‘Average Payment Time’ vs. ‘Range of Payment Statistics’: Judge Carey (Del.) Weighs in Favor of the Latter in In re AES Thames, LLC Preference Dispute

By Evan T. Miller, Esq.

Judge Carey recently ruled in favor of a defendant on a 547(c)(2) issue, notwithstanding that the Debtors paid the defendant more than six times later during the Preference Period than they had in the Historical Period.  In Forman v. Moran Towing Corp. (In re AES Thames, LLC, et al.), Adv. No. 13-50394 (KJC) (Bankr. D. Del. Mar. 3, 2016), the Court found that a holistic view of the parties’ relationship mitigated the apparent lateness of the subject Transfers (as defined below), such that they were in fact made in the ordinary course of business.  This represents one of Judge Carey’s first opinions regarding 547(c)(2) since his 2010 In re Pillowtex decision.

Given the frequency with which ordinary course issues arise in preference litigation and the ever nuanced application of the doctrine, this is a unique and useful decision for those representing defendants.

The Bankruptcy Case, the Parties’ Background, and the Transfers

The facts of this adversary proceeding were stipulated to in a joint pretrial memorandum.  Prior to the Petition Date (February 1, 2011), the Debtor at issue here had operated a coal-fired power plant.  In 2004, the Debtor entered into a Transportation Agreement (the “Agreement’) with Moran Towing Corporation (“Defendant”), under which Defendant agreed to provide marine services to transport coal by vessel or barge to the Debtor’s facility.

During the period between July 16, 2007 and September 22, 2010 (the “Historical Period”), Defendant invoiced the Debtor; between October 5, 2010 and November 16, 2010, Defendant sent eight invoices (the “Invoices”) to the Debtor, five of which were due on November 26, 2010, and three were due on December 26, 2010.  Notwithstanding, the Debtor paid the former batch on December 15, 2010 (19 days late) and the latter batch on January 6, 2011 (10 days late); it was these two batches of transfers (collectively, the “Transfers”) which the Plaintiff-Trustee later sought to claw back  through the instant action.

Traits of the Transfers vs. Historical Practice

The Court recited the following comparison between the Parties’ practices during the Historical and Preference Periods:

Historical Period

Preference Period

Lateness: -28 days (i.e. 28 days early) to 35 days after Agreement Due Date, or 2.45 avg days late Lateness: 10-19 days after Agreement Due Date, or 15.63 avg days late
Payment Amounts: ~$42K to ~$138K Payment Amounts: ~$69K to ~ $123K
Number of invoices paid by one payment: one to eight Number of invoices paid by one payment: three to five
Payment Method: wire Payment Method: wire

The Court’s Analytical Framework

Citing to Judge Sontchi’s (Bankr. D. Del.) Burtch v. Texstars, Inc. (In re AE Liquidation, Inc.), Adv. No. 10-55502, 2013 WL 5488476 (Bankr. D. Del. Oct. 2, 2013) (which in turn cites the Third Circuit’s 1999 SEC v. First Jersey Sec., Inc., 180 F.3d 504 decision), the Court referenced the following factors in analyzing 547(c)(2) defenses:

(i) The length of time the parties engaged in the type of dealing at issue;
(ii) Whether the subject transfers were in an amount more than usually paid;
(iii) Whether the payments at issue were tendered in a manner different from previous payments;
(iv) Whether there appears to be an unusual action by the creditor or debtor to collect on or pay the debt; and
(v) Whether the creditor did anything to gain an advantage (such as obtain additional security) in light of the debtor’s deteriorating financial condition

Judge Carey further notes (and the present opinion underscores) that “no one factor is determinative [and] the Court should consider the parties’ relationship in its entirety.”  Indeed, he cites (i) Judge Robinson’s (D. Del.) Forklift Liquidating Trust v. Clark-Hurth (In re Forklift LP Corp.), Case No. 02-1073, 2006 WL 2042979 (D. Del. Jul. 20, 2006), (ii) Judge Sontchi’s Burtch v. Prudential Real Estate and Relocation Services, Inc. (In re AE Liquidation, Inc.), Adv. No. 10-55543, 2013 WL 3778141 (Bankr. D. Del. Jul. 17, 2013), and (iii) Judge Walsh’s Radnor Holdings Corp. v. PPT Consulting, LLC (In re Radnor), Adv. No. 08-51184, 2009 WL 2004226 (Bankr. D. Del. Jul. 9, 2009), for the position that “[c]ourts have determined that the timing of payments along with some other factor prevent application of ordinary course of business defense.”

The Parties’ Positions

The Parties disagreed on how to compute the timing of the payments.  The Trustee argued that it was appropriate to analyze only whether the Debtor consistently paid Defendant on the Due Date specified in the Agreement, or the degree of lateness thereafter; Defendant’s preferred approach – i.e., measuring from cargo load date to payment, or from invoice date to payment – would not reflect whether the payments were timely or whether there was a consistency to the payments.

The Trustee further argued that the average days late in the Historical Period (2.45 days after the Due Date) clearly contrasted with that in the Preference Period (15.63 days after the Due Date), and that only 4 of 164 invoices (2.44%) in the Historical Period were paid 10 days or later after the Due Date.  Thus, the Transfers did not conform to more than 97% of Historical Period payments, although Defendant responds that the Preference Period lateness range (10-19 days) is actually well within the Historical Period lateness range (-28-35 days).

The Court’s Holding – Does lateness alone take a payment out of the ordinary course?

Initially, the Court found that the Historical Period’s three years were sufficient to establish an ordinary course of dealings.  Moreover, the Parties stipulated that Defendant took no unusual action to collect on the Invoices.  Thus, before the Court was strictly a matter of determining whether the Transfers were similar to those made during the Historical Period – i.e., pitting Trustee’s average payment reliance against Defendant’s range of payment statistics.

Judge Carey held that notwithstanding timing’s importance, it “does not portray the complete picture”, quoting from Judge Sontchi’s Sass v. Vector Consulting, Inc. (In re American Home Mortgage Holdings, Inc.), 476 B.R. 124, 138 (Bankr. D. Del. 2012).  As such, the Court found that a late payment of 10 or 19 days was not unprecedented in the parties’ relationship.  Moreover, the Court found that the Transfer amounts fell within the Historical Period amount range; the Transfers paid multiple invoices together, just as the Debtor had done historically; payments were always made by wire; and there was no attempt by Defendant to gain an advantage over other creditors during the Preference Period.  Ergo, the difference in payment timing, “without more, . . . should [not] preclude application of the ordinary course of business defense.”

Conclusion

While the Court stressed that the instant opinion was specific to these “unique circumstances”, it is nonetheless noteworthy that an otherwise “ordinary” relationship can potentially trump a relatively large deviation in average days to pay.  One wonders what difference it would have made had the Transfers in this case been made substantially earlier in the Preference Period, as opposed to later, which some courts have noted is a pertinent distinction.  It is also questionable whether the Court will always look for another factor to pair with average lateness, or if it would have been determinative had the deviation been twice or three times as large.

A copy of the memorandum order can be found here.

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