EDWARD ELLINGTON, Bankruptcy Judge.
Prevalence Health, LLC
On June 9, 2009, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. According to the Debtor's Disclosure Statement for Debtor's Chapter 11 Plan (#167) (Disclosure Statement), which was filed in the Debtor's main case, and as Anthony testified in his deposition,
On August 4, 2010, the Order Confirming Debtor's Amended Chapter 11 Plan (#203) was entered. Pursuant to the confirmed plan, H. Kenneth Lefoldt (Trustee) was appointed as the Liquidating Agent of the Debtor.
On June 7, 2011, the Trustee filed his Complaint to Avoid and Recover Preferences (#1) (Complaint). In his Complaint, the Trustee alleges that on January 28, 2008, Anthony paid the Debtor $125,000. The next day, on January 29, 2008, the Debtor executed a Promissory Note payable on demand, in which the Debtor agreed to repay Anthony $175,000 plus interest at the rate of 7% per annum. Subsequently, on February 28, 2008, Anthony paid the Debtor an additional $50,000. Anthony had now fully funded the total amount provided for in the Promissory Note, namely $175,000 (2008 Loan).
The Trustee further alleges in his Complaint that in or around August of 2008, Anthony made a demand for repayment from the Debtor. Then on August 29, 2008, the Debtor paid $175,000 to First Commercial Bank (FCB) in satisfaction of a personal loan obtained by Anthony to fund the 2008 Loan. The Trustee asks the Court to set aside this payment as a preference pursuant to 11 U.S.C. § 547
Anthony denies that the repayment is an avoidable preference in his Answer and Defenses to Complaint to Avoid and Recover Preferences (#11) (Answer) which he filed on July 15, 2011. In his Answer, Anthony asserts among other defenses that the Debtor incurred and paid the 2008 Loan in the ordinary course of its business.
The Trustee and Anthony have filed dueling motions for summary judgment. On March 14, 2012, the Trustee filed his Motion for Summary Judgment by H. Kenneth Lefoldt Liquidating Agent for Prevalence Health, LLC (#22) (Trustee's Motion). In the Trustee's Motion, the Trustee alleges that he is entitled to a judgment as a matter of law because there is no genuine dispute that the payment by the Debtor to FCB for the benefit of Anthony is an avoidable preference.
Anthony filed his Defendant's Motion for Summary Judgment (#26) (Anthony's Motion) on March 22, 2012. Anthony alleges that there is no genuine dispute that the transfer in question, the repayment of the 2008 Loan, was not a preference because it was made in the ordinary course of business pursuant to § 547(c)(2). Therefore, Anthony asserts he is entitled to a judgment as a matter of law declaring that the payment is not an avoidable preference under § 547.
The parties filed numerous briefs in support of their respective motions. The final reply brief was filed on May 2, 2012. The Court then took the matter under advisement.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1) and (2)(F).
Rule 56 of the Federal Rules of Civil Procedure,
"The moving party bears the burden of showing the . . . court that there is an absence of evidence to support the non-moving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L. Ed. 2d 265 (1986)." Hart v. Hairston, 343 F.3d 762, 764 (5th Cir. 2003). Once a motion for summary judgment is pled and properly supported, the burden shifts to the non-moving party to prove that there are genuine disputes as to material facts by "citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations, . . . admissions, interrogatory answers, or other materials."
When considering a motion for summary judgment, a court must view the pleadings and evidentiary material, and the reasonable inferences to be drawn therefrom, in the light most favorable to the non-moving party, and the motion should be granted only where there is no genuine issue of material fact. Thatcher v. Brennan, 657 F.Supp. 6, 7 (S.D. Miss. 1986), aff'd, 816 F.2d 675 (5th Cir. 1987)(citing Walker v. U-Haul Co. of Miss., 734 F.2d 1068, 1070-71 (5th Cir. 1984)); see also Matshushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 1356-57, 89 L. Ed. 2d 538, 553 (1986). The Court must decide whether "the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2512, 91 L. Ed. 2d. 202 (1986). On cross-motions for summary judgment, the Court must review each party's motion independently. Ford Motor Co. v. Tex. Dep't Of Transp., 264 F.3d 493, 498 (5th Cir. 2001).
