Caplan v. Peterson Engineering Co. (In Re Century Brass Products, Inc.)

Citations: 121 B.R. 136; 1990 Bankr. LEXIS 2409Docket: 19-30235

Court: United States Bankruptcy Court, D. Connecticut; November 5, 1990; Us Bankruptcy; United States Bankruptcy Court

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In the case of *In the Matter of Century Brass Products, Inc.*, the key issue is the application of the "ordinary course of business" defense regarding a preference action under Bankruptcy Code § 547. The plaintiff, Jerome E. Caplan, serves as the plan administrator following Century Brass Products, Inc.'s Chapter 11 filing on March 15, 1985. The defendant, Peterson Engineering Co., has a longstanding relationship with Century, performing installation and repair work under varying payment terms. 

Evidence shows that Peterson's invoices typically stated "TERMS: NET CASH," but the actual payment terms were understood to be net 30 days. Historically, payments from Century were delayed, averaging 80 days in 1982, 72 days in 1983, and 85 days in 1984. Notably, two payments from Century to Peterson, totaling $25,408.94, were made just before the bankruptcy filing. The first payment covered invoices that were 120 to 132 days old, while the second covered invoices that were 141 to 149 days old. 

The parties have agreed that these payments were made to Peterson as a creditor on account of pre-existing debt, while Century was insolvent, and occurred within 90 days prior to the bankruptcy petition. Furthermore, these payments allowed Peterson to receive more than it would have in a Chapter 7 liquidation scenario.

The plaintiff can avoid payments as preferential unless the defendant establishes a defense under Section 547(c)(2), which protects transfers that meet three conditions: (A) payment for a debt incurred in the ordinary course of business, (B) made in the ordinary course of business for both parties, and (C) made according to ordinary business terms. The plaintiff acknowledges that condition (A) is met but disputes that conditions (B) and (C) are satisfied. Peterson must prove these remaining conditions.

For condition (B), the court examines the historical transaction patterns between the parties. The payments in question occurred 120 to 149 days after the invoice date, averaging 134 days, while past payments never exceeded 85 days. This significant delay indicates that the payments were not made in the ordinary course of business. Peterson argues for considering the range of payment delays rather than the average; however, only 3.8% of prior payments exceeded 120 days, marking such delays as extraordinary. Additionally, the necessity of dunning calls for payment further suggests that these transactions fell outside the ordinary course of business, as established in prior case law.

For condition (C), Peterson failed to demonstrate that the payments adhered to "ordinary business terms." Current consensus in most jurisdictions defines "ordinary business terms" by industry standards, rather than subjective perceptions of the parties involved. Thus, the court finds that Peterson has not met the burden of proof for either remaining condition under Section 547(c)(2).

Peterson cannot argue that it was typical for vendors in both Century's and Peterson's industries to make or receive payments four to five months after invoices, particularly when invoices specified net cash terms. The businesses were not seasonal shippers or billers. At the time of the questioned payments, only creditors under pressure were paid, while others received nothing. Although a debtor may typically choose to pay one creditor over others when facing insufficient assets, such payments should not be safeguarded under Code § 547(c)(2). The intent of Code § 547 is to promote equal distribution among creditors, requiring any creditor receiving a larger payment than others in their class to return those funds for equitable sharing. The court concludes that the defense in § 547(c)(2) does not apply to the circumstances of this case. Consequently, judgment will be entered allowing the plaintiff to avoid the transfers made to Peterson on January 9 and February 7, 1985, and requiring Peterson to repay $25,408.94.