Official Plan Comm. v. Expeditors Intl. ( 1998 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 98-1154
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In re: Gateway Pacific Corp., *
*
Debtor. *
_____________________ *
*
Official Plan Committee, formerly *
known as Official Unsecured Creditors *
Committee, *
* Appeal from the United States
Appellee, * Bankruptcy Appellate Panel.
*
Gateway Pacific Corp., doing business *
as Buffalo Tool, *
*
v. *
*
Expeditors International of Washington, *
Inc., *
*
Appellant. *
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Submitted: June 8, 1998
Filed: September 1, 1998
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Before WOLLMAN and MURPHY, Circuit Judges, and FENNER,1 District Judge.
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WOLLMAN, Circuit Judge.
Expeditors International of Washington, Inc. (Expeditors) appeals from the
decision of the Bankruptcy Appellate Panel affirming the bankruptcy court’s2 decision
that certain payments made by Gateway Pacific Corporation (Debtor) to Expeditors
were avoidable under the Bankruptcy Code, 11 U.S.C. § 547. We affirm.
I.
Debtor was engaged in the business of selling tools, most of which were
imported from Asia. Expeditors contracted to act as Debtor’s freight forwarder and
customs broker. As part of these services, Expeditors procured shipment of the goods
through air and shipping lines, advanced customs duties for Debtor’s shipments, and
secured customs clearance for the goods.
Debtor and Expeditors began their business relationship in the summer of 1993.
Expeditors extended Debtor a $25,000 credit line, which was later increased to
$60,000. On October 5, 1993, Debtor submitted a credit application to Expeditors that
included the following provision: “[Expeditors] shall have a general lien on any and all
property . . . of [Debtor] in its possession, custody or control or en route, for all claims
for charges, expenses or advances incurred by [Expeditors] in connection with any
shipments of [Debtor].” The agreement further provided that Debtor would make
payment to Expeditors within fifteen days of the date of any invoice.
1
The HONORABLE GARY A. FENNER, United States District Judge for the
Western District of Missouri, sitting by designation.
2
The Honorable Barry S. Schermer, United States Bankruptcy Judge for the
Eastern District of Missouri.
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Expeditors and Debtor continued their business relationship for approximately
two years. During that time, Expeditors generally made two to three shipments to
Debtor per week. Each shipment was accompanied by an invoice containing a fifteen-
day payment term and a lien provision similar to the conditions of the credit agreement.
Nevertheless, Debtor almost never paid within these terms. As it did with all of its
slow-paying customers, Expeditors made regular telephone calls to Debtor seeking
payment. In seeking payment, however, Expeditors assessed no interest or late
charges, started no collection actions, and made no threats to withhold goods.
Eventually, the parties developed a practice whereby Expeditors would release goods
to Debtor after payment of a prior invoice. The amount of goods released generally
exceeded the amount of payment.
On August 30, 1995, Debtor filed a petition seeking Chapter 11 bankruptcy
protection. At the time of the filing, Debtor still owed Expeditors more than $40,000,
a sum that Expeditors sought as an unsecured claim in the bankruptcy. The United
States Trustee appointed an unsecured creditor’s committee, which brought this action
pursuant to 11 U.S.C. § 547(b) to recover $96,797.30 in transfers made from Debtor
to Expeditors during the ninety-day period preceding the bankruptcy filing.
In response, Expeditors asserted three defenses: (1) ordinary course of business
(11 U.S.C. § 547(c)(2)); (2) contemporaneous exchange (11 U.S.C. § 547(c)(1)); and
(3) new value (11 U.S.C. 547(c)(4)). The parties stipulated that all of the payments
were preferential under 11 U.S.C. § 547(b) and that $42,661.71 was protected from
avoidance by the new value defense. That left the ordinary course of business and
contemporaneous exchange defenses for trial.
The bankruptcy court rejected Expeditors’ contemporaneous exchange defense
and found that four of the twenty-eight preferential transfers were made in the ordinary
course of business. See Official Unsecured Creditors Comm. v. Expeditors Int’l of
Wash. Inc. (In re Gateway Pacific Corp.), 205 B.R. 164, 167-69 (Bankr. E.D. Mo.
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1997). Accordingly, the court entered judgment against Expeditors for $40,577.31. As
indicated above, the judgment was affirmed by the Bankruptcy Appellate Panel. See
Official Plan Comm. v. Expeditors Int’l of Wash. Inc. (In re Gateway Pacific Corp.),
214 B.R. 870, 877 (B.A.P. 8th Cir. 1997).
II. Ordinary Course of Business
Applying the same standards as the Bankruptcy Appellate Panel, we review the
bankruptcy court’s findings of fact for clear error and its conclusions of law de novo.
See Hartford Underwriters Ins. Co., v. Magna Bank, N.A. (In re Hen House Interstate,
Inc.), No. 97-3859, slip op. at 4 (8th Cir. July 27, 1998).
