Opinion ID: 3027931
Heading Depth: 2
Heading Rank: 2

Heading: The Ordinary Course of Business Defense

Text: To prove that the transfers were not avoidable by Hechinger as preferential transfers under § 547(c)(2), UFP had the burden to prove that the transfers were “(A) incurred in the ordinary course of both the debtor’s and the creditor’s business; (B) made and received in the ordinary course of their respective businesses; and (C) ‘made according to ordinary business terms.’” In re Molded Acoustical Products, Inc., 18 F.3d 217, 219 (3d Cir. 1994) (quoting 11 U.S.C. § 547(c)(2)). Neither “ordinary course of business” nor “ordinary business terms” is defined in the Bankruptcy Code. In re J.P. Fyfe, Inc., 891 F.2d 66, 70 (3d Cir. 1989). The parties agreed that UFP proved the first element. The trial therefore focused on subsections B and C. Starting with subsection B of the defense, UFP argued that all payments made by Hechinger within the new credit terms (i.e., within eight days of the invoice date) presumptively qualified as payments made in the “ordinary” course of the parties’ business under § 547(c)(2)(B).5 UFP maintained that In 5 Although $ 265,099.00 of the amount at issue in this case was paid outside of credit terms (i.e., nine or more days after the date of invoice), UFP contends that these late payments should also be considered “ordinary” because the percentage of late payments that Hechinger made during the preference period was roughly equivalent to the historical percentage. However, these late payments, like the timely payments at issue, were made according to the “extreme” new credit terms instituted by UFP in February, 1999. The Bankruptcy Court found that all of the transfers made under these new terms were not made according to the ordinary course of business. 17 re Daedalean, Inc., 193 B.R. 204, 212 (Bankr. D. Md. 1996), established this presumption of ordinariness. However, the Daedalean Court did not address the presumptive ordinariness of payments made within agreed credit terms in its holding because all of the payments at issue in the case were made outside of the agreed terms. We agree with the Bankruptcy Court that we should not apply such a presumption; rather, each fact pattern must be examined to assess “ordinariness” in the context of the relationship of the parties over time.6 The Bankruptcy Court examined the relationship between the parties and concluded that the payments made by Hechinger to UFP during the preference period were not “made in the ordinary course of business or financial affairs of the debtor and the transferee” within the meaning of § 547(c)(2)(B) because the changes UFP had imposed on Hechinger were “so extreme, and so out of character with the long historical relationship between these parties.” In re Hechinger Inv. Co., 326 B.R. at 292. UFP likens this case to In re Tennessee Valley Steel Corp., 201 B.R. 927 (Bankr. E.D. Tenn. 1996), where the court found that the debtor’s preference period payments were made within the ordinary course of the parties’ dealings, even though the payments made during the preference period were not as timely as before, and some were even made several days after the invoice due date. However, In re Tennessee Valley did not 6 Other courts have also declined to adopt a presumption that payments made within credit terms are ordinary. See In re TWA, Inc. Post Confirmation Estate, 327 B.R. 706, 709 (Bankr. D. Del. 2005) (finding that transfer made during the preference period was not ordinary because, although it was made within the contract terms, the history of dealings between the parties was that of payments being made well outside such terms). 18 involve any change in the parties’ credit terms during or immediately before the beginning of the preference period. If Hechinger and UFP had not changed their credit terms immediately prior to the beginning of the preference period, the accelerated timing of Hechinger’s payments during this period would be less significant. Here, however, where there were changes in the credit arrangements that were “so extreme, and so out of character with the long historical relationship between these parties,” this change and the resultant change in the timing of Hechinger’s payments was appropriately considered by the Bankruptcy Court. See In re M Group, Inc., 308 B.R. 697, 702 (Bankr. D. Del. 2004) (finding that payments were not ordinary under §547(c)(2)(B) where “payment schedules here were altered as bankruptcy became a possibility” and the ordinary course of business between the parties consisted of making payments on a much more random and haphazard basis than occurred during the preference period). This case is more closely analogous to In re Roberds, Inc., 315 B.R. 443 (Bankr. S.D. Ohio 2004). There, the court found that