices required payment to be made within 30 days,

after which a finance charge would accrue, Terry rarely

paid within this 30-day period.2

 From July 23, 2001 to

March 24, 2003, the time between the invoice and date of

payment ranged anywhere from 98 to 321 days.3

 Terry

always paid the finance charge and the principle balance

when it made its payment. Bonifay allowed payments so

late largely because it depended on Terry for business

and because of the long-standing business relationship.4

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 4 of 17
5. Plaintiff’s Trial Exhibit 3 (emphasis in

original).

6. Id. 

7. Trial Transcript, p. 20.

5

On January 9, 2003, however, Bonifay sent Terry a

letter setting forth a payment schedule under which Terry

“could get ‘current’ with Bonifay by Mid-May of 2003 by

paying $21,500 per week, each and every week, without

fail.”5 The letter continued, “If for any reason a week

were missed, then a double amount would need to be paid

the next week to meet this timetable.”6

 Terry made these

weekly payments for two months, but reverted to paying

off specific invoices as it could sometime in March 2003.7

Terry filed a voluntary Chapter 11 bankruptcy on July

7, 2003. In the ninety days immediately preceding the

Chapter 11 filing, Terry made six payments to Bonifay,

totaling $107,713.15. These payments were in

satisfaction of invoices with dates ranging from October

17, 2002 to January 22, 2003, and were made anywhere from

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 5 of 17
8. Joint Pretrial Statement, Stipulated Facts, ¶¶ 1-

8.

9. Trial Transcript, pp. 21-25.

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138 to 182 days after the invoice date.8

 The median for

outstanding invoices in the garment industry, according

to Risk Management Association and Credit Research

Foundation, two independent research organizations, is 39

to 41 days and 55 days, respectively. Bonifay was unique

in the garment industry for allowing payments so far

beyond the billing date.9

The trustee instituted this action against Bonifay to

avoid the six payments made during the 90-day preference

period. In an order dated August 3, 2005, the bankruptcy

court ruled in favor of the trustee, holding that the

payments were inconsistent with ordinary business terms

in the garment industry because they were so much later

than the industry norm and because Bonifay attempted to

put Terry on a payment schedule. Bonifay filed a timely

notice of appeal.

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 6 of 17
10. Section 547(b) provides that a trustee may avoid

a transfer to a creditor in satisfaction of a antecedent

debt if the transfer was made within 90 days of the

debtor’s filing for bankruptcy and the creditor

benefitted from such payment relative to a dispostion of

the debtor’s assets under chapter 7 of the Bankruptcy

Code. 11 U.S.C.A. § 547(b).

7

III. DISCUSSION 

The sole issue on appeal is whether the bankruptcy

court gave appropriate weight to the long-standing

business relationship between Bonifay and Terry, during

which payments were regularly allowed more than 60 days

late, in determining whether the six payments were made

in the regular course of business, as that term is

defined by 11 U.S.C.A. § 547(c)(2). The parties agree

that these six transfers are preferential under § 547(b)10

unless they fall within the statutory exception created

by § 547(c)(2). Under that provision, a trustee may not

avoid a transfer as preferential if the transfer 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;

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“(B) made in the ordinary course of

business or financial affairs of the

transferee; and

“(C) made according to ordinary business

terms.”

11 U.S.C.A. § 547(c)(2). Because this exception operates

as an affirmative defense, the creditor bears the burden

of proof. 11 U.S.C.A. § 547(g); In re A.W. & Assocs.,

Inc., 136 F.3d 1439, 1441 (11th Cir. 1998). 

Bonifay has unquestionably satisfied the first two

elements of § 547(c)(2). Terry incurred the debts

satisfied by these six payments in exchange for sewing

work performed by Bonifay, so the debt arose in the

ordinary course of business between the debtor and

transferee. See 11 U.S.C.A. § 547(c)(2)(A). Bonifay

regularly allowed Terry to make payments substantially

later than the invoice required, so Bonifay’s decision to

accept these six payments was in the ordinary course of

business of the transferee. See 11 U.S.C.A.

§ 547(c)(2)(B).

