In Re Hechinger Inv ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
6-7-2007
In Re Hechinger Inv
Precedential or Non-Precedential: Precedential
Docket No. 06-2166
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
Nos. 06-2166 and 06-2229
__________
IN RE: HECHINGER INVESTMENT COMPANY
OF DELAWARE, INC., ET AL.
Debtors
HECHINGER INVESTMENT COMPANY OF
DELAWARE, INC.
v.
UNIVERSAL FOREST PRODUCTS, INC.,
Appellant No. 06-2166
__________
(continued)
_____________
IN RE: HECHINGER INVESTMENT COMPANY
OF DELAWARE, INC., ET AL.
Debtors
HECHINGER INVESTMENT COMPANY OF
DELAWARE, INC.
v.
UNIVERSAL FOREST PRODUCTS, INC.
Hechinger Liquidation Trust, as successor in
interest to Hechinger Investment Company of
Delaware Inc., et al., Debtors in Possession,
Appellant No. 06-2229
__________
On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil No. 05-cv-00497)
District Judge: Honorable Kent A. Jordan
2
__________
Argued on March 28, 2007
Before: RENDELL and CHAGARES,* Circuit Judges.
(Filed: June 7, 2007)
Kevin J. Mangan
Monzack & Monaco
1201 North Orange Street
400 Commerce Center
Wilmington, DE 19899
-and-
(continued)
__________________
* The Honorable Maryanne Trump Barry participated in
the oral argument and panel conference and joined in
the decision on this case, but discovered facts causing
her to recuse from this matter prior to filing of the
Opinion. The remaining judges are unanimous in this
decision, and this Opinion and Judgment are therefore
being filed by a quorum of the panel.
3
Michael S. McElwee [ARGUED]
Barnum, Riddering, Schmidt & Hewlett
333 Bridge Street, N.W., Suite 1700
Grand Rapids, MI 49504
Counsel for Appellant/Cross Appellee
Universal Forest Products, Inc.; and Hechinger
Liquidation Trust, as successor in interest to
Hechinger Investment Company of Delaware Inc., et al.,
Debtors in Possession
Joseph L. Steinfeld, Jr. [ARGUED]
Karen M. Scheibe
A.S.K. Financial
2600 Eagan Woods Drive, Suite 220
Eagan, MN 55121
Counsel for Appellee/Cross Appellant
Hechinger Investment Company of Delaware, Inc.
__________
OPINION OF THE COURT
__________
RENDELL, Circuit Judge.
This case arises out of the bankruptcy proceedings of
Hechinger Investment Company of Delaware, Inc.
(“Hechinger”). Hechinger filed a complaint in the Bankruptcy
Court against its creditor, Universal Forest Products (“UFP”), to
avoid and recover preferential transfers from UFP, pursuant to
4
11 U.S.C. §§ 547 and 550. The Bankruptcy Court rejected
UFP’s defenses that the transfers were either contemporaneous
exchanges for new value under Bankruptcy Code § 547(c)(1) or
made in the ordinary course of business under § 547(c)(2), and
denied UFP’s motion for an adverse evidentiary inference
against Hechinger on the ground of spoliation. It also denied
Hechinger’s motion for prejudgment interest. The District Court
affirmed. Both sides now appeal.
I.
UFP, a leading manufacturer of treated lumber products,
began its business relationship with Hechinger some 15 years
prior to Hechinger’s June 11, 1999 bankruptcy filing. Prior to
February 1999, Hechinger was one of UFP’s biggest customers.
However, Hechinger’s financial condition worsened in 1999 and
UFP became concerned about continuing to sell goods to
Hechinger on credit.
On February 4, 1999, UFP and Hechinger had a meeting
to discuss Hechinger’s financial situation and possible solutions
in order to allow the companies to maintain their business
relationship during the upcoming spring season, when
Hechinger’s demand for lumber products was the greatest. Prior
to this meeting, Hechinger had an open line of credit with UFP
on terms of “1% 10 days, net 30, with a 7-day mail float.”
Under this arrangement, Hechinger could earn a 1% price
reduction for invoices paid within the “discount period,”
5
namely, ten days plus a seven-day grace period for payments
made by mail. App. 207. Hechinger had up to 30 days to pay
in order for the payment to be considered prompt. Id.
