Court: United States Bankruptcy Court, D. Delaware; June 5, 2012; Us Bankruptcy; United States Bankruptcy Court
The Court, following a trial from September 23 to October 3, 2011, issued findings and conclusions regarding Vector Consulting, Inc.'s defenses under 11 U.S.C. § 547(c). The bankruptcy proceedings originated from the debtors' filings on August 6, 2007, with the Official Committee of Unsecured Creditors initiating an adversary proceeding against Vector to recover four payments totaling $29,920, claimed as preferential transfers. The transactions occurred within the Preference Period from May 8 to August 6, 2007, during which Vector received four checks from American Home Mortgage Corp. totaling the disputed amount.
Vector responded to the complaint, asserting defenses under § 547(c) of the Bankruptcy Code, claiming the transfers were not avoidable. After reviewing summary judgment motions, the Court determined that the plaintiff established a prima facie case under § 547(b) and identified material factual disputes necessitating a trial regarding Vector’s defenses. At trial, evidence was presented from three witnesses for Vector, including an employee and the CEO, alongside testimony from one witness for the plaintiff. Vector maintained that it had defenses related to the ordinary course of business under § 547(c)(2) and a new value defense under §§ 547(c)(4) and/or 547(c)(1) to negate preference liability.
Vector’s CEO, Manbir Khurana, provided credible testimony during the trial regarding the company’s operations in staffing temporary IT professionals and his extensive experience in the field. Vector and AHM entered a Professional Service Agreement (PSA) in October 2006 for a three-month contract to provide programming services, which was later extended to eight months. The PSA stipulated that payments to Vector were due within thirty days of AHM receiving invoices, with Bonnie Singh designated as AHM’s project manager. Vector sent invoices to Singh following AHM's approval of timesheets for services rendered by Peter Lindner. All invoices were paid except for one dated July 27, 2007, amounting to $1,360.
Khurana testified about Vector’s payment practices, noting that the company applied payments to the oldest invoices first, consistent with its accounting procedures across all clients. Throughout the preference period, payments were made for invoices of corresponding amounts, with one exception. Notably, on May 7, 2007, the Debtor paid two invoices totaling $12,920.00 alongside a preference period check. Additionally, between May 7 and May 17, 2007, Lindner worked 64 hours, resulting in an invoice of $5,440.00 at an agreed hourly rate of $85.00.
Prior to the Preference Period, referred to as the Historical Period, Vector's accounting records indicate a consistent payment pattern between the parties. Payments during this period ranged from $4,675.00 to $12,240.00, with most corresponding to single invoices—except for a January 25, 2007 payment that covered two invoices. Comparatively, payments during the Preference Period ranged from $5,440.00 to $12,920.00. The time between invoice issuance and payment during the Historical Period varied from 7 to 67 days, while in the Preference Period, it ranged from 34 to 62 days.
Vector's customary procedure involved internal discussions about open invoices followed by polite inquiries with clients, emphasizing customer relationship management. Emails from the Debtor’s accounts receivable records show that two invoices dated April 20, 2007 ($5,440.00) and May 4, 2007 ($6,120.00) were resubmitted on June 13, 2007, due to the absence of a key employee. The Debtor requested additional copies before processing, which led to follow-up communications by Vector. Subsequently, payments for both invoices were made on July 5 and July 9, 2007, respectively, shortly after they were resubmitted, with the payment for Invoice Number 23737 occurring 22 days post-resubmission.
Payment was made approximately 26 days after Invoice Number 23702 was emailed on June 13, 2007. Vector did not exert pressure on the Debtor for payments and did not impose any late fees during the Preference Period. Testimony from Mr. Khurana indicated that payments made by AHM to Vector, including those during the Preference Period, were consistent with ordinary business practices. In rebuttal, the Plaintiff presented accounts payable records from Belinda Jones, a former AHM clerk, which included checks, remittance information, and invoices related to payments made to Vector.
Records showed that during the Preference Period, payments ranged from $5,440.00 to $12,920.00, while payments in the Historical Period varied from $4,675.00 to $12,240.00. The invoices paid during the Preference Period also ranged from $5,440.00 to $7,480.00, in contrast to $4,675.00 to $8,160.00 during the Historical Period.
Vector's defense included expert testimony from Bradley Sienkiewiez, a certified public accountant with expertise in accounts receivables and industry payment practices, who supported the argument that the payments were made in the ordinary course of business.
Mr. Sienkiewiez, an expert in the IT staffing industry, highlighted that he has multiple clients who compete directly with Vector and engage in similar accounts receivable practices. He concluded that payments from AHM to Vector were made within the ordinary course of business, based on his industry experience and payment history analysis, and his opinion remained unchanged despite Mr. Khurana's testimony.
