Court: United States Bankruptcy Court, M.D. Florida; December 11, 1996; Us Bankruptcy; United States Bankruptcy Court
On October 13, 1994, L. Bee Furniture Company (the Debtor) borrowed $150,000 from SunTrust Bank, with repayment terms set at fifty-nine monthly installments of $3,080 starting November 13, 1994, plus a 5% late charge for overdue payments. The Debtor filed for Chapter 7 bankruptcy on February 23, 1996, and the Chapter 7 Trustee initiated an adversary proceeding on May 7, 1996, seeking to recover three payments totaling $9,702.00 made late between November 1995 and February 1996. These payments were contested under 11 U.S.C. § 547(b), with the Defendant arguing they were made in the ordinary course of business, which would exempt them under § 547(c)(2).
Defendant filed for summary judgment on July 15, 1996, while the Plaintiff also sought summary judgment, acknowledging that the requirements of § 547(b) were met but disputing the ordinary course defense. On August 12, 1996, the Court denied both motions due to insufficient evidence to determine if the payments were part of the normal business relationship and whether Defendant engaged in unusual collection efforts. The Court noted the need to clarify the subjective versus objective analysis of subsections 547(e)(2)(B) and (C).
Evidence presented indicated that the Defendant typically sent invoices ten days prior to payment due dates and past due notices ten days thereafter. The payment history revealed a pattern of late payments by the Debtor, with the Defendant consistently accepting these late payments throughout the loan's duration.
The primary legal issue is whether certain transfers can be avoided under the ordinary course of business exception in subsection 547(c)(2) of the Bankruptcy Code. This provision allows a trustee to avoid transfers unless they meet three criteria: (A) they must be for a debt incurred in the ordinary business dealings of both the debtor and the transferee; (B) they must be made in the ordinary course of business; and (C) they must adhere to ordinary business terms. The Eleventh Circuit emphasizes that this exception aims to maintain normal financial relationships, avoiding unusual actions during a debtor’s financial decline.
The creditor bears the burden of proof to demonstrate that these conditions are met, with the standard being preponderance of the evidence. Subsection 547(c)(2) is interpreted narrowly. It is agreed that criterion A is satisfied, as the debt was incurred in the ordinary course of business. The dispute focuses on criteria B and C, requiring the court to assess if the payments were typical for the debtor and transferee and aligned with ordinary business practices.
The court typically uses four factors to evaluate whether the transfers fall within the ordinary course of business exception: (1) the prior dealings between the parties, (2) the payment amounts, (3) the timing of the payments, and (4) the circumstances of the payments. The parties disagree on the interpretation of subsections B and C; the plaintiff advocates for a subjective analysis using the four factors for B and an objective analysis based on industry norms for C, while the defendant argues for a purely subjective examination of both subsections based on their prior interactions. Most courts, including those in the relevant district, have applied the subjective four-factor analysis to both B and C.
Courts have not definitively established the appropriateness of a subjective inquiry regarding subparagraphs “B” and “C.” The Eleventh Circuit has not clarified whether these subparagraphs should be interpreted subjectively, focusing instead on the debtor-creditor relationship for its determinations. In the case of Thurman, while addressing subparagraph “C,” the court noted a lack of evidence for “industry norms” to establish that transfers were made according to ordinary business terms, ultimately deciding based on the prior dealings between the parties.
A minority of courts have interpreted subparagraph “B” subjectively, emphasizing the parties' relationship, while treating subparagraph “C” objectively by considering industry norms. For instance, courts such as Fiber Lite Corp. and In re Tolona Pizza Prod. Corp. have required that creditors demonstrate that transfers align with prevailing industry standards, arguing that failing to do so would render subparagraph “C” ineffective or redundant.
Conversely, this court rejects the minority viewpoint and supports a subjective inquiry, influenced by Graphic Prod. Corp. v. WWF Paper Corp., where it was determined that analysis of subparagraph “C” should focus on the specific business practices between the parties rather than general industry standards. The court concluded that requiring compliance with industry norms would negate the purpose of the exception.
Parties are required to conduct themselves according to industry standards, particularly during a debtor's bankruptcy, to allow normal business operations and discourage atypical actions. The Court will analyze the relationship between parties using a subjective approach based on four factors outlined in Thurman.
1. **Prior Course of Dealing**: The debtor consistently made late payments to the defendant, a pattern that persisted during the preference period, indicating a stable course of dealing.
2. **Amount of Payments**: The payments sought to be avoided were each $3,234, consistent with prior payments averaging $3,274.83, suggesting no unusually large payments were made during the preference period.
3. **Timing of Payments**: Payments were made on average 25.66 days late during the preference period, only slightly more than the 24 days late prior, demonstrating that late payments were part of the ordinary course of business.
4. **Circumstances Surrounding Payments**: The defendant's collection practices during the preference period were routine and did not intensify, including sending invoices and following up with past due notices and calls.
Based on this analysis, the Court concludes that the preferential transfers totaling $9,702 were made in the ordinary course of business and are not avoidable. A separate order will be issued reflecting these findings and conclusions.
