UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
DISSOLUTION CO. f/k/a
CASE NO. 02-14261
L. BERMAN, solely in his
as the Liquidating Trustee of the
ADV. NO. 04-1164
Defendant herein has filed a Motion for Judgment on the Pleadings and/or for
Summary Judgment pursuant to Federal Rules of Bankruptcy Procedure 7012(b)
and/or 7056, and Federal Rule of Civil Procedure 12(c).
The Defendant maintains that there are no genuine issues of material
fact in regard to the claims against it, and that it is entitled to judgment
as a matter of law on all affirmative defenses raised in its Answer and set
forth in the memorandum and exhibits accompanying its motion.
The Plaintiff has filed a memorandum in response and the Defendant has
replied. This court heard the
matter on March 2, 2005, and it is now submitted for decision.
1. Factual and procedural background
Plaintiff filed his Complaint to Avoid and Recover Preferential Transfers on
November 9, 2004. Therein at
Count I he alleges that one or more of the liquidating debtor entities, in
this instance Bowie Resources, Inc. (“Bowie”), made transfers totaling
$1,224,928.28 to or for the benefit of the Defendant within 90 days of the
petition dates, November 13 and 14, 2002.
He further alleges that the transfers are avoidable pursuant to
Bankruptcy Code section 547(b), and that the transfers are recoverable from
the Defendant as initial transferee pursuant to Bankruptcy Code section
550(a)(1). The Plaintiff has
withdrawn Count II of the Complaint, which sought to avoid transfers during
the period 180 days prior to the filing of the petitions pursuant to
Bankruptcy Code section 544(b) and KRS 378.060.
III of the Complaint seeks disallowance of claims pursuant to Bankruptcy Code
section 502(d), which provides in pertinent part that “the court shall
disallow any claim of any entity from which property is recoverable under
section . . . 550 . . . of this title or that is a transferee of a transfer
avoidable under section . . . 547 . . . of this title, unless such entity or
transferee has paid the amount, or turned over any such property, for which
such entity or transferee is liable under section . . . 550 . . . of this
title.” 11 U.S.C. § 502(d).
Count III alleges that any claims asserted by the Defendant in this
case should be disallowed until full payment and/or turnover of the amounts of
the transfers are made to the Plaintiff.
Defendant filed its Motion for Judgment on the Pleadings and/or for Summary
Judgment on January 27, 2005. Therein
it sets out that the Defendant is a Colorado corporation in the commercial
construction business. Bowie
entered into a contract (“the Contract”) with the Defendant to construct
railroad track to one of its mines in Colorado.
The total contract amount was estimated to be $2,041,876.65.
Payment under the Contract was to be made upon the Defendant’s
submission of monthly invoices or pay requests for work performed in the prior
month. Bowie agreed to pay 90% of
each pay request within 30 days of receipt.
The other 10% was to be paid within 30 days of completion and
acceptance of the project.
Defendant began construction of the project on February 18, 2002, and
completed all work on or about August 30, 2002.
Seven pay requests were submitted pursuant to the contract terms from
February to August 2002. Pay request number 6 for $614,160.88 was made on July 25,
2002, and paid on August 29, 2002. Pay
request number 7 for $610,767.40 was made on August 23, 2002 and paid on
September 25, 2002. These two
payments are the subject of the Plaintiff’s Complaint.
November 14, 2002, the Debtors moved the court for authority to continue to
pay critical trade vendors. The motion defined “Trade Claim” as “any claim of any
person or entity against the Debtors for good provided and/or services
rendered by said person to the Debtors in the ordinary course of business
prior to the Petition Date.” A
“Critical Trade Creditor” was defined as “any party which holds a Trade
Claim and which provides goods or service that are essential to the Debtors’
continued operation and for which no alternate supplier is available without
significant expense.” An order
sustaining this motion was entered on January 13, 2003.
Defendant further represents that on November 22, 2002, it gave Bowie written
notice of its intent to file a lien statement pursuant to section 38-22-109(3)
of the Colorado Revised Statutes. On
December 4, 2002, the Defendant filed a lien statement for the remaining
retention earned in the amount of $237,528.00.
