IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

IN RE: §

§

KEVCO, INC., ET AL., §

§

Debtors. §

______________________________ §

§

COASTAL INDUSTRIES, INC., §

§

Appellant, §

§

VS. § NO. 4:05-CV-691-A

§

DENNIS FAULKNER, §

PLAN ADMINISTRATION AGENT, §

ACTING ON BEHALF OF KEVCO, §

INC. UNDER ITS CONFIRMED PLAN, §

§

Appellee. §

MEMORANDUM OPINION

and

ORDER

This action comes before the court as an appeal from a July

15, 2005, judgment of the United States Bankruptcy Court for the

Northern District of Texas, Fort Worth Division, the Honorable

Barbara J. Houser presiding. The court, having considered the

briefs of appellant, Coastal Industries, Inc. ("Coastal"), and

appellee, Dennis Faulkner, as the Plan Administration Agent for

the debtors, Kevco, Inc., and its direct and indirect wholly

owned subsidiaries, ("the Agent"), the record on appeal, and

applicable authorities, finds that the bankruptcy court's

judgment should be affirmed. 

 

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On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 became effective, including a substantial broadening of

the ordinary course of business defense. See In re SGSM Acquisition Co., LLC,

439 F.3d 233, 237 n.1. (citing 11 § 547(c)(2)). The law applicable here,

however, is the pre-amendment ordinary course of business defense. 

2

I.

Jurisdiction

The appeal is from a judgment signed July 15, 2005, awarding

the Agent recovery against Coastal in the amount of $813,627.71

plus pre-judgment interest. This court's jurisdiction exists

pursuant to 28 U.S.C. § 158(a).

II.

Underlying Proceedings

On February 5, 2001, Kevco, Inc. and its direct and indirect

wholly owned subsidiaries and affiliates (collectively, "the

debtors" or "Kevco") filed voluntary petitions for relief under

Chapter 11 of the United States Bankruptcy Code. On June 25,

2004, under the debtors' confirmed plan of liquidation, the Agent

initiated an adversary proceeding against Coastal seeking to

recover $1,926,172.90 in allegedly preferential payments made by

Kevco to Coastal. After a four-day trial, the bankruptcy court

held that all the payments were preferential transfers and

further that Coastal had failed to carry its burden of proof

under 11 U.S.C. § 547(c)(2)1

 and (g) that any of them were

shielded by the ordinary course of business ("OCOB") defense. 

The bankruptcy court, however, did find that Coastal was entitled

to a subsequent new value defense in the amount of $1,112,545.19. 

See 11 U.S.C. § 547(c)(4). Judgment was awarded to the Agent for

 

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The structure of appellant's brief is very confusing. Among other

things, the summary of the statement of issues on page 2 does not always

correspond with the substantive briefing later in the brief. For example,

Coastal has a discussion on whether the bankruptcy court erred in its analysis

of Coastal accounts receivable from Kevco. See Br. of Appellant at 21-23. 

Yet this issue is not listed in the preliminary Statement of Issues. Id. at

2. Because of this confusion, the court is defining the issues as it

understands them, which understanding, in turn, largely corresponds with how

the Agent framed the issues.

3

the remaining balance of $813,627.71 plus pre-judgment interest. 

This appeal ensued.

III.

Underlying Facts

In the memorandum opinion of June 30, 2005, the bankruptcy

court thoroughly recited the relevant facts to this dispute. 

They will not be repeated here. Briefly, in the underlying

bankruptcy proceedings, Coastal stipulated that all the payments

at issue were preferences under 11 U.S.C. § 547(b) of the

Bankruptcy Code. Therefore, as set forth more specifically

below, the only issues before the bankruptcy court, and now this

court, are the viability of Coastal's defenses of OCOB, judicial

estoppel, and res judicata, notably on all of which Coastal bears

the burden of proof. 

IV.

Issues on Appeal

There are four issues2 on appeal:

A. Whether the bankruptcy court erred at trial by finding

in favor of the Agent with regard to Coastal's OCOB defense under

11 U.S.C. § 547(c)(2)(B), including,

1. Whether the bankruptcy court erred in giving the

testimony of Stephen Thomas, the Agent's expert,

 

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more weight than that of Coastal's fact witness

David Cook.

