## United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 97-4151

___________ In re Spirit Holding Company, Inc., * * Debtor. * *

______________________ * * Central Hardware Company, Inc., * * Appellee, * * v. * Appeals from the United States * District Court for the Eastern Sherwin-Williams Company, * District of Missouri. * Appellant. * *

______________________ * * Peter Lumaghi, * * Trustee. * * * *-2-

___________ No. 97-4353

___________ In re Spirit Holding Company, Inc., * * Debtor. * *

______________________ * * Central Hardware Company, Inc., * * Appellee, * * v. * * Walker-Williams Lumber Company, * * Appellant. * *

______________________ * * Peter Lumaghi, * * Trustee. *

___________ Submitted: June 8, 1998 Filed: August 28, 1998

___________The Honorable Owen M. Panner, United States District Judge for the District 1 of Oregon, sitting by designation. The Honorable George F. Gunn, Jr., United States District Judge f or the Eastern 2 Di strict of Missouri, with respect to Sherwin-Williams; the Honorable Stephe n Nathaniel Limbaugh, United Stat es District Judge for the Eastern District of Missouri, with respect to Walker-Williams. -3- Be fore RICHARD S. ARNOLD and MORRIS SHEPPARD ARNOLD, Circui t Judges, and PANNER, District Judge. 1

___________ MORRIS SHEPPARD ARNOLD, Circuit Judge. Central Hardware Compa

ny filed a voluntary petition for bankruptcy relief, see 11 U.S.C. § § 1101-1146, six days after its parent, the Spirit Holding Company, ha d fil ed its own similar petition. These appeals concern two wire transfers, one to th e Sherwin-Williams Comp any and the other to the Walker-Williams Lumber Company, that Central made in the interval between the bankruptcy filings of Central and Spirit. The trustee in bankruptcy sought to avoid the payments as preferential transfers i n violatio n of 11 U.S.C. § 547, and the bankruptcy court granted summary judgment in favo r of Sherwin-Williams and Walker-Williams. On separate appeals, the distric t court reversed the bankruptcy court. The district court opinion with respect t o Sherwin-Williams is unpublished; see In re Spirit Holding Company, Inc. , 214 B.R. 891 (E.D. Mo. 1997), with respect to Walker-Williams. Sherwin-Williams an d Walker-Williams appeal the judgments of the district court, and we affirm. 2
I. The bankruptcy code provides that a trustee in bankruptcy may avoid certai n tra nsfers made 90 days before the petition for bankruptcy is filed, see 11 U.S.C

. § 547(b ), but allows the transferee certain defenses to the trustee's broad avoidanc e power, see 11 U.S.C. § 547(c). The question here is whether the payments at issue-4-

were made in the ordinary course of business, for if they were, they are not subject to the trustee's power of avoidance. See 11 U.S.C. § 547(c)(2).
A transfer by a debtor must have three characteristics before it qualifies as one made in the ordinary course of business: it must be for a debt incurred in the ordinary course of bus iness, it must be made in the ordinary course of business of financia l affairs of t he debtor and the transferee, and it must be made according to ordinary business terms. See 11 U.S.C. § 547(c)(2). The parties here do no t dispute the holding that each of the transfers was for a debt incurred in the o rdinary course of business, see 11 U.S.C. § 547(c)(2)(A). The dispute concerns whether the district court properl y held that the transfers at issue do not satisfy the second and third statutory requirements. Because we hold that t hose transfers do not satisfy the requirement that they be made in the ordinary course of business, see 11 U.S.C. § 547(c)( 2)(B), we need not consider whether the payments were made according to ordinary business terms, see 11 U.S.C. § 547(c)(2)(C).
Wehave indicated that " 'there 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 ordinary course of business; rather, th[e] court must eng age in a "peculiarly factual" analysis.' " Lovett v. St. Johnsbury Trucking , 931 F.2d 494, 497 (8th Cir. 1991) , quoting In re Fulghum Construction Corp. , 872 F.2d 739, 743 (6th Cir. 1989), itself quoting In re First Software Corp. , 81 B.R. 211, 213 (Bankr. D. Mass. 1988). " '[T]he corner stone of this element of a preference defense is that the creditor needs [to ] demonstrate some consistency with other business tran sactions between the debtor and the creditor.' " Lov ett , 931 F.2d at 497, quoting In re Magic Circle Energy Corp. , 64 B.R. 269, 272 (Bankr. W.D. Okla. 1986).
The legis lative history of § 547(c)(2) also provides us with some guidance i n deciding this case. The relevant congressional reports reveal that the purpose of this section was "to leave undisturbed normal financial relations, bec ause it does not detract-5-

