Opinion ID: 859154
Heading Depth: 2
Heading Rank: 1

Heading: Transfers Between Pillar and Debtor

Text: First, Pillar argues that the loans, which it made to the Debtor were meant to defray operating expenses and thus were incurred in the ordinary course of business. Therefore, Pillar argues that under § 364(a), court authorization was not needed for -7- these post-petition transfers. Pillar admits that the transactions did not meet the horizontal test, but it contends that this court should reject the use of the horizontal and vertical tests. Pillar argues that its transactions would pass a reasonableness standard for being in the ordinary course of business under § 364(a) although Pillar also contends that the reasonableness standard should not be used. Pillar, instead, argues that the court should not utilize any tests or standards but rather interpret the plain language of the statute. We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Papio Keno Club, Inc. v. City of Papillion (In re Papio Keno Club, Inc.), 262 F.3d 725, 728–29 (8th Cir. 2001). Under 11 U.S.C. § 549(a)(1), a bankruptcy trustee may avoid a transfer of property of the estate that occurs after the commencement of the case. Section 364(a) allows the trustee to extend credit in the ordinary course of business without prior court approval. The creditor asserting the ordinary-course-of-business defense has the burden of production. In re Living Hope Sw. Medical Servs., 450 B.R. at 149 (citing United States Trustee v. Lombardozzi (In re RJC Indus., Inc.), 369 B.R. 845, 850 (Bankr. M.D. Pa. 2006)). Section 364(a) does not define the term ordinary course of business. Bankruptcy courts developed the vertical and horizontal tests as a means for determining whether post-petition transfers are in the ordinary course of business. The vertical test looks to whether creditors that deal with the debtor would anticipate the type of transaction in question and whether the transaction was consistent with pre-petition conduct. In re Johns-Manville Corp., 60 B.R. 612, 616–17 (Bankr. S.D.N.Y. 1986) (citing In re James A. Phillips, Inc., 29 B.R. 391, 394 (Bankr. S.D.N.Y. 1983)). The horizontal test requires an inquiry into whether the conduct is typical in the specific trade covered by the debtor's business. In re RJC Indus., Inc., 369 B.R. at 851. -8- The bankruptcy court used both the horizontal and vertical tests to determine whether the transfers were in the ordinary course of business. It found that the transactions failed the horizontal test because no evidence was presented that the practice was acceptable within the industry. The transactions failed the vertical test because the transactions subjected other creditors to markedly different risks. The bankruptcy court highlighted that because Goldenberg was aware of when the Debtor had sufficient funds in its account, Pillar gained a superior position over the unsecured creditors by having access to blank checks. Furthermore, the court found that the Debtor represented Goldenberg as a financial partner to employees and not as a purveyor of bridge loans that were to be repaid ahead of other creditors. The bankruptcy court further noted that the proper inquiry in post-petition transfer cases is on the advance of the funds rather than how the funds were ultimately used by the debtor. The bankruptcy court also stated there was no nunc pro tunc basis warranting an equitable retroactive approval of the credit extension, because the advances by Pillar occurred 27 days after the initial $25,000 payment to NHC, a time period the bankruptcy court felt was more than adequate to file an 11 U.S.C. § 364 motion. Applying either the horizontal or the vertical test we conclude that Pillar's loans to the Debtor were not in the ordinary course of business. As Pillar concedes, it failed the horizontal test's definition of ordinary course of business, as there is no evidence that the use of blank checks to reimburse a creditor in bankruptcy for short-term bridge loans is typical in the Debtor's industry. In addition, Pillar fails the vertical test, because there was no evidence that any of the Debtor's creditors participated in any practice akin to Goldenberg's blank-check repayment scheme. Although the NFC did have a line of credit with the Debtor, the line of credit was court-approved, and as the district court aptly stated, the NFC arrangement did not give the debtor unbridled freedom to then enter into any type of short term financing arrangement with any creditor that came along offering to cover the same types of expenses. In re Living Hope Sw. Medical Servs., LLC, 2012 WL 1078345, at . Furthermore, the Debtor's other creditors would not have reasonably expected the Debtor to enter into -9- an arrangement, which enabled Pillar to place its claims ahead of other creditors' claims, without the other creditors' knowledge, Given that Pillar failed both the vertical and horizontal tests the transactions were not in the ordinary course of business under § 364(a).