On December 18, 2014, Bankruptcy Judge Christopher Sontchi issued an opinion (a copy of which is found here)  granting summary judgment in favor of defendant and against trustee who sought to avoid and recover $1,181,583.84 as preferential transfers pursuant to 11 U.S.C. sections 547 and 550.  The Court granted the defendant’s motion seeking summary judgment that the preferential transfers, if any, were not avoidable because they were made in the ordinary course of business under section 547(c)(2)(A) of the Bankruptcy Code.  Specifically, based on the length of relationship between the debtor and defendant, the timing of payments, and the historical billing practices, the Court concluded that the alleged transfers were made in the ordinary course of business and are therefore not voidable pursuant to section 547(c)(2)(A).

Summary:

Charles A. Stanziale, Jr. (the “Trustee”) of the bankruptcy estates of Conex International, LLC (“Conex”), formerly known as Conex International Corporation; Conex Holdings, LLC; and Advance Blasting & Coating (collectively, the “Debtors”) sought to avoid and recover seven transfers totaling $1,181,583.84 (the “Transfers”) under Bankruptcy Code sections 547 and 550 against defendant Industrial Specialists Inc. a/k/a  Industrial Specialists, LLC (the “Defendant”) allegedly made in the 90 days preceding the Debtors’ filing of Chapter 7 bankruptcy (the “Preference Period”).  Following discovery, the Defendant moved for summary judgment under two theories that the preferential Transfers, if any, were not avoidable because they (i) were made in the ordinary course of business under section 547(c)(2)(A); and/or (ii) were barred by the Texas Construction Trust Fund Act.  Because the Court determined that the Transfers were not avoidable based on section 547(c)(2)(A), the Court did not rule on whether the action was barred under the Texas Construction Trust Fund Act.

Discussion:

In support of its defense that the payments occurred in the ordinary course of business, the Defendant claimed that each transfer in the Preference Period was (i) received squarely within the historic range of days after invoice and was consistent with the parties’ prior course of dealings; (ii) was made on account of debts incurred by the parties in the ordinary course of business; and (iii) was a continuation of normal financial relations between the Debtors and Defendant.  The Court noted that the determination of whether a creditor has met its burden under section 547(c)(2)(A) is a subjective test, “calling for the Court to consider whether the transfer was ordinary as between the debtor and the creditor.” Op. at 9-10.  The Court then pointed to the “myriad of factors in this test, including: (1) the length of time the parties engaged in the type of dealing at issue; (2) whether the subject transfers were in an amount more than usually paid; (3) whether the payments at issue were tendered in a manner different from previous payments; (4) whether there appears to have been an unusual action by the debtor or creditor to collect on or pay the debt; and (5) whether the creditor did anything to gain an advantage (such as additional security) in light of the debtor’s deteriorating financial condition.”  Op. at 11.  The Court noted that no one factor is determinative and it must “first determine what the ordinary course of business was and then compare the preferential transfers to it.”  Op. at 11.

The Court found that the parties had been doing business for approximately 16 months and this duration was sufficient for the Court to determine the ordinary course of business between them.  Op. at 12.  Next, in comparing the Transfers to the transfers made in the course of dealings between the parties prior to the Preference Period, the Court, while placing particular importance on the timing of payment, noted that “this inquiry is intensely fact specific” but small deviations in timing might not preclude  a finding of ordinariness.  Op. at 13.  The Court disregarded the Trustee’s “dollar-weighted days” (“DSO”) analysis (see Op. at 13-15 for discussion), but rather looked to the 20 transfers made before the Preference Period and compared them to the Transfers.   Even considering four “outlying” payments (made 95, 81, 78, and 77 days after invoice), which increased the difference in the average days to pay between the pre-Preference Period and Preference Period payments by 7 days, the Court found that the timing of the payments was still in the ordinary course of business.

Next, the Trustee asserted that the Defendant did not meet its burden because it did not identify the payee because payments not made out to any other entity other than the named Defendant should not be included in the historical period.  The Defendant, however, submitted uncontroverted evidence in support of its name change to allow the Court to conclude that the payments made were to the same entity to be considered in its analysis.  Finally, the Court found no evidence of change in the amount of the subject Transfers such that payments in the Preference Period were in an amount more than usually paid; nor that the Transfers were tendered in a different manner from previous payments; nor that the Defendant took any unusual action to collect such debts from the Debtor; nor that the Defendant did anything to gain an advantage as a result of the Debtor’s deteriorating financial condition.

Stanziale v. Industrial Specialists Inc. a/k/a Industrial Specialists, LLC (In re Conex Holdings, LLC), Adv. Proc. No. 12-51170 (CSS) (Bankr. D. Del. Dec. 18, 2014)