from the general policy of the preference section to discourage unusual action by either the debtor or his creditors during the debtor's slide into bankruptcy." S. Rep

. No. 95 -989 at 88 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5874; H.R. Rep

. No. 95-595 at 373 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6329. With these principles in mind, we turn to a consideration of t he facts of the cases before us.
II. Centr al purchased paint products and related merchandise from Sherwin

Williams for several years prior to filing bankruptcy, and Central typically pai d Sher win-Williams by check. Central made two payments by wire transfer in 1992 , however, after it exceeded its credit limit and Sherwin-Williams threatened to disrupt delivery of goods.
On March 22, 1993, Central sent a check to Sherwin-Williams in payment o f outstanding invoices. The parties do not dispute that the check conformed to th e ordinary financial dealings between the parties, as it was neither unusually large no r unusually early or late. The next day, Central's parent company petitioned for relief in bankr uptcy court. A day later, Central called Sherwin-Williams to inquire whether it had rec eived Central's check, and Sherwin-Williams indicated that it had not. O n March 25, Central called Sherwin-Williams again, and Sherwin-Williams stated tha t the company still had no t received the check. (Although Sherwin-Williams apparently did not know so at the time, the check had in fact arrived earlier t hat day.) Central then informed Sh erwin-Williams that it would make the outstanding payment by wire, and la ter that day Central indeed wired the money to Sherwin-Williams and stoppe d payment on the check. Four days later, Central filed for bankruptcy relief. SherwinWilliams argues that the transf er was made in the ordinary course of business because th ere was little evidence that it engaged in an unusual collection effort in the relevant instance, because the wire transfer was consistent with earlier business transactions-6-

between Central and Sherwin-Williams, and because even if the wire transfer wa s inconsistent, a change in th e method of payment is not a sufficient deviation from past conduct to allow the conclusion that the transfer was not made in the ordinary course of business. There was, as Sherwin-Williams points out, little direct evidence of an unusual coll ection effort on Sherwin-Williams's part. The testimony, in fact, tended to sho w that Central called Sherwin-Williams, not that Sherwin-Williams called Central. A represen tative of Sherwin-Williams testified, moreover, that Central proposed on it s own accord to make the wire transfer. But while we understand that proof of a n unusual collection effort has a tendency to show that a transfer occurred outside th e ordinary course of business, see In re Braniff, Inc. , 154 B.R. 773, 781-82 (Bankr. M.D. Fl a. 1993), the absence of an unusual collection effort by Sherwin-Williams does not necessarily make the transfer an ordinary one. It means only that we will not find that the transfer was not ordinary on account of Sherwin-Williams's collection effort.
The relevant legislative history, as we have already noted, states that th e ordinary-course-of-business exception discourages unusual action "by either the debtor or his creditor s." S. Rep. No. 95-989 at 88, reprinted in 1978 U.S.C.C.A.N. at 5874; H.R. Rep. No. 95-595, reprinted in 1978 U.S.C.C.A .N. at 6329. Our cases, too, focus not narrow ly on the collection effort by the creditor but broadly on the consistenc y between the transfer at issue and other business transactions between the debtor and the creditor. See Lo vett , 931 F.2d at 497-99. Thus, even assuming that Central acted on its own initiative, we must determine whether that initiative comported with th e ordina ry course of financial transactions carried on between Central and Sherwin

