Court: United States Bankruptcy Court, M.D. Florida; July 11, 2000; Us Bankruptcy; United States Bankruptcy Court
The case involves a determination of whether certain preference payments made by the Debtor to the Defendant, which owns sixteen radio stations including WEJZ, were made in the ordinary course of business under 11 U.S.C. 547(c)(2). The findings reveal that the Debtor, a significant advertising account for WEJZ from 1991 to 1996, typically paid its invoices between 90 and 120 days, despite payment terms stipulating 'thirty days net.' Testimony indicated that other clients usually paid within 60 to 90 days, and that 90 days was the critical point for the station to monitor overdue accounts.
A Revenue Aging Report from July 1998 showed that a substantial percentage of WEJZ's receivables were outstanding, highlighting a pattern of delayed payments. In early 1995, the Debtor increased its advertising with WEJZ, resulting in an agreement where the Defendant extended credit on the condition that invoices would not exceed 90 days overdue, formalized in writing on April 3, 1995. The arrangement involved the Defendant's business manager notifying the Debtor monthly about aging accounts, allowing the Debtor to issue post-dated checks for the amounts owed. This practice of collecting post-dated checks was uncommon for the Defendant, with the general manager stating it was only done under exceptional circumstances.
Notably, after the initial four months of this agreement, the Debtor maintained outstanding invoices beyond 120 days but did not do so after August 1995.
Debtor sent multiple post-dated checks to Defendant for past-due invoices between June and October 1995, totaling various amounts applied to specific invoices. Debtor filed for Chapter 7 bankruptcy on February 23, 1996, and Plaintiff was appointed as trustee. Plaintiff claimed that Debtor transferred a series of checks totaling $27,435 to Defendant within ninety days before the bankruptcy filing. These checks were also applied to specific invoices. At trial, Defendant admitted that all elements for establishing a preference under 11 U.S.C. § 547(b) were met but argued the transfers were protected under the ordinary course of business exception of 11 U.S.C. § 547(c)(2). The Court initially ruled in favor of Defendant, indicating the payments fell under this exception by focusing on the specific business relationship rather than industry practices. Plaintiff appealed, and the appeal was heard by Judge Schlesinger, who reversed the initial judgment, directing the Court to consider industry standards as per the Eleventh Circuit decision in Miller v. A.W. Associates. In a subsequent trial on September 15, 1998, the Court again ruled in favor of Defendant, acknowledging that although the payments did not align with industry standards, the long-standing relationship between the parties justified some deviation from those standards. Thus, the transfers were not avoidable by the trustee. Plaintiff filed another appeal following this judgment.
Judge Schlesinger vacated and remanded the December 21, 1998 Judgment due to the absence of substantive evidence from the September 15, 1998 supplemental evidentiary hearing in the accompanying Findings of Fact. The Plaintiff contends that the Debtor and Defendant's method of paying delinquent bills was idiosyncratic and deviated from ordinary business terms, citing the age of the debts and the use of post-dated checks. The Court previously characterized this payment procedure as 'unique' and 'unusual.' In contrast, the Defendant argues that the payment timing aligns with industry standards, where most clients pay within sixty to ninety days, and asserts that post-dated checks were an established practice prior to the Debtor's bankruptcy. The Eleventh Circuit's reasoning in A.W. Associates, which is cited, defines 'ordinary business terms' as practices typical for similar firms and states that only significantly unusual dealings fall outside that definition. The Plaintiff argues that the Court must now classify the relationship as so idiosyncratic that it falls outside the scope of 547(c)(2)(C). The Court seeks a precise understanding of industry standards based on A.W. Associates and related cases, noting the legislative intent of 547(c)(2) to uphold normal financing relationships and discourage unusual conduct during a debtor's insolvency.
The court endorsed the Seventh Circuit's decision in Tolona while refining its 'idiosyncratic' test concerning preference provisions, emphasizing the importance of a longstanding debtor-creditor relationship in determining the permissibility of deviations from industry credit terms. It concluded that a stronger, more established relationship allows for greater flexibility in credit practices, reducing the risk of unfair advantages to certain creditors. However, even long-term relationships do not permit gross deviations from industry standards. The Fourth Circuit adopted this enhanced approach in Advo-System, framing it as a 'sliding-scale window' that considers the history between the debtor and creditor. This framework posits that an established relationship provides a baseline for evaluating credit terms, ensuring that the preference section's goal of equitable treatment among creditors is upheld. The court must assess whether the practices of the Debtor and Defendant align with industry standards, ultimately posing several critical questions to determine compliance with 547(c)(2)(C). If the practices are found to be within the standards and reflect a long-standing relationship, the preference provision is satisfied; otherwise, it fails the test.
Defendant's invoices stipulated a thirty-day payment period, but evidence indicated that the industry standard for payment typically spans sixty to ninety days, with some payments extending beyond ninety days. Debtor, however, had a history of delaying payments, sometimes exceeding 120 days. The relationship between Debtor and Defendant dates back to 1991, with Debtor being a top billing account in the mid-1990s. By April 1995, Debtor began using post-dated checks to pay invoices, approximately ten months before filing for bankruptcy. The Court acknowledged that, due to the long-standing relationship, Defendant is afforded some flexibility regarding the payment timeline. Testimony confirmed that the use of post-dated checks is not a standard practice in the industry, but given the established relationship and credit practices, such payments do not fall outside the broad range of acceptable norms. The Court ruled that Defendant's attempts to maintain a profitable relationship with Debtor were legitimate rather than exploitative. Ultimately, the Court concluded that the payments made by Debtor during the preference period adhered to industry standards, satisfying the criteria under 547(c)(2), and therefore, these payments cannot be avoided by the trustee.
A separate judgment will be issued based on the Findings of Fact and Conclusions of Law. The Court adopts the Findings of Fact from its initial decision in Grant v. Renda Broadcasting Corp., incorporating evidence from the September 15, 1998 trial on remand. Weatherby’s testimony indicated that approximately 68% of the Defendant's accounts receivables were outstanding at thirty days and 49% at sixty days; however, these figures were attributed to an incorrect interpretation of Defendant's Exhibit 1A, which actually reflected KRXO's accounts receivables. The July 1998 aging report showed that 66% of the Defendant's accounts receivables were outstanding at thirty days, with 37% outstanding at sixty days. While this report suggests an industry standard of thirty to sixty days, it pertains to a period three years after the relevant timeframe. The Court finds more credibility in the testimonies of Garrett and Weatherby, concluding that the industry standard for payment is actually between sixty to ninety days.
