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NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 07a0309n.06

Filed: May 7, 2007

No. 06-1428

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

In re: ADVANCED SYSTEMS

INTERNATIONAL, INC.

Debtor.

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KENNETH NATHAN, Trustee

Appellant,

v.

AMERICAN MEDICAL SECURITY,

INC., 

Appellee.

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ON APPEAL FROM THE UNITED

STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF MICHIGAN

Before: BOGGS, Chief Circuit Judge; DAUGHTREY and GIBBONS, Circuit Judges. 

JULIA SMITH GIBBONS, Circuit Judge. This case arises from Chapter 7 bankruptcy

proceedings initiated against Advance Systems International (ASI). Kenneth Nathan, the appointed

Trustee, seeks review of a district court decision reversing the bankruptcy court’s determination that

American Medical Security, Inc. (AMS), an ASI creditor, failed to carry its burden of demonstrating

that a series of preferential payments ASI made to AMS were not exempt from avoidance under the

“ordinary course of business” exception set forth at 11 U.S.C. § 547(c)(2). For the reasons outlined
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below, we reverse. 

I.

ASI maintained a group insurance policy with appellee, AMS, an employee benefits provider.

In spring 2002, ASI made three premium payments to AMS: (1) a wire transfer of $15,212.00 on

March 26, 2002; (2) a check in the amount of $8,797.34 on April 23, 2002; and (3) a wire transfer

of $11,798.38 on May 21, 2002. ASI made each of these payments after their due dates at the

beginning of the month but within the thirty-one-day grace period provided for under the terms of

ASI’s policy with AMS. 

On May 30, 2002, a group of creditors filed an involuntary bankruptcy petition against ASI

seeking Chapter 7 bankruptcy relief in the United States Bankruptcy Court for the Eastern District

of Michigan. On June 24, 2004, Nathan, the appellant and appointed Chapter 7 Trustee (“Trustee”),

filed an amended complaint for avoidance and recovery from AMS of the $35,807.72 in premiums

paid by ASI between March and May 2002. AMS answered, contending, among other things, that

the “ordinary course of business” exception, provided under 11 U.S.C. § 547(c)(2), exempted the

transfers from avoidance. 

At issue in this appeal is the strength of the evidence AMS submitted on the question of

whether it received the spring 2002 transfers pursuant to “ordinary business terms,” a showing

necessary to avail itself of the protections of § 547(c)(2). At a bench trial before the bankruptcy

judge, AMS offered the testimony of Mary Janssen, an administrative manager at AMS who handles

billing. Janssen testified that it was ordinary for other AMS insureds in Michigan and throughout

the country to pay their premiums after their due dates but within the thirty-one-day grace period.
AMS also attempted to admit the testimony of Carl Moore on the issue of insurance industry 1

practices. On the Trustee’s motion, the bankruptcy court excluded this testimony on the ground that

AMS failed to disclose Moore as an expert witness prior to trial. AMS does not challenge that

exclusion on appeal. 

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She further testified that Humana, another insurance provider and her former employer, included

grace periods in its policies. Janssen had no knowledge of any insurer that did not include a grace

period provision in its policies.

AMS also cited a Michigan statute that requires insurance providers to maintain a grace

period during which insurance coverage must remain in force following the passage of the

designated due date for payment. That statute reads: 

Sec. 3410. There shall be a provision as follows: 

GRACE PERIOD: A grace period of . . . (insert a number not less than “7” for

weekly premium policies, “10 ” for monthly premium policies and “31” for all other

policies) days will be granted for the payment of each premium falling due after the

first premium, during which grace period the policy shall continue in force. 

Mich. Comp. Laws § 500.3410. AMS argued that the existence of section 500.3410 confirmed the

ordinariness of grace period payments within the relevant industry.1

Following trial, the bankruptcy judge issued an oral decision, concluding that AMS failed

to carry its burden of showing that the payments at issue were made consistent with industry practice,

as required for the application of the ordinary course of business exception. The court held that

Sixth Circuit precedent requires “at least some evidence of the standards in the relevant industry.”

