Material Factual Disputes as to Appropriate Historical Range and Ordinary Course Methodologies Preclude Summary Judgment on Both Ordinary Course and New Value Defenses
Stanziale v. Superior Technical Re- sources, Inc. (Powerwave Technologies, Inc.), 2017 WL 1373252 (Bankr.D. Del. April 13, 2017)
In Stanziale v. Superior Technical Re- sources, Inc., the chapter 7 trustee for Powerwave Technologies commenced an action against Superior Technical Re- sources to recover, among other things, certain alleged preferential transfers pursuant to section 547 of the Bankruptcy Code. Section 547 of the Bankruptcy Code allows a trustee or debtor in possession to avoid a transfer made by a debtor while insolvent to or for the benefit of a creditor on account of an antecedent debt within 90 days (or one year in the case of an “insider”) of the petition date, where such transfer enables the creditor to receive more than it would have received in a chapter 7 liquidation. The defendant did not dispute that the trustee made his prima facie case but sought summary judgment with respect to its two asserted affirmative defenses, ordinary course of business and subsequent new value under section 547(c)(2) and (4) of the Bankruptcy Code. The court denied the relief sought in the motion in its entirety.
In this case, the debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on January 28, 2013 and sought to convert its case to chapter 7 shortly thereafter. Upon conversion, the trustee was appointed to administer the chapter 7 proceeding. Prior to the bankruptcy filing, defendant provided the debtor with temporary contract personnel pursuant to an agreement entered into on September 12, 2008 and renewed on an annual basis. During the course of their relationship, defendant sent invoices to the debtor and required payment within 45 days from the invoice date. The debtor typically paid multiple in- voices with each payment, which were made via wire transfer. Occasionally, when payments were late, defendant followed up by email on the status of outstanding payments. During the preference period, in November 2012, defendant’s employees corresponded concerning the need to reduce the debtor’s $200,000 aging balance. On December 7, 2012, defendant notified the debtor that its payment terms were changed from net 45 to net 7. Defendant further informed the debtor that it considered the debtor’s account high risk and demanded payment in full by the close of business on December 12, 2012. The debtor wired a payment to the defendant on December 12 and made weekly payments thereafter until the petition date.
In its summary judgment motion, defendant argued that the preference period transfers were made in the ordinary course of business and could not be avoided. Pursuant to section 547(c)(2)(A) of the Bankruptcy Code, a defendant may assert that transfers are protected from avoidance because they were both incurred and paid for in the ordinary course of business be- tween the defendant and the debtor.The subjective ordinary course of business analysis requires the court to look at the circumstances surrounding the payments during the preference period and compare them to the historical transactions of the parties. As an initial matter, the court noted that the defendant and the trustee relied upon different timeframes to establish the historical baseline course of dealings; with the trustee relying upon a longer prepreference time period and arguing that it presents a more accurate picture of the historical dealings because it includes time when the debtor was healthy. The court noted the well-established tenet that the historical period should incorporate the time period when the debtor was financially healthy and observed that both the defendant and the trustee included time when the debtor’s financial condition was deteriorating but defendant did not include a sustained period when the debtor was financially healthy. As a result, the court concluded that a factual dispute existed as to the appropriate historical period.
In addition, the court found that a material dispute existed as to the appropriateness of the methodologies used by the defendant to conclude that payments were made in the ordinary course of business. Specifically, defendant argued that historically payments were made between 34 and 371 days from invoice date and that all preference period payments were made within that range. The trustee countered that this range was overbroad and included outliers. Indeed, defendant’s historical data included a three and a half month period during which no payments for services were made yet defendant made no adjustments for this gap in payments through its methodology. The court concluded that a genuine factual dispute existed as to the appropriateness of using the range methodology. The court reached the same conclusion with respect to defendant’s proposal to calculate the average payment time for each batch of invoices paid during the preference period and compare it to the average payment time for batches of invoices paid during the historical period. The court noted this would lead to misleading results as the number of invoices paid via a single transfer varied greatly. The court briefly turned to the methodologies utilized in the trustee’s ordinary course analysis which included days sale outstanding (comparing the dollar- weighted average of days from invoice date to payment date) and analysis of the standard deviation as a marker for historical payment patterns. The court ultimately declined to make a determination whether specific transfers were shielded by the ordinary course defense in light of the factual dispute as to the proper historical time period to be applied to the analysis. The court further noted that there is an additional factual dispute whether defendant’s collection activities precluded application of the ordinary course of business defense to certain payments.
Defendant also asserted a defense under section 547(c)(2)(B) of the Bankruptcy Code, which protects payments made according to the norms in the applicable industry. Defendant asserted it was classified as an employment agency in the administrative and waste management services industry but the trustee countered that its classification was unclear, and thus the proper industry for section 547(c)(2) (B) purposes was in dispute. The court agreed with the trustee and found that a material dispute existed with respect to defendant’s property industry classification.
Finally, the court turned to defendant’s subsequent new value defense. Section 547(c)(4) of the Bankruptcy Code provides a defense to a preference action based upon new value provided by the defendant after receiving the avoidable transfers. The court noted that in the Third Circuit new value includes both paid and unpaid invoices provided that any paid invoices are not paid by a transfer that is “other- wise unavoidable.” The trustee argued that the new value defense could not be decided until a determination is made whether certain transfers may be protected by the ordinary course of business defense and thus “otherwise unavoidable.” The court agreed and denied summary judgment as to the new value defense.
COMMENTARY
This decision reaffirms the importance of establishing an appropriate historical baseline period that encompasses time when a debtor is financially healthy and highlights additional areas of common factual dispute, including appropriate methodologies for analyzing subjective ordinary course and proper industry classification for application of the objective ordinary course defense. As illustrated above, these are intrinsically factual exercises that can preclude resolution of matters on summary judgment when in dispute.