In re Murray, Inc. v. ( 2008 )

ELECTRONIC CITATION: 2008 FED App. 0010P (6th Cir.)
File Name: 08b0010p.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: MURRAY, INC., )
)
Debtor. ) No. 07-8064
_____________________________________ )
)
WILLIAM KAYE, )
)
Plaintiff - Appellant, )
)
v. )
)
AGRIPOOL, SRL )
)
Defendant - Appellee. )
)
Appeal from the United States Bankruptcy Court
for the Middle District of Tennessee, Nashville Division.
Case No. 04-13611; Adversary No. 05-0715.
Argued: May 14, 2008
Decided and Filed: July 24, 2008
Before: RHODES, SCOTT, and SHEA-STONUM, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: Jeffrey P. Nolan, PACHULSKI, STANG, ZIEHL & JONES, Los Angeles, California,
for Appellant. Randal S. Mashburn, BAKER, DONELSON, BEARMAN, CALDWELL &
BERKOWITZ, Nashville, Tennessee, for Appellee. ON BRIEF: Jeffrey P. Nolan, PACHULSKI,
STANG, ZIEHL & JONES, Los Angeles, California, Phillip G. Young, Jr., BASS, BERRY & SIMS,
Nashville, Tennessee, for Appellant. Randal S. Mashburn, John H. Rowland, Courtney H. Gilmer,
BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, Nashville, Tennessee, for
Appellee.
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____________________
OPINION
____________________
JOSEPH M. SCOTT, JR., Bankruptcy Appellate Panel Judge. William Kaye, Trustee of the
Murray Liquidating Trust (“Trustee”), appeals an order of the bankruptcy court dismissing his
adversary complaint against Agripool, SRL (“Agripool”) to avoid certain payments as preferential
transfers and recover $271,242.90 pursuant to 11 U.S.C. §§ 547 and 550. The bankruptcy court
found that Agripool proved the ordinary course of business defense under 11 U.S.C. § 547(c)(2).
For the reasons that follow, we reverse and remand.
I. ISSUES ON APPEAL
The issues presented by this appeal are whether the bankruptcy court erred when it (1) failed
to draw an adverse inference that Agripool applied pressure upon the Debtor for payments because
Agripool did not produce requested emails; and (2) found that Agripool met its burden of proof that
the ordinary course of business defense applied and, as a result, dismissed the Trustee’s complaint.
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction to decide this appeal. The United States District Court for the Middle
District of Tennessee has authorized appeals to the Panel, and neither party has timely elected to
have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the
bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). The dismissal of
the Trustee’s complaint is a final order as it “ends the litigation on the merits and leaves nothing for
the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794,
798, 109 S. Ct. 1494, 1497 (1989) (citations omitted).
The bankruptcy court’s conclusions of law are reviewed de novo. Riverview Trenton R.R.
Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940 (6th Cir. 2007). “Under a de novo standard of
review, the reviewing court decides an issue independently of, and without deference to, the trial
court’s determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798,
2
800 (B.A.P. 6th Cir. 2007). The court’s findings of fact are reviewed under the clearly erroneous
standard. In re DSC, Ltd., 486 F.3d at 944. “A finding of fact is clearly erroneous ‘when although
there is evidence to support it, the reviewing court on the entire evidence is left with the definite and
firm conviction that a mistake has been committed.’” Id. (quoting Anderson v. City of Bessemer
City, 470 U.S. 564, 573, 105 S. Ct. 1504 (1985)).
III. FACTS
Agripool, SRL (“Agripool”) is a foreign company with its headquarters in Italy and
manufacturing facilities in both Italy and Hungary. Agripool primarily manufactures parts for lawn
and garden equipment, with an emphasis on bags which are attached to equipment for catching grass,
leaves and snow. From 2003 to 2004, 75% of Agripool’s revenues were derived from the
manufacture of grass catcher bags for lawnmowers, and 99% of the products manufactured by
Agripool in that time period were lawn and garden products.