Hechinger paid UFP by check accompanied by remittance
advices that matched each payment to particular previous
invoices. During the three years prior to Hechinger’s
bankruptcy filing, Hechinger made most of its payments to UFP
within the “discount period.” App. 906. As of February 4,
1999, Hechinger’s account reflected no amount past due, and
$37,148 coming due within the next 30 days. App. 713.
At the February 4 meeting, UFP presented Hechinger
with four different options to allow the business relationship of
the parties to continue. Hechinger agreed to a $1 million credit
limit for future purchases and its credit terms were reduced to
“1%, 7 days, net 8,” meaning that Hechinger could earn a 1%
price reduction for invoices paid within the seven day “discount
period,” and had up to eight days to pay in order for the payment
to be considered prompt. Hechinger also agreed to remit
payments to UFP by wire transfer, instead of check. Hechinger
wired payments in lump sum amounts of $500,000 or
$1 million, prior to sending remittance advices to UFP. The
changed terms of Hechinger’s credit arrangements with UFP
required Hechinger to make larger and more frequent payments
to UFP because Hechinger placed orders for between $160,000
and $250,000 worth of product per day. Hechinger made a total
of 22 wire transfers during the “preference period,” which ran
from March 13 to June 11, 1999. This equates to a wire nearly
6
every 2.9 days. Hechinger usually made wire transfers in the
amount of the credit limit, which was $1 million for most of this
period.1 The payments reduced the outstanding balance in
Hechinger’s UFP account and replenished Hechinger’s
$1 million line of credit, so that Hechinger could order
additional goods from UFP.2
At the time that Hechinger made each wire transfer, it did
not know which shipments were covered by the transfer.
Hechinger sent remittance advices to UFP after making
payments, in order to explain how UFP should match the
payments to the invoices that UFP created. According to these
remittance advices, some of Hechinger’s payments during the
preference period were “advance payments,” meaning payments
made prior to shipment of the goods. Hechinger’s payments
during the preference period were usually made up to ten days
1
Hechinger’s credit limit was briefly reduced to $500,000 and
was returned to $1 million on April 8. App. 1333. For four or
five days after the limit was returned to $1 million, Hechinger
continued to send wires in the amount of the previous credit
limit of $500,000, but later began sending $1 million wires.
2
There is a dispute between the parties as to whether they
intended unshipped orders to have counted against Hechinger’s
available credit. UFP argues that the parties agreed that both
shipped and unshipped orders were counted against the credit
limit, while Hechinger argues that only shipped orders were
included.
7
before shipment, to eight days after shipment, with the greatest
concentration of payments occurring on the date of shipment.
App. 905.
Hechinger filed for Chapter 11 bankruptcy protection on
June 11, 1999. On June 5, 2001, Hechinger filed a complaint
against UFP to avoid and recover preferential transfers under 11
U.S.C. § 547 and § 550. Hechinger originally sought to recover
$16,703,604.57, the full amount of the payments made to UFP
during the 90-day period prior to Hechinger’s June 11, 1999
filing. Before trial, Hechinger conceded that $6,576,603.36 of
these payments were advance payments and therefore, by
definition, not recoverable under § 547 as payments for or on
account of an antecedent debt. The parties also stipulated that
the “net preference” at issue at trial, potentially subject to UFP’s
§ 547(c)(1) and § 547(c)(2) defenses, was $1,004,216.03 and
that Hechinger had established a prima facie case under § 547(b)
that these transfers were avoidable. App. 39.
Prior to trial, UFP filed a spoliation motion with the
Bankruptcy Court, asking the Court to draw an adverse
inference against Hechinger because, prior to the filing of its
complaint, Hechinger destroyed documents that might have
helped UFP prove that Hechinger intended its preference period
payments to be contemporaneous exchanges for new value
under § 547(c)(1). The Court denied the motion, without
discussion, in October 2004.