the creditor failed to prove that the transfers were made and received in the ordinary course of the parties’ respective businesses under § 547(c)(2)(B) because the creditor changed the parties’ credit arrangements during the preference period. During the period after the change: (1) the credit limit of $750,000 was vigorously enforced by the Creditor; (2) credit holds, involving individual negotiations resulting in payments satisfactory to the Creditor prior to the shipment of furniture, were in effect; (3) payment terms were changed; (4) the Debtor paid, on average, earlier than Net 30 terms; and (5) other 19 creditors were being significantly delayed, or denied, in the receipt of their payments while this Creditor was receiving accelerated payments andnone of these events had ever occurred in the parties’ history. Id. at 467 (internal footnote omitted). Based on these factual findings, the court concluded that the creditor failed to prove that the transfers that occurred during this portion of the preference period were made and received in the ordinary course of the parties’ businesses under §547(c)(2)(B). Like the debtor in Roberds, Hechinger was pressured to make accelerated payments during the preference period because of UFP’s vigorous enforcement of its credit limit. During the preference period, 96.5% of Hechinger’s payments were made 0-10 days from invoice, while during the comparable three-month periods in 1996, 1997 and 1998, 10% of Hechinger’s payments were made 0-10 days from the date of invoice. App. 1342. During the preference period, Hechinger’s outstanding daily balance with UFP ranged from $1 million owed to a $1 million credit balance. During the same 90-day period in 1998, Hechinger’s daily balance was always greater than $1 million and was generally between $3 million and $4 million. Id. UFP argues that this alteration in terms was not that significant because, previously, the parties had operated under an even more accelerated payment schedule and had used a wire transfer. In June of 1998, it was agreed that Hechinger would make payments within five days of the invoice date and Hechinger sent UFP a check for $1,433,800 via FedEx overnight delivery on June 9. App. 449, 958-60. However, these 20 arrangements were as a result of an “unusual dispute regarding some past due invoices” and were not the terms employed by the parties during the rest of their fifteen year relationship. Appellee Br. 51 nn. 10 & 11. The Bankruptcy Court did not find the credit limit imposed on Hechinger to be the deciding factor in its determination that the transfers did not fall within the § 547(c)(2) defense to preference avoidance. Rather, the Bankruptcy Court considered the credit limit as well as the other changes in the credit arrangements of the parties, such as the change in terms to 1% 7 days, net 8 and the requirement that Hechinger make payments by wire transfer. In re Hechinger Inv. Co., 326 B.R. at 292. The Bankruptcy Court also properly considered the length of time the parties had engaged in the type of dealing at issue, the way the payments were made, whether there appeared to be any unusual action by either the debtor or creditor to collect or pay on the debt, and whether the creditor did anything to gain an advantage in light of the debtor's deteriorating financial condition. See In re Logan Square E., 254 B.R. 850, 855 (Bankr. E.D. Pa. 2000) (listing such factors as appropriate considerations in determining whether transfers are “ordinary”). Each of these factors weighed in favor of a finding that the disputed transfers were not “ordinary” under §547(c)(2)(B). In essence, a month before the beginning of the preference period, UFP tightened its credit terms, imposed a credit limit, required Hechinger to make payments by wire transfer in large, lump-sum amounts, and required Hechinger to send remittance advices after making payment on invoices. This was not the ordinary course of dealing between the parties. The Bankruptcy Court did not clearly err in finding that the new credit arrangements between the parties were “extreme” and “out of character with the long historical relationship between 21 these parties.” Based on this finding, the Court properly concluded that UFP failed to prove that the transfers were “made in the ordinary course of business or financial affairs of the debtor and the transferee.” The Bankruptcy Court also noted that UFP failed to prove the third element of the § 547(c)(2) defense, namely, that the transfers were made according to “ordinary business terms.” We need not, however, discuss this aspect of its ruling because UFP’s failure to demonstrate that the transfers were “made in the ordinary course of business or financial affairs of the debtor and the transferee” precludes the § 547(c)(2) defense altogether.