Murray, Inc. (“Debtor”) was a manufacturer of lawnmowers and snow blowers with its
principal place of business in Brentwood, Tennessee. In 2003, Agripool and the Debtor began
negotiations for Agripool to become a supplier of grass catcher bags for lawnmowers manufactured
by the Debtor. The negotiations culminated with Agripool supplying the Debtor with polypropylene
grass catcher bags for its 20 and 22 inch push mowers. The contractual terms for payment were 60
days from date of issuance of an invoice. Shipments took place by containership.
The first order for the bags was placed on October 23, 2003. Over the course of the parties’
dealings, Agripool issued sixteen invoices to the Debtor, twelve before the preference period and
four during the preference period. All payments by the Debtor, both prior to and during the
preference period, were made by wire transfer. In July 2004, the Debtor placed an order for 200,000
bags for the 2005 season. As a result, Agripool was to be the exclusive provider of bags to the
Debtor for the 2004-2005 season.
In February 2004, several hundred thousand of the Debtor’s lawnmowers were recalled due
to a product defect. As a result, the Debtor’s owner missed its capital contribution which violated
the Debtor’s bank covenants and placed it in default. The Debtor’s lender, GE Financing, then
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refused to extend its prior ceiling of credit resulting in limited funds for future ongoing operations.
In April 2004, the Debtor missed its sales forecast by $30 million. By July 2004, large retailers of
the Debtor’s products learned of the Debtor’s financial crisis and pulled its products for the 2005
sales year. In September 2004, the Debtor laid off 30% of its salaried work force. Agripool,
however, was unaware of the Debtor’s financial difficulties at this time. In August 2004, the Debtor
made two payments to Agripool on four invoices totaling $271,242.90 which brought its balance
current.
On November 8, 2004, the Debtor filed a petition for relief under Chapter 11 of the
Bankruptcy Code. The bankruptcy court confirmed the Debtor’s liquidation plan on September 23,
2005. On October 14, 2005, the Trustee filed an adversary complaint against Agripool seeking to
recover $271,242.90 in payments made between August 10, 2004, and November 8, 2004, the
preference period, by the Debtor to Agripool in satisfaction of four invoices. Agripool responded
to the complaint asserting the “ordinary course of business” defense under 11 U.S.C. § 547(c)(2).
The parties stipulated that the Trustee met his burden of proof as to each of the elements of
11 U.S.C. § 547(b) and that the sole issue to be determined was the applicability of the ordinary
course of business defense set forth in § 547(c)(2). On June 11, 2007, the bankruptcy court held a
trial at which the former Controller of the Debtor, the former Cash Management Manager of the
Debtor, the Business Development Manager of Agripool, and experts for each side on the issue of
“ordinary course of business” testified. On October 9, 2007, the bankruptcy court issued a
memorandum opinion concluding that Agripool was entitled to the ordinary business defense and
an order dismissing the Trustee’s complaint. The Trustee’s timely appeal followed.
IV. DISCUSSION
11 U.S.C. § 547(b) provides that the Trustee may avoid certain preferential transfers made
in the ninety days preceding the petition for relief as preferences if five conditions are satisfied. A
transfer must “‘(1) benefit a creditor; (2) be on account of antecedent debt; (3) be made while the
debtor was insolvent; (4) be made within 90 days before bankruptcy; and (5) enable the creditor to
receive a larger share of the estate than if the transfer had not been made.’” Luper v. Columbia Gas
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of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir. 1996) (quoting Union Bank v. Wolas,
502 U.S. 151, 155, 112 S. Ct. 527, 529-30 (1991)). The parties stipulated that all of the elements
to establish a voidable preference under § 547(b) were satisfied.
Pursuant to 11 U.S.C. § 547(c) the transferee of a preferential payment may prevent
avoidance 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). As the creditor, Agripool bears the burden of proving by a preponderance
of the evidence that the preferential payments it received are not avoidable under § 547(c)(2). In re
Carled, Inc., 91 F.3d at 813. The parties agree that the Debtor’s debts to Agripool were incurred in
the ordinary course of business as required by subsection (A). Therefore, only subsections (B) and
(C) are in dispute and at issue in this appeal.
