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Advo-System, Incorporated v. Maxway Corporation Danners, Incorporated, by and Through Their Official Committee of Unsecured Creditors, 37 F.3d 1044, 4th Cir. (1994)
Advo-System, Incorporated v. Maxway Corporation Danners, Incorporated, by and Through Their Official Committee of Unsecured Creditors, 37 F.3d 1044, 4th Cir. (1994)
3d 1044
63 USLW 2307, 26 Bankr.Ct.Dec. 211, Bankr.
L. Rep. P 76,140
ARGUED: Lacy H. Reaves, Poyner & Spruill, L.L.P., Raleigh, NC, for
appellant. Rebecca Sofley Henderson, Durham, Wyche, Story, Whitley &
Henderson, Charlotte, NC, for appellees. ON BRIEF: Donna S. Richter,
Eric P. Stevens, Poyner & Spruill, L.L.P., Raleigh, NC, for appellant.
Albert F. Durham, Durham, Wyche, Story, Whitley & Henderson,
Charlotte, NC, for appellees.
Before WILKINSON and MICHAEL, Circuit Judges, and DUPREE,
Senior United States District Judge for the Eastern District of North
Carolina, sitting by designation.
Affirmed by published opinion. Judge MICHAEL wrote the opinion, in
which Judge WILKINSON and Senior Judge DUPREE joined.
OPINION
MICHAEL, Circuit Judge:
II.
3
Maxway was a discount retail chain before it went out of business in 1991.
Between 1986 and 1990, Maxway was one of Advo's customers, with Advo
printing and distributing Maxway's direct mail advertisements. On October 7,
1988, Maxway filed a petition under Chapter 11 of the Bankruptcy Code. In the
90-day period preceding the filing of its Chapter 11 petition (July 9, 1988,
through October 7, 1988), Maxway made twelve payments to Advo. Two of the
twelve payments were prepayments for Advo's services. The other ten
payments, totalling $177,506.33, were payments for services previously
rendered. Because these ten payments were, among other things, made on
account of an antecedent debt, they were preferences under 11 U.S.C. Sec.
547(b). Of the $177,506.33, Maxway paid around $50,000 by official bank
check less than one week prior to the filing of the bankruptcy petition. Before
that payment, Maxway had always paid Advo by company check.
On August 13, 1991, Maxway brought an action against Advo pursuant to Sec.
547(b) to recover the $177,506.33 in preference payments. Advo answered that
the ten preference payments were made in the ordinary course of business and
therefore were exempt under Sec. 547(c)(2) from the trustee's avoidance power.
The parties filed cross motions for summary judgment. In an August 6, 1992,
order, the bankruptcy court granted Maxway's motion for summary judgment
and denied Advo's; the court held that Advo could not satisfy subsections B
and C of Sec. 547(c)(2). In an October 28, 1993, order, the district court
affirmed, apparently concluding that Advo could not satisfy subsection C.
Advo now appeals to this court. We base our affirmance on Advo's failure to
satisfy subsection C. As a result, we do not reach the issue of whether the
payments fit subsection B.1
III.
7
8
First,
the avoidance power promotes the "prime bankruptcy policy of equality of
distribution among creditors" by ensuring that all creditors of the same class will
receive the same pro rata share of the debtor's estate. Second, the avoidance power
discourages creditors from attempting to outmaneuver each other in an effort to
carve up a financially unstable debtor and offers a concurrent opportunity for the
debtor to work out its financial difficulties in an atmosphere conducive to
cooperation.
9
Morrison v. Champion Credit Corp. (In re Barefoot), 952 F.2d 795, 797-98 (4th
Cir.1991) (citations omitted) (quoting H.R.Rep. No. 595, 95th Cong., 2d Sess.
178 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6138); see also Harman v.
First Am. Bank of Md. (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d
479, 488 (4th Cir.1992) ("Congress was concerned that creditors would race to
the courthouse to dismember the [debtor] or that a debtor would favor certain
creditors over others").
10
Advo concedes that the ten payments at issue here are preferences under Sec.
547(b). However, Advo argues that the payments are not avoidable because,
Advo says, the payments fall within the ordinary course of business exception
in Sec. 547(c)(2). Section 547(c)(2) says that the trustee may not avoid a
transfer:
Advo has the burden of proving by a preponderance of the evidence that each
payment satisfies each of Sec. 547(c)(2)'s three subsections. See 11 U.S.C. Sec.