It was insufficient, the court concluded, to present evidence of the history of dealing between “the

particular debtor in this case and the defendant.” As to Janssen’s testimony, the bankruptcy court

deemed it “vague and of little value” because Janssen offered no information on other insurance

industry actors and the payment practices of their insureds. The court additionally found that
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Janssen’s testimony concerning her time at Humana was too dated to be of assistance. Finally, the

court rejected AMS’s claims as to the significance of the Michigan statute requiring grace periods,

explaining again that, “[t]here needs to be some evidence regarding the actual . . . payment patterns

in the relevant industry under 547 (c)(2)(C).” The court entered judgment in favor of the Trustee on

July 12, 2005. 

AMS sought review of the bankruptcy court’s decision in the United States District Court

for the Eastern District of Michigan. The district court agreed with AMS that the payments made

by ASI “correspond[ed] to a general pattern of payment” maintained by AMS and ASI and “ordinary

business terms.” It accordingly reversed the judgment of the bankruptcy court in an order dated

January 25, 2006. On February 24, 2006, the Trustee filed a timely notice of appeal. 

II.

“Whether a transaction comports with the standards for business conduct within an industry

is a factual determination [not to be] set aside unless it is clearly erroneous.” Luper v. Columbia Gas

of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir. 1996). We apply this review standard

to the decision of the bankruptcy court. See, e.g., Nicholson v. Isaacman (In re Isaacman), 26 F.3d

629, 631 (6th Cir. 1994) (“On appeal to this court, we consider the judgment of the bankruptcy court

directly, using the same standards of review as the district court.”).

The Bankruptcy Code empowers a bankruptcy trustee to avoid “any transfer of an interest

of the debtor in property” where the transfer occurs within ninety days of the date of a bankruptcy

filing and provides the creditor with a greater interest than it would receive in a bankruptcy

proceeding brought under chapter 7 of Title 11 of the United States Code. 11 U.S.C. § 547(b).

Section 547(c)(2) limits the avoidance power of the trustee where the transfer is: 
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(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. § 547(c)(2) (2002). 

The Sixth Circuit has explained that subsections (B) and (C) of § 547(c)(2) embody a

subjective and objective component. Logan v. Basic Distrib. Corp. (In re Fred Hawes Org., Inc.),

957 F.2d 239, 244 (6th Cir. 1992). “The subjective prong (subsection (B)) requires proof that the

debt and its payment are ordinary in relation to other business dealings between that creditor and that

debtor. The objective prong (subsection (C)) requires proof that the payment is ordinary in relation

to the standards prevailing in the relevant industry.” Luper, 91 F.3d at 813. In Luper, the Sixth

Circuit joined the “clear consensus” among the other courts of appeals that the definition of

“‘ordinary business terms’ [under § 547(c)(2)(C)] means that the transaction was not so unusual as

to render it an aberration in the relevant industry.” Id. at 818 (collecting cases from other circuits).

The creditor receiving a preference bears the burden of proving, by a preponderance of the evidence,

the nonavoidability of a preferential payment under § 547(c)(2). Id. at 813 (relying on 11 U.S.C. §

547(g)).

The parties’ dispute over the application of § 547 to the transfers at issue is limited in scope.

AMS does not dispute that the transfers were subject to avoidance by the Trustee. The Trustee

concedes that AMS has satisfied the first two requirements of § 547(c)(2)(A) and (B). Thus, the sole

issue on appeal is whether AMS carried its burden of satisfying the so-called objective prong of the

ordinary course of business test, that is, whether ASI made the relevant payments according to
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“ordinary business terms,” as required by § 574(c)(2)(C). The bankruptcy court concluded that AMS

failed to meet its burden. Because the record in the instant case does not yield a “definite and firm

conviction” that the bankruptcy court was mistaken, Luper, 909 F.2d at 813, the district court erred

in reversing that decision. 

As a starting point, the bankruptcy court properly concluded that Janssen offered little

information of value. Her testimony concerning the payment practices of AMS customers – while

relevant to the subjective prong of the ordinary course of business exception – offers no insight into

the patterns of payment within the insurance industry more generally. See Logan, 957 F.2d at 246

(“[C]ourts do not look only at the manner in which one particular creditor interacted with other

similarly situated debtors, but rather analyze whether the particular transaction in question comports

with the standard conduct of business within the industry.”). Similarly, one can draw no reliable

conclusions based upon Janssen’s testimony concerning her tenure at another insurance company.

