Court Opinion

ID: 3028289
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:40:14.21922+00
Date Added: 2024-06-11T09:33:02.408522
License: Public Domain

United States Bankruptcy Appellate Panel
                               FOR THE EIGHTH CIRCUIT

                                   No. 01-6040 EM

In re: Laclede Steel Co.,                 *
                                          *
                     Debtor.              *
                                          *
Concast Canada, Inc.,                     *      Appeal from the United States
                                          *      Bankruptcy Court for the Eastern
                     Appellant,           *      District of Missouri
                                          *
      v.                                  *
                                          *
Laclede Steel Co.,                        *
                                          *
                     Appellee.            *

                            Submitted: November 30, 2001
                               Filed: January 2, 2002

Before KOGER, Chief Judge, SCOTT and DREHER, Bankruptcy Judges.

SCOTT, Bankruptcy Judge

       Laclede Steel Co. and Concast Canada, Inc. had been engaged in business for
many years. The formal terms of their dealings required that Laclede pay its
obligations to Concast thirty days after invoicing. In the ordinary course of their
dealings, however, they did not adhere to these requirements. Rather, the average
time it took Laclede to pay its obligations to Concast, prior to the 90 day preference
period, was 52 days, although at least one payment had been as late as 70 days past
invoicing.

       When Laclede met with financial difficulty, Concast did not exert any pressure
for earlier payment. Rather, as it had done in the past, Concast waited for payment.
The last payment prior to the filing of the chapter 11 case was made with four
checks.1 The checks were dated July 15, 1998. They all cleared the bank on
November 19, 1998, eleven days prior to the filing of the chapter 11 case. Nothing
was unusual about this transaction except for one fact: the payments were 177 days
beyond invoicing, a period that even Concast characterizes as “excruciatingly late.”

       When Laclede sought to avoid the payments as preferences, Concast defended
on the basis that the payments were made in the ordinary course of business. At trial
before the bankruptcy court, the parties disputed only whether the payments were
ordinary as between the parties and whether the payments were made according to
ordinary business terms. 11 U.S.C. § 547(c)(2)(B), (C). The bankruptcy court2
concluded that, although late payments were ordinary within the context of the
industry standards, the payment made 177 days beyond invoicing was not in the
ordinary course of the business affairs of the debtor and the transferee. Concast
appeals the decision of the bankruptcy court, arguing that the bankruptcy court
improperly focused solely upon the fact that the payment was made so long after
invoicing. We affirm the conclusions of the bankruptcy court.

      1
        The payment was made by four separate checks, although they were all apparently
sent together, each had the same date, and all cleared the bank on the same date. The
parties do not indicate whether this was the usual course for the debtor to make payment
by separate checks for what appears to be a single transaction.
      2
       The Honorable Barry S. Schermer, United States Bankruptcy Judge for the
Eastern District of MIssouri.

                                           2
       We review the bankruptcy court’s choice of the appropriate legal standard de
novo inasmuch as that question is one of law. See Hartford Underwriter’s Ins. Co.
v. Magna Bank, N.A. (In re Hen House Interstate, Inc.), 150 F.3d 868 (8th Cir. 1998),
aff’d, 530 U.S. 1 (2000). The court’s application of the statute to the facts of the case,
i.e., whether the payments were made in the ordinary course of business, is reviewed
under the clearly erroneous standard. In re U.S.A. Inns of Eureka Springs, Arkansas,
9 F.3d 680, 685 (8th Cir. 1993).

       Section 547 permits the chapter 11 debtor in possession to avoid certain
payments made within the ninety days prior to the filing of the bankruptcy petition.
In this instance, the parties do not dispute that the payments were preferential as
defined in section 547(b). Rather, the parties dispute the application of the ordinary
course of business exception to the avoidance action. Section 547 provides in
pertinent part:
       (c) The trustee may not avoid under this section a transfer–

             (2) to the extent that such transfer was –

                   (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;

                   (B) made in the ordinary course of business or
             financial affairs of the debtor and the transferee; and

                  (C) made according to ordinary business terms.
11 U.S.C. § 547(c)(2).

       Under this exception, the defendant has the burden of separately demonstrating
the three prongs of the exception. Only the second prong is at issue in this appeal.
Specifically, the bankruptcy court determined that the payment, constituting four
checks, made 177 days after invoicing, was not in the ordinary course of business of

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the parties because the payment was not consistent with the prior payment patterns
between the parties. See Lovett v. St. Johnsbury Trucking, 931 F.2d 494 (8th Cir.
1991)(establishing that the cornerstone of the peculiarly factual analysis to be applied
is consistency with the parties’ prior business transactions). After a careful
consideration of the arguments of the appellant and appellee, we conclude that the
bankruptcy court was correct in its analysis of the law and its application of the law
to the facts of this case.

