1 NO T RE CO M M EN DE D F OR F UL L- TEX T P UB LIC AT ION F ile Nam e: 07a0309n.06 F iled: May 7, 2007 No. 06-1428 UN ITED STA TES C OU RT OF AP P EA LS F OR THE SI XT H C IR CU IT
In re: AD VANCED S YSTEMS INTERNATIONAL, INC. Debtor .

________________________ _ _ _ __________ KENN ETH NATH AN, Trustee Appellan t,
v. AMER I C A N M ED I C A L S EC URITY, INC., Appellee. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ON AP P EA L F RO M THE UN ITED STA TES DIST RI CT CO UR T F OR THE EASTE RN DISTRICT OF M ICHIGAN

Before: BOGG S, Chief Circuit Judge; DAU GHTREY and GIBBONS, Circuit Jud ges. JULIA SMITH GIBBONS , Circuit Judge. This case arises f rom C h ap ter 7 ba

nkruptcy proce eding s initi ated ag ainst Advanc e Sy stems I nternational (ASI ). Ke nneth Natha n, the appointed Trustee , seeks r eview of

a dis trict court decision reve rsing the bankr uptcy court’s de termination that Americ an Medic al S ecur ity , I nc. (AMS), an ASI cre ditor, failed to car ry its burden of de monstrating that a ser ies of pre fer ential pay ments ASImade to AMS wer e not exempt from avoidance unde r the “ordina ry course of business” exception set forth at 11 U.S.C. § 547(c)(2) . For the re asons outlined2

below, we reve rse.

I. ASImaintained a g roup i n s u r a n c e p o li c y w it h a p p e llee, AMS, an e mploy ee be nefits provider
. I n spring 2002, ASImade thre e premium pay ments to AMS: (1) a wire transfe r of $15,212.00 on Marc h 26, 2002; (2) a chec k in the amount of $8,797.34 on April 23, 2002; a nd (3) a wire tra nsfer of $11,798.38 on May

21, 2002. ASImade e ac h o f t h ese pay ments after

their due dates at the beg inning of

the month but within t he thi rty -one- day g rac e per iod provided for under the terms of ASI ’s policy

with AMS. On May 30 , 20 02 , a g ro up of c re dit or s fi le d an inv olu nta ry ba nk ru ptc y pe tit ion

a g a ins t A SI seekingChapter 7 ba

nkruptcy relief in the United States Ba

nkruptcy Court for the Ea stern District of Michig an. On J une 24, 2004, Nathan, the appe llant and appointed Chapte r 7 Trustee (“Tr ustee” ), fi le d a n ame nd e d c omp la int

fo r a vo ida nc e and re c ov e ry fr om AM S of

the $3 5, 80 7. 72 in p re miums paid by ASI betwee n Marc h and May 2002. AMS answer ed, conte nding, a mong othe r thing s, that the “or dinary

course of business” e x cept i o n , provided unde r 11 U.S.C. § 547(c)( 2), exempted the transfe rs from a

voidance
. At issue in this appeal is the streng th of the evide nce AM S s u b m i t ted on the question of whether it rece ived the spring2002 transfers pursuant to “or dinary business terms,” a

showing
nece ssary to avail itself of the pr otections of § 547(c )(2) . At a benc h trial befor e the ba nkruptcy judge , AMS offer ed the testimony of Mar y J anssen, a

n administrative manag er at AMS w ho handles billing. J anssen testified that it wa s ordinary for other AMS insure ds in Mic higa n and throug hout the country

to p ay their pre miums after their due dates but within the thirty -one- day g rac e per iod.AMS also attempted to admit the testimony of Carl Moore on the issue of insurance industry 1 prac tices. On the Truste e’s motion, the bankr uptcy court e x cluded this testimony on the g round that AMS failed to disclose Moore as an e x p ert witness prior to trial. AMS does not challeng e that exclusion on appeal. 3 She further

testified that Humana , another insurance provider and her forme r employ er, inc luded g rac e periods in its policies. J anssen had no knowledg e of any insurer that did not include a g rac e pe ri od pr ov isi on

in i ts p oli c ie s. AM S al s o cit ed a Mic higa n statute that requir es insuranc e provide rs to maintain a g rac e period during wh i ch insurance cover ag e must remain in for ce f ollowing the pa ssag e of the de sig nate d d