Following the trial, the Plaintiff filed a Motion to Strike Mr. Sienkiewiez's expert testimony, arguing that he referenced documents not included in his report or disclosed during discovery, which could potentially surprise the Plaintiff. The legal standard under Rule 7026 aims to prevent such surprises, emphasizing that exclusion of critical evidence is an extreme measure and requires evidence of willful deception or flagrant disregard of court orders.
Mr. Sienkiewiez's report included the necessary facts and data supporting his opinion about the transfers being ordinary business transactions. His trial testimony was consistent with his report and did not introduce materially different opinions. Any minor discrepancies were deemed immaterial or were responses to trial evidence, permissible under Federal Rule of Evidence 703, which allows experts to base their opinions on information acquired during the trial.
Ultimately, there was no evidence of willful deception or disregard for court orders, as Mr. Sienkiewiez's report and supporting documents had been provided to the Plaintiff well before trial. The Plaintiff had the opportunity to address any concerns regarding the documentation prior to the trial but chose to withdraw their request to depose Mr. Sienkiewiez.
Mr. Sienkiewicz’s testimony is deemed admissible in its entirety, with the Plaintiff's objections regarding the expert's reliance on certain information relating to the evidence's weight rather than its admissibility. The Plaintiff did not provide expert testimony to counter the claims made.
The Trustee has met all necessary elements under section 547(b) of the Bankruptcy Code; however, the Preference Period Transfers can only be avoided if they do not meet the exemptions outlined in section 547(c). Vector, asserting that the transfers fall under these exemptions, bears the burden of proof by a preponderance of the evidence. Vector successfully demonstrated that all four Preference Period Transfers are exempt from avoidance under section 547(c), establishing that they were made in the ordinary course of business per section 547(c)(2). Additionally, Vector proved the provision of “new value” of $5,440.00, partially protecting the $12,920.00 payment received on May 7, 2007, from avoidance under sections 547(c)(4) and/or (c)(1).
Section 547(c)(2) allows a “safe harbor” for preferential payments made in the ordinary course of business. The parties agreed that the Preference Period Transfers occurred within the ordinary course of business between AHM and Vector. The Court must determine if these transfers were made in the ordinary course of business or according to “ordinary business terms.” Vector successfully demonstrated compliance with both criteria.
The ordinary course of business defense involves a subjective analysis of the usual payment practices between the parties, examining factors such as the duration of their business relationship, payment amounts, payment methods, any unusual actions taken regarding the debt, and whether the creditor sought advantages amid the debtor's financial troubles. The Court concluded that the duration of the engagement was adequate to establish an ordinary course of dealing, emphasizing the importance of maintaining ongoing business relationships to mitigate the impacts of insolvency.
The relationship between AHM and Vector lasted approximately eight months, governed by the Professional Services Agreement (PSA), initially set for three months and later extended by five months. Vector provided professional services to assist AHM with its SAS development project, during which AHM made fourteen payments, four of which occurred during the Preference Period. Given the short duration of their dealings, the court assessed the ordinary course of business defense by referencing industry standards. Testimonies from Mr. Khurana and Mr. Sienkiewicz indicated that the contract length was typical in the IT staffing industry, with an average contract duration of six months. The court concluded that the eight-month relationship was sufficient to qualify as ordinary in this context, as the plaintiff did not present any contradictory evidence.
Additionally, the court compared the transactions during the Historical Period with those in the Preference Period. It found that the amounts paid during both periods were consistent with each other. However, the plaintiff argued that the timing of payments differed significantly, citing an increase in the average days between invoice and payment from 24.7 days to 57.4 days and that 80% of payments during the Preference Period exceeded the thirty-day terms outlined in the PSA, as compared to 20% during the Historical Period. The plaintiff contended that these discrepancies indicated that the Preference Period payments were not ordinary.
The Plaintiff's arguments lack persuasiveness and do not align with precedents from this Court and the Third Circuit. Courts typically find that small timing deviations in payments do not undermine their ordinariness, while significant deviations can. The PSA stipulated thirty-day payment terms, but late payments can still be considered ordinary, and a consistent pattern of late payments may establish an ordinary course of business.
Vector and the Plaintiff submitted payment records, with the Court determining that the creditor's receipt date is the relevant factor, rather than when the checks clear. Vector's payment application was deemed reasonable and consistent with its procedures. According to Third Circuit standards, evidence of a range of similar payment practices suffices to demonstrate ordinariness. The Trustee's use of average payment times does not adequately reflect the full payment history.
Vector's records, corroborated by testimony, show that payments during the Preference Period occurred between 34 and 62 days after invoices, within the historical range of 7 to 67 days. In a related case, despite payments being outside historical ranges, summary judgment favored the defendant due to the ordinary course business exemption.
The Court finds that the payments made during the Preference Period are comparable to those in the Historical Period, maintaining consistency in payment methods throughout their business relationship. Each of the four Preference Period payments is deemed protected. Specifically, the May 25, 2007 payment of $5,440 was made in 19 days, qualifying as ordinary. The May 2, 2007 payment of $12,920, covering two invoices with clear days of 54 and 69, also falls within the historical payment range, thus being protected.