       In Lovett v. St. Johnsburg Trucking, 931 F.2d 494 (8th Cir. 1991), the United
States Court of Appeals for the Eighth Circuit articulated the general standard for
determining whether a transaction is within the ordinary course of business. The
court concluded that there was no particular test which was required to be applied,
but, rather, the courts should engage is a “peculiarly factual analysis,” the cornerstone
of which is the consistency of the transaction in question as compared to other, prior
transactions between the parties. Lovett, 931 F.2d at 497. In Lovett, as in this case,
the timing of the payments was the determining factor in the analysis. The Court of
Appeals concluded that, since the payments sought to be avoided were consistent
with prior practice, the payments were made in the ordinary course between the
parties, even though the creditor had insisted that the debtor accelerate the payments
as much as possible. Thus, in Lovett, the Court of Appeals looked to the timing of
the payments, and found that factor to be of overriding importance, to the exclusion
of the fact that the creditor pressured the debtor for payment. Since the timing of the
preferential payment was consistent with the timing of the payment in prior
transactions, the ordinary course of business exception applied to preclude avoidance
of the transfer under section 547(b).

      The Eighth Circuit Court of Appeals has been consistent in following this
standard and in its application. Most recently, in Gateway Pacific Corp. Unsecured
Creditors’ Committee v. Expeditors International of Washington, Inc. (Gateway
Pacific Corporation), 153 F.3d 915 (8th Cir. 1998), the Court of Appeals again

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indicated that the controlling factor was the consistency of prior practice between the
parties during the pre- and preference periods. In Gateway, as in Lovett, the court
focused upon the timing of the payments. It is noteworthy that in Gateway, as in this
case, the transferee creditor argued that the other consistencies between the periods
overcame the single inconsistency – the lateness of the payment in the preference
period compared to earlier transactions. The Court of Appeals rejected this
argument, stating that the significant change in the payment pattern was sufficient to
remove the transaction from the ordinary course of business exception.

       While it is true that a number of decisions, including Central Hardware Co. v.
The Walker-Williams Lumber Co. (In re Spirit Holding), 214 B.R. 891 (E.D. Mo.
1997), aff’d, 153 F.3d 902 (1998), articulate a four part test,3 neither the test nor its
application is inapposite to the Eighth Circuit holdings in Gateway and Lovett.
Indeed, a scrutiny of the case authority applying that test, including Spirit Holding,
indicates that there is a general focus upon one of the factors and, if any one of the
factors is compellingly inconsistent with prior transactions, the payment is deemed
to be outside of the ordinary course of business between the parties. That was the
result in Spirit Holding. In Spirit Holding, the parties agreed that virtually every
element, including the timing of the payment of the disputed transaction, was
consistent with prior transactions, with one exception: the debtor had substituted a
wire transfer for the check on which payment had been stopped. Thus, the only
inconsistency was the form of payment. In determining that the transfer was within
the ordinary course of business between the parties, the bankruptcy court reasoned
that the mere change in the method of payments was insufficient to render the

       3
        The factors the courts consider have been articulated as: (1) the length of time the
parties were engaged in the transactions at issue; (2) whether the amount or form of
tender differed from past practices; (3) whether the debtor or the creditor engaged in any
unusual collection or payment activity; and (4) whether the creditor took advantage of the
debtor’s deteriorating financial condition. In re Spirit Holding, Co., 214 B.R. 891, 897
(E.D. Mo. 1997)(citing In re Grand Chevrolet, Inc., 25 F.3d 728, 732 (9th Cir. 1994)),
aff’d, 153 F.3d 902 (8th Cir. 1998).

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payment not in the ordinary course, particularly when there was no unusual collection
activity and the debtor had paid other creditors by wire transfer. The district court,
however, reversed, concluding that the single factor, the replacement of the check by
a wire transfer, was sufficiently inconsistent to remove the transaction from the
exception. Spirit Holding, 214 B.R. at 898-90.

