Summer/Fall 2013 Issue

Sparkman v. American Residential Services, LLC (In re Anderson Homes, Inc.), 2013 WL 1279403 (Bankr.E.D.N.C. Nov. 15, 2012)

In Sparkman v. American Residential Services, LLC, the chapter 7 trustee for Anderson Homes commenced an action against American Residential Services to avoid and recover certain alleged preferential transfers under Bankruptcy Code section 547. Following motions for summary judgment that limited the issues remaining for trial, the court held a trial in connection with the defendant’s affirmative defenses that the payments at issue were not avoidable because they were protected by the “contemporaneous exchange for new value” defense and/or the “ordinary course of business” defense. Bankruptcy Code section 547(c) (1)states that a transfer is protected by the “contemporaneous exchange” defense if a defendant demonstrates that: (i)both parties intended the transfer to be a contemporaneous exchange for new value, (ii) the exchange was in fact contemporaneous, and (iii) the creditor, in fact, gave new value to the debtor. To be protected by the “ordinary course of business” defense, a preference defendant must show that the transfer was either (i) made in accordance with the parties’ ordinary (historical) course of business (the “subjective test”) or (ii) made in accordance with normal business terms in the industry (the “objective test”).

The debtor filed the underlying bankruptcy case on March 16, 2009. The debtor and the defendant commenced their business relationship in 1987. Defendant provided heating, ventilation and air conditioning (HVAC) services to the debtor for nearly 30 years. Defendant performed HVAC services for the debtor in three stages – “rough in” (initial stage of HVAC services when duct work is per- formed), “trim” (second stage during which HVAC equipment is installed) and “start up” (final stage during which HVAC equipment is turned on). Sixty percent of the total service price was paid at the completion of the rough in stage. The defendant generally did not commence trim work until it was paid for the rough in work. The remaining 40 percent of the purchase price was paid at the conclusion of the trim work. The start up work’s cost was included in the amount billed for the trim work. Payments were based upon purchase orders generated by the debtor rather than separate invoices generated by the defendant. According to a summary of payments made during the two-year period prior to the preference period prepared by the defendant, the average time from purchase order date to payment date was approximately 48 days (with the days to payment ranging from 19 to 75 days). During the preference period, the average time from purchase order to payment date was 95 days (with the days to payment ranging from 82 to 111 days). Furthermore, up until October 31, 2008, approximately one month prior to the beginning of the preference period, the defendant provided certain discounts to the debtor based upon payment timing.

The defendant contended that the preference period payments were protected by the contemporaneous exchange for new value defense under Bankruptcy Code section 547(c)(1), asserting that the payments were intended to be, and actually were, contemporaneous exchanges for new value. In support of this argument, the defendant claimed that (i) it would have timely filed a lien against the property where work was performed and (ii) if it filed liens there was sufficient equity such that its lien claims would have been paid in full in a liquidation. The defendant argued that by giving up its right to file liens when it got paid, it provided contemporaneous new value to the debtor. The court found that this argument was insufficient to support a contemporaneous exchange for new value defense because the defendant could not additionally establish the “intent” component. In other words, the Defendant could not establish that the parties intended for the payments to be contemporaneous exchanges for new value. The court further noted that evidence adduced at trial showed that the parties intended for the payments to be compensation for services already performed. Accordingly, the court ruled that the defendant failed to meet its bur- den of establishing the contemporaneous exchange for new value defense under Bankruptcy Code section 547(c)(1).

Next, the court examined whether the preference period payments were protected by the ordinary course of business defense pursuant to Bankruptcy Code section 547(c)(2). Turning first to the “subjective test” of Bankruptcy Code Section 547(c)(2)(A) – whether the payments at issue were made in the ordinary course of business between the parties – the court noted that preference period payments were made markedly slower than historical payments (an approximately 95 percent increase in the time between purchase order and payment date). In addition, the Court noted that historical discounts available to the debtor were eliminated approximately one month be- fore the preference period and found this change to be a significant deviation from the prior course of dealings. Accordingly, the court concluded that the payments at issue were not protected by the subjective ordinary course of business defense under Bankruptcy Code section 547(c)(2)(A). Finally, the court evaluated whether the payments were protected under the ordinary business terms defense under Bankruptcy Code section 547(c)(2)(B) – the “objective test” to determine if payments are ordinary within industry standards. The court noted that defendant’s own witness testified that payments are typically made within 45 to 60 of purchase order in the defendant’s industry. Accordingly, the preference period payments, ranging from 82 to 111 day were not made within ordinary business terms of the industry. Consequently, the court ruled that the preference period payments at issue were not protected by the ordinary business terms defense under Bankruptcy Code section 547(c)(2)(B).

COMMENTARY
Practitioners considering whether payments may be protected by the contemporaneous exchange for new value defense should carefully consider the intent component of this defense and determine whether sufficient evidence of intent could be established to succeed. In addition, counsel should observe any changes in the parties’ relationship (including changes in discount terms) when evaluating whether payments may be protected by the ordinary course of business defense.

