## United States Court of Appeals
FOR THE EIGHTH CIRCUIT

________________ No. 05-2984

________________ In re: Bridge Information Systems, Inc.,

Debtor.

_____________________________ Gulfcoast Workstation Corporation, Appellant,

v. Scott P. Peltz, Plan Administrator on behalf of Bridge Information Systems, Inc., Appellee. *
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* Appeal from the United States District Court for the Eastern District of Missouri.

________________ Submitted: March 17, 2006 Filed: May 18, 2006

________________ Before COLLOTON, JOHN R. GIBSON and GRUENDER, Circuit Judges.

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GRUENDER, Circuit Judge.1 The Honorable David P. McDonald, Un ited States Bankruptcy Judge for the Eastern District of Missouri.

2 The Honorable Henry E. Autrey, United States District Court Judge for the Eastern District of Missouri.

-2- Scott P. Peltz (“Peltz”), the court-appoi nted plan administrator in the jointly administered chapter 11 bankruptcy cases of Bridge Information Systems, Inc. and certain of its affiliates (collectively, “Bri dge”), filed an adversary proceeding against Gulfcoast Workstation Corporation (“Gulfco ast”), seeking to avoid more than $2.155 million in alleged preferential transfers pursuant to Bankruptcy Code, 11 U.S.C. § 547. After a trial, the bankruptcy court 1 found that the payments at issue were preferential transfers and that Gulfcoast failed to establis h a defense to the avoidance of the payments. Gulfcoast appealed and the district court 2affirmed. For the reasons discussed below, we also affirm.

I. BACKGROUND

On February 15, 2001 (the “Petition Date”), Bridge filed for chapter 11 bankruptcy relief. Prior to the Petition Date, Bridge and Gulfcoast, both computer products resellers, bought and so ld goods with one another on net-30 terms. As of the Petition Date, Bridge owed to Gulfcoast ove r $1 million and Gulfcoast owed to Bridge over $713,000. Gulfcoast commenced an adversary proceeding against Bridge, seeking court authority to offset its prepetition debts owed to Bridge against the prepetition amounts owed by Bridge to Gulfcoast.

On February 13, 2002, the bankruptcy court confirmed a joint plan of liquidation and appointed Peltz as plan administrator. As plan administrator, Peltz was authorized to pursue causes of action on behalf of the Bridgeestates and their creditors, including actions to recover pr eferential transfers pursuant to Bankruptcy Code § 547.3 The bankruptcy court consolidated for purposes of trial the still-pending setoff adversary proceeding with the preferential tr ansfer adversary proceeding. After the trial, in a separate memo randum opinion, the bankruptcy court found that Gulfcoast was entitled to offset its prepetition debt to Bridge against Bridge’s prepetition debt to Gulfcoast and to a secured claim inthe amount of $713,677 under Bankruptcy Code § 506(a). Peltz appealed the order on the setoff memorandum opinion to the district court, which affirmed. Peltz did not further appeal the setoff issue.

-3- On February 11, 2003, Peltz filed an adversary proceeding against Gulfcoast, seeking to avoid $2,155,105.80 in alleged preferential transfers made by Bridge to Gulfcoast in the 90 days prior to the Pe tition Date and to recover this amount from Gulfcoast. At trial, Gulfcoast argued that these payments were subject to the ordinary course defense provided under Bankruptcy Code § 547(c) and th us were excepted from avoidance. Peltz argued that the ordi nary course defense did not apply because the transfers were not conducted pursuant to objectively ordinary business terms due to the use of remittance advice notations by Bridge with its payments. Specifically, when Bridge sent a payment to Gulfcoas t, it included a remittance advice notation specifying against which invoice Gulfcoast should apply the proceeds. Gulfcoast complied with the remittance advice notations.

After a trial, the bankruptcy court f ound that Peltz established that the payments were preferential transfers and that Gulfcoast failed to establish that the use of remittance advice notations to direct the application of payments to specific invoices was ordinary within the computer re sale industry. As a result, the bankruptcy court entered a judgment in favor of Peltz in the amount of $2,155,105.80. 3

II. DISCUSSION

A preferential transfer is any transfer of an interest of the debtor in property “(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was-4- insolvent; [and] (4) made...on or within 90 days before the date of the filing of the petition . . .” 11 U.S.C. § 547(b) (in relevant part). On appeal, Gulfcoast does not challenge the bankruptcy court’s finding that, in light of the undisputed evidence, Peltz established that the transfers were preferential.

