Are Invoice Terms Alone Sufficient to Establish Contemporaneous Exchange for New Value or Ordinary Course of Business Defenses? In Cousins Fish Market, Second Circuit Offers Guidance

By Evan T. Miller, Esq.

The United States Court of Appeals for the Second Circuit (the “Second Circuit”) recently affirmed the judgment of the United States District Court for the Northern District of New York (the “District Court”) in John Nagle Co. v. McCarthy (In re The Cousins Fish Market, Inc.), 2016 WL 3854277 (2d Cir. July 12, 2016), which in turn had affirmed a decision of the district’s bankruptcy court (together with the District Court, the “Lower Courts”), finding the Lower Courts properly ruled that the defendant (“Defendant”) had not established its affirmative section 547(c) defenses.  Defendant offered no testimony or contractual terms in support of its section 547(c)(1) defense, nor did it provide sufficient pre-Preference Period evidence to establish a defense under section 547(c)(2).  The Second Circuit’s ruling is in the form of a summary order, so certain facts are pulled from the District Court’s opinion, available at 539 B.R. 205 and here.

Lower Court Activity

This action was initiated in October 2011.  Pertinent to this post, Defendant offered 44 invoices and checks in support of its affirmative defenses under section 547(c)(1) and (2).  To the latter, the bankruptcy court found – and the District Court affirmed – that the invoices and checks were primarily from within the Preference Period, meaning no “baseline of dealings” could reasonably be discerned.  Moreover, there was no evidence to establish when payments were due under any of the invoices or whether the Debtor typically paid them early or late, although Defendant argued that the invoice term “COD Check” implied otherwise.  The District Court noted that notwithstanding the “COD” term, it was readily apparent – even by the limited evidence offered – that the Debtor did not pay the invoices COD.  That fact, combined with the absence of any context for the timing of payments, rendered it impossible to determine what was ordinary between the parties.

As to the contemporaneous exchange for new value defense under section 547(c)(1), the bankruptcy court found that the documents alone could not show the subjective intent required.  The District Court found that the bankruptcy court’s findings in this regard were not clear error, adding that intent can be established through testimony or through surrounding circumstances, but could not be established in this case simply by the invoices and checks alone.  This amounted to mere innuendo, according to the District Court.

The Second Circuit Appeal

The Second Circuit affirmed the Lower Courts in all respects.  As to section 547(c)(1), the court found that Defendant produced no testimony or contractual terms governing the transfers, and “although reasonable inferences of intent can be drawn from the invoices and corresponding checks between the parties, we cannot say in these circumstances that the Bankruptcy Court’s finding that [Defendant] failed to prove intent was clearly erroneous.”

As to section 547(c)(2), the Second Circuit agreed with the Lower Courts, finding that although Defendant “had submitted 44 invoices, . . . 37 of these were dated within the preference period . . . and the remaining 7 were dated within the week before the preference period; and that only 2 of the checks tendered by [the Debtor] were dated before the preference period.”  This “paucity of evidence”, combined with the lack of any indication as to when payments were due during the pre-Preference Period, led the Second Circuit to affirm the Lower Courts.

Conclusion

Not discussed in this post are some of the reasons why Defendant failed to provide sufficient evidence in support of its section 547(c) defenses, which were also subject to a portion of the appeals.  Both the Second Circuit and Lower Courts suggest that had Defendant been in position to offer such evidence, the outcome here may have been different.

Nevertheless, the Second Circuit’s Summary Order is useful in delineating what is inadequate for purposes of evidence in support of a section 547(c)(1) or (2) defense: subjective intent can likely not be shown based on invoices and checks alone, nor can the terms of the invoice establish what constituted “ordinariness” between a debtor and a preference defendant – even with the introduction of 7 pre-Preference Period invoices and 2 pre-Preference Period checks as guidance.  The distinguishing factor as to the relevance of the pre-Preference Period invoices appears to be their nearness in time to the Preference Period.

A copy of the District Court and Second Circuit rulings can be found here and here, respectively.

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