On February 14, 2003, Bowie tendered to the Defendant a document
entitled “Agreement: Payment of Some Pre-Petition Amounts.”
The Defendant represents that the agreement was authorized by the
court’s order of January 13, 2003 in regard to Critical Claim Creditors,
that it accepted the agreement, and that the Debtors made payments on the
retention amount still owed, less $528.00.
On June 8, 2003, the Debtors paid the Defendant the final sum of
$61,714.00, and the Defendant released its lien on June 11, 2003.
2. Legal discussion
the Defendant has styled its motion as one for judgment on the pleadings or,
in the alternative, for summary judgment, it has argued the motion as though
for summary judgment and the court will treat it as such.
The summary judgment standard
Rule of Civil Procedure 56(c), made applicable in bankruptcy
by Bankruptcy Rule 7056, provides that summary judgment is appropriate and
“shall be rendered forthwith if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any,
show that there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.” The Supreme Court has observed that
provides that the mere existence of some alleged factual dispute
between the parties will not defeat an otherwise properly supported motion for
summary judgment; the requirement is that there be no genuine issue of material
As to materiality, the substantive law will
identify which facts are material. Only
disputes over facts which might affect the outcome of the suit under governing
law will properly preclude the entry of summary judgment.
Liberty Lobby, Inc.,
477 U.S. 242, 247-248, 106 S. Ct. 2505, 2510 (1986)(emphasis in original).
summary judgment standard is set out in Celotex Corp. v. Catrett, 477
U.S. 317, 323, 106 S. Ct. 2548, 2552-53 (1986):
language of Rule 56(c) mandates the entry of summary judgment, after adequate
time for discovery and upon motion, against a party who fails to make a
showing sufficient to establish the existence of an element essential to that
party’s case, on which that party will bear the burden of proof at trial.
In such a situation, there can be “no genuine issue as to any
material fact,” since a complete failure of proof concerning an essential
element of the nonmoving party’s case necessarily renders all other facts
Circuit has opined that “[r]ead together, Liberty Lobby and Celotex
stand for the proposition that a party may move for summary judgment asserting
that the opposing party will not be able to produce sufficient evidence at
trial to withstand a directed verdict motion.”
Street v. J.C. Bradford & Co., 886 F.2d 1472, 1478 (6th Cir.
Defendant argues that the Plaintiff cannot prevail on his allegation of
preferential transfers pursuant to Bankruptcy Code section 547(b((3) because
the debtor entity Bowie was not insolvent at the time of the transfers.
In support of this contention, the Defendant states that Bowie’s
amended schedules as of November 14, 2002 showed assets of $32,969,741.15 and
liabilities of $28,944,032.27. The Defendant contends that this representation, along with
what it characterizes as Bowie’s history of timely payments, is sufficient
to rebut the presumption of insolvency set out in Bankruptcy Code section
Plaintiff’s response to this contention is to point out that at the time of
filing of the Chapter 11 petitions, the Debtors were burdened with over $1.1
billion in secured debt. The
Plaintiff recites the details of the three tiers of secured debt, including
$250,000,000.00 to Deutsche Bank Trust Company Americas, the pre-petition
senior secured lender which had a validly perfected, first priority lien on
substantially all of the Debtors’ assets, $465,000,000.00 in second-tier
notes, and $450,000,000.00 in third-tier notes.
The record shows that each Debtor guaranteed the repayment of all three
tiers of secured debt, and that all their assets were given as security.
The Defendant therefore cannot overcome the presumption of insolvency.
The Defendant as secured creditor
Defendant argues that it had a validly perfected lien on Bowie’s property at
the time of the transfers, and that its lien is one of those addressed in
Bankruptcy Code section 545(2) which provides in pertinent part that “[t]he
trustee may avoid the fixing of a statutory lien on property of the debtor to
the extent that such lien is not perfected or enforceable at the time of the
commencement of the case against a bona fide purchaser. . .”
11 U.S.C. § 545(2). Further,
Bankruptcy Code section 546 provides for limitations on the trustee’s
avoiding powers, specifically section 546(b)(1)(A) which provides that “[t]
rights and powers of a trustee under sections 544, 545, and 549 of this title
are subject to any generally applicable law that permits perfection of an
interest in property to be effective against an entity that acquires rights in
property before the date of perfection.” 11 U.S.C. § 546(b)(1)(A).