A. 11 U.S.C. § 547(c)(2)(B) - THE SUBJECTIVE PRONG
Subsection (B) is a subjective component of the ordinary course of business defense which
requires proof that the debt and the payment thereof are ordinary in relation to other business
dealings between this particular creditor and debtor. In re Carled, Inc., 91 F.3d at 813. Whether a
payment is made in the ordinary course of business is a factual determination which we will not set
aside unless it is clearly erroneous. Yurika Foods Corp. v. United Parcel Serv. (In re Yurika Foods
Corp.), 888 F.2d 42, 45 (6th Cir. 1989) (citing In re Fulghum Const. Corp., 872 F.2d 739, 742 (6th
Cir. 1989)). In a case such as this, we treat the evidentiary findings of the bankruptcy court as factual
determinations subject to the clearly erroneous standard, and analyze the evidence to determine
whether it supports the legal conclusions of the bankruptcy court as a matter of law. In re Carled,
Inc., 91 F.3d at 813. While this is a factual determination, in reaching a decision on the issue, the
Sixth Circuit Court of Appeals has instructed courts to consider factors including the history of the
parties’ dealings with one another, timing, the amount at issue, and the circumstances of the
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transaction. Brown v. Shell Canada Ltd. (In re Tenn. Chemical Co.), 112 F.3d 234, 237 (6th Cir.
1997). “Generally, the entire course of dealing is considered.” Id. (citing In re White, 64 B.R. 843
(Bankr. E.D. Tenn. 1986)). For example, if a debtor typically made late payments, then late
payments will be considered as within the ordinary course of business under § 547(c)(2)(B). In re
Yurika Foods Corp., 888 F.2d at 44. If the transactions in question are consistent with the dealings
of the parties, even though irregular, they may be considered “ordinary” for the purposes of
§ 547(c)(2). Id. at 45.
An additional factor to be considered under subsection (B) is whether the creditor engaged
in any unusual action to collect the debt. Michigan Consolidated Gas Co. v. Solomon (In re Indus.
Metal Fabricators), 902 F.2d 33, 1990 WL 57232, at *4 (6th Cir. 1990) (unpublished table
decision). If the creditor engages in unusual collection practices, and the debtor makes a payment
in response, the debtor’s subjective intent in making the payment is relevant as to the ordinariness
of the payment. Speco Corp. v. Canton Drop Forge, Inc. (In re Speco Corp.), 218 B.R. 390, 401
(Bankr. S.D. Ohio 1998) (citing Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563,
1566 (11th Cir. 1986)).
The Trustee’s first argument on appeal is that as a result of Agripool’s failure to produce
emails from 1994 between Agripool and the Debtor, he was entitled to an adverse inference that
pressure was applied to the Debtor to obtain the transfers during the preference period making the
payments out of the ordinary. During the discovery process, the Trustee propounded requests for
production of documents to Agripool which sought documents memorializing communications
between Agripool and the Debtor. Although numerous documents were produced, including some
emails, no emails from 2004 were produced. At trial, Matteo Castelli (“Castelli”), Agripool’s
Business Development Manager, testified that while he may have some emails from 2004
communications with the Debtor, he had acknowledged at his deposition that he did not do a very
good job of searching for them. (Appellant’s App. at 522-525.) He also acknowledged at trial that
the documents which were produced did not contain any emails from 2004. (Appellant’s App. at
527.)
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Castelli testified, however, that Agripool never applied any unusual collection efforts upon
the Debtor. (Appellant’s App. at 500-01.) Nor did Agripool ever request any financial assurances
from the Debtor. (Appellant’s App. at 500-01.) Moreover, the Debtor’s former controller, Thomas
Sharpe, testified that he did not inform Agripool of the Debtor’s financial difficulties and was never
asked by Agripool to bring the balance current. (Appellant’s App. at 625.) Additionally, the
Debtor’s former Cash Management Manager, Perry Adams, testified that she did not recall Agripool
asking her to bring the balance current. (Appellant’s App. at 634.)
“‘[T]he general rule is that [w]here relevant information . . . is in the possession of one party
and not provided, then an adverse inference may be drawn that such information would be harmful
to the party who fails to provide it.’” Clay v. United Parcel Serv., Inc., 501 F.3d 695, 712 (6th Cir.