ue date fo r p ay

me nt. Th a t st a tut e re a ds : Se c . 3 41 0. Th e re sh a ll b e a pr ov isi on

a s f oll ow s: GRACE PERI OD: A g rac e per iod of . . . (insert a number not l es s t han “7” for wee kly premium policies, “10 ” for monthly premium policies and “ 31” for all other policies) day s will be g rante d for the pay ment of each premium falling due afte r the first premium, during which g rac e per iod the policy shall continue in forc e. Mich. Comp. L aws § 500.3410. AMS argued that the ex istence of section 500.3410 conf irmed the
o r d i n ar i n e s s o f

g r a c e p e r i o d

p aym e n t s w i t h i nt h e r e l e v an ti n d u s t r y. 1 Follo wi n g t ri al, the bankr uptcy judge issued an ora l decision, conc luding that AMS fa iled to car ry its burden of showing that the pay ments at issue wer e made consistent with industry prac tice,
as re quired for

the application of the ordinar y course of business excep t i o n. The c ourt held that Six th Circuit prece dent re quires “at least some evidenc e of the standards in the re levant industry .” I t was insufficie nt, the court conclude d, to pr esent e vidence of the history of dea ling be tween “ the particula r debtor in this ca se and the defe ndant.” As to Janssen’s testimony , the bankr uptcy court deeme d it “v agu e and of lit tle value” beca use Janssen offer ed no information on other insuranc e industry actor s and the pa

y ment prac tices of their

insur eds. The court additionally found that4

J anssen’ s testimony

conce rning her time at Humana wa s too dated to be of a ssistance. F inally , the
c ourt re je c te d A MS’ s c la ims a s to the sig nif ic anc e of the Mic hig a

n s ta tut e re qu ir ingg ra c e pe ri od s, explaining ag ain t hat, “[ t] here needs to be some e vidence reg ardingthe ac tual . . . pay ment patterns in the rele vant industry

under 547 ( c)( 2)(C).” The c ourt enter ed judgment i n favor of the Tr ustee on J uly 12, 2005. AMS sought r ev i ew of the ba nkruptcy court’s de cision in the United States District Court for the E astern D istrict of Michig an. The district court ag ree d with AMS that the pay ments made by ASI“cor respond[ed] to a ge nera l pattern of pay ment” maintained by

AMS and ASIand “or dinary business terms. ” I t acc ording ly reve rsed the judg ment of the ba nkruptcy court in an or der dated J anuar y 25, 2006. On Fe bruar

y 24, 2006, the Trustee filed a timely notice of a

ppeal. II. “Whether a

transac tion c omports w ith the standards for business c onduct within an industry is a factual determination [not to be] set aside unless it is clearly err oneous.” Luper v. Columbia Gas of O hio, I nc. ( In re Carled, Inc .) , 91 F.3d 811, 813 (6th Cir. 1996). We apply this review standa

rd to the decision of the ba

nkruptcy court. See, e .g. , Nicholson v

. Isaacman ( In re Isaac man) , 26 F.3d 629, 631 (6th Cir. 1994) (“ On appeal to this court, we c onsider the judg ment of the ba nkruptcy court direc tly , using the same standa rds of re view as the district court.”)
. Th e Bankr

up tc y Cod e e mpo we rs a

ba nk ru ptc y tr us te e to a vo id “ any tr ans fe r o f a

n in te re st of t he debtor in property” whe re the transfe r occ urs within ninety day s of the date of a ba

nkruptcy filing a nd provides the c reditor with a g reat er i n t er est than it would rec eive in a ba nkruptcy proce eding broug h t u

n d e r c h a p te r 7 o f T it le 1 1 o f

th e U n it e d

St a te s Co d e . 1 1 U
. S. C. § 5 4 7 ( b ). Se c tio n 5 47 (c )( 2) lim its the a vo ida nc e po we r o f t

he tr us te e wh e re the tr ans fe r i s:5

(A) in pa y ment of a de bt incurre d by the debtor in the or dinary course of business or fi na nc ia l a ff a ir s o f t he de bto r a