8
A trial in the Bankruptcy Court commenced on February
25, 2005, with the main issue being UFP’s contention that
$1,004,216 in payments were not avoidable based on
§ 547(c)(1) and § 547(c)(2) of the Bankruptcy Code. These
sections provide that:
(c) The trustee may not avoid under this
section a transfer--
(1) to the extent that such transfer was--
(A) intended by the debtor and the creditor
to or for whose benefit such transfer was
made to be a contemporaneous exchange
for new value given to the debtor; and
(B) in fact a substantially
contemporaneous exchange;
(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;
9
Accordingly, UFP urged that, although the payments may have
been on account of antecedent debts, they were nonetheless not
avoidable because they were contemporaneous exchanges for
new value under § 547(c)(1), and, alternatively, because they
were made in the ordinary course of business under § 547(c)(2).
The Bankruptcy Court entered judgment in favor of
Hechinger on June 16, 2005 in the amount of $1,004,216. With
respect to whether the transfers were intended as
contemporaneous exchanges for new value under § 547(c)(1),
the Court stated that “the nature of a credit relationship is
inconsistent with the intent which is required in order to sustain
the § 547(c)(1) defense.” In re Hechinger Inv. Co. of Del., 326
B.R. 282, 289 (Bankr. D. Del. 2005). It also concluded that the
transfers were not made in the ordinary course of business
between the parties under § 547(c)(2)(B) because the transfers
were made under vastly different conditions from those that had
previously governed the relationship of the parties. Id. at 292.
The Court further found that the transfers were not made
according to ordinary business terms under § 547(c)(2)(C)
because the terms varied substantially from those normally
employed by UFP with other customers similar to Hechinger.
Id. at 293. Hechinger had requested prejudgment interest to
compensate it in full for the “value” of the payments it
recovered, but the Bankruptcy Court denied this request without
any discussion. Id. at 294.
Both parties appealed the adverse rulings to the District
Court. Challenging the Bankruptcy Court’s rejection of UFP’s
contemporaneous exchange defense under § 547(c)(1), UFP
argued that the Bankruptcy Court’s ruling was grounded in an
error of law regarding the nature of the transactions and the
intent required under § 547(c)(1). The District Court disagreed,
concluding that the Bankruptcy Court did not commit legal error
10
in stating that “the § 547(c)(1) defense may not be applied to
credit transactions.” In re Hechinger Inv. Co. of Del., 339 B.R.
332, 336 (D. Del. 2006). The District Court did not read this
statement as a legal pronouncement that credit transactions are
categorically excluded from § 547(c)(1). Rather, it understood
this passage to signify that the Bankruptcy Court had found that
the parties intended a credit, rather than a cash, relationship. Id.
The District Court then rejected UFP’s other challenges to the
judgment of the Bankruptcy Court and Hechinger’s challenge to
the denial of prejudgment interest, and affirmed the Bankruptcy
Court’s order. Id. at 36-38. This appeal followed.
II.
The District Court had jurisdiction over the appeal of the
Bankruptcy Court’s orders pursuant to 28 U.S.C. § 158(a)(1).
We have jurisdiction to review the District Court’s decision
pursuant to 28 U.S.C. § 158(d)(1). “Our review of the District
Court's decision effectively amounts to review of the bankruptcy
court’s opinion in the first instance,” In re Hechinger Inv. Co. of
Del., 298 F.3d 219, 224 (3d Cir. 2002), because our standard of
review is “the same as that exercised by the District Court over
the decision of the Bankruptcy Court,” In re Schick, 418 F.3d
321, 323 (3d Cir. 2005).
We review the Bankruptcy Court’s findings of fact for
clear error and exercise plenary review over questions of law.
In re Fruehauf Trailer Corp., 444 F.3d 203, 209-10 (3d Cir.
2006). We review the Bankruptcy Court’s denial of an award of
prejudgment interest for abuse of discretion. In re Investment
Bankers, Inc., 4 F.3d 1556, 1566 (10th Cir. 1993). We also
review the denial of UFP’s motion seeking an evidentiary
inference based on spoliation of evidence for abuse of
11
discretion. See Complaint of Consol. Coal Co., 123 F.3d 126,
131 (3d Cir. 1997) (reviewing district court’s decision on
spoliation motion for abuse of discretion).