2007) (quoting McMahan & Co. v. Po Folks, Inc., 206 F.3d 627, 632-33 (6th Cir. 2000)). This rule
is a permissive one which directs that the inference may be drawn by the trier of fact; it is not
mandatory. Int’l Union, United Automobile, Aerospace & Agricultural Implement Workers of Am.
v. Nat’l Labor Relations Bd., 459 F.2d 1329, 1349 (D.C. Cir. 1972) (Tamm, J., dissenting); see also
Central States v. U.S. Truck Co. Holdings, Inc. (In re U.S. Truck Co. Holdings, Inc.), 341 B.R. 596,
608 (E.D. Mich. 2006). “‘Whether to draw the inference is a matter of discretion for the fact
finder.’” BASF Corp. v. Old World Trading Co., Inc., 41 F.3d 1081, 1098 (7th Cir. 1994) (quoting
Int’l Union, UAW v. NLRB, 459 F.2d at 1339)). The rule is one more of common sense than of
common law and is no different than other inferences which are weighed by fact finders. Id. (citing
Int’l Union, UAW v. NLRB, 459 F.2d at 1335)).
Because drawing such an inference is a matter of discretion for the bankruptcy court, we
review it for an abuse of discretion. “An abuse of discretion occurs only when the [trial] court relies
upon clearly erroneous findings of fact or when it improperly applies the law or uses an erroneous
legal standard.” Volvo Commercial Fin. LLC the Americas v. Gasel Transp. Lines, Inc. (In re Gasel
Transp. Lines, Inc.), 326 B.R. 683, 685 (B.A.P. 6th Cir. 2005) (citing Schmidt v. Boggs (In re
Boggs), 246 B.R. 265, 267 (B.A.P. 6th Cir. 2000)). A court also abuses its discretion “if the
reviewing court has a definite and firm conviction that the trial court committed a clear error of
judgment in the conclusion that it reached based on all of the appropriate factors.” Belfance v. Black
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River Petroleum, Inc. (In re Hess), 209 B.R. 79, 80 (B.A.P. 6th Cir. 1997) (citing Bowling v. Pfizer,
Inc. 102 F.3d 777 (6th Cir. 1996)). We must ask “whether a reasonable person could agree with the
bankruptcy court’s decision; if reasonable persons could differ as to the issue, then there is no abuse
of discretion.” Mayor and City Council of Baltimore, Md. v. W. Va. (In re Eagle-Picher Indus.,
Inc.), 285 F.3d 522, 529 (6th Cir. 2002).
In his Proposed Final Statement of Facts and Conclusions of Law submitted after trial, the
Trustee asserted that he was entitled to an adverse inference on the issue of collection efforts.
(Appellant’s App. at 365.) The bankruptcy court did not specifically address this assertion in its
memorandum opinion. It found, however, that “there was no proof at trial of any unusual collection
activity by [Agripool] during the preference period that resulted in the payment of any amounts at
issue. . . .” (Appellant’s App. at 461-62.) The bankruptcy court went on to find:
Mr. Castelli confirmed that [Agripool] received its last pre-petition payment from the
debtor two months prior to the petition date. He also testified that [Agripool] did not
exert any payment pressure on the debtor prior to the petition date and [Agripool]
was not aware that the debtor was suffering financial difficulties until immediately
before the petition date. Mr. Castelli’s testimony was both credible and consistent
with his testimony concerning the timing of the payments received by [Agripool]
during the preference period. Mr. Castelli’s testimony as to the seasonal nature of
the business between the parties went unchallenged. And as Mr. Castelli testified,
the payments received by [Agripool] in the summer of 2004 represented the logical
conclusion of the parties’ 2004 relationship, one that placed the debtor’s lawn
products in the hands of retailers in the spring of 2004.
(Appellant’s App. at 462.) (emphasis added.)