nd the tr ans fe re e ; (B ) made in the ordinary

course of busi ness or financ ial aff airs of the debtor and the transfe ree ; and (C ) m a de a c c or din g to o rd ina ry bu sin e ss t e rm s. 11 U.S.C. § 547(c)(2) (2002). T h e S i x t h C i r c u i th a s e x p l a i n e d t h a ts u b s e c t i o n s ( B ) an d ( C ) o f § 5 4 7 ( c ) ( 2 ) e m b o dy a subjective a

nd objective c omponent. Logan v. Basic Distrib. Corp. (In reFred Hawes Org., I nc.) , 957 F.2d 239, 244 (6th Cir. 1992). “The subjective prong ( subsection (B )) r equire s proof that the debt and its pay

ment are ordinary in relation to other business dealing s betwee n that cre ditor and that debtor. The objective prong (subsec tion (C)) requires proof t hat t he pay ment is ordinary

in relation t o the standar ds preva iling in the re levant industry .” Luper , 91 F.3d at 813. I n Luper , the Sixth Circuit joined the “cle ar c onsensus” among the other c ourts of appe als that th e d ef i n ition of “‘or dinary

business terms’ [under § 547(c )(2) (C)] means that the transa ction was not so unusual as to r ender it an aber

ration in the re levant industry .” Id. at 818 (c ollecting case s from other c ircuits). The c reditor r ece iving a

pref ere nce be ars the bur den of proving , by a preponde ranc e of the evidenc e, the nonavoidabilit y of a pref ere ntial pay

ment under § 547( c)( 2). Id. at 813 (re ly ing on 11 U .S.C. § 547(g )). The pa rties’ dispute over the application of § 547 to the transfe rs at issue is limit ed in scope
. AMS does not dispute that the transfe rs wer e subjec t to avoidance by the Trustee . The Tr

us tee
c on c e de s th a t A MS h a s sa tis fi e d th e fi rs t tw o r e qu ir e me nts of § 5 47 (c )( 2) (A ) a

nd (B ). Thus , th e so le issue on appea l is whether AMS car ried it s burden of satisfying the so-ca lled objective prong of the
or din ary c ours e of

bu sin e ss t e st, that is , w he th er AS I mad e the re le va nt p ay me nts a c c or din g to6

“ or din ary bu sin e ss t e rm s, ” a s r e qu ir e d by § 5 74 (c )( 2) (C ). Th e ba nk ru ptc y c ourt c on c lud e d th a t A MS failed to mee t its burden. Be cause the record in the inst ant ca se does not yield a “de finite and fir m conviction” that the ba

nkruptcy court wa s mistaken, Luper , 909 F.2d at 813, the district court e rre d in reve rsing that decision. As a sta rt ingpo int , th e ba

nk ru ptc y c ourt pr op e rl y

c on c lud e d th a t Jan sse n o ff e re d li ttl e inf or ma tio n o f v a lue . H e r t e sti mony c on c e rn ing the pa y me nt pr a c tic e s of A MS c us tom e rs – w hil e
re le va nt t o th e su

bje c tiv e pr on g of the or din ary c ours e of bu sin e ss e xce pti on

– o ff e rs no ins ig ht i nto the patter ns of pay ment within the insurance industry more g ener ally
. See Logan , 957 F.2d at 246 (“[C] ourts do not look only at the manne r in which one particula r cr editor intera cted with other sim ila rl y sit uate d d e bto rs , b ut r a the r a na ly ze w he the r t

he pa rt ic ula r t ra ns a c tio n in qu e sti on

c omp or ts wi th t he sta nd ard c on du c t of bu si nes s wi th in t he ind us tr y .” ). Simi larl y , o ne c an d ra w n o r e lia

ble
c o n c l u s i o n s b a s e d

u p o nJ an s s e n ’ s t e s t i m o n y c o n c e r n i n g h e r t e n u r e a t an o t h e r i n s u r an c e c o mp a n y. Al t h o u gh J an s s en wo rk ed at Hu m an a fr o m 1 9 8 1 t o 1 9 8 9 , s h e c o n ce d edt h at s h e h adn o kn o wl ed ge of Humana’s “ c u r

r e n t” b il li n g p r a c ti c e s o r

th e p ay me n t p r a c ti c e s o f

it s in s u r e d s . M o r e o v e r , tha t J anssen c ould not identify an insuranc e compa

ny that does not inc lude a g rac e period in its policies d o e s n o t n e c e s s ar il y

p r o v e th e n o r

ma lc y o f p a y me n ts b y in s u r e d s during a gra c e p e r io d
. We there fore ag ree with the bankruptc y court’s w ell-re asoned c onclusion that J anssen’ s testimony does not suffice to satisfy