       Thus, while there may be four factors which may be analyzed, the case
authority often focuses upon one of these factors and any significant alteration in any
one of the factors may be sufficient to conclude that a payment was made outside the
ordinary course of business. As in Lovett, the timing of the payments from the debtor
to Concast appears to be the most significant of the factors. The other, separate
factors regarding other conduct between the parties – whether the terms were
changed, whether the creditor exerted any pressure for collection – have more weight
in the analysis if the issue on timing is a close one. Thus, a court may conclude that
a transfer, even though a few days later than was the practice during the pre-
preference period, may be ordinary if there is no change in the collection methods.
See, e.g., Speco Corporation v. Canton Drop Forge, Inc. (In re Speco Corporation),
218 B.R. 390 (Bankr. S.D. Ohio 1998)(payments two to four days beyond the usual
range of lateness and which were not the result of improper actions were within the
exception); Marlow v. Federal Compress & Warehouse Co. (In re The Julien
Company), 157 B.R. 834 (Bankr. W.D. Tenn. 1993). In contrast, if there is any
deviation in the collection method, the courts may be harsher in determining that a
late payment was not in the ordinary course. E.g., Fiber Lite Corp. v. Molded
Acoustical Products, Inc. (In re Molded Acoustical Products, Inc.), 18 F.3d 217 (3d
Cir. 1994), (historical payments 58 days after invoicing compared to 89 during the
preference period, combined with alteration of collection activity, were outside the
scope of the ordinary course of business exception).

     This analysis is similar to the sliding scale employed in Fiber Lite Corp. v.
Molded Acoustical Products, Inc. (In re Molded Acoustical Products, Inc.), 18 F.3d
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217 (3d Cir. 1994), and, to some extent, urged by Concast. This analysis may have
some merit, particularly when the issue is a close one, see, Speco Corporation, 218
B.R. 390, 401. Accordingly, while analysis of the debtor’s payment history is a
significant and guiding factor, the other factors may be considered according to their
appropriate weight under the circumstances. Official Committee of Unsecured
Creditors of R.M.L., Inc. v. Sabrina S.P.A. (In re R.M.L., Inc.), 195 B.R. 602 614
(Bankr. M.D. Pa. 1996). Thus, the facts that Concast took no action regarding
shipments, did not alter its terms, or seek earlier payment, are indeed relevant.
However, in this instance, the “excruciating” lateness of the payment outweighs the
relevance of these factors. Compare In re R.M.L., 195 B.R. at 614 (“These negative
proofs, however, while relevant, do not function to explain the unusual lateness of the
preference payments in ordinary business terms or to offset the weight of such
lateness in the subjective analysis.”); Hassett v. Altai, Inc. (In re CIS Corp.), 214
B.R. 108, 120 (Bankr. S.D.N.Y. 1997).

       Laclede made a payment that was 177 days beyond the invoice date and 103
days beyond the longest it had ever delayed payment. While late payments may be
ordinary between the parties, and, thus, consistent with prior practice, the payments
during the preference period must fall within the normal range of lateness. See In re
CIS Corp, 214 B.R. 108 (preference payment 80 days late, compared to historical
average of 51 days late was a significant difference); In re R.M.L., 195 B.R. 602
(historically, payments were 30-32 days late in contrast to 94 during preference
period). Concast’s assertion that the degree of lateness is not relevant is contradicted
by the case authority as well as the policies behind the preference provisions. The
question is whether the payment was consistent with the practice of the party, and
thus, the degree of lateness is directly relevant. In the ordinary course between the
parties, payment was made by Laclede on an average of 52 days following invoicing,
with the latest payment being made 70 days beyond invoicing. The “excruciatingly
late” payment in this case was clearly inconsistent with this practice between the
parties prior to the preference period and, thus, was not in the ordinary course of

                                           7
business between the parties, even though there was no other change in the course of
conduct between the parties.

       The fact that the debtor had a reason for the lateness of the payments does not
render the payment ordinary between the parties. The debtor’s explanation that the
check was not delivered because it could not be covered is not an unusual one. It is,
however, the reason for the preference provision: to ensure that all creditors are
treated equally, even during the “slide into bankruptcy” – the period during which the
debtor is unable to cover its obligations. The fact that the debtor could not cover the
check to Concast is not a justification which brings the payment within the ordinary
course of business exception. Rather, it is simply the reason the payment is a
preference in the first place.

       The fact that delay generally in the industry is an acceptable practice does not
bring this payment within the ordinary course between the parties. That fact is not
even relevant to this analysis under section 547(c)(2)(B), but, rather, is a factor to be
considered in conjunction with the third prong of the test: whether the transaction
was ordinary pursuant to terms in the industry.

       In reaching the conclusion that the payments were not in the ordinary course
between the parties, the bankruptcy court compared Laclede’s past payments to the
preference payments. By comparing the history and the preference period payments
the bankruptcy court was able to determine that there was a significant deviation in
the practice and, thus, a lack of consistency. The fact that the bankruptcy court
determined that the payments were late – late beyond the normal conduct between
the parties – does not, as asserted by Concast, constitute a rejection of the appropriate
standard. Rather, it was a application of the standard as articulated by the Court of
Appeals for the Eighth Circuit and one we cannot find was clearly erroneous. The
Judgment is therefore affirmed.

                                           8
A true copy.

      Attest:

               CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
               EIGHTH CIRCUIT

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