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 8 of 17
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As to the third element, the Eleventh Circuit Court

of Appeals has defined “ordinary business terms” as “the

range of terms that encompasses the practices in which

firms similar in some general way to the creditor in

question engage,” and stated “that only dealings so

idiosyncratic as to fall outside that broad range should

be deemed extraordinary and therefore outside the scope

of subsection C [of § 547(c)(2)].” A.W. & Assocs., 136

F.3d at 1443 (emphasis in original). In comparing a

specific transaction to industry standards, those

standards are not a “litmus test by which the legitimacy

of a transfer is adjudged,” but rather “function as a

general backdrop against which the specific transaction”

is evaluated. Id. 

“The likelihood of unfair overreaching by a creditor

(to the disadvantage of other creditors) is reduced if

the parties sustained the same relationship for a

substantial time frame prior to the debtor’s insolvency.”

In re Molded Acoustical Products, Inc., 18 F.3d 217, 225

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 9 of 17
11. In A.W. & Assocs., The Eleventh Circuit cited

the Third Circuit’s approach approvingly. 136 F.3d at

1443.

10

(3d Cir. 1993). Accordingly, “the more cemented (as

measured by its duration) the pre-insolvency relationship

between the debtor and the creditor, the more the

creditor will be allowed to vary its credit terms from

the industry norm yet remain within the safe harbor of

§ 547(c)(2).”11 Id. However, such a variance is not

boundless. “[T]he parties’ longstanding credit terms,

although consistent between them, may depart so grossly

from what has been established as the pertinent

industry’s norms that they cannot be seriously considered

usual and equitable with respect to the other creditors.”

See id. at 226.

A three-step analysis guides courts in determining

whether transactions in long-standing business

relationships are exempted under § 547(c)(2). First, the

terms between the parties are compared to the range of

terms on which firms similar to the transferee provide

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 10 of 17
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credit to firms similar to the debtor. Molded Acoustical

Products, 18 F.3d at 226-27. If the terms between the

parties fall outside this industry norm, the court

creates a “customized window surrounding the industry

norm,” which takes into account the “length of the

parties’ relationship predating the debtor’s insolvency.”

Id. at 227. Finally, the court determines “whether the

relationship remained relatively stable leading into and

throughout the insolvency period.” Id. A relationship

is not stable for these purposes if the terms of payment

during the preference period vary considerably from the

terms throughout the longstanding relationship or if the

creditor has made efforts to accelerate repayment or

otherwise collect the debt. Id. at 227-28. If the

transfers in question fit within the customized window

and the relationship was stable leading up to the

insolvency, the transfers are not preferential even if

they vary from the industry norm. Id. at 226.

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 11 of 17
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In the case at bar, the six payments made by Terry to

Bonifay were 138 to 182 days past the invoice date, more

than three times later than the industry standard of 39

to 55 days late. No comparable firms allowed payments

anywhere near that late. Accordingly, these six payments

departed substantially from the industry norm. Accord

Molded Acoustical Products, 18 F.3d at 227 (explaining

that payments made two times later than the industry norm

is a substantial departure).

The nearly 18-year relationship between Terry and

Bonifay seems to entitle Bonifay to considerable leeway

when crafting a window surrounding the industry norm.

See Molded Acoustical Products, 18 F.3d at 227 (noting

that payments accepted 30 % later than the industry norm

would likely satisfy § 547(c)(2) given the 18-month

relationship between the parties leading up to the

debtor’s insolvency). Nonetheless, Bonifay departed from

the industry norm by more than 300 %, which could

certainly be characterized as a gross departure.

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 12 of 17
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Although no court has defined what constituted a gross

departure or considered the outer limit for a reasonable

variance under § 547(c)(2), this court need not blaze

that trail because Bonifay fails the final step of the

inquiry, stability of the relationship.

A court cannot determine if a relationship is stable

unless it can discern the baseline or standard pattern of

payments before and during the preference period. For

example, in Molded Acoustical Products, the court found

that a 30-day increase in the average payment period was

sufficient to show that the relationship was not stable

leading into the debtor’s insolvency. 18 F.3d at 227-28.