Defendant filed a notice of its intent to file a lien statement pursuant to
section 38-22-109(3) of the Colorado Revised Statutes on November 22, 2002; on
December 4, 2002, it filed its lien statement.
Both of these dates are post-petition.
The Defendant maintains, however, that it was the holder of a statutory
lien that had the right to perfect the lien at the time the case was
commenced. Section 38-22-101 of the Colorado Revised Statutes provides:
who furnishes or supplies laborers, machinery, tools, or equipment in the
prosecution of the work, and mechanics, materialmen, contractors,
subcontractors, builders, and all persons of every class performing labor upon
or furnishing directly to the owner or persons furnishing labor, laborers, or
materials used in construction, alteration, improvement, addition to, or
repair, either in whole or in part, of any . . . railroad . . . shall have a
lien upon the property upon which they have furnished laborers or supplied
machinery, tools, or equipment or rendered service or bestowed labor or for
which they have furnished materials or mining or milling machinery or other
fixtures . . .
C.R.S. § 38-22-101.
This statute does not, however, provide that the lien arises when the
work is performed or the materials are provided.
In fact, as set out in Wholesale Specialties, Inc. v. Village Homes,
Ltd., 820 P.2d 1170 (Colo. App. 1991), liens arise when they are
mechanics’ liens statutes, . . . , are designed to benefit and protect
subcontractors, materialmen, and laborers who are hired to improve or
construct structures on the land of another.
. . . To be entitled to a
lien upon the owner’s property, however, the claimant must perfect his lien
by filing a lien statement and otherwise complying with § 38-22-109, . .
. Until these statutory steps are
taken, the rights of the lien claimant are merely inchoate.
Accordingly, a lien does not ripen until it is perfected. . . .
Wholesale argues, however, that its liens did
‘arise’ in 1985 because they relate back pursuant to § 38-22-106(1)
. . . , which states that all ‘liens established by virtue of this article
shall relate back to the time of the commencement of work.’
Wholesale’s reliance on this statute is misplaced for two reasons.
First, for there to be a relation back, there
must be an established lien. An
established lien is one that is perfected.
Id. at 1173 (citations omitted).
The Defendant, therefore, had no interest in Bowie’s property until
it filed its lien statement after the commencement of the Debtors’ cases,
and this attempt to perfect its lien post-petition was a violation of the
interplay of Bankruptcy Code sections 362(b)(3) and
546(b)(1)(a) is analyzed in detail in In re 229 Main St. Ltd.
P’ship, 262 F.3d 1(1st Cir. 2001).
There the court acknowledged that the threshold question in this
analysis is whether the creditor had a pre-petition interest in the debtor’s
property. The court found that
the creditor did have such an interest, that section 362(b)(3) was applicable,
and that the creditor’s act to perfect its lien did not violate the
automatic stay. Having determined
here that the Defendant did not have a pre-petition interest in Bowie’s
property, this court’s analysis need proceed no further.
Having perfected its lien post-petition in violation of the automatic
stay, the Defendant is not secured
and Bowie’s transfer to it is avoidable unless some other defense applies.
The ordinary course of business exception
Defendant contends that even if the transfers in question meet the criteria of
section 547(b), they fall within the ordinary course of business exception
pursuant to section 547(c)(2). That
section provides that the trustee may not avoid a transfer to the extent that
it was “in payment of a debt incurred by the debtor in the ordinary course
of business or financial affairs of the debtor and the transferee; made in the
ordinary course of business or financial affairs of the debtor and the
transferee; and made according to ordinary business terms.”
11 U.S.C. § 547(c)(2)(A)(B)(C).
In order to determine if the ordinary course of business defense
applies, the court must engage in a “peculiarly factual analysis.”
