Court: United States Bankruptcy Court, M.D. Florida; December 21, 1998; Us Bankruptcy; United States Bankruptcy Court
The case involves an order of remand from the United States District Court for the Middle District of Florida, issued on May 6, 1998, to assess if specific preference payments were made in the ordinary course of the Debtor's business, as outlined in 11 U.S.C. § 547(c)(2). Following a trial held on September 15, 1998, the Bankruptcy Judge, George L. Proctor, presents findings of fact and conclusions of law related to this determination.
1. The Defendant owns a radio station in Jacksonville, Florida, and the Debtor advertised with the station from 1991 to 1996.
2. The Debtor consistently paid invoices late, typically between 90 and 120 days, despite the terms stating 'thirty days net'; other customers usually paid within 60 to 90 days.
3. In spring 1995, the Debtor proposed increased advertising with a liquidation theme, leading to an agreement in writing on April 3, 1995, that allowed credit extension as long as invoices did not exceed 90 days overdue.
4. The Defendant’s business manager communicated with the Debtor monthly regarding outstanding amounts, allowing the Debtor to issue post-dated checks to settle these amounts.
5. For four months post-agreement, the Debtor exceeded the 120-day limit for outstanding invoices but did not do so after August 1995.
6. Multiple series of post-dated checks were sent by the Debtor to the Defendant for past-due invoices, detailing specific checks and their application to various invoices from June to October 1995.
7. The Debtor filed for Chapter 7 bankruptcy relief on February 23, 1996, with the Plaintiff appointed as trustee.
8. The Plaintiff claims the Debtor made preferential transfers totaling $27,435 to the Defendant within 90 days of the bankruptcy filing, detailing the checks and their application to invoices.
9. At trial, the Defendant acknowledged the preference elements under 11 U.S.C. § 547(b) but argued that the transfers fell under the ordinary course of business exception in § 547(c)(2).
10. The Court initially ruled in favor of the Defendant, finding the payments protected under the ordinary course of business exception, focusing on the specific business relationship.
11. The Plaintiff appealed, and Judge Schlesinger reversed the ruling, directing a reconsideration based on the Eleventh Circuit's decision in Miller v. Florida Mining and Materials, which emphasized the need to examine industry standards under § 547(c)(2)(C).
12. The current issue is whether the Defendant has satisfied its burden of proof concerning ordinary business terms under § 547(c)(2)(C).
Plaintiff contends that the payment procedure employed by Debtor and Defendant for settling overdue bills was sufficiently atypical to be excluded from "ordinary business terms," citing the age of the debts and the use of post-dated checks as unconventional for the industry. The Court previously characterized the procedure as "unique" and "unusual." In contrast, Defendant argues that the payment timing aligns with industry standards, presenting evidence that most payments in the radio advertising sector are made within sixty to ninety days post-invoice issuance. Defendant further claims that the use of post-dated checks was established before Debtor filed for bankruptcy.
Referencing A.W. Assoc. and In re Tolona Pizza Products Corp., the Court recognizes that "ordinary business terms" encompass typical practices within similar firms, with only truly idiosyncratic dealings falling outside this range. Despite the Court's earlier findings of uniqueness, Plaintiff urges that the relationship should now be deemed idiosyncratic enough to fall outside § 547(c)(2)(C). The Court acknowledges the challenge in defining industry standards based on A.W. Assoc. and looks to Molded Acoustical Products for additional insight. This case emphasized that the extent of deviation from industry norms is influenced by the "cemented" nature of the creditor-debtor relationship prior to insolvency. Ultimately, the more established this relationship, the more variation in credit terms a creditor can maintain without breaching the safe harbor of § 547(c)(2). The approach aims to safeguard normal financing relations while deterring unusual creditor behavior during a debtor's financial decline.
The court emphasized that even in longstanding debtor-creditor relationships, credit terms could be deemed unusual if they significantly deviate from industry standards. The Fourth Circuit adopted the "sliding-scale window" approach from Molded Acoustical's interpretation of § 547(c)(2)(C) in Advo-System, Inc. v. Maxway Corp., underscoring the relevance of the historical relationship between the parties before the preference period. The absence of a long-term relationship was highlighted, as it lacks a baseline for comparing credit terms during the preference period. The court concluded that established relationships allow for greater deviations from industry norms without being considered preferential treatment. This approach aims to protect unique business relationships and serves the preference section's purpose by ensuring that established creditors are not unfairly advantaged compared to others. The subsection's function includes alleviating concerns among creditors about preferential deals made before bankruptcy, ensuring equitable treatment among them.
The Court evaluates whether the practices of the Debtor and Defendant align with the sliding scale standard under § 547(c)(2)(C). It needs to ascertain: 1) what constitutes the industry standard, 2) whether the parties' practices meet that standard, and if not, 3) the history of their credit practices. If their practices are longstanding and not grossly deviating from the norm, they may satisfy § 547(c)(2)(C).
Defendant’s invoices required payment in thirty days, but evidence suggests an industry norm of payment within sixty to ninety days, which the Debtor did not adhere to, carrying invoices up to and beyond 120 days. Testimony indicates a long-standing relationship dating back to 1991 and a strong account history, with Debtor being a top billing account from 1993 to 1995. The Debtor began paying within the ninety-day timeframe using post-dated checks in April 1995, ten months before bankruptcy, although temporary payment arrangements occurred earlier.
The Court finds that the late payments fall within industry standards due to the established relationship. While the use of post-dated checks was not typical, it was not sufficiently idiosyncratic to fall outside the broad industry norm given their longstanding relationship. The Court concludes that the Defendant acted in good faith to maintain a profitable relationship and that the Debtor’s payments during the preference period were consistent with industry standards. Thus, the Defendant has met its burden under § 547(c)(2), and the payments cannot be avoided by the trustee. A separate judgment will be issued, adopting the previous findings in Grant v. Renda Broadcasting Corp., In re L. Bee Furniture, Co. Inc., 204 B.R. 804 (Bankr. M.D. Fla. 1997).