Here, the bankruptcy court concluded that no typical

period of payment existed either prior to or during the

preference period. This conclusion, based on expert

testimony, was not clearly erroneous because prior to the

preference period payments were made anywhere from 98 to

321 days after the invoice date and during the preference

period the payments were made anywhere from 138 to 162

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 13 of 17
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days after the invoice. The lack of typicality of

payments is itself sufficient to show that the

relationship was unstable. Put another way, a

relationship is not stable simply because it is

consistently unstable. Bonifay has simply not met its

burden of proof to show stability because the evidence

does not support an adequate baseline for the court to

assess typicality. 

Even if the relationship had been stable in the years

preceding Terry’s insolvency, the relationship

deteriorated when Bonifay attempted to place Terry on a

payment schedule on January 9, 2003. This schedule

required weekly payments of $ 21,500, which notably

differed from prior practice because the payments were

not related to any particular invoices. Placing a debtor

on a payment plan “does not suggest business as usual

within the industry but, quite to the contrary, resembles

a calculated response to a deteriorating creditor-debtor

relationship.” Molded Acoustical Products, 18 F.3d at

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 14 of 17
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228. This payment plan was clearly intended to reduce

the outstanding balance to zero by mid-May of 2003.

Essentially, Bonifay was engaged in non-judicial

collection proceedings against Terry. Terry made weekly

payments through March 2003, though it ceased payments

just before the preference period began. This collection

effort extended sufficiently close to the bankruptcy for

the court to conclude that this was not a normal debtorcreditor relationship leading up to insolvency. 

The court is certainly sympathetic to Bonifay’s

position because Bonifay’s forbearance likely kept Terry

out of bankruptcy longer than otherwise would have been

the case. Indeed, the rule allowing variances from the

industry norm is premised on the recognition that

forbearing creditors of long standing often keep debtors

out of bankruptcy. See Molded Acoustical Products, 18

F.3d at 225. For that reason, the court agrees with

Bonifay that longstanding business relationships can and

should alter the court’s inquiry under § 547(c)(2) in

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 15 of 17
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some cases. This is simply just not one of those cases

because whatever stability existed in the parties’

relationship was lost when Bonifay attempted to place

Terry on a payment plan which Terry followed until the

preference period began. 

In sum, the court adopts the analysis set forth in

Molded Acoustical Products. A long-standing business

relationship may allow a creditor to depart from the

industry norm and still qualify for the safe harbor of

§ 547(c)(2). A particularly long-term relationship will

allow a creditor even greater leeway from the industry

norm. However, instability in the relationship leading

up to the debtor’s insolvency, manifested either as

inconsistent payment terms or attempts to put the debtor

on a payment plan, will prevent the creditor from

invoking § 547(c)(2). Because the court concludes that

the relationship between Terry and Bonifay lacked

stability, particularly immediately prior to the

preference period, these six payments made during the

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 16 of 17
12. The court’s reason for reaching this conclusion

(lack of stability in the relationship) differs from that

of the bankruptcy court in its memorandum decision (Doc.

No. 1), dated May 9, 2005. That court held that the six

payments were inconsistent with ordinary terms because

they were made well outside the stipulated 30-day invoice

billing period and substantially departed from the

industry average. Alexander v. Bonifay Manufacturing

Co., 04-3072, slip op. at 7 (Bank. M.D. Ala. May 9,

2005). The bankruptcy court did not explicitly mention

the long-standing business relationship or apply the

three-step analysis from Molded Acoustical Products in

making this determination. Although the bankruptcy court

also found that Bonifay’s attempt to impose the payment

plan was not according to ordinary business terms, id. at

7-8, it did not explicitly find that a payment plan

suggests a lack of stability in the relationship.

preference period were not according to ordinary business

terms.12

An appropriate judgment will be entered affirming the

decision of the bankruptcy court.

DONE, this the 9th day of October, 2005.

_____________________________ /s/ Myron H. Thompson

UNITED STATES DISTRICT JUDGE 

Case 2:05-cv-00730-MHT Document 11 Filed 11/09/05 Page 17 of 17