Preferential transfers are subject to a voidance by the trustee. 11 U.S.C. § 547(b). When a preferential transfer is avoided, the transferee generally must disgorge the amount of the transfer and retu rn it to the debtor’s estate. 11 U.S.C. § 550(a). However, the Bankruptcy Code pr ovides an “ordinary course” defense to avoidance. A preferential tran sfer is excepted from avoidan ce if the transfer was: “(1) in payment of a debt incurred by the debtorin the ordinary course of business or financial affairs of the debtor and the tran sferee; (2) made in the ordinary course of business or financial affairs of the debtor and the transf eree; and (3) made according to ordinary business terms.” 11 U.S.C. § 547( c)(2). Establishing the ordinary course defense by a preponderan ce of the evidence is the transferee’s burden. Jones v. United Sav. & Loan Ass’n (In re USA Inns of Eureka Springs) , 9 F.3d 680, 682 (8th Cir. 1993) (citations omitted).

The bankruptcy court held that Gulfcoas t failed to establish the third prong of the ordinary course defense. This prong is an objective test that requires the transferee to prove that the business terms are in accordance with industry practice, not simply that they are in acco rdance with the practice between the debtor and the transferee. Id. at 684 (rejecting the district court’s misinterpretation of Lovett v. St. Johnsbury Trucking , 931 F.2d 494 (8th Cir. 1991), and agreeing with the First, Third, Sixth, Seventh and Eleventh Circuits that a tr ansferee is required unde r Bankruptcy Code § 547(c)(2)(C) to produce evidence of an “i ndependent, objective standard of the practices of the relevant industry”). The bankruptcy court determined that Gulfcoast4The practice of using remittance advice notations to direct the application of payments to specific invoices, if outside th e ordinary course of business, allows an impending bankruptcy debtor to give pref erential prepetition treatment to certain creditors by disproportionately satisfying those creditors’ debts. For example, the debtor could pay unusually larg e or late debts or pay an invoice that has not yet come due–all of which Bridge did for Gulfcoast in the 90 days before Bridge filed for bankruptcy relief. By doing so , the debtor favors one creditor over another in the last days before all creditors become subject to the priority treatment rules of the Bankruptcy Code and the pro rata distribution of the estate.

-5- did not show that its use of remittance advice notations to direct the application of payments to specific invoices was within objectively ordinary business terms. 4

On appeal, Gulfcoast argues that the te stimony of two of its own employees, Thomas Pyla, the comptroller, and Bradle y Whitsett, the general manager and vice president, established that its use of remittance advice notations was according to objectively ordinary business terms. A transferee may use its own employees or officers to establish the third prong of the ordinary course defense. Id. at 685 (holding that the testimony of the transferee’s CEO was sufficient); St. Johnsbury Trucking , 931 F.2d at 499 (holding that the tr ansferee produced sufficient evidence of the industry-wide practice regarding timing of payments through the uncontroverted evidence of two of the transf eree’s employees). However, to establish the third prong of the ordinary course defe nse, the testimony of a transferee employee cannot be evidence merely of the practice between the transferee and the debtor; it must be “evidence of a prevailing practi ce among similarly situated members of the industry facing the same or similar problems.” Eureka Springs , 9 F.3d at 685.

Gulfcoast points to no testimony in the r ecord where its witness testified as to the common industry-wide practice regardi ng the use of remittance invoice notations to direct the application of payments to specific invoices, and our independent review5 In its briefing and at oral argument, Gulfcoast suggested that it and Bridge essentially were “the industry” and, thus , Gulfcoast’s testimony regarding its practices with Bridge satisfied the “industry-wide” evidence requirement. However, we do not need to decide whether the relationship be tween a transferee and the debtor alone can constitute the “industry” for purposes of the third prong of the ordinary course defense because Gulfcoast failed to pr esent evidence at trial to support this claim on appeal.

-6- of the record reveals no such testimony. 5 Pyla testified on issues relating to the payment relationship between Gulfcoast and Bridge and, to a limited degree, to Gulfcoast’s relationship with its other cust omers. However, he did not offer any testimony on the industry-wide use of remittance advice notations to direct the application of payments to specific invoi ces. Whitsett offered testimony on the issue of industry-wide practices related to payment terms and delinquency, but likewise offered no evidence on the use of remittance a dvice notations to direct the application of payments to specific invoices in the computer resale industry. Although both witnesses offered testimony on Gulfcoast’s re lationship with Bridge as well as on Gulfcoast’s relationship with others in th e industry, this does not constitute objective evidence of the industry-wide use of re mittance advice notations to direct the application of payments to specific invoices. It merely is eviden ce of Gulfcoast’s use of remittance advice notations in this fashion. Cf. id. at 685 (holding that the transferee met its burden under the third prong by providing evidence that not only were 8-10% of its accounts on a pay schedule such as that of the debtor, but also that “working with delinquent customers as long as some type of payment was forthcoming was common industry practice ”) (emphasis added); St. Johnsbury Trucking , 931 F.2d at 499 (holding that the transferee met its burden under the third prong by providing evidence that it “is ‘common’ within the trucking industry ” for payments to be made more than 30 days after invoice under a contract with net-30 terms) (emphasis added). As such, Gulfcoas t did not meet its burden of showing that, throughout the relevant computer resale industry, the use of remittance advice notations to direct the application of payments to specific invoices was an ordinary business term.6 Double dipping occurs in this context wh en a creditor uses the debtor’s unpaid, prepetition invoices both to offset the cr editor’s prepetition liability to the debtor under Bankruptcy Code § 553 and to establis h new value to a preference action under Bankruptcy Code § 547. Peltz objected to Gulfcoast’s initial efforts to double dip through the concurrently pending setoff a dversary proceeding. He argued it was impermissible double counting, citing In re Comptronix Corp ., 239 B.R. 357, 360