Waldschmidt v. Ranier (In re Fulghum Construction Corp.), 872
F.2d 739, 743 (6th Cir. 1989). In order to prevail, the defendant
must prove each element of section 547(c)(2) by a preponderance of the
application of Bankruptcy Code section 547(c) has been the subject of much
debate, and has generated several significant cases from the Sixth Circuit. The
requirements for demonstrating the exception were set out in Logan v. Basic
Distrib. Corp. (In re Fred Hawes Org., Inc.), 957 F.2d 239 (6th
Cir. 1992). A transferee may not
use the same standard to prove all the elements of section 547(c)(2). Subsection (A) is demonstrated relatively easily by a showing
that each party was engaged in its usual business when the debt was incurred
and the transfer took place. Subsection
(B) has been determined to be the “subjective” prong, while subsection (C)
is the “objective” prong.
subjective prong requires proof that the transaction between the debtor and
the transferee was ordinary as to them; the objective prong requires proof
that the transaction was ordinary in relation to standards prevailing in the
relevant industry. See also
Jones v. United Sav. and Loan Ass’n (In re U.S.A. Inns of Eureka Springs,
Arkansas, Inc.), 9 F.3d 680, 682 (8th Cir. 1993)(transferee
must prove the three statutory elements by a preponderance of the evidence); WJM,
Inc. v. Massachusetts Dept. of Pub. Welfare, 840 F.2d 996, 1010-11 (1st
Cir. 1988) (each of the three elements must be satisfied by the creditor); J.P.
Fyfe, Inc. v. Bradco Supply Corp., 891 F.2d 66, 69 (3rd Cir.
1989) (creditor must prove all three “statutory conjunctive elements”); Hovis
v. Stambaugh Aviation, Inc. (In re Air South Airlines, Inc.), 247 B.R. 165
(Bankr. D.S.C. 2000) (Subsections (B) and (C) provide subjective and objective
tests which require separate analyses).
Fred Hawes court elaborated on the elements required to establish
subsection (B), noting that such a determination required a fact specific
analysis as set out in Fulghum, supra.
The court further noted that in making such an analysis, courts examine
several factors, “including timing, the amount and manner a transaction was
paid and the circumstances under which the transaction was made.” (quoting
from Yurika Foods Corp. v. UPS (In re Yurika Foods Corp.), 888 F.2d.
42, at 45 (6th Cir. 1989)). See
also Brown v. Shell Canada, Ltd. (In re Tennessee Chem. Co.), 112 F.3d
234, 237 (6th Cir. 1997). As
concerns late payments the court stated that a “late payment will be
considered ‘ordinary’ only upon a showing that late payments were the
normal course of business between the parties.”
At 244, citing Yurika Foods and Fulghum.
in most cases, subsection (A) is easily satisfied here.
Neither party contests the fact that the other was engaged in its usual
business when they entered into the Contract.
The court will next consider whether the Defendant can satisfy
subsection (B); if not, there is no need to analyze the extent of compliance
with subsection (C).
course of dealing between the Defendant and Bowie was circumscribed by the
Contract, and the contractual terms control.
As set out above, the Contract called for Bowie to pay 90% of each
payment request within 30 days of receipt.
Pursuant to the Contract, seven total payments were made within a
six-month period. The last two
payments were made 35 and 33 days after receipt.
“A late payment will be considered ‘ordinary’ only upon a showing
that late payments were the normal course of business between the parties.” In re Fred Hawes Org., Inc., 957 F.2d at 244.
Further, “[f]ailure to make a payment within the time limit set by
the contract is presumptively ‘nonordinary.’” Id.
A long history of dealing between the parties may counteract this
Defendant has recently tendered affidavits of Keith Seiber (“Seiber”), a
former officer of Bowie, and Alan Parkerson (“Parkerson”), the
vice-president of Parkerson Construction, Inc., a commercial construction
business in Colorado. These affidavits are in addition to the affidavit of the
Defendant’s president, Michael Cunningham, which was attached to the
Defendant’s motion. Seiber’s affidavit states that Bowie retained J.E.
Stover & Associates (“Stover”), a mining engineering firm, to design
and manage the construction of Bowie’s
load-out facility. Stover and Seiber drafted the Contract, and Stover served as
the project manager once the Contract was awarded.
Accordingly, the Defendant would first deliver invoices for payment to
Stover for review and approval. Stover
would review the invoices and then give them to the project manager to review.
The invoices would then go to Seiber who would send them out to the
Debtors’ headquarters in Ashland, Kentucky for payment.