547(g); Logan v. Basic Distribution Corp. (In re Fred Hawes Org., Inc.), 957
F.2d 239, 242 (6th Cir.1992). "This inquiry is 'peculiarly factual.' " Bigelow,
956 F.2d at 486 (quoting In re First Software Corp., 81 B.R. 211, 213
(Bankr.D.Mass.1988)).
16
Maxway acknowledges that the payments were made in the ordinary course of
the parties' business and thus Advo has satisfied subsection A. Whether Advo
made its case under subsections B and C is disputed. As we explain below,
Advo cannot satisfy subsection C and therefore cannot take advantage of the
ordinary course of business exception.
A.
17
18
Seizing upon the Code's silence, Advo urges us to use a subjective analysis
under subsection C. Specifically, Advo argues that business terms are not
unusual so long as they are consistent with the terms used between the debtor
and this particular creditor in their prior course of dealing. However, Advo
recognizes that a majority of the federal circuits which have addressed this issue
have held that subsection C requires an objective analysis. 3 These circuits have
said that a preference payment is made according to ordinary business terms if
the payment's terms are not unusual when compared with the prevailing
standards in the creditor's industry. In other words, the benchmark for
ordinariness is the norm in the creditor's industry.
19
This issue will not detain us for long. The subjective analysis Advo urges us to
use under subsection C is the same analysis used under subsection B, which
asks whether payments were "made in the ordinary course of business or
financial affairs of the" parties. Cf. Bigelow, 956 F.2d at 488. Because
subsections B and C are written in the conjunctive, the use of subsection B's
subjective approach under subsection C would render subsection C
superfluous. We refuse to say that Congress wrote a separate subsection for no
reason at all. See In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th
Cir.1993) (refusing to "cut out and throw away one-third of an important
provision of the Bankruptcy Code [Sec. 547(c)(2) ]"). To the contrary,
Congress had good reason to favor an objective analysis for subsection C, for
there are two functions that an objective analysis serves.
20 is evidentiary. If the debtor and creditor dealt on terms that the creditor testifies
One
were normal for them but that are wholly unknown in the industry, this casts some
doubt on his (self-serving) testimony.... The second possible function of the
subsection is to allay the concerns of creditors that one or more of their number may
have worked out a special deal with the debtor, before the preference period,
designed to put that creditor ahead of the others in the event of bankruptcy.
21
Id. In short, we hold that subsection C requires us to look to the norm in the
creditor's industry when determining whether preference payments were made
according to ordinary business terms.
22
But holding that subsection C requires us to refer to an industry norm only gets
our foot in the door. We still must figure out how subsection C is to be applied.
Specifically, how are we to determine the relevant industry and how much of a
departure from that industry's norm will subsection C allow? To those ends, we
have the benefit of two recent, well-reasoned panel decisions from the Seventh
and Third Circuits. We summarize these decisions below and adopt their
reasoning.
B.
23
In Tolona Pizza, supra, the Seventh Circuit, Judge Posner writing, held
24 "ordinary business terms" refers to the range of terms that encompasses the
that
practices in which firms similar in some general way to the creditor in question
engage, and that only dealings so idiosyncratic as to fall outside that broad range
should be deemed extraordinary and therefore outside the scope of subsection C.
25
27
Molded Acoustical says that the extent to which a preference payment's credit
terms can stray from the industry norm yet still satisfy Sec. 547(c)(2)(C)
depends on the duration of the debtor-creditor relationship. "[T]he more
cemented (as measured by its duration) the pre-insolvency relationship between
the debtor and the creditor, the more the creditor will be allowed to vary its
credit terms from the industry norm yet remain within the safe harbor of Sec.
547(c)(2)." Id. at 225. A "sliding-scale window" is thus placed around the
industry norm. On one end of the spectrum, "[w]hen the relationship between
the parties is of recent origin, or formed only after or shortly before the debtor
sailed into financially troubled seas, the credit terms will have to endure a
rigorous comparison to credit terms used generally in a relevant industry." Id. In
such a case, only those "departures from [the] relevant industry's norms which
are not so flagrant as to be 'unusual' remain within subsection C's protection."
Id. at 226.
28
On the other end of the spectrum, "when the parties have had an enduring,
steady relationship, one whose terms have not significantly changed during the
pre-petition insolvency period, the creditor will be able to depart substantially
from the range of terms established under the objective industry standard
inquiry and still find a haven in subsection C." Id. In any event,
29
[e]ven
when the debtor/creditor relationship has been well-settled prior to the
debtor's insolvency, should the creditor be unable to fit its terms within the slidingscale window surrounding the established industry's norm, the preferential transfer
will not be deemed unavoidable by virtue of Sec. 547(c)(2), although the terms of
Secs. 547(c)(2)(A) & (B) are fulfilled. That is to say, the parties' longstanding credit
terms, although consistent as between them, may depart so grossly from what has
been established as the pertinent industry's norms that they cannot be seriously
considered usual and equitable with respect to the other creditors.