Although Janssen worked at Humana from 1981 to 1989, she conceded that she had no knowledge

of Humana’s “current” billing practices or the payment practices of its insureds. Moreover, that

Janssen could not identify an insurance company that does not include a grace period in its policies

does not necessarily prove the normalcy of payments by insureds during a grace period. We

therefore agree with the bankruptcy court’s well-reasoned conclusion that Janssen’s testimony does

not suffice to satisfy § 547(c)(2). 

As to the Michigan grace period statute, AMS argues that section 500.3410 effectively moves

the deadline for payment until the end of the grace period, making ASI’s payments after the due date

but prior to the expiration of the grace period neither late nor unusual. The Sixth Circuit has rejected

AMS’s argument regarding the impact of section 500.3410 on applicable due dates, however. In
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Grogan v. Liberty Nat’l Life Ins. Co. (In re Advance Glove Mfg. Co.), 761 F.2d 249, (6th Cir. 1985),

the court addressed a separate bankruptcy issue arising from the enforcement of section 500.3410.

The court there explained the effect ofsection 500.3410 on the due date established in an insurance

policy: 

The 31-day grace period was not intended by the parties or Michigan law to defer the

due date of the premium, but was designed for the unrelated purpose of protecting the

policyholder from premature termination of coverage upon default. As stated in

Couch on Insurance: 

The grace clause does not change the date when the premium is due but provides a

period in which default in payment may be retrieved and corrected without complete

loss of policy, and if death occurs during the grace period, the policy must be paid,

but not because the defaulted premium was not due until the end of the grace period.

Default occurs when a premium is not paid on the due date and the default is not

postponed for the grace period, the latter merely constituting a waiver of the default.

Id. at 251 (citing Couch on Insurance 2d § 32:133 (2d ed. 1961)). AMS somehow construes the

court’s statement in Grogan to support its position that “payments made during the grace period”

required under section 500.3410, “are not ‘late.’” However, Grogan’s language suggests just the

opposite: insureds who make payments after the established due date, are, under this court’s

interpretation of the Michigan statute, in default despite the continuation of coverage mandated by

section 500.3410. As a consequence, any suggestion that ASI’s payments within the grace period

are necessarily ordinary because they were timely is without merit. This court has held that

payments made during a grace period mandated by section 500.3410 are, in fact, late payments, and

we conclude that section 500.3410 does not relieve AMS of its obligation to offer evidence that it
The dissent suggests that Grogan and the distinction between “late” and “timely” payments 2

are of no relevance to the question before us. We believe this distinction material to our analysis to

the extent that AMS contends that because its payments were “timely” they must also be deemed

ordinary. We cite Grogan merely to make clear that our precedent has undercut any such argument.

Although the court in Luper acknowledged the difficulty of acquiring information regarding 3

competitors’ payment practices, 91 F.3d at 819, it is not evident here that AMS made any effort to

secure additional information concerning standard industry procedures. See id. at 814 (“Columbia

presented evidence about the difficulty of obtaining information from other utility companies . . .

relating collection deficiencies because such information is not generally known or disseminated and

is considered proprietary.”). 

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is ordinary for other industry actors to avail themselves of the ability to make premium payments

beyond the applicable due date.2

AMS seeks to rely on Luper and Yurika Foods Corp. v. United Parcel Serv. (In re Yurika

Foods Corp.), 888 F.2d 42 (6th Cir. 1989), in support of its claim that it adequately satisfied the

objective prong of the § 547(c)(2) test. Those cases are distinguishable, however, because in each,

the creditors offered some probative evidence on the business practices of other industry participants.

See Luper, 91 F.3d at 818 (noting that creditor offered evidence that twenty-four percent of the

customers of another gas utility company were at least thirty days past due on their accounts and it

was ordinary for commercial customers to fall into that category); Yurika, 888 F.2d at 45 (“[F]or

many years, 82% of carriers in the industry had not followed the credit limitation set out in the

regulation and invoice terms.”). There is no such evidence here. Asthe bankruptcy court correctly 3

observed, the existence of grace periods in insurance policies “says nothing about how often or how

common or uncommon it is for [premium] payments to be made by employers’ group policies after

the due date and before the expiration of the grace period.” In other words, AMS made no attempt

to demonstrate the frequency with which insureds take advantage of the mandatory grace period

across the industry.
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The dissent would have us allow “common knowledge and common sense . . . do at least a