A. The Contemporaneous Exchange Defense
To prove that the transfers were not avoidable because
they fell within the contemporaneous exchange defense under
§ 547(c)(1), UFP had to show that the transfers were (i) intended
by the debtor and the creditor to be a contemporaneous
exchange for new value given to the debtor; and (ii) in fact a
substantially contemporaneous exchange. In re Spada, 903 F.2d
971, 974 -75 (3d Cir. 1990). “The critical inquiry in
determining whether there has been a contemporaneous
exchange for new value is whether the parties intended such an
exchange.” Id. at 975.
The Bankruptcy Court found that the disputed transfers
were not intended by the parties to be contemporaneous
exchanges because the transfers were credit transactions. In
reaching this result, the Court relied upon several factually
distinguishable cases, none of which stand for the proposition
that parties can never intend credit transactions to be
contemporaneous exchanges under § 547(c)(1)(A).3 We
3
The Court cited Kallen v. Litas, 47 B.R. 977 (N.D. Ill.
1985), and two later cases that cite Kallen, for the proposition
that it is “well established that the § 547(c)(1) defense may not
be applied to credit transactions.” In re Hechinger Inv. Co., 326
B.R. at 289. However, this was not the holding in Kallen. The
Kallen Court stated that § 547(c)(1) “was meant to apply to cash
or quasi-cash transactions,” but did not rely on any distinction
between cash and credit transactions in its holding. Kallen,
12
disagree with the Bankruptcy Court’s conclusion. Indeed, it
would appear that § 547(c)(1) covers little other than credit
transactions. The § 547(c)(1) defense applies only to transfers
that the debtor has shown are payments on an “antecedent debt”
under § 547(b). See 11 U.S.C. § 547(b)(2) (definition of
avoidable transfers). If there is no delay between when the debt
arises and payment of the obligation, then the transfer is outside
the scope of § 547(b), and § 547(c)(1) is not implicated. The
existence of a delay between the creation of a debt and its
payment is a hallmark of a credit relationship, which is, by
definition, a relationship in which the creditor entrusts the
debtor with goods without present payment. OXFORD ENGLISH
DICTIONARY (2d ed. 1989) (defining “credit” as “[t]rust or
confidence in a buyer’s ability and intention to pay at some
future time, exhibited by entrusting him with goods, etc. without
present payment.”).
We do not think that the District Court’s interpretation of
the Bankruptcy Court’s order – namely, as concluding that the
parties intended to have a credit relationship – necessarily
47 B.R. at 983 & n.7.
The Bankruptcy Court also relied upon In re Contempri
Homes, Inc., 269 B.R. 124 (Bankr. M.D. Pa. 2001), in which the
court rejected the defendant’s § 547(c)(1) defense based on a
finding that both parties intended the debtor’s payments to be
applied to old invoices. Id. at 129. The court did not, however,
find that the parties lacked the requisite intent based on the fact
that the transactions were styled as “credit transactions.”
Instead, the court concluded that the parties could not have
intended a contemporaneous exchange because the invoices to
which the payments were applied were “dated,” “old” and
“aged.” Id. at 128.
13
resolves the question. The inquiry still remains: even if a credit
relationship was intended, was it nonetheless their intent that the
ongoing payments would be contemporaneous exchanges for
new value? A court may find the parties intended a
contemporaneous exchange for new value even when the
transaction is styled as a “credit” transaction. See In re Payless
Cashways, Inc., 306 B.R. 243 (8th Cir. BAP 2004), aff’d, 394
F.3d 1082 (8th Cir. 2005). The question is one of intent, and
although a delay between the incurrence of the debt and its
payment can evidence that the exchange was not intended to be
contemporaneous, the passage of time does not necessarily
negate intent. In In re Payless Cashways, for example, the
debtor generally paid the creditor for specific shipments some
time after the goods were shipped, but before or at the time that
the shipments arrived at the debtor’s facility. Id. at 247. The
court concluded that the parties intended the transfers to be part
of a contemporaneous exchange for new value. The court noted
that the debtor and creditor agreed to credit terms that would
match up the date of the actual delivery of the goods purchased
by the debtor with the date of the debtor’s obligation to wire
payment for the goods to the creditor. Id. at 246. The court also
put great weight on the fact that the contracts were “destination
contracts,” meaning that the creditor could have refused to
deliver the goods if the debtor had failed to make payment
before the delivery arrived. Id. at 250, 254.