Section 547(b) of the Bankruptcy Code provides that transfers made by the
debtor during the ninety-day period preceding the filing of a petition for bankruptcy may
be avoided in bankruptcy as a “preference.” See 11 U.S.C. § 547(b). Avoidance may
be prevented, however, if the 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). To prevail on this issue, Expeditors must prove the existence
of the three statutory elements by a preponderance of the evidence. See 11 U.S.C. §
547(g); Jones v. United Sav. & Loan Ass’n (In re U.S.A. Inns of Eureka Springs,
Arkansas, Inc.), 9 F.3d 680, 682 (8th Cir. 1993). Because the parties agree that
Expeditors has met the first and third requirements of this defense, we need decide only
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whether the bankruptcy court erred in finding that the transfers were not made in the
ordinary course of business.
“‘There is no precise legal test which can be applied’ in determining whether
payments by the debtor during the 90-day period were ‘made in the ordinary course of
business’; ‘rather, the court must engage in a ‘peculiarly factual’ analysis.’” Lovett v.
St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991) (quoting In re Fulghum
Constr. Corp., 872 F.2d 739, 743 (6th Cir. 1989)). The controlling factor is whether the
transactions between the debtor and the creditor, both before and during the ninety-day
period, were consistent. See Lovett, 931 F.2d at 497. “[T]he analysis focuses on the
time within which the debtor ordinarily paid the creditor’s invoices, and whether the
timing of the payments during the 90-day period reflected ‘some consistency’ with that
practice.” Id. at 498.
The record reflects that during the time preceding the preferential period, as well
as during the preferential period itself, Debtor consistently made tardy payments with
company checks, paid the invoices in full, and was not penalized for its slow payments.
When late payments were the standard course of dealing between the parties, they are
also the ordinary course of business during the preference period. See id. at 498; In re
of Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th Cir. 1993) (“[A] ‘late’ payment
really isn’t late if the parties have established a practice that deviates from the strict
terms of their written contract”). After a detailed examination of Debtor’s payment
history, however, the bankruptcy court concluded that a major portion of the transfers
made during the ninety-day period were not within the ordinary course of business. The
stipulated evidence established that during the nine months preceding the preference
period, the median time that elapsed between the date of invoice and the date of
payment was thirty-five days. During the preference period this number increased to
fifty-four days, or a 54% increase.
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The bankruptcy court noted that during the nine months preceding the preference
period, only nine of approximately 155 payments were more than fifty days old, while
twenty-four of the twenty eight payments during the preference period were at least fifty
or more days old. The court concluded from this fact that any payments made during
the preference period that were at least fifty days old were not made within the ordinary
course of business.
Expeditors contends that the other consistencies within the relationship are
sufficient to overcome the inconsistent payment intervals. We do not agree. The
bankruptcy court did not, as Expeditors argues, arbitrarily create a “bright line” test of
fifty days. Rather, carefully following the analytical framework set forth in Lovett, the
bankruptcy court noted the significant change in the Debtor’s payment pattern and
concluded that the irregular payments were not within the section 547(c)(2) exception.
We find no error in the bankruptcy court’s decision.
III. Contemporaneous Exchange
Expeditors also maintains that the transfers are protected by the contemporaneous
exchange exception found in 11 U.S.C. § 547(c)(1). As noted above, Expeditors
eventually began the practice of delaying the release of Debtor’s shipments until it
received payment on prior invoices. Expeditors contends that this practice, the general
lien provisions of both the credit agreement and the invoices, and general principles of
commercial law created a security interest in the goods. Arguing that it released the
security interest in exchange for payment, Expeditors maintains that the transaction was
a contemporaneous exchange for value.
Section 547(c)(1) provides:
The trustee may not avoid under this section a transfer --
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(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[.]
Id.
To establish its contemporaneous exchange defense, Expeditors must
demonstrate that: (1) both Debtor and Expeditors intended the release of the alleged
security interest to be a contemporaneous exchange; (2) the exchange was in fact
contemporaneous; and (3) the exchange was for new value. See Tyler v. Swiss Am.
Sec., Inc. (In re Lewellyn & Co., Inc.), 929 F.2d 424, 427 (8th Cir. 1991).
“‘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 428
(quoting In re Spada, 903 F.2d 971, 975 (3d Cir. 1990)). The existence of
contemporaneous intent is a question of fact, the determination of which we review for
clear error. See In re Lewellyn & Co., Inc., 929 F.2d at 428.
The court rejected Expeditor’s section 547(c)(1) defense after crediting the
testimony of Robert Lawson, Debtor’s former president, chief operating officer, and
chief financial officer, who testified that Expeditors had not discussed any claimed
security interest with him.
Characterizing Lawson’s testimony as “irrelevant,” Expeditors argues that the
bankruptcy court erroneously credited his testimony and disregarded the documents and
the conduct of the parties. We do not agree. Lawson’s lack of knowledge regarding
a contemporaneous exchange shows the absence of any intent on the parties’ part to
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create a contemporaneous exchange. Moreover, Expeditors made a weak showing of
its own intent. It did not assert the alleged security interest in the bankruptcy
proceedings, but rather sought to establish its claim as an unsecured creditor.
Accordingly we conclude that the bankruptcy court did not err in finding that Expeditors
failed to demonstrate contemporaneous intent.
The judgment is affirmed.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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