Opinion ID: 748192
Heading Depth: 2
Heading Rank: 2

Heading: OMI Payments as an Avoidable Preference

Text: 38 Alternatively, it is the Trustee's position that the $16,856.00 invoice for the foundation seed and the even-steven payment of $69,683.88 created an antecedent debt of $86,539.88 and consequently form the basis for a preference recovery under § 547 of the Bankruptcy Code because the transfer occurred within 90 days of bankruptcy. 39 First, the Trustee suggests that the bankruptcy court erred in its determination that the original transfer of the foundation seed from Golden Seed to OMI was a bailment. The Trustee argues that the $16,856.00 invoice is a debt owed by OMI and thus creates a preference. The bankruptcy court rejected this argument and found that the invoice merely recorded the amount of foundation seed delivered to OMI to keep track of the amount supplied. In re Ostrom-Martin, 191 B.R. at 133. The district court agreed. 40 The Trustee claims that the second element of the preference is the even-steven payment of $69,683.88. As discussed above, both the bankruptcy court and the district court concluded that this payment was a progress payment. Id. at 126, 129, 134. Although the Trustee attempted to appeal that conclusion, he also argues in the alternative that if the $69,683.88 is not a final payment, then it qualifies as a loan to OMI which was repaid by the delivery of seed within 90 days of bankruptcy. The bankruptcy court rejected the characterization of the payment as a loan and recognized that prepayments for tax purposes are a common occurrence and fall within the ordinary course of business. Id. at 134. The district court agreed and refused to disrupt the bankruptcy court's conclusion. 41 The Trustee argues that Golden Seed received an avoidable preference of $86,539.88 3 pursuant to § 547. Section 547 provides: 42 (c) The trustee may not avoid under this section a transfer- 43 (2) to the extent that such transfer was- 44 (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; 45 (B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and 46 (C) made according to business terms. 47 § 547(c). The transferee has the burden to demonstrate that the transfer was not a preference and thus not avoidable by the Trustee. 11 U.S.C. § 547(g). The focus regarding the elements of § 547(c)(2) differ. See Matter of Midway Airlines, Inc., 69 F.3d 792, 797 (7th Cir.1995). As to §§ 547(c)(2)(A) and 547(c)(2)(B), a court's focus is on the specific relationship between the parties and the particular course of dealing between the parties. Courts look to a variety of factors to determine if the payments in question were ordinary as between the parties: 48 Among factors courts consider in determining whether transfers are ordinary in relation to past practices are: (1) the length of time the parties were engaged in the transaction at issue; (2) whether the amount or form of tender differed from past practices; (3) whether the debtor or creditor engaged in any unusual collection or payment activity; and (4) whether the creditor took advantage of the debtor's deteriorating financial condition. 49 In re Midway Airlines, Inc., 180 B.R. 1009, 1013 (Bankr.N.D.Ill.1995) (citing In re Grand Chevrolet, Inc., 25 F.3d 728, 732 (9th Cir.1994) (citations omitted)). But when considering § 547(c)(2)(C), a court must focus on industry standards and common practice. To satisfy § 547(c)(2)(C), the transferee need only establish that its own dealings with the debtor fall within the outer limits of normal industry practice. In re Tolona Pizza Products Corp., 3 F.3d 1029, 1033 (7th Cir.1993). 50 Under § 547(c)(2)(A), the debt must be incurred in the ordinary course of business between both parties. Golden Seed was in the business as a dealer of soybean seed and OMI was in the business as a producer of soybean seed. The invoice of the seed and the prepayment for services rendered reflect the fact that the debt was incurred in the ordinary course of both Golden Seed and OMI's businesses. Next, pursuant to § 547(c)(2)(B), the transfer must be made in the ordinary course of business. OMI provided either a cash discount or soybean seed pursuant to the oral contract between OMI and Golden Seed. Thus, the transfer was in the ordinary course of both their businesses. Finally, under § 547(c)(2)(C), the transfer must fall within industry standards. The bankruptcy court concluded that there was undisputed evidence that the oral contract and its terms fell within ordinary business standards. Id. at 134. Accordingly, the bankruptcy court concluded that a debt was incurred, the transfer was made, and the terms of the transfer all were according to ordinary business standards. Id. at 133-34. 51 In reviewing the bankruptcy court record, the district court stated: 52 This Court finds that the Bankruptcy Court's rejections of the Trustee's positions constitute findings of fact that are not clearly erroneous. The views presented in the Bankruptcy Court's decision present permissible views and fail to firmly convince this Court of a mistake. 53 In re Ostrom-Martin, Inc., No. 96-1118, Slip Op. at 16-17. As the district court concluded, we too decline to disrupt the findings of the bankruptcy court and agree with the district court that Golden Seed did not receive an avoidable preference pursuant to § 547(c) of the Bankruptcy Code.