Similarly, the Bankruptcy Court in In re CCG 1355, Inc.,
276 B.R. 377, 386 (Bankr. D.N.J. 2002), found that a debtor’s
payment, made seven to eleven days after shipment of the goods
but prior to receipt of the creditor’s invoices, was intended by
the parties as a “contemporaneous exchange” for new value
under § 547(c)(1)(A). The court did not specify whether the
debtor had arranged credit terms with the creditor. See also In
14
re Bridge Inform. Sys., Inc., 321 B.R. 247, 256 (Bankr. E.D. Mo.
2005) (finding that parties intended a contemporaneous
exchange for new value when they agreed that debtor would pay
creditor within one business day following its receipt of invoice
for services provided the previous week); In re Anderson-Smith
& Assoc., Inc., 188 B.R. 679, 689 (Bankr. N.D. Ala. 1995)
(finding that parties intended a contemporaneous exchange for
new value when creditor refused to deliver goods without
debtor’s assurance of payment). The payments at issue in the
present case were, for the most part, made even closer to the
date of shipment than the payments in In re Payless Cashways
and In re CCG. The parties stipulated that over half of the
payments that Hechinger sought to avoid were made within five
days of the date of the invoice (which was also the date that the
orders were shipped). App. 219. The Bankruptcy Court,
however, did not address the evidence that the “outstanding
debt” to which the transfers were applied was in most cases less
than six days old. Instead, the Court categorized the transfers at
issue as credit transactions and then found, as a matter of law,
that this finding compelled it to conclude that the debtor did not
intend the transfers to be part of a contemporaneous exchange
for new value.
We conclude that the Bankruptcy Court erred in holding
that the fact that the parties had a credit relationship precluded,
as a matter of law, a finding that Hechinger intended the
transfers to be part of a contemporaneous exchange for new
value. We do not opine as to whether there is sufficient
evidence in the record for the Bankruptcy Court to have found
that UFP failed to prove that the transfers were intended to be
15
contemporaneous exchanges for new value.4 Rather, we
conclude only that the Bankruptcy Court did not make the
necessary finding as to what the parties intended. Instead, the
Court decided that Hechinger did not intend a contemporaneous
exchange based on the erroneous legal conclusion that the
existence of a credit relationship between the parties was
determinative. Whether the parties intended a contemporaneous
exchange is a question of fact to be decided in the first instance
by the factfinder. In re Spada, 903 F.2d 971, 975 (3d Cir. 1990)
(“The determination of such intent is a question of fact.”). We
will accordingly remand to the District Court with instructions
to remand to the Bankruptcy Court to consider whether
Hechinger and UFP intended the transfers at issue to be
contemporaneous exchanges for new value, with the
understanding that transfers made under “credit” terms are not,
as matter of law, categorically excluded from the scope of the
§ 547(c)(1) defense to avoidance.
4
We do note that Hechinger arguably may have intended that
its transfers would be part of a contemporaneous exchange for
“new value” in the form of a renewed line of credit, which
Hechinger received on the date of the payment and immediately
made use of by charging new shipments to its account with
UFP. See In re Roemig, 123 B.R. 405, 408 (Bankr. D.N.M.
1991) (finding $41.40 of debtors’ payment to pay down line of
credit was intended as a “contemporaneous exchange for new
value” because debtors transferred money to pay down their
credit card on the same day as they charged a purchase of this
amount to their credit card).
16
B. The Ordinary Course of Business Defense
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 and-
none 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
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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.
C. The Spoliation Motion
UFP also appeals the Bankruptcy Court’s denial of its
motion for an evidentiary inference in its favor that Hechinger
intended its transfers during the preference period to be
contemporaneous exchanges for new value under §547(c)(1)
because, it argued, Hechinger improperly destroyed records
prior to discovery that might have assisted UFP in proving
Hechinger’s intent. Hechinger acknowledged that it destroyed
various records in September 1999, after filing for bankruptcy,
in order to reduce the amount of space occupied by the
company.