 2. Whether the bankruptcy court erred in creating the

"Wingate Historical Period" for comparing payments

made in the OCOB or financial affairs between

Kevco and Coastal in the pre-preference period

with the preference period under 11 U.S.C. §

547(c)(2)(B).

 3. Whether the bankruptcy court erred in finding that

Coastal engaged in "unusual collection practices"

during the preference period.

B. Whether the bankruptcy court erred by finding in favor

of the Agent with regard to Coastal's OCOB defense under 11

U.S.C. § 547(c)(2)(C), including,

1. Whether the bankruptcy court erred in holding that

the manufactured housing industry was the

applicable industry standard for the purposes of

determining "ordinary business terms" under 11

U.S.C. § 547(c)(2)(C).

2. Whether the bankruptcy court erred in giving zero

weight to the testimony of James Cunningham with

respect to whether the payments in question were

made pursuant to the "ordinary business terms" in

accordance with 11 U.S.C. § 547(c)(2)(C).

C. Whether the bankruptcy court erred in finding against

Coastal on its defense of judicial estoppel.

D. Whether the bankruptcy court erred by not granting

summary judgment for Coastal on its res judicata defense and in

granting summary judgment for the Agent on Coastal's res judicata

defense. 

 

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V.

Standard of Review

To the extent the appeal presents questions of law, the

bankruptcy court's judgment is subject to de novo review. 

Pierson & Gaylen v. Creel & Atwood (In re Consolidated

Bancshares, Inc.), 785 F.2d 1249, 1252 (5th Cir. 1986). Findings

of fact, however, will not be set aside unless clearly erroneous. 

Bankr. R. 8013; Memphis-Shelby County Airport Authority v.

Braniff Airways, Inc. (In re Braniff Airways, Inc.), 783 F.2d

1283, 1287 (5th Cir. 1986). A finding is clearly erroneous,

although there is evidence to support it, when the reviewing

court on the entire evidence is left with a definite and firm

conviction that a mistake has been committed. Id. The mere fact

that this court would have weighed the evidence differently if

sitting as the trier of fact is not sufficient to set aside the

bankruptcy court's order if that court's account of the evidence

is plausible in light of the record viewed in its entirety. 

Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985).

VI.

Analysis

A. Coastal's OCOB Defense under 11 U.S.C. § 547(c)(2)(B)

There is no precise legal test for whether payments are made

in the OCOB. Gasmark Ltd. Liquidating Trust v. Louis Dreyfus Gas

Corp., 158 F.3d 312, 317 (5th Cir. 1998) (citation omitted). 

Rather, the analysis focuses on the time within which the debtor

ordinarily paid the creditor and whether the timing of the

 

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payments during the 90-day period reflected some consistency with

that practice. Id. It follows that the OCOB inquiry is

peculiarly factual and that the bankruptcy court's findings in

this regard are consequently entitled to deference unless clearly

erroneous. In re Braniff Airways, Inc., 783 F.2d at 1287. The

justification for this great deference to the factual findings of

the bankruptcy court is perhaps well illustrated here where the

bankruptcy court's forty-one page memorandum opinion reflects

extremely careful attention to and consideration of the facts.

1. The Testimony of Stephen Thomas v. David Cook

With regard to its OCOB defense under 11 U.S.C. §

547(c)(2)(B), Coastal complains that the bankruptcy court wrongly

gave the testimony of the Agent's expert, Stephen Thomas, more

weight than the testimony of Coastal's fact witness, David Cook. 

The bankruptcy judge's opportunity to make first-hand credibility

determinations entitles its assessment of the evidence to

deference, which like other factual findings, will not be set

aside unless clearly erroneous. In re Perry, 345 F.3d 303, 309

(5th Cir. 2003). Where the finding of a bankruptcy judge is

based on its decision to credit the testimony of one witness over

that of another, that finding, if not internally inconsistent,

can virtually never be clear error. Theriot v. U.S., 245 F.3d

388, 395 (5th Cir. 1998). Such is the case here. The court

finds no error by the bankruptcy court in its assessment as to

the respective credibility of these two witnesses.