We infer, therefore, that the bankruptcy court rejected the Trustee’s argument and declined
to draw an adverse inference based on the testimony of the witnesses. The bankruptcy court is in the
best position to assess the witnesses’ testimony and determine the credibility of those witnesses. See
Official Unsecured Creditors Comm. of Valley-Vulcan Mold Co. v. Ampco-Pittsburgh Corp. (In re
Valley-Vulcan Mold Co.), 237 B.R. 322, 327 (B.A.P. 6th Cir. 1999) (citing Sicherman v. Diamondcut,
Inc. (In re Sol Bergman Estate of Jewelers, Inc.), 225 B.R. 896, 904 (B.A.P. 6th Cir. 1998)). The
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bankruptcy court was not required to draw an adverse inference from Agripool’s failure to produce
emails from 2004. It appears that, based on the testimony of the witnesses, the bankruptcy court did
not believe any such emails would reveal that Agripool engaged in any unusual collection activities.
The bankruptcy court did not abuse its discretion by failing to draw the requested adverse inference.1
Even if the “missing” emails were to reveal that there had been a demand for payment,
collection practices alone do not prevent the transfers from being ordinary. Collection practices are
just one factor to be considered by the fact finder. Even where a creditor sends a series of demand
letters to a debtor, the Sixth Circuit Court of Appeals, upon consideration of all relevant factors, has
found payments to be in the ordinary course of business. See, e.g., Brown v. Shell Canada Ltd. (In
re Tenn. Chemical Co.), 112 F.3d 234 (6th Cir. 1997). The bankruptcy court considered all of the
relevant factors–the timing of the transfers, the amount, the manner in which the transfers were made,
and the entire circumstances under which the transfers were made–in concluding that Agripool met
its burden of proof under § 547(c)(2)(B).
The Trustee further argues that the issue of collection pressures is additionally important
because the parties’ business relationship was not long enough to determine whether the payments
during the preference period were in the ordinary course of business. Specifically, the Trustee argues
that “[i]t is difficult to determine factual consistency in the record since it was not disputed that the
pre-preference period lasted only one season, or nine months. While [Trustee] readily acknowledges
the standard in the Sixth Circuit does not demand absolute consistency or perfection in timing, a
finding of pressure offends the policy basis for allowing a transfer to be shielded regardless of
similarity in timing.” (Appellant’s Br. at 20.)
1
We question whether the Trustee properly raised this issue in the bankruptcy court. He
did not file a motion to compel the discovery, no supplemental request for production of
documents was made, and no pre-trial motion requesting that an adverse inference be drawn was
filed by the Trustee. However, because we conclude that the bankruptcy court did not abuse its
discretion in presumably refusing to draw such an inference, we need not determine whether the
issue was properly raised.
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Agripool’s expert witness, Harold Schaeffer (“Schaeffer”), testified that the average number
of days between invoice and payment preceding the preference period was approximately 80 days,
and was 84 days during the preference period. Timing of payments before the preference period
ranged from 62 to 126 days, and from 67 to 105 days during the preference period. Based on these
facts, Schaeffer concluded that the preferential transfers were in the ordinary course of business
between the parties. On the other hand, the Trustee’s expert witness, Michael Atkinson (“Atkinson”),
testified that he could not make a meaningful comparison between the pre-preference and post-
preference period transfers because there were not enough pre-preference transactions. The
bankruptcy court agreed with Schaeffer’s analysis and concluded that the transfers made during the
preference period were in the ordinary course of business between these parties.
The Sixth Circuit Court of Appeals has held that a transaction can be in the ordinary course
of business even if it is the first such transaction the parties have made. Gosch v. Burns (In re Finn),
909 F.2d 903, 908 (6th Cir. 1990). Here there were nine months of transactions before the preference
period. Those transactions included twelve invoices and ten payments before the preference period,
and four invoices and two payments during the preference period. The bankruptcy court was not
clearly erroneous in finding that there was sufficient evidence upon which to conclude that the
transfers were in the ordinary course of business between these parties.
The bankruptcy court also considered the manner in which the payments were made.
Testimony at trial showed that all payments, both before and during the preference period, were made
by wire transfer. Further, as the bankruptcy court found, there was no change in the terms of credit
between the parties. The bankruptcy court did not err in finding that Agripool met its burden of proof
under § 547(c)(2)(B).