bit of additional work,” (Dissenting Op. at 1), work that AMS has failed to do in its attempt to retain

a preferential payment subject to avoidance under the Bankruptcy Code. Presumably, in cases like

this, where it seems obviousthat a payment was made pursuant to ordinary terms, the dissent would

require the bankruptcy trustee to perform the task of demonstrating that certain payments were an

aberration and subject to avoidance. (See Dissenting Op. at 1 (“Nathan did not present any evidence

that any Michigan insurer issued policies without grace periods, or that payments within the grace

period are an aberration.”).) We acknowledge the appeal ofsuch an approach, but conclude that the

result would effectively amend the applicable statute, relieving creditors of the burden of § 547(g)

and making trustees responsible for proving avoidability. Although the dissent accuses us of

unreasonable devotion to the rules of evidence, we think it not needless formalism to enforce the

statutorily-mandated burden of proof and the longstanding evidentiary principle that “[a] party with

the burden of persuasion who arrives emptyhanded on decision day must expect to lose.” Monroe

v. Children’s Home Ass’n of Illinois, 128 F.3d 591, 593 (7th Cir. 1997).

Had AMS offered some admissible evidence on this issue, the district court’s reversal of the

bankruptcy court’s decision might well have been appropriate. Section 547(c)(2) is, of course,

intended to protect the continuation of normal business relationships with a company in financial

distress, see Walschmidt v. Ranier (In re Fulghum Constr. Corp.), 872 F.2d 739, 743 (6th Cir. 1989),

and ASI’s payments to AMS for the maintenance of health benefits for its employees possess a

certain ordinary quality. However, federal statute and the law of this circuit require that a creditor

seeking to retain a preferential payment subject to avoidance establish its entitlement to that more

favorable treatment. See Luper, 91 F.3d at 813. Because AMS failed to make this showing, we
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cannot conclude that the bankruptcy court clearly erred in finding that AMS’s receipt of premium

payments between March 2002 and May 2002 was not in the ordinary course of business. 

III.

For the foregoing reasons, we reverse the judgment of the district court and remand for

proceedings consistent with this opinion.
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BOGGS, Chief Judge, dissenting. The court’s opinion in this case correctly identifies the

governing law and properly states the standard of review. However, I respectfully disagree with the

court’s conclusion. I would hold that the bankruptcy court clearly erred in finding that the recipient

of insurance payments made within the statutorily mandated grace period failed to prove by a

preponderance of the evidence that “the transaction was not so unusual as to render it an aberration

in the relevant industry.” Luper, 91 F.3d at 818.

American Medical Security did present three pieces of evidence: 

(A) that this insurance company habitually received payments within the 31-day grace

period;

(B) that such a grace period is mandated by statute in the state of Michigan; and

(C) that a few years earlier another major insurance company also had such grace periods

in its contracts.

Nathan did not present any evidence that anyMichigan insurer issued policies without grace

periods, or that payments within the grace period are an aberration. The only question is whether

AMS’s evidence was sufficient to satisfy the fairly relaxed “preponderance” standard. While an

evidence maven could certainly have asked for more airtight testimony (perhaps from an insurancelaw professor, or an industry analyst), I believe that AMS’s evidence shows that the existence of the

grace period accords with ordinarybusiness terms, and that common knowledge and common sense

can do at least a bit of additional work in establishing that a payment made within an available grace

period is not an aberration.

As a general proposition, businesses generally do not give up their own money by making

payments significantly in advance of the time that adverse consequences would apply. For that

reason, we clearly should not require substantial proof that it is not an aberration for a debtor to make
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a transfer on the last day of a “regular” payment period. The debtor is simply acting rationally by

taking advantage of the time-value of money for as long as it can. Yet there is no legally cognizable

difference in the consequences attaching to a payment made on the last day of a “regular” payment

period and to a payment made during a grace period.

It is instructive that, in the extensive discussion in the court’s opinion of why a payment

made during the grace period is “late” rather than “timely,” there is no reference to the fact that those

terms are not what is at issue in § 547(c)(2)(C). It does not matter whether the payment was late;

it matters whether it was an aberration in the insurance industry. I believe that AMS’s evidence,

combined with the common-sense conclusion that it is good business to avail oneself of grace

periods when they are available, sufficiently demonstrates that the payments it received were not

aberrant.