Read full article here.

Sparkman v. American Residential Services, LLC (In re Anderson Homes, Inc.), 2013 WL 1279403 (Bankr.E.D.N.C. Nov. 15, 2012)

In Sparkman v. American Residential Services, LLC, the chapter 7 trustee for Anderson Homes commenced an action against American Residential Services to avoid and recover certain alleged preferential transfers under Bankruptcy Code section 547. Following motions for summary judgment that limited the issues remaining for trial, the court held a trial in connection with the defendant’s affirmative defenses that the payments at issue were not avoidable because they were protected by the “contemporaneous exchange for new value” defense and/or the “ordinary course of business” defense. Bankruptcy Code section 547(c) (1)states that a transfer is protected by the “contemporaneous exchange” defense if a defendant demonstrates that: (i)both parties intended the transfer to be a contemporaneous exchange for new value, (ii) the exchange was in fact contemporaneous, and (iii) the creditor, in fact, gave new value to the debtor. To be protected by the “ordinary course of business” defense, a preference defendant must show that the transfer was either (i) made in accordance with the parties’ ordinary (historical) course of business (the “subjective test”) or (ii) made in accordance with normal business terms in the industry (the “objective test”).

The debtor filed the underlying bankruptcy case on March 16, 2009. The debtor and the defendant commenced their business relationship in 1987. Defendant provided heating, ventilation and air conditioning (HVAC) services to the debtor for nearly 30 years. Defendant performed HVAC services for the debtor in three stages – “rough in” (initial stage of HVAC services when duct work is per- formed), “trim” (second stage during which HVAC equipment is installed) and “start up” (final stage during which HVAC equipment is turned on). Sixty percent of the total service price was paid at the completion of the rough in stage. The defendant generally did not commence trim work until it was paid for the rough in work. The remaining 40 percent of the purchase price was paid at the conclusion of the trim work. The start up work’s cost was included in the amount billed for the trim work. Payments were based upon purchase orders generated by the debtor rather than separate invoices generated by the defendant. According to a summary of payments made during the two-year period prior to the preference period prepared by the defendant, the average time from purchase order date to payment date was approximately 48 days (with the days to payment ranging from 19 to 75 days). During the preference period, the average time from purchase order to payment date was 95 days (with the days to payment ranging from 82 to 111 days). Furthermore, up until October 31, 2008, approximately one month prior to the beginning of the preference period, the defendant provided certain discounts to the debtor based upon payment timing.

The defendant contended that the preference period payments were protected by the contemporaneous exchange for new value defense under Bankruptcy Code section 547(c)(1), asserting that the payments were intended to be, and actually were, contemporaneous exchanges for new value. In support of this argument, the defendant claimed that (i) it would have timely filed a lien against the property where work was performed and (ii) if it filed liens there was sufficient equity such that its lien claims would have been paid in full in a liquidation. The defendant argued that by giving up its right to file liens when it got paid, it provided contemporaneous new value to the debtor. The court found that this argument was insufficient to support a contemporaneous exchange for new value defense because the defendant could not additionally establish the “intent” component. In other words, the Defendant could not establish that the parties intended for the payments to be contemporaneous exchanges for new value. The court further noted that evidence adduced at trial showed that the parties intended for the payments to be compensation for services already performed. Accordingly, the court ruled that the defendant failed to meet its bur- den of establishing the contemporaneous exchange for new value defense under Bankruptcy Code section 547(c)(1).

Next, the court examined whether the preference period payments were protected by the ordinary course of business defense pursuant to Bankruptcy Code section 547(c)(2). Turning first to the “subjective test” of Bankruptcy Code Section 547(c)(2)(A) – whether the payments at issue were made in the ordinary course of business between the parties – the court noted that preference period payments were made markedly slower than historical payments (an approximately 95 percent increase in the time between purchase order and payment date). In addition, the Court noted that historical discounts available to the debtor were eliminated approximately one month be- fore the preference period and found this change to be a significant deviation from the prior course of dealings. Accordingly, the court concluded that the payments at issue were not protected by the subjective ordinary course of business defense under Bankruptcy Code section 547(c)(2)(A). Finally, the court evaluated whether the payments were protected under the ordinary business terms defense under Bankruptcy Code section 547(c)(2)(B) – the “objective test” to determine if payments are ordinary within industry standards. The court noted that defendant’s own witness testified that payments are typically made within 45 to 60 of purchase order in the defendant’s industry. Accordingly, the preference period payments, ranging from 82 to 111 day were not made within ordinary business terms of the industry. Consequently, the court ruled that the preference period payments at issue were not protected by the ordinary business terms defense under Bankruptcy Code section 547(c)(2)(B).

COMMENTARY
Practitioners considering whether payments may be protected by the contemporaneous exchange for new value defense should carefully consider the intent component of this defense and determine whether sufficient evidence of intent could be established to succeed. In addition, counsel should observe any changes in the parties’ relationship (including changes in discount terms) when evaluating whether payments may be protected by the ordinary course of business defense.