B. 11 U.S.C. § 547(c)(2)(C) - THE OBJECTIVE PRONG
Subsection (C) is an objective component of the defense which requires proof that the
transactions in question comport with the standards in the relevant industry. In re Carled, Inc., 91
F.3d at 813. In analyzing whether a transaction meets the requirements of § 547(c)(2)(C), “‘courts
do not look only at the manner in which one particular creditor interacted with other similarly situated
10
debtors, but rather analyze whether the particular transaction in question comports with the standard
conduct of business within the industry.’” Id. at 815 (quoting Logan v. Basic Distr. Corp. (In re Fred
Hawes Organization, Inc.), 957 F.2d 239, 246 (6th Cir. 1992)). In the Sixth Circuit, “ordinary
business terms” as used in § 547(c)(2)(C) means “that the transaction was not so unusual as to render
it an aberration in the relevant industry.” Id. at 818. It does not mean that the transactions in question
must conform with the majority of the industry’s transactions, or that the creditor establish that the
nature of the transaction in question resembles the pattern of a significant percentage of its customers.
Id.
“Whether a transaction comports with the standards for business conduct within an industry
is a factual determination that [is not to be] set aside unless clearly erroneous.” In re Carled, Inc.,
91 F.3d at 813 (citing Yurika Foods Corp. v. United Parcel Serv. (In re Yurika Foods Corp.), 888
F.2d 42, 45 (6th Cir. 1989)). The Trustee asserts two errors in regard to the objective prong of this
defense. First, he asserts that the bankruptcy court erred in concluding that Agripool is in the lawn
and garden tractor and garden equipment manufacturing industry. Second, he contends that the court
erred in accepting the testimony of Agripool’s expert which made subjective adjustments to objective
data.
Castelli testified at trial that during the 2003 and 2004 time period, 75% of Agripool’s
revenues were generated by the production and sale of grass catcher bags for lawnmowers and 98 to
99% of all products manufactured by Agripool at that time were lawn and garden products.
(Appellant’s App. at 530-31.) He further testified that the grass catcher bags manufactured by
Agripool were constructed of polypropylene. (Appellant’s App. at 492.) Based upon that
information, Agripool’s expert concluded that Agripool was in the “lawn and garden tractor and
garden equipment manufacturing industry.” (Appellant’s App. at 542.) The Trustee’s expert,
however, concluded and testified that Agripool was in the “canvas and related products” industry
based on interviews with employees of the Debtor, review of Agripool’s website (although he said
he could not read it because the text is in Italian), review of discovery including the deposition of
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Castelli2, and the classification given to Agripool by Hoover’s, a Dun & Bradstreet company.
(Appellant’s App. at 647.) Agripool’s expert, Schaeffer, rejected the contention that Agripool was
in the “canvas and related products” industry because, as he testified, that industry classification
“revolves around sails, tarps, possibly tents” and Agripool’s primary focus was parts for lawnmowers.
(Appellant’s App. at 542.)
The bankruptcy court noted that the Trustee’s expert did not conduct a physical examination
of any of Agripool’s products. The court also found that Castelli’s testimony that the grass catcher
bags were made of polypropylene, not canvas, was unrefuted, and that none of the bags manufactured
by Agripool contain cotton or canvas. Ultimately, the bankruptcy court concluded that Agripool is
in the “Lawn and Garden Tractor and Garden Equipment Manufacturing” industry. (Appellant’s App.
at 464.) Based on the evidence presented at trial, the bankruptcy court was not clearly erroneous in
finding that Agripool was in the “Lawn and Garden Tractor and Garden Equipment Manufacturing”
industry.
Agripool’s expert, Schaeffer, then testified that the preferential payments fell within the range
of payments in the “Lawn and Garden Tractor and Garden Equipment Manufacturing” industry. He
reached this conclusion by analyzing information obtained from the Risk Management Association
(“RMA”), a 94 year old non-profit organization that supplies credit information.