30
Id.
31
32
C.
33
34 read subsection C as establishing the requirement that a creditor prove that the
[W]e
debtor made its pre-petition preferential transfers in harmony with the range of
terms prevailing as some relevant industry's norms. That is, subsection C allows the
creditor considerable latitude in defining what the relevant industry is, and even
departures from that relevant industry's norms which are not so flagrant as to be
"unusual" remain within subsection C's protection. In addition, when the parties
have had an enduring, steady relationship, one whose terms have not significantly
changed during the pre-petition insolvency period, the creditor will be able to depart
substantially from the range of terms established under the objective industry
standard inquiry and still find a haven in subsection C.
35
36
We turn now to apply our newly adopted rule of construction to the facts of the
instant case.
IV.
37
38
We, too, will assume arguendo that Advo is the relevant industry and therefore
that its general credit practices constitute the relevant industry norm. And we
will assume arguendo that the terms of Maxway's preference payments were
consistent with the credit terms used by the parties in their prior course of
dealing. Finally, we will assume arguendo that the parties' pre-insolvency
relationship was both steady and well-established. With these assumptions, to
satisfy subsection C Advo would only have to show that the credit terms it
extended to Maxway were not a gross departure from the credit terms Advo
normally extended to its other customers. However, as explained below, Advo
cannot survive summary judgment because it has presented no evidence on the
credit terms it normally extended to its other customers. In fact, the record
shows that it was unusual for Advo to extend credit to its customers.
A.
39
Rather than presenting specific credit terms representative of its norm, e.g., the
manner, form, amount, and timing of its customers' credit payments to it, Advo
offers a more general characterization of its norm in an effort to satisfy
subsection C's objective standard: Advo argues that its norm was "to work with
its customers and [to] extend credit to some customers ... instead of requiring
prepayment." Appellant's Br. at 32. We think Advo has characterized the
industry norm at too high a level of generality.5 Were creditors allowed to
characterize the industry norm at such a high level of generality, subsection C
could become virtually meaningless. A simple example will make the point.
40
41
Perhaps Advo did not submit evidence on its normal credit terms because,
contrary to its assertions, Advo normally did not extend credit or "work with"
delinquent customers. Rather, the record clearly shows that Advo's norm was to
require prepayment.
42
To begin with, the pre-invoice Advo sent to its customers before their
advertisements were mailed said, "TERMS ALL INVOICES NET PAYABLE
ON RECEIPT." JA 37. The pre-invoice also said, "All distribution and printing
services require prepayment. The Postal Service requires payment prior to the
release of your mailing: therefore Advo must receive payment at least 9 days
prior to the In Home Date." JA 38. Advo's final invoice said, "NET PAYABLE
UPON RECEIPT." JA 42.
43
The record shows that Advo normally stuck to the terms of its invoices. Advo
conceded in response to Maxway's interrogatories that it required "most all of
its other customers [to] pay for its services as well as the postage costs of the
advertisements prior to the actual mailing of the advertisements." JA 7. Advo's
Billing Supervisor, Darrell Easterwood, confirmed in his affidavits that "ADVO
generally requires its customers to pay for its services in advance of the printing
and distribution of the customer's advertisement," JA 35, and that "[a]s a
general policy, ADVO requested that Maxway pre-pay its services." JA 40.
44
45
Fuqua did say that Advo would "work with" customers who were slow in
making payments, but he clarified this statement. By "working with" a
customer, Fuqua meant that Advo would not necessarily hold up a distribution
if a customer's payment was not received; rather, Advo would contact the
customer to find out what the problem was. Fuqua explained:
46 a large account like Maxway, obviously we're not going to slap that account in
[F]or
the face and say, "We ain't got your check. It's not going to mail." We would try to
work with the account and find out what's going on.... So we just say, "What's the
problem, is it [the check] on it's [sic] way," or "is it going to be here soon," or "was it
someone who was sick that day and didn't issue the check," or whatever. We would
just investigate each individual issue with each individual client. And we don't have
this problem a lot, but when it happens, you want to find out why it's happening.