Read full article here.

Sparkman v. American Residential Services, LLC (In re Anderson Homes, Inc.), 2013 WL 1279403 (Bankr.E.D.N.C. Nov. 15, 2012)

In Sparkman v. American Residential Services, LLC, the chapter 7 trustee for Anderson Homes commenced an action against American Residential Services to avoid and recover certain alleged preferential transfers under Bankruptcy Code section 547. Following motions for summary judgment that limited the issues remaining for trial, the court held a trial in connection with the defendant’s affirmative defenses that the payments at issue were not avoidable because they were protected by the “contemporaneous exchange for new value” defense and/or the “ordinary course of business” defense. Bankruptcy Code section 547(c) (1)states that a transfer is protected by the “contemporaneous exchange” defense if a defendant demonstrates that: (i)both parties intended the transfer to be a contemporaneous exchange for new value, (ii) the exchange was in fact contemporaneous, and (iii) the creditor, in fact, gave new value to the debtor. To be protected by the “ordinary course of business” defense, a preference defendant must show that the transfer was either (i) made in accordance with the parties’ ordinary (historical) course of business (the “subjective test”) or (ii) made in accordance with normal business terms in the industry (the “objective test”).

The debtor filed the underlying bankruptcy case on March 16, 2009. The debtor and the defendant commenced their business relationship in 1987. Defendant provided heating, ventilation and air conditioning (HVAC) services to the debtor for nearly 30 years. Defendant performed HVAC services for the debtor in three stages – “rough in” (initial stage of HVAC services when duct work is per- formed), “trim” (second stage during which HVAC equipment is installed) and “start up” (final stage during which HVAC equipment is turned on). Sixty percent of the total service price was paid at the completion of the rough in stage. The defendant generally did not commence trim work until it was paid for the rough in work. The remaining 40 percent of the purchase price was paid at the conclusion of the trim work. The start up work’s cost was included in the amount billed for the trim work. Payments were based upon purchase orders generated by the debtor rather than separate invoices generated by the defendant. According to a summary of payments made during the two-year period prior to the preference period prepared by the defendant, the average time from purchase order date to payment date was approximately 48 days (with the days to payment ranging from 19 to 75 days). During the preference period, the average time from purchase order to payment date was 95 days (with the days to payment ranging from 82 to 111 days). Furthermore, up until October 31, 2008, approximately one month prior to the beginning of the preference period, the defendant provided certain discounts to the debtor based upon payment timing.

The defendant contended that the preference period payments were protected by the contemporaneous exchange for new value defense under Bankruptcy Code section 547(c)(1), asserting that the payments were intended to be, and actually were, contemporaneous exchanges for new value. In support of this argument, the defendant claimed that (i) it would have timely filed a lien against the property where work was performed and (ii) if it filed liens there was sufficient equity such that its lien claims would have been paid in full in a liquidation. The defendant argued that by giving up its right to file liens when it got paid, it provided contemporaneous new value to the debtor. The court found that this argument was insufficient to support a contemporaneous exchange for new value defense because the defendant could not additionally establish the “intent” component. In other words, the Defendant could not establish that the parties intended for the payments to be contemporaneous exchanges for new value. The court further noted that evidence adduced at trial showed that the parties intended for the payments to be compensation for services already performed. Accordingly, the court ruled that the defendant failed to meet its bur- den of establishing the contemporaneous exchange for new value defense under Bankruptcy Code section 547(c)(1).

Next, the court examined whether the preference period payments were protected by the ordinary course of business defense pursuant to Bankruptcy Code section 547(c)(2). Turning first to the “subjective test” of Bankruptcy Code Section 547(c)(2)(A) – whether the payments at issue were made in the ordinary course of business between the parties – the court noted that preference period payments were made markedly slower than historical payments (an approximately 95 percent increase in the time between purchase order and payment date). In addition, the Court noted that historical discounts available to the debtor were eliminated approximately one month be- fore the preference period and found this change to be a significant deviation from the prior course of dealings. Accordingly, the court concluded that the payments at issue were not protected by the subjective ordinary course of business defense under Bankruptcy Code section 547(c)(2)(A). Finally, the court evaluated whether the payments were protected under the ordinary business terms defense under Bankruptcy Code section 547(c)(2)(B) – the “objective test” to determine if payments are ordinary within industry standards. The court noted that defendant’s own witness testified that payments are typically made within 45 to 60 of purchase order in the defendant’s industry. Accordingly, the preference period payments, ranging from 82 to 111 day were not made within ordinary business terms of the industry. Consequently, the court ruled that the preference period payments at issue were not protected by the ordinary business terms defense under Bankruptcy Code section 547(c)(2)(B).

COMMENTARY
Practitioners considering whether payments may be protected by the contemporaneous exchange for new value defense should carefully consider the intent component of this defense and determine whether sufficient evidence of intent could be established to succeed. In addition, counsel should observe any changes in the parties’ relationship (including changes in discount terms) when evaluating whether payments may be protected by the ordinary course of business defense.

Read full article here.