Doubt regarding the avoidability of the $5,440 invoice paid by a $12,920 payment on May 2, 2007, is addressed by the assertion that this invoice is safeguarded by new value provided by Vector post-payment. The court determined that the Preference Period checks of $6,120 on June 29, 2007, and $5,440 on July 3, 2007, were executed in the ordinary course of business based on the circumstances surrounding their timing. It was noted that Bonnie Singh, the contact for the invoices, was on maternity leave, delaying payment processing without Vector being informed beforehand. Vector learned of her absence through follow-up communications. Invoice copies were sent by Tracey Belton on June 13, 2007, with payments made shortly thereafter, aligning with the PSA's 30-day payment terms. The average days to pay were recalculated from 57.4 to 38 days, reflecting the actual receipt of invoices.
All payments were consistently made via check, with no disputes regarding the payment methods. Vector's collection practices were deemed standard, involving polite inquiries about outstanding payments without any unusual actions that could indicate a deteriorating creditor-debtor relationship. Mr. Khurana’s testimony confirmed that collection practices were uniformly applied across all clients and did not expedite payment processes. Importantly, there is no evidence that Vector exploited AHM’s financial difficulties, nor was Vector aware of any impending bankruptcy. Vector did not request additional security, assess late fees, or exert pressure for payments, and AHM's internal communications showed no indication of awareness regarding its financial condition.
Vector successfully established its defense under the ordinary course of business doctrine regarding four Preference Period Checks, demonstrating that these payments were made to maintain normal business operations rather than in response to creditor pressure. Each transfer adhered to “ordinary business terms,” which are defined by prevailing industry norms. The court emphasized that for a transfer to be avoided under section 547(c)(2)(B), it must be deemed idiosyncratic and fall outside the customary practices within the creditor's industry. The Third Circuit and other circuits have established that even slight deviations from industry norms can still be considered ordinary, provided they do not stand out as particularly unusual.
The court noted that the burden on creditors to prove compliance with the ordinary business terms standard is not overly demanding; they need only demonstrate a range of terms typical among similar firms. No precise data is required to substantiate the claim, and the evidentiary standard is described as accommodating. Vector's expert, Bradley Sienkiewicz, provided testimony supporting that Vector's dealings conformed to industry standards, particularly in the IT staffing sector. Although the court gave limited weight to this opinion, it found that Vector adequately met its burden of proof regarding industry standards, supported by evidence of payment practices within the sector.
Vector's invoicing and payment practices align with industry standards, as confirmed by Mr. Khurana's testimony and supported by expert Bradley Sienkiewicz. Payments were typically applied to the oldest invoices unless otherwise agreed, reflecting standard practices in the software development and IT staffing sectors. Sienkiewicz analyzed Vector's payment history and the Debtor’s accounts payable records, noting that payments were often made after the due date, consistent with industry norms. His findings, which were not challenged by any opposing expert, indicated that the payments during the Preference Period were in line with these practices.
Additionally, Vector invokes a partial defense under section 547(c)(4) of the Bankruptcy Code, arguing that it provided new value to the Debtor through professional consulting services rendered by Peter Lindner after a payment of $12,920. The services, valued at $5,440, were performed between May 7 and May 17, 2007, following the payment, and were documented through approved timesheets.
Lindner's services provided after payment amount to a total value of $5,440.00, derived from Invoice No. 23799 ($4,080.00) and Invoice No. 23911 ($1,360.00). The Court finds that this "new value" was either contemporaneous with or following the Debtor's payment on May 7, 2007, thereby entitling Vector to this amount. The Defendant successfully proved its defenses under Section 547(c) of the Bankruptcy Code regarding the four Preference Period Transfers, leading to a judgment in favor of the Defendant and dismissal of the Plaintiff's Complaint with prejudice. The Plaintiff had previously withdrawn its claim under Section 548 of the Bankruptcy Code.
The Court also outlined considerations for excluding evidence under Rule 37, including the potential prejudice to the opposing party, the ability to remedy such prejudice, the impact on trial proceedings, and the question of bad faith in non-compliance with court orders. Various case law precedents were cited to support these points, emphasizing the importance of adhering to procedural rules and the implications of check payments under the Bankruptcy Code.
Telephone calls made by a defendant are considered ordinary business practices, even if they lead the debtor to issue a check via overnight mail. Contacting customers, including debtors regarding outstanding invoices, falls within acceptable business conduct. Courts have established that only transactions deemed unusual, falling outside the typical range of business dealings, should be classified as extraordinary. The analysis under 11 U.S.C. § 547(c)(2)(B) indicates that while it provides a framework for determining the ordinary nature of payments, it does not require excessively precise evidence that could be challenging to obtain. The emerging legal consensus suggests that there must be objective proof that disputed payments are typical according to the prevailing standards in the creditor's industry.