In Schmid v. Milwaukee Electric Tool Corp., 13 F.3d 76(3d Cir. 1994), we explained the history of the “spoliation
inference:”
Since the early 17th century, courts have admitted
evidence tending to show that a party destroyed
evidence relevant to the dispute being litigated.
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Such evidence permitted an inference, the
“spoliation inference,” that the destroyed
evidence would have been unfavorable to the
position of the offending party.
Id. at 78 (internal citation omitted). We found that the “key
considerations in determining whether such a sanction is
appropriate should be: (1) the degree of fault of the party who
altered or destroyed the evidence; (2) the degree of prejudice
suffered by the opposing party; and (3) whether there is a lesser
sanction that will avoid substantial unfairness to the opposing
party and, where the offending party is seriously at fault, will
serve to deter such conduct by others in the future.” Id. at 79.
Neither of the first two factors identified in Schmid favors
UFP. There is no evidence that Hechinger intentionally
destroyed documents that it knew would be important or useful
to UFP in defending against a preference action. In fact, there
is no evidence that any of the documents destroyed would have
been useful to UFP. There was also no showing that UFP was
prejudiced because UFP did not identify any evidence that was
destroyed by Hechinger that would have aided UFP. Any
finding that this conduct prejudiced UFP would be purely
speculative. Therefore, the Bankruptcy Court had little basis for
granting UFP’s spoliation motion and we will not disturb the
Court’s denial of that motion.
D. Denial of Prejudgment Interest
Hechinger appeals the Bankruptcy Court’s denial of its
request for prejudgment interest pursuant to 11 U.S.C. § 550(a).
Section 550(a) provides that:
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(a) Except as otherwise provided in this section,
to the extent that a transfer is avoided under
section 544, 545, 547, 548, 549, 553(b), or 724(a)
of this title, the trustee may recover, for the
benefit of the estate, the property transferred, or,
if the court so orders, the value of such property,
from--
(1) the initial transferee of such transfer or the
entity for whose benefit such transfer was
made; or
(2) any immediate or mediate transferee of
such initial transferee.
(emphasis added). There is no reference to prejudgment interest
in the Bankruptcy Code, but courts have relied on the word
“value” in § 550(a) as authorizing an interest award. In re Art
Shirt Ltd., Inc., 93 B.R. 333, 341 n.9 (E.D. Pa. 1988). “[T]he
award of prejudgment interest in a preference action is within
the discretion of the bankruptcy court.” In re USN Commc’n,
Inc., 280 B.R. 573, 602 (Bankr. D. Del. 2002) (collecting courts
of appeals cases). However, “[d]iscretion must be exercised
according to law, which means that prejudgment interest should
be awarded unless there is a sound reason not to do so.” In re
Milwaukee Cheese Wis., Inc., 112 F.3d 845, 849 (7th Cir. 1997).
As Hechinger notes, the Bankruptcy Court gave no
reason for its decision to deny Hechinger’s motion for
prejudgment interest. We therefore cannot determine from the
record before us whether the Court had a “sound reason” to deny
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Hechinger’s request. We will accordingly vacate the order of
the District Court affirming the denial of Hechinger’s request for
prejudgment interest. We will instruct the District Court to
remand to the Bankruptcy Court for an explanation of its
reasons for denying Hechinger’s request for prejudgment
interest.
III.
For the reasons set forth above, we will VACATE the
order of the District Court insofar as it affirms the order of the
Bankruptcy Court entering judgment in favor of Hechinger and
denying Hechinger’s prejudgment interest request. We will
REMAND this matter to the District Court with instructions to
remand to the Bankruptcy Court for a finding as to whether
Hechinger intended the transfers at issue to be contemporaneous
exchanges for new value, with the understanding that “credit”
transactions are not categorically excluded from §547(c)(1), and
for an explanation of the Court’s reasons for denying
Hechinger’s request for prejudgment interest. We will AFFIRM
the District Court’s order insofar as it affirms the Bankruptcy
Court’s denial of UFP’s spoliation motion.
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