 

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2. The Wingate Historical Period

Coastal contends that the bankruptcy court erred by not

considering the entire business relationship between Coastal and

Kevco, which dated back to 1982, in making the determination as

to what the OCOB was between them. Instead, the bankruptcy court

found that the fifteen-month period between when Wingate Partners

("Wingate") took control of Kevco in August 1999 until November

2001, was the appropriate pre-preference period with which to

compare Coastal's business and financial affairs with Kevco in

the preference period. See Coastal's App. in Support of Appeal

at 87 (Mem. Opinion at 21). 

As an initial matter, the court concurs with the bankruptcy

court that there is legal authority for considering less than the

entire relationship of the parties. See Coastal's App. in

Support of Appeal at 87 (Mem. Opinion at 21); see also Lovett v.

St. Johnsbury Trucking, 931 F.2d 494, 498 (8th Cir. 1991) (twelve

month period is an appropriate standard for determining the

ordinary course of business between the parties). Given how the

relationship between Coastal and Kevco changed after Wingate's

takeover, the court further concludes that the bankruptcy court

appropriately did just that here.

Specifically, the bankruptcy court found that, after Wingate

took over Kevco, its cash-management system became more

sophisticated. See Coastal's App. in Support of Appeal at 86

(Mem. Opinion at 20). Kevco's payments to vendors, including

Coastal, also became more regular. Id. Moreover, the pattern of

 

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payments from Kevco to Coastal was different after Wingate's

investment and assumption of management control. Id. Payments

to vendors were unquestionably more regular and occurred almost

invariably on the 10th and 25th of the month. Id. None of

these factual findings is clearly erroneous. Nor was the

bankruptcy court's finding that it would be unfair to the other

creditors to permit Coastal to cherry-pick some isolated payment

over the parties' twenty-year relationship to show that there was

some consistency with a payment within the preference period. 

Id. at 88 (Mem. Opinion at 22). 

 3. The Finding of Unusual Collection Practices

Before concluding that Coastal had failed to establish, by a

preponderance of the evidence, the absence of unusual collection

activity, the bankruptcy court engaged in a thorough analysis of

all the facts in evidence. See Coastal's App. in Support of

Appeal at 89-101 (Mem. Opinion at 23-35). This court need not

recite each of the bankruptcy court's findings here. Suffice it

to say that the court has thoroughly reviewed them and concluded

that none of them is clearly erroneous. 

B. Coastal's OCOB Defense Under 11 U.S.C. § 547(c)(2)(C)

The third prong of the OCOB defense required Coastal to

prove by a preponderance of the evidence that Kevco made the

transfers at issue according to "ordinary business terms." See

11 U.S.C. § 547(c)(2)(c). A payment, in turn, is made according

to its ordinary business terms if the payment practices at issue

comport with the standard in the industry. In re Gulf City

 

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Seafoods, Inc., 296 F.3d 363, 367-68 (5th Cir. 2002). Here,

Coastal complains that the bankruptcy court defined the

applicable industry too narrowly and also failed to duly credit

the testimony of James Cunningham. 

1. The Chosen Industry

At trial, through the testimony of James Cunningham, Coastal 

attempted to define the relevant industry as the manufacturing

industry generally. Finding that far too broad, the bankruptcy

court instead defined the relevant industry as the manufacturing

housing industry, notably the industry in which Coastal and Kevco

operated. According to the bankruptcy court, Cunningham's

knowledge regarding the competitors or collection practices of

either Coastal or Kevco was virtually nil. He could not even

identify Coastal's or Kevco's competitors. See Coastal's App. in

Support of Appeal at 103-105 (Mem. Opinion at 37-39). For an

industry standard to be a meaningful benchmark, there should be

evidence of credit arrangements of other debtors and creditors in

the same industry. Gulf City Sea Foods, Inc., 296 F.3d at 369. 