§ 547(c) (2). As to t h e M i ch i gan gra ce p er i o d s t at u t e, AM S ar gu es t h at s ec t i o n5 0 0
. 3 4 1 0 ef fe ct i v ely moves the de a dli ne fo r p ay

me nt u nti l th e e nd

of the g ra c e pe ri od , ma

kin g ASI ’s pa

y me nts a ft e r the du e date but prior to the expiration of the g rac e period neither late nor unusual. The Six th Circuit has rejec ted A M S ’ s ar g u m e n tr e g ar d i n g t h e i mp a c to f s e c t i o n5 0 0
. 3 4 1 0 o na

p p l i c a b l e d u e d a t e s , h o w e v e r . In7

Grogan v. Liberty Nat’l Lif e Ins. Co. (

In re Adv ance G love M

fg. Co.) , 761 F.2d 249, (6th Cir. 1985), the cour t addre ssed a se parate bankr uptcy issue arising from the enforc ement of se ction 500.3410. The c ourt there explained the eff ect of section 500.3410 on the due date established in an insura nce po lic y : The 31-da

y g rac e per iod w as not intende d by the parties or Michig an law to de fer the due date of the pre mium, but was desig ned for the unrelated purpose of protec ting the po lic y ho lde r f ro m pr e ma tur e te rm inatio n o f c ov e ra g e up on de fa ult . A s st a te d in Couch on Insurance : Th e g ra c e c la

us e do e s n ot c ha

ng e the date wh e n the pr e mium is du e bu t pr ov ide s a pe ri od in w hic h d e fa

ult in p ay me nt m ay be re tr ie ve d and c or re c te d w ith ou t c omp le te loss of policy , and if death occur s during the g rac e per iod, the policy must be paid, but not because the def

aulted pre mium was not due until the end of the g rac e per iod. De fault occurs whe n a pre mium is not paid on the due date and the de fault is not po stp on e d fo r the g ra c e pe ri od , the la tte r me re ly c on sti tut ing a wa ive r of the de fa ult
. Id
. at 2 5 1 (c i t i n g Couch on Insurance2d § 32:133 (2d ed. 1961))
. AM S somehow construe s the court’s state ment in Grogan to support its posi tion t h at “pay ments made duringthe g rac e per iod” require d under se ction 500.3410, “ar e not ‘late .’” H oweve r, Grogan ’s lang uag e sug g ests just the opposite: insureds who make pa y ments aft er t h e established due date, a re, unde r this court’s interpre tation of the Michig an statute, in default despite t he continuation of covera g e mandated by section 500.3410. As a conseque nce, any sug g estion that ASI ’s pay ments within the gr ace period
are nece ssarily

ordinary beca use they wer e timely i s wi t h o u t merit. This court has he ld that pay ments made duringa g rac e per iod mandated by section 500.3410 ar e, in fac t, late pay ments, and
we c on c lud e that se c tio n 5 00 .3 41 0 d oe s n ot re lie ve AM S of its ob lig a tio n to of

fe r e vid e nc e that itTh e dis se nt s ug g e sts that Grogan and the dis tin c tio n be tw e e n “ la te ” and “ tim e ly ” pa

y me nts 2 are of no re le va nc e to t he qu e sti on

be fo re us . We be lie ve thi s d ist inc tio n mate ri a l to our a na ly sis to the extent that AMS contends that beca use its pay

ments were “timely ” they mu s t also be de emed ordinary . We cite Grogan me re ly to make c le ar that our pr e c e de nt ha s un de rc ut any su c h a rgume nt. Although the cour

t in Lup e r acknow ledg ed the difficulty of ac quiring information re g arding 3 c omp e tit or s’ pa

y me nt p ra c tic e s, 91 F .3 d at 81 9, it i s n ot e vid e nt h e re tha t A MS ma de any