Schaffer made certain adjustments to the RMA data because, according to him, it does not
include foreign companies. He testified that “[b]efore we could actually compare [the transactions
between the parties and those in the relevant industry] we had to take into consideration the
environment that revolved between the parties.” (Appellant’s App. at 546.) Because Agripool is a
foreign company which shipped its products to the Defendant via containership, Schaeffer made a 30-
day downward adjustment of the data from the payment history between the parties to reflect the time
required to transport goods from Italy to a United States port by ship, including the time necessary
2
The particular testimony upon which he relied was Castelli’s statement that Agripool
produces “rider bags, walk-behind bags, blower bags, strap harnesses” and a new product also
“made of fabric.” (Appellant’s App. at 301.)
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to clear customs. (Appellant’s App. at 497 & 547.) He also explained that there are different
considerations for a foreign company extending credit to a U.S. company, such as “country risk,
which would be the political condition of that particular company; the economic risk, which would
be the financial condition of that particular country itself; the monetary risk, which is currency.”
(Appellant’s App. at 546-47.) With this adjustment, Schaeffer testified, he was able to compare the
payment history of the parties with the industry data compiled by RMA. (Appellant’s App. at 548.)
On cross-examination by the Trustee’s attorney, Schaeffer conceded that not all international
companies necessarily extend 60-day credit terms to U.S. customers, and that some companies may
ship products to U.S. customers by air rather than ship. (Appellant’s App. at 555-56.) He did not
research whether other international companies in the relevant industry ship their products to the U.S.
by containership. (Appellant’s App. at 557.) If an international company ships by air, Schaeffer
testified, the 30-day adjustment would not be necessary. (Appellant’s App. at 556.) Furthermore,
Schaeffer conceded he did not know how long it typically takes for similar products to clear U.S.
customs, which was a factor he asserted was considered in making the 30-day adjustment.
(Appellant’s App. at 561.) Finally, Schaeffer conceded that Dun & Bradstreet data, which is used by
some experts in his field (including the Trustee’s expert), but which he does not consult, includes data
regarding international transactions. (Appellant’s App. at 566.)
With the 30-day downward adjustment, Schaeffer concluded that the payments of the Debtor
to Agripool averaged 54 days.3 (Appellant’s App. at 549.) According to the RMA data for the
relevant industry reviewed by Schaeffer, the average in the industry is 23 to 58 days. Therefore,
Schaeffer concluded that the preferential payments fell within the industry range. (Appellant’s App.
at 549.) Schaeffer conceded, however, that absent the downward adjustment in the data, the payments
were outside of the ordinary course of business. (Appellant’s App. at 553-54.)
3
Schaeffer, Agripool’s expert, testified that the average days between invoice and
payment during the preference period was 84 days. The adjusted days between invoice and
payment was 54 days. The range of timing of the payments, before adjustment, was 67 to 105
days, and after adjustment was 37 to 75 days.
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On the other hand, the Trustee’s expert, Atkinson, testified, based on RMA data and Dun &
Bradstreet data4, that the high and low average payments in the “canvas and related products” industry
were 20 to 49 days between invoice date and date of payment. (Appellant’s App. at 648-49.) Based
on the industry data, Atkinson testified that any payment outside that industry range was outside the
ordinary course of business. (Appellant’s App. at 648-49.)
The bankruptcy court found that Schaeffer’s 30-day downward adjustment was
understandable, and that his testimony and analysis was “credible and sound.” (Appellant’s App. at
465.) The court further found that the Trustee’s expert failed to examine the appropriate industry,
and, therefore, his testimony did not present credible evidence regarding the ordinary business terms
of similar companies. Accepting the testimony of Agripool’s expert, the bankruptcy court found that
none of the transfers were “so unusual as to render them an aberration” in the industry. (Appellant’s
App. at 465.)
The Trustee argues that the bankruptcy court erred in allowing Agripool’s expert to make
subjective adjustments to the industry data to take into account transport of the product by ship. He
further argues that by selecting industry data which was limited to domestic sales, Schaeffer used
either the “wrong industry, wrong data, or insufficient data.” (Appellant’s Br. at 25- 26 n.11.)
Specifically, he asserts that Schaeffer’s testimony does not meet the Daubert standard for expert
testimony because there was no reliable methodology employed by Schaeffer in making the
adjustments to the objective data of RMA.