The bankruptcy court did not err in concluding that such evidence

was lacking.

 2. Testimony of James Cunningham

Coastal complains that the bankruptcy court wrongfully

discounted James Cunningham's testimony. Again, the bankruptcy

judge's first-hand credibility determinations are entitled to

deference. In re Perry, 345 F.3d at 309. Given Mr. Cunningham's

apparent lack of experience and knowledge in the relevant

 

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industry, the weight or lack thereof afforded to his testimony by

the bankruptcy court was not clearly erroneous. 

C. Judicial Estoppel

Consisting of barely two short paragraphs without any

citation to legal authority, Coastal's urging of its affirmative

defense of judicial estoppel is half-hearted at best. From what

the court can gather, however, Coastal appears to assert that the

Agent took an inconsistent position insofar as Coastal believed

that it was doing business with "Kevco, Inc." Kevco, Inc., in

turn, did not disclose any payments to Coastal within 90 days of

the petition date on its schedules or statement of financial

affairs. Another Kevco entity -- Kevco Distribution, L.P. --

did. Therefore, per Coastal, the Agent's preference claim is

barred by judicial estoppel.

Judicial Estoppel is a common law doctrine that prevents a

party from assuming inconsistent positions in litigation. In re

Coastal Plains, Inc., 179 F.3d 197, 205 (5th Cir. 1999). Three 

requirements must be met for it to apply here: (1) the Agent's

position is clearly inconsistent with a previous one; (2) the

bankruptcy court accepted the previous position; and (3) the nondisclosure was not inadvertent. In re Superior Crewboats, Inc.,

374 F.3d 330, 335 (5th Cir. 2004). 

The bankruptcy court correctly stated this applicable law. 

It also correctly applied it to the facts in concluding that

judicial estoppel did not apply. Indeed, based on the

uncontroverted evidence, the court is perplexed as to how Coastal

 

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even begins to contend that it might. To begin with, there is no

evidence that the Agent took an inconsistent position, the very

first requirement. Coastal was doing business with Kevco

Distribution, L.P., and the statement of financial affairs of

that entity completely and accurately disclosed that, in the

ninety days preceding the petition date, it had paid Coastal

$1,926,172.90. See Coastal's App. in Support of Appeal at 82

(Mem. Opinion at 16). Coastal's perception as to which Kevco

entity it was selling product is irrelevant. Moreover, that

Coastal thought it was doing business with Kevco, Inc., rings

hollow given that Coastal admits that it did not even review the

schedules or statement of financial affairs of that the entity. 

Id. at 80 n.14. The bankruptcy court did not err in finding

judicial estoppel inapplicable. 

D. Res Judicata

Apparently Coastal cares even less about its affirmative

defense of res judicata as Coastal fails to even articulate what

its res-judicata argument is. Rather, in its primary brief, it

merely states that various undiscussed facts in the record in

this case are similar in an unidentified way to a bankruptcy

opinion out of Michigan. See Br. of Appellant at 49. Similarly,

in its reply brief, Coastal states that it "stands on its

arguments previously made on this issue to the Bankruptcy Court

in its pre-trial briefs, including its summary judgment briefs

and to this Court in its initial brief." See Reply of Appellant

at 25. In essence, Coastal invites the court to sift through the

 

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voluminous record in search of facts supporting its res judicata

defense and then to perform independent research as to whether

those facts support a finding in favor of this defense. The

court declines to do so and finds that Coastal has abandoned this

argument on appeal. See, e.g., Fehlhaber v. Fehlhaber, 681 F.2d

1015, 1030 (5th Cir. 1982) (failure to brief and argue an issue

is grounds for finding that the issue has been abandoned). 

Further, even had Coastal not abandoned this argument on appeal,

it is without any merit, and the bankruptcy court therefore did

not err by rejecting it. 

VII.

Order

For the reasons discussed herein,

The court ORDERS that the July 15, 2005, judgment from which

appeal is taken be, and is hereby, affirmed. 

 SIGNED July 18, 2006.

 /s/ John McBryde 

JOHN McBRYDE

United States District Judge

 

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