e ff or t to secur e additional information concerning standard industry proce dures. See id. a t 81 4 ( “ Col umb ia prese nted evidenc e abou t the difficulty of obtaining information from other utilit y companies . . . relating c ollection defic iencies be cause such information is not g ener ally kno wn o r d isse minated and is considere d proprieta

ry .”). 8 is o rd ina ry fo r o the r i nd

us tr y a c tor s to a va il the mse lve s o f t he a bil ity to m a ke pr e mium pa

y me nts bey ond the applica

ble due date. 2 AMS seeks to rely

on Luper and Y urika Foods Cor

p . v. Un i t ed Parcel Se rv. ( In re Yur ika Foods Corp.) , 888 F.2d 4 2 (6 t h C i r. 1 9 89), in support of its claim that it adequately satisfied the objective pr ong of the § 547(c) (2) test. Those case s are distinguishable, howeve r, beca use in eac h, the c r e d i t o r s o f

f e re d s ome pr ob a tiv e e vid e nc e on the bu sin e ss p ra c tic e s o f o the r i nd us tr y pa rt ic ipa nts
. See Luper , 91 F.3d at 8 1 8 (n o t i n g that cre ditor offe red e vidence that twenty -four perc ent of the
c us tom e rs of

ano the r g a s u til ity

c omp any we re a t le a st thi rt y da y s pa st d ue on the ir a c c ounts and

it
wa s o rd ina

ry fo r c omm e rc ia l c us tom e rs to f a ll i nto that c a te g or

y ); Y urika , 888 F. 2d at 45 (“ [F]or many y ear s, 82% of c arr i er s i n t h e indus try had not followed the cre dit lim itation set out in t he
re g ulatio n a

nd inv oic e te rm s. ” ). Th e re is no su c h e vid e nc e he re . As the ba nk ru ptc y c ourt c or re c tly 3 observe d, the exist ence of gra ce periods in insurance policies “say s nothing a bout how often or how
common or uncommon it is for [premium] pay ments to be made by

employ ers’ g roup policies af ter the due date and be fore the expiration of the g rac e per iod.” I n other wor ds, AMS made no attempt to demonstrate the f

reque ncy with which in s u re ds take a dvantag e of the mandatory g rac e per iod
a c r o s s t h e i n d

u s t r y.9

Th e dis se nt w ou ld have us a llo w “ c omm on kn ow le dg e and c omm on se ns e . . . d o at le a st a bit of a dd iti on a l w or

k, ” (D iss e nti ngOp . at 1) , w or k th a t AMS h a s f

a ile d to do in i ts atte mpt

to r e ta in a pre fer ential pay

ment subject to a

voidance under the Ba

nkruptcy Code. Presumably , in case s like thi s, wh e re it se e ms ob vio us that a pa y me nt wa s ma de purs ua

nt to or din ary

te rm s, the dis se nt w ou ld require the bankr

uptcy trustee to per form the task of demonstrating that cer tain pay ments were an aber ration and subjec t to avoidance . ( See Dissenting Op. at 1 (“Nathan did not pre sent any evidenc e that any Michig an insurer

issued policies without gr ace periods, or that pay ments within the g rac e period a re a n aber ration.”) .) We a cknowledg e the appea l of such an approa ch, but conc lude that the
re s u l two u l d

ef fe ct i v el y am en d t h e ap p l i cab l e s t at u t e, re l i ev i n g cr ed i t o rs o f t h e b u rd en o f § 5 4 7 (g) and makingtrustees re sponsible for provingavoidability . Although the d i s s en t accuses us of
unrea sonable de votion to the rules of evide nce, w e think it not ne ed l es s fo rmalism to enforc e the statut or ily -m and a te d b ur de n o f pr oo f and the lon g sta nd ing e vid e nti ary pr inc ipl e that “ [a] p art y wi th the burde n of per suasion who ar rives empty

handed on de cision day

must ex pect to lose.” Monroe

v . Ch ild re n’ s H om e As s’ n o

f I lli no is , 128 F.3d 591, 593 ( 7th Cir. 1997). Had AMS offe red some admissible evidenc e on this issue, the district court’s reve rsal of the bankruptc y court’s decision might well have been appropr iate. Section 547(c) (2) is, o f c o urse, intended to protec t the continuation of normal business re lationships with a company in financia l distress, see W