The Trustee also argues that because the parties’ relationship was limited to nine months prior
to the preference period, the industry standard is especially critical to the analysis. When the
relationship of the parties is relatively new, the credit terms “will have to endure a rigorous
comparison to credit terms used generally in a relevant industry.” Barrett Dodge Chrysler Plymouth,
Inc. v. Cranshaw (In re Issac Lease Co., Inc.), 389 F.3d 1205, 1210-11 (11th Cir. 2004); see also
Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044, 1049-50 (4th Cir. 1994) (holding that industry
norm is critical where business relationship is fairly new because “there is no baseline against which
4
Atkinson testified that Dun & Bradstreet includes international figures.
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to compare the pre-petition transfers at issue to confirm the parties would have reached the same
terms absent the looming bankruptcy.”).
In Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 113 S. Ct. 2786 (1993), the United
States Supreme Court held that Federal Rule of Evidence 702 requires a trial judge to assure the
reliability, as well as the relevance, of scientific testimony or evidence. In Kumho Tire Co., Ltd. v.
Carmichael, 526 U.S. 137, 119 S. Ct. 1167 (1999), the Supreme Court extended Daubert to non-
scientific expert testimony, requiring that “where such testimony’s factual basis, data, principles,
methods, or their application are called sufficiently into question, [] the trial judge must determine
whether the testimony has ‘a reliable basis in the knowledge and experience of [the relevant]
discipline.’” Id. at 149 (quoting Daubert, 509 U.S. at 592). Furthermore, “[a]lthough F.R.E. 703 has
greatly liberalized the law regarding the type of information on which an expert may base his opinion,
that liberalization has not eliminated the requirement that an expert ground his opinion on reliable
data rather than pure speculation.” Coal Res., Inc. v. Gulf & Western Indus., Inc., 865 F.2d 761, 772
n.4 (6th Cir. 1989) (citations omitted).
The Panel concludes that Schaeffer’s opinion regarding the ordinary course of business in the
industry is not grounded on reliable data, but rather is based on speculation. Schaeffer stated that he
believed that the RMA industry data available only accounted for domestic sales, rather than both
domestic and international sales. Schaeffer then determined that he should make an adjustment to
the industry data based on international shipping times in order to compare the amount of time taken
to pay. This analysis required speculation on three levels.
First, Schaeffer speculated that it was necessary to adjust the time to pay for international sales
because of the increased shipping time. However, he offered no evidence or data to support the
conclusion that ordinary course payments in the industry took longer for international sales due to
increased shipping times. The bankruptcy court thus had no reliable basis for accepting Schaeffer’s
assertion that this adjustment was necessary.
Second, Schaeffer speculated that shipping took 30 days. However, he arrived at this time
period based on the shipping arrangements between these parties, not based on any evidence
regarding any shipping arrangements within the industry. Specifically, he did not know whether all
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foreign companies in the industry ship using the same methodology as these parties. Nor did he
provide any evidence regarding the time required for these types of products to clear customs. This
distinction is critical because the focus of § 547(c)(2)(C) is on the industry, not the parties.
Finally, and perhaps most importantly, Schaeffer offered no basis to conclude that even if
shipping adds 30 days to the buyer’s time in acquiring the purchased goods, the industry then adds
30 days to pay for the goods. It was pure speculation on his part. Accordingly, the bankruptcy court
should not have accepted Schaeffer’s testimony that a 30 day adjustment was appropriate in
evaluating whether Agripool met its burden under § 547(c)(2)(C).
Agripool failed to show any reliable data regarding the industry standards for the timing of
payments on international transactions. Therefore, Agripool failed to carry its burden of proving
§ 547(c)(2)(C). Because the parties had stipulated that all the elements of § 547(b) were met, and
Agripool did not prove its defense, the bankruptcy court should have entered judgment for the Trustee
in the amount of his claim.
V. CONCLUSION
The order dismissing the Trustee’s adversary complaint is, therefore, REVERSED. The
bankruptcy court shall enter judgment for the Trustee in the amount of his claim.
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