Williams.
Sherwin-Williams maintains that the wire transfer at issue was indeed consistent with the ordinary course of financial transactions between it and Central. For thi s proposition, Sherwin-Williams relies upon the f act that Central had made two previous-7-

payments t o Sherwin-Williams by wire transfer. If Central had done it before, th e argumentruns , then doing it again cannot fail to be ordinary. This argument, whil e superficially appealing, overlooks the facts surrounding those earlier wire transfers. A representat ive of Central testified that each of the 1992 wire transfers was mad e because Central had

substantially exceeded its credit limit and Sherwin-Williams was thre atening to withhold goods. One may therefore conclude that a wire transfer is an ordinary f

inancial transaction in this case insofar as it is a response by Central to a threat by Sherwin-Williams to withhold goods. But, as we noted above, and a s Sherwin-Williams itself asserted, there is little evidence that Sherwin-William s employedany unusual collection effort with respect to the 1993 payment. Given the evidence of the parties' past financial dealings, we belie ve it is clear that a wire transfer was not the ordinary means to respond to a normal invoice; a wire transfer would be ordinary only in a factual cont ext that Sherwin-Williams itself denies existed in regard to the payment at issue. Furthermore, as the district court recognized, the transfer at is sue was not merely a wire transfer. The transfer was originally attempted by check and was onl y subsequently effected by wire. There was no evidence that Central had an ordinary pra ctice of issuing checks to Sherwin-Williams to pay invoices and then stoppin g paymenton t hose checks and sending a wire transfer in their place. Indeed, such a re placement, taking place during the week between Central's parent company' s bankruptcy filing and its own, leads this court to the same conclusion that the district court reached, namely, that the wire transfer was a preference of one creditor ove r others.
Sherwin-Williams maintains that the change in a method of payment, standing alone, i s an insufficient deviation from past practices to take a payment out of th e ordinary course

of business. Bankruptcy courts seem to be somewhat divided on this question. Compare In re Valley Steel Corp. , 182 B.R. 728, 737-38 (Bankr. W.D. Va. 1995) (holding that payment by wire transfers was not in the ordinary course of-8-

business because the debtor had always paid by check before), with In the Matter o f Brown Transport Truckload, Inc. , 161 B. R. 735, 740 (Bankr. N.D. Ga. 1993) (holding that the cha nges in the method of payment by a debtor are not enough to make th e business relationship not ordinary). While thi s may be an interesting question, we need not decide it today. We are not presented with a change in the form of payment alone; instead, Central replace d a check it had already issued with a wire transfer. Under the circumstances of this case, we believe that the wire transfer from Central to SherwinWilli ams represented a sufficient deviation from past dealings that the wire transfe r cannot qualify as a payment made in the ordinary course of business.
III. Wal ker-Williams sold lumber products to Central for several years prior t o Central's bankruptcy filing, and prior to the tra nsfer at issue here, Central normally paid Walker- Williams by check. On March 22, 1993, Central sent a check to Walker

Williams in payment of outstanding invoi ces. The parties do not dispute that the check conformed to the ordinary financial dealings between the parties, as it was neithe r unus ually large nor unusually early or late. The next day, Central's parent compan y peti tionedfor relief in bankruptcy court, and the day after that, Walker-William s contacted Central to inquire about the effect on Central of its parent's bankruptcy

. Although there is no evidence that Walker-Williams requested it to do so, Centra l offered to replace the check with a wire transfer, and did so the next day.
W alker-Williams argues that the wire transfer was made in the ordinary course of business because there was little eviden ce of an unusual collection effort on WalkerWilliams's pa rt and that a change in the method of payment was not a sufficien t deviationfrom past conduct to allow the conclusion that the transfer was not made in the ordin ary course of business. Walker-Williams thus makes arguments similar t o thos e of Sherwin-Williams on similar facts, and we reject those arguments for th e reasons that we gave in rejecting Sherwin-Williams's. Under the circumstances of this case, we believe that the wire transfer from Central to Walker-Williams was a sufficient-9-

deviation from past dealings that the payment cannot qualify for the ordinarycourse-of-business exception to the general rule of preference avoidance.
IV. For the foregoing reasons, we affirm the judgments of the district court. A true copy.
Attest: CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.