Rushton v. SMC Electrical Products, Inc (In re C.W. Mining Company)
- Summarized by Brandon Bickle , Gable & Gotwals, PC
- 9 years 4 months ago
- United States Bankruptcy Appellate Panel of the Tenth Circuit, No. UT-13-026
- The BAP affirmed the bankruptcy court's ruling, on summary judgment, that the debt between the debtor and creditor-defendant was incurred in the ordinary course of the parties' businesses, and the alleged preferential payment was made in the ordinary course of the parties' businesses, and therefore the preferential payment was covered by the ordinary course of business defense of 11 U.S.C. section 547(c)(2) and could not be avoided. Citing 10th Circuit precedent, the BAP applied the "clearly erroneous" standard of review because the application of the ordinary course of business defense is "primarily factual." The burden of proving the defense - which is premised on the dual goals of preventing "undue pressure on struggling debtors" and discouraging "unusual action," both of which "favor certain creditors or hasten bankruptcy by alarming other creditors and motivating them to force the debtor into bankruptcy," while at the same time "leav[ing] undisturbed normal financial relations" - was on the creditor-defendant/transferee. The defense has two prongs, establishing that (1) the debt was incurred in the ordinary course of the parties' businesses, and (2) the payment was made in the ordinary course of the parties' businesses. For purposes of the first prong, the trustee argued that the debt was not incurred in the ordinary course of the debtor's business because the reason for the purchase was to allow the debtor to engage in a new type of mining, which the debtor had not engaged in previously. While noting that the 10th Circuit has not discussed the "incurred prong" of the defense, the BAP concluded, citing, among others, an opinion from the United States Bankruptcy Court for the Western District of Virginia, that the requirement simply means that the debt must have been incurred "in a typical, arms-length commercial transaction that occurred in the marketplace," as opposed to "as an insider arrangement with a closely-held entity." In other words, "the transaction need not have been common; it need only be ordinary." This requirement was met because the debt related to the debtor's primary business purpose - mining - and the creditor was a mining equipment vendor. The fact that there were no prior dealings between the parties did not change the analysis; in fact, it helped the creditor establish that the transaction was at arms-length in the open market. For purposes of the second prong, the BAP considered four factors: (1) the length of time involved in the preference period transaction; (2) whether the amount or form of the payment different from previous practice; (3) whether the transaction involved any unusual collection or payment activity; and (4) the circumstances under which the transfer was made. Because the creditor was able to establish - again, by an unchallenged affidavit - the facts that the payment terms, schedule, and the timing and manner of payments were typical and not unusual in its business for customers with large invoices, and there was no coercive collection activity with respect to the preferential payment made to the creditor (this fact also helped to offset the fact that the debtor made payments on the invoiced debt by way of somewhat irregular partial payments), the BAP upheld the bankruptcy court's finding that the preferential payment was made in the ordinary course of the parties' businesses, and affirmed the bankruptcy court's ruling that the ordinary course of business defense precluded avoidance of the preferential transfer.
- Procedural context:
- Appeal from an order of the United States Bankruptcy Court for the District of Utah granting summary judgment in favor of a creditor, SMC Electrical Products, Inc., in an adversary proceeding brought by the Chapter 7 Trustee in an involuntary Chapter 7 bankruptcy proceeding to avoid a preferential transfer - a payment made by the debtor, C.W. Mining Company, to one of its creditors within 90 days of the commencement of the involuntary bankruptcy case.
- The facts were established as undisputed, for summary judgment purposes, by an unchallenged affidavit filed by the creditor-defendant in the Chapter 7 Trustee's adversary proceeding to avoid the preferential transfer. In 2007, the debtor purchased an electrical system from the creditor to engage in a new method of coal mining. This was the first relationship between the two parties, and was within the normal scope of products and services provided by the creditor. The terms of purchase involved a "pay as you go" schedule with specified progress payments to be made on the occurrence of specified events. There were no specified due dates, but the creditor's price quote provided that additional charges could be applied to any amount not paid within 30 days of the creditor's invoice date. The invoice for the disputed payment, dated September 18, 2007, described the terms of payment as "special." The undisputed facts, however, established that this term simply reflected the fact that the debtor was to make progress payments as it received invoices. The debtor made several payments from multiple sources to pay the invoice in full over a 28 day period following issuance of the invoice, the last of which fell within the 90 day preference period. The bankruptcy court found that (1) the debt was incurred in the ordinary course of the parties' businesses, (2) the time and manner of payments, including the preferential payment, were not unusual for the creditor's other customers, (3) the payments, including the preferential payment, were made in accordance with the parties' agreement, and (4) the creditor did not engage in any coercive collection activity with regard to the invoiced debt or the preferential payment. Accordingly, the bankruptcy court concluded that the preferential payment was covered by the ordinary course of business defense in 11 U.S.C. section 547(c)(2), and could not be avoided. The Chapter 7 Trustee appealed.
- Cornish, Karlin, and Romero, Bankruptcy Judges. Opinion by Judge Karlin.
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