alschmidt v. Ranier (

In re Fulghum Constr. Corp.) , 872 F.2d 739, 743 ( 6th Cir. 1989),
and ASI ’s pa y me nts to AMS for th e ma int e na nc e of he a lthbe ne fi ts f

or its e mpl oy e e s p os se ss a
cer tain ordinary

quality
. Howeve r, fede ral statute and the law of this c ircuit require that a cr editor seekingto retain a

pref ere ntial pay

ment subject to avoidanc e establish its entitlement to that more f a v o r a b le tr e a tm e n t. See Luper , 91 F.3d at 813. Be cause AMS failed to make this showing , we10

cannot c onclude that the bankruptc y court clea rly err ed in finding that AMS’s rec eipt of pre mium pay ments betwee n Marc h 2002 and May 2002 was not in the ordinar y course of business. III
. For t h e for eg oing r easons, we reve rse the judg ment of the district cour t and re mand for proce eding s consistent with this opi nion.11

BOGG S, Chief

Judge, di ssenting. The court’s opi nion in this case corr ectly identifies the g overninglaw and pr operly states the standard of revie w. Howeve r, Irespe ctfully disag ree with the court’s c onclusion. Iwould hold that the bankruptcy court clearly err ed in finding that the re cipient
o f i n s u r a n c e p aym e n t s m a d e w i t h i nt h e s t a tu t o r i l y m an d a t e d g r a c e p e r i o d

f a i l e d t o p r o v e b y a preponde ranc e of the evidenc e that “the tra nsaction wa s not so unusual as to rende r it an abe rration in the rele vant industry .” Luper , 91 F.3d at 818. Am e ri c an M e dic a l Se c ur ity did pr e se nt t hr e e pie c e s o f e vid e nc e : (A) that th i s insurance company habitually

rec eived pa

y ments within the 31-day g rac e period; (B ) that such a

g rac e per iod is mandated by statute in the state of Michig an; and (C) that a f

ew y ear s ea rl i er an o ther major insura nce c ompany

also had such g rac e per iods in i ts c on tr a c ts. Nathan did not pre sent any evidenc e that any Michig an insurer issued policies without gr ace periods, or that p ay

ments within the gr ace period a re a n aber ration. The only

question is whether AMS’s e v id e n c e w a s s u f f ic ie n t to s a ti s f

y th e f a ir ly r e laxe d “ p r e p o n d e r an c e ” s ta n d ar d
. Wh il e an evidenc e maven could cer tainly have asked for more airtig ht te stimony (per haps fr om an insuranc elaw prof essor, or a n industry analy st), Ibelieve that AMS’s evidence shows that the existenc e of the grace pe riod a c c or ds wi th o rd ina ry bu sin e ss te rm s, and

that c omm on

kn ow le dg e and

c omm on se ns e
c an d o at le a st a

bit of a dd iti on a l w or

k in e sta bli sh ingthat a payme nt m ade within an available grace period is not an aber

ration. As a g ener al proposition, businesses g ener ally do not give up their own money by making pay m en t s signific antly

in advanc e of the time that adver se conse quence s would apply . For that
rea son, we c lear ly

should not require substantial proof that it is not a

n aber ration for a debtor to make12

a tra nsfer on the last day

of a “ regular” pay

ment period. The debtor is simply actingrationally by takin g a dv anta g e of

the tim e -v a lue of

mon e y fo r a s lo nga s it c an. Ye t th e re is n o le g a lly c og niza ble differ ence in the conseque nces attaching to a pay ment made on the l ast day of a “r eg ular” pay ment period a nd to a pay

ment made dur ing a

g rac e per iod. I t is inst ructive that, in the ext ensive discussion in t h e co u rt ’s opinion of why a pay ment
ma de duri ngthe g ra c e pe ri od is “ la te ” rathe r t

ha n “ tim e ly ,” the re is no re fe re nc e to t he fa c t th a t th os e terms ar e not what is at issue in § 547 (c )(2) (C). I t does not matter whe ther the pa y ment was late ; it matt er s whether

it was an a

berr ation in the insurance industry . Ibelieve that AMS’s evidence , combined with the common-se nse conc lusion that it is goo d business to avail oneself of g rac e periods whe n they

are ava i l ab le, suffic iently demonstrates that the pay ments it rece ived wer e not aber rant.