UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
RAGLAND COAL CO., INC.
DEBTOR CASE NO. 94-70644
PHAEDRA SPRADLIN, TRUSTEE PLAINTIFF
VS. ADV. NO. 96-7029
MARCO MINE SUPPLY DEFENDANT
In the matter now before the Court, the trustee seeks to avoid a post-petition, pre-confirmation transfer from the debtor to the defendant pursuant to 11 U.S.C.'549(a)(2)(B), and to recover that transfer for the benefit of the estate pursuant to 11 U.S.C. '550(a). The defendant=s defense to this action is that the transfer took place in the ordinary course of business and so is not avoidable. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); the plaintiff has alleged that it is a core proceeding pursuant to 28 U.S.C. '157.
The parties have entered into stipulations which set out pertinent facts including the following:
The debtor filed a Chapter 11 petition in this Court on December 29, 1994. The case was converted to a case under Chapter 7 on April 19, 1996. On or about March 12, 1996, the debtor transferred a total of $30,000.00 to the defendant, a creditor, for post-petition liabilities it had incurred. The president of the debtor, Sheridan Booth, and the president and one-third owner of the defendant, James Booth, are brothers. Between December 29, 1994, and May 23, 1995, the defendant supplied at least $30,000.00 worth of mining supplies to the debtor in the ordinary course of business. This was the only post-petition payment made by the debtor to the defendant. No order approving the $30,000.00 payment to the defendant was entered in the Chapter 11 case. At the time of the transfer the debtor had authority pursuant to 11 U.S.C.'1108 to operate its business. The debtor ceased its mining operations shortly after May 23, 1995.
The debtor=s accountant was charged with preparing the debtor=s operating reports filed in its Chapter 11 case. The debtor never supplied the accountant with information regarding post-petition debts owed to the defendant prior to February 9, 1996, and the accountant was unaware of any such debt. Prior to the issuance of the $30,000.00 check the accountant advised the debtor not to make any payment to the defendant.
Claims for administrative expenses in the Chapter 11 case have been filed including the following:
Further, the accountant and the debtor=s attorney were not paid fees ordered by the Court prior to conversion. Attorney=s fees incurred by the Chapter 11 debtor totaled $1,878.35, and costs totaled $578.82. Accountant=s fees totaled $2,740.00.
Review of the record in this case reveals that the defendant filed a proof of claim in the Chapter 11 case on January 24, 1995, for $574,154.07. Of this total, $214,152.13 represents a debt for mining supplies provided to the debtor from January 1994 to December 30, 1994. The remainder of the defendant=s claim constitutes the balance of a $400,000.00 note James Booth co-signed with the debtor on October 8, 1994.
When the debtor issued the $30,000.00 check on March 12, 1996, it was signed only by Sheridan Booth. The Chapter 11 Operating Order requires, inter alia, the signature of two persons on each check drawn from the Debtor-in-Possession account. After this check was written only $2,623.40 remained in the debtor=s Chapter 11 operating account. The March 12, 1996 payment was the only payment made by the debtor to the defendant from January 1994, and was made more than nine months from the date that goods were last supplied by the defendant. No court approval was obtained for the payment to the defendant. When the U.S. Trustee filed her Motion to Convert or Dismiss on March 18, 1996, she cited the debtor=s failure to file a Chapter 11 plan, and the fact that Athe Debtor=s monthly revenues have dropped significantly and its cash on hand is being used to fund its now meager operations and to pay officers= salaries, its attorney and accountant fees, and quarterly fees.@
In order to prevail under 11 U.S.C.'549(a)(2)(B), the trustee must demonstrate that a transfer of property of the estate was made after the commencement of the case which was not authorized under title 11 or by the Court. The parties have stipulated that the transfer was not authorized by the Court, and the debtor has not argued that the monies transferred were not property of the estate. The trustee maintains that the $30,000.00 payment was not authorized under title 11 as a transfer made in the ordinary course of business pursuant to 11 U.S.C. '363(c)(1), and that in fact it was prohibited by '363(b) as not in the ordinary course of business. The defendant argues that the transfer was in the ordinary course of business. The question of whether the subject transfer falls within the purview of '363(c)(1) constitutes the issue to be resolved by the Court.