47
Id. at 29. The reason Advo did not "have this problem a lot" is because
customers generally paid upon receipt of the invoice. Fuqua could come up
with only two situations where a customer's "slow" payment might not be a big
deal: where the customer's check was "in the mail" or where the customer did
not receive a timely invoice from Advo's accounting department. When asked
to describe Advo's reaction if a customer, instead of saying, for instance, that
the check was in the mail, said, "I don't have the funds to pay now," id. at 31,
Fuqua answered that he "would be foolish to send their mail out," id. at 32,
because Advo would have to cover the postage costs.
48
In short, the record, which is silent on the credit terms Advo normally extended
to its customers, clearly shows that it was unusual for Advo to extend credit and
it was unusual for Advo to work with delinquent customers. Advo's norm was
to require prepayment.
B.
49
50
In the final analysis, our review of the record reveals that there are no genuine
issues of material fact. As a matter of law, Advo cannot meet its burden of
showing that the preference payments were "made according to ordinary
business terms" as subsection C requires. Consequently, Advo cannot take
advantage of the ordinary course of business exception to Sec. 547(b)'s
avoidance power. Therefore, Maxway is entitled to recover the $177,506.33 in
preference payments made to Advo.
V.
51
We affirm the judgment of the district court affirming the bankruptcy court's
order granting Maxway's motion for summary judgment and denying Advo's
motion for summary judgment.
52
AFFIRMED.
Advo argues that the district court applied the wrong standard of review.
Specifically, Advo charges that the district court applied a "clearly erroneous,"
as opposed to de novo, standard when reviewing the bankruptcy court's
summary judgment ruling. Maxway disagrees. In any event, regardless of how
one might characterize the standard of review used by the district court, our
review is de novo. We have the "power to determine independently whether
summary judgment may be upheld...." Ross v. Communications Satellite Corp.,
759 F.2d 355, 363 (4th Cir.1985)
E.g., Sulmeyer v. Pacific Suzuki (In re Grand Chevrolet, Inc.), 25 F.3d 728, 733
(9th Cir.1994); Fiber Lite Corp. v. Molded Acoustical Prods., Inc. (In re
Molded Acoustical Prods., Inc.), 18 F.3d 217, 223-26 (3d Cir.1994); Clark v.
Balcor Real Estate Fin., Inc. (In re Meredith Hoffman Partners), 12 F.3d 1549,
1553 (10th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 2677, 129 L.Ed.2d
812 (1994); Jones v. United Sav. & Loan Ass'n (In re U.S.A. Inns of Eureka
Springs, Ark.), 9 F.3d 680, 683-84 (8th Cir.1993); In re Tolona Pizza Products
Corp., 3 F.3d 1029, 1032-33 (7th Cir.1993); Logan v. Basic Distribution Corp.
(In re Fred Hawes Org.), 957 F.2d 239, 243-44 (6th Cir.1992). But see
Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1565 (11th
Cir.1986) (per curiam) (lumping together subsections B and C and using a
subjective analysis)
The Third Circuit also made a minor modification to the Tolona Pizza standard
by substituting the word "unusual" for "idiosyncratic" to comport with Sec.
507(c)(2)'s legislative history. See 18 F.3d at 224. Compare Tolona Pizza, 3
F.3d at 1033 ("only dealings so idiosyncratic " fall outside scope of subsection
C (emphasis added)) with S.Rep. No. 989, supra, at 88, reprinted in 1978
U.S.C.C.A.N. at 5874 (Sec. 547 "discourage[s] unusual action by either the
debtor or his creditors during the debtor's slide into bankruptcy" (emphasis
added))
Cf. Hills Oil & Transfer, Inc. v. Havana Nat'l Bank (In re Hills Oil & Transfer,
Inc., 143 B.R. 207, 209 (Bankr.C.D.Ill.1992) ("But even assuming that industry
practice or standards, in general, was to extend a line of credit through
overdrafting of a checking account, the [creditor] further failed to establish the
specifics of how such lending would occur and how it would be repaid, and
how these specific transactions would compare to what would occur in the
banking industry.")
6
We note that the Third Circuit thought there likely would be a gross departure
from the industry norm if, notwithstanding that the parties' longstanding credit
terms were consistent between them, "the range of time transpiring between
invoices and payment has always varied greatly between the parties, because
then one cannot feel confident that 'late' payments during the insolvency period
were unmotivated by unusual creditor pressure or dictated by the debtor's
financial woes...." Molded Acoustical Products, 18 F.3d at 226. We assumed
above that Advo and Maxway maintained a steady relationship during the prepreference period. However, the record shows that during the pre-preference
period there was great, indeed erratic, variance in how long it took Maxway to
pay after it received an invoice that was not prepaid in full: the payment period
ranged from 2 days to over 100 days, hitting many points in between