He states that this two-step process could take several days, and that
the five and three day delays in the payments at issue were purely incidental
to the review process he recites, and the mail.
The court concludes that Seiber’s statements raise issues of fact in
regard to subsection (B) of section 547(c)(2), particularly since each of the
two payments was only a few days late.
offers testimony concerning what is considered timely payment in the context
of a contract between a mining company and a construction company which
addresses the requirements of subsection (C).
Parkerson states in his affidavit that he has been involved in the
commercial construction business, including construction for mining
operations, for over twenty years. He
further states that based on that experience, payments made by property owners
within ten days to two weeks after the due date established by the invoice are
not considered untimely. He
states that construction companies like his are asked to first submit invoices
to the engineer or architect overseeing the project to review and approve for
payment before the invoice is forwarded to the property owner.
He states that such review process will often cause a delay in payment
of up to two weeks. He further
states that a delay of two weeks or less is not considered untimely.
The court concludes that Parkerson’s statements go toward
establishing standards in the industry as required to satisfy subsection (C)
of section 547(c)(2).
Defendant also argues that in any event the Plaintiff should be estopped from
denying that all the payments made to it were made in the ordinary course of
business. This contention is
based on the fact that the Defendant became a consenting Critical Trade Vendor
pursuant to an agreement executed on February 14, 2003.
Critical Trade Vendors were those who held Trade Claims, defined in the
Debtors’ November 14, 2002 Motion to Pay Critical Trade Vendors as claims
incurred pre-petition in the ordinary course of business.
Plaintiff responds that the Defendant’s identification as a Critical Trade
Vendor only operates to establish the first prong of section 547(c)(2), that
the transfers were incurred in the ordinary course of business. The Order Authorizing Debtors to Pay Certain Critical
Prepetition Trade Creditors in the Ordinary Course provides in pertinent part
the Debtors are
authorized, in their discretion, to pay the Trade Claims of Critical Trade
Creditors (as defined in the Critical Trade Creditor Motion) in the ordinary
course of their businesses in an aggregate amount not to exceed $35 million
(without prejudice to the right of the Debtors to seek further increases in
this amount); and it is further
such payments shall be made to a Critical Trade Creditor (as defined in the
Critical Trade Creditor Motion) that agrees (i) to continue to supply goods or
services to the Debtors on Customary Trade Terms and (ii) that, if such
Critical Trade Creditor later refuses to supply goods or services to the
Debtors on Customary Trade Terms during these case, then on motion by the
Debtors and with the Court’s approval (a) any payments on account of Trade
Claims made by the Debtors to, or received by, such Critical Trade Creditor
after the date on which these cases were filed (the “Petition Date”) shall
be deemed to be postpetition advances recoverable by the Debtor from such
Critical Trade Creditor in cash or additional goods or services, and (b) any
such Trade Claims of such Critical Trade Creditor paid after the Petition Date
shall be reinstated as a prepetition debt;
Bowie and the
Defendant entered into an agreement pursuant to which the Defendant would be
classified as a Critical Trade Creditor, but this agreement was in relation to
the retention amount still owed on the Contract, $237,528.00.
This agreement did not address the pre-petition payments already made
under the Contract. Further, the
language “in the ordinary course of their businesses” defines the
circumstances of the Debtors’ making post-petition payments to
Critical Trade Creditors on pre-petition claims; it does not define a
defense in regard to pre-petition payments.
The court therefore agrees with the Plaintiff that the Defendant’s
status as a Critical Trade Creditor is not sufficient to satisfy subsections (B)
and (C) of section 547(c)(2).
consideration of all of the foregoing, the issues having been narrowed, the
court concludes that while the Defendant has not demonstrated that it is
entitled to judgment as a matter of law, it has raised sufficient issues of fact
in regard to Bankruptcy Code section 547(c)(2) to allow this matter to go on to
trial. Based on the affidavits the
Defendant has tendered, it may very well be able to develop sufficient facts at
trial to satisfy all elements of section 547(c)(2), and avail itself of the
ordinary course defense. The
Defendant’s Motion for Judgment on the Pleadings or in the Alternative for
Summary Judgment should be overruled, and the court will do so by separate
Charles Wright, Esq.
L. Wright, Esq.