-7- Gulfcoast also argues th at the bankruptcy court erred as a matter of law by holding that, because Gulfcoast failed to establish that its use of remittance advice notations was within ordinary business terms, it failed to establish the third prong of the ordinary course defense. Gulfcoast claims that the bankruptcy court’s analysis was “myopic,” focusing only on the parties’ use of remittance advice notations, rather than recognizing that other parts of thei r transactions may have been conducted according to objectively ordinary business terms. However, even if other terms of the Gulfcoast-Bridge relationship were objectivel y ordinary, this does not mitigate the fact that a key element of the relationship–the use of the remittan ce advice notations to direct the application of payments to specific invoices–was not shown to be an objectively ordinary business term. The bankruptcy court was not myopic, but was properly focused on the issue of whether the use of remittance invoice notations to direct the application of payments to sp ecific invoices was outside ordinary business terms for the industry.

Finally, Gulfcoast argues that the bankruptcy court erred in finding that Gulfcoast abandoned its new value defense, another defense to avoidance available under Bankruptcy Code § 547(c). The bankrupt cy court held thatGulfcoast conceded prior to trial that it could not produce su fficient evidence to establish a new value defense and thus abandoned this defense. The district c ourt affirmed, noting that the only reference to a new value defense attrial was Gulfcoast’s acknowledgment that the new value defense was the basis for its setoff claim asse rted in a separate adversary proceeding, which was accompan ied by an assurance from Gulfcoast that it would not seek to “double dip.” 6(Bankr. M.D. Tenn. 1999). Gulfcoast ultimat ely agreed not to attempt to double dip.

-8- On appeal, Gulfcoast maintains that it ne ver conceded that it could not establish a new value defense and that the lower courts misconstrued Gulfcoast’s comments regarding double dipping. Howe ver, we do not need to decide whether Gulfcoast conceded pretrial that it could not establis h the new value defense or that it otherwise affirmatively waived the defense. Even if the bankruptcy court erred, the error was harmless. A review of the record show s that Gulfcoast abandoned its new value defense at trial by failing to offer any evidence of the defense.

To establish the new value defense, a tr ansferee must show th at (1) the parties intended a contemporaneous exchange of va lue; (2) the exchange was, in fact, contemporaneous; and (3) the exchange was for new value. Harrah’s Tunica Corp. v. Meeks (In re Armstrong) , 291 F.3d 517, 525 (8th Cir. 2002). The critical inquiry in determining if a transfer is subject to the new value defense is whether the parties intended the transfer to be a contemporaneous exchange for new value. Official Plan Comm. v. Expeditors Int’l of Wash., Inc. (In re Gateway Pac. Corp.) , 153 F.3d 915, 918 (8th Cir. 1998).

Although Gulfcoast asserted a new value defense pretrial, it made no attempt to construct a new value defens e at trial. It offered no evidence to satisfy any of the three prongs. Rather, it is clearfrom the record that Gulfcoast’s defense at trial rested on its asserted ordinary cour se defense. No Gulfcoast witness testified on the new value defense. No computation model, supported by evidence of each payment matched with the contemporaneously pr ovided goods or services, was offered to demonstrate the proper offset of a preferen tial payment with the subsequently given new value. In fact, no evidence was offere d into evidence to establish that either Gulfcoast or Bridge even intended that the preferential tran sfers be contemporaneous exchanges for new value. As such, we a ffirm the bankruptcy court’s judgment on the ground that Gulfcoast abandoned any new value defense it may have had by failing-9- to pursue such defense at trial. See Harman v. Cook , 191 F.3d 911, 921 n.9 (8th Cir. 1999) (citations omitted) (holding that this Court “review[s] judgments, not opinions, and we may affirm on any ground supported by the record, whether . . . that ground was urged below or passed on by the district court”).

III. CONCLUSION

For the reasons discussed above, we affirm the bankruptcy court’s judgment.

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