The court in In re Springfield Contracting Corp., 154 B.R. 214 (Bkrtcy.E.D.Va. 1993), provided a detailed explanation ofAordinary course of business@ in regard to '549:
[In t]he case of Burlington Northern Railroad Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700 (9th Cir.1988), the Court of Appeals describes the
[T]he vertical dimension or creditor dimension test .... inquires whether the transaction subjects a creditor to economic risks of a different nature from those he accepted when he decided to extend credit.
At 225-226. See also In re Roth American, Inc., 975 F.2d 949, 952-954 (3rd Cir. 1992).
The trustee points to the fact that the defendant continued to supply goods to the debtor post-petition after having done so for a year before the petition was filed without being paid, and having amassed a pre-petition debt of $214,152.13. The last goods were supplied on May 23, 1995, but no payment was made to the defendant until March 12, 1996, more than nine months later. The trustee refers to the defendant=s invoices, copies of which have been filed herein, which list payment terms of Anet thirty@ demonstrating that payment within thirty days of date of invoice is the standard in the industry.
The trustee also refers to the fact that the transfer was made to an insider on the eve of conversion out of all the remaining funds of the debtor-in-possession, but these elements are considered in cases of pre-petition preferential transfers where an exception is alleged pursuant to 11 U.S.C.'547(c). As set out above, the Ahorizontal dimensions@ and Avertical dimensions@ tests are applied under '363(c). Finally, the trustee argues that the $30,000.00 payment preferred the defendant over priority administrative claims that had been approved by the Court.
The defendant argues that the subject payment was in the ordinary course of business. It cites in support of its position Habinger v. Metro. Cosmetic & Surgical Clinic, 124 B.R. 784 (D.Minn. 1990). There the district court remanded the matter to the bankruptcy court for a determination of whether post-petition transfers were in the ordinary course of business. In so doing, the court set out elements to be considered by the bankruptcy court when it made its determination, including
(1) whether the amounts paid to [the creditor] were consistent with the
At 787. The defendant acknowledges that the second element does not apply here, as it is not secured. It completely ignores theAindustry-wide@ or Ahorizontal dimension@ test. It makes no argument that the $30,000.00 payment was in line with industry-wide practice in the mining supply business.
The defendant does argue that theAcreditor=s expectation@ or Avertical dimension@ test should be interpreted in regard to its own expectation of payment. However, as pointed out by the court in In re Johns-Manville Corp., 60 B.R. 612, 616 (Bkrtcy.S.D.N.Y. 1986) this test views the transaction Afrom the vantage point of a hypothetical creditor and inquires whether the transaction subjects a creditor to economic risks of a nature different from those he accepted when he decided to extend credit.@ This Court is of the opinion that the debtor=s using up the last of its financial resources to make a lump sum payment on this one debt indeed subjected the other creditors of this debtor to Aeconomic risks of a nature different@ from those they accepted when they extended credit.
The defendant goes on to argue, however, that no other creditor was prejudiced by the subject payment because, as it disingenuously states in its brief,Aif Marco Mine Supply had not been willing to supply Ragland Coal Co., Inc. with the essential coal mining supplies to operate their business, then re-organization under Chapter 11 would have been virtually impossible.@ The fact is, reorganization apparently was impossible, and never took place. No plan was ever proposed, and this case eventually converted to a Chapter 7. As the trustee points out, at the very least the priority administrative claimants were prejudiced by this action. This Court does not believe that the defendant has demonstrated under either of the tests set out above that the $30,000.00 payment was in the ordinary course of business, and the trustee may therefore avoid this transfer.
Having found that the subject transfer was not in the ordinary course of business, the Court now turns to the question of whether the trustee may recover the amount transferred for the benefit of the estate. The pertinent statute, 11 U.S.C.'550(a)(1), provides that to the extent a transfer is avoided under '549, the trustee may recover the property transferred, or its value, from the initial transferee. The defendant has made no argument in opposition to recovery under '550. There is no question but that the defendant was the initial and only transferee, and the trustee may recover the $30,000.00 paid to the defendant for the benefit of the estate. An order in conformity with this opinion will be entered separately.
By the Court -
Elizabeth Lee Thompson, Esq.
Greg Smith, Esq.