In Cullen Center Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411 (5th Cir. 1997), the United States Court of Appeals for the Fifth Circuit explained the purpose of § 547:
Cullen, 102 F.3d at 1414. (footnote omitted).
Section 547(b) sets forth the preferential transfer requirements, as follows:
11 U.S.C. § 547(b).
In order for the payment made by the Debtor on the 2008 Loan to be set aside as a preference pursuant to § 547(b), the Trustee must prove each of these five elements by a preponderance of the evidence. T.B. Westex Foods, Inc. v. FDIC (In re T.B. Westex Foods, Inc.), 950 F.2d 1187, 1190 (5th Cir. 1992); In re Bullion Reserve of N. Am., 836 F.2d 1214, 1217, (9th Cir. 1988), cert. denied, 486 U.S. 1056 (1988); In re Adbox, Inc., 488 F.3d 836, 843 (9th Cir. 2007); Phoenix Restaurant Group, Inc. v. Fuller, Fuller & Associates, P.A. (In re Phoenix Restaurant Group, Inc.), 316 B.R. 671, 675 (Bankr. M.D. Tenn. 2004).
According to Anthony's Answer, Anthony does not contest that the Debtor paid FCB $175,000 on account of the 2008 Loan he made to the Debtor.
While Anthony's Motion focuses mainly on an affirmative defense, namely that the 2008 Loan was incurred and the repayment was made in the ordinary course of business under § 547(c)(2), the Court addresses the insolvency issue first to determine whether the Trustee has met all five requirements of § 547(b). This task hinges solely upon an application of law.
In his Answer and in his pleadings in opposition to the Trustee's Motion, Anthony denies that the Debtor was insolvent at the time the payment was made to FCB. The Code defines insolvency as follows:
11 U.S.C. § 101(32)(A). The Debtor is presumed to have been insolvent during the 90 days prior to the petition date. 11 U.S.C. § 547(f). For the period between 90 days and one year, which applies to transfers to insiders, courts use a "balance sheet test." Here, the transfer to Anthony, an insider, occurred on August 29, 2008, which is within one year before the Debtor filed its petition on June 9, 2009.
In his Response Brief in Opposition to Plaintiff's Motion for Summary Judgment (#33)
In summary, the Court finds that the Trustee has met his burden of demonstrating that no genuine issue exists as to any of the elements of § 547(b). The payment by the Debtor of $175,000 in satisfaction of the 2008 Loan for Anthony's benefit is an avoidable preference as a matter of law unless Anthony has raised a genuine issue regarding whether the ordinary course of business defense bars the Trustee's recovery of the preference.
In § 547(c) and § 547(h), there are exceptions to the general rule of avoidability of a preference under § 547(b). Anthony asserts the ordinary course of business defense in § 547(c)(2).
Section 547(c)(2) provides:
11 U.S.C. § 547.
The 2005 amendments
The ordinary course of business defense "`is intended to protect recurring, customary credit transactions' that are incurred and paid in the preference period for the purpose of encouraging the continuation of business by suppliers with a person seeking to avoid a bankruptcy filing. G.H. Leidenheimer Baking Co. v. Sharp (In re SGSM Acquisition Co., LLC), 439 F.3d 233, 240 (5th Cir. 2006); 5 Collier on Bankruptcy ¶ 547.04[2] at p. 547—51 (16th ed.2010)." Goldberg. v. Graybar Elec. Co., (In re ACP Ameri-Tech Acquisition, LLC), 09-90082, 2012 WL 481582, at *7 (Bankr. E.D. Tex. Feb. 14, 2012). The burden of proving the ordinary course of business defense rests with Anthony. Braniff Airways, Inc. v. Midwest Corp., 873 F.2d 805, 806 (5th Cir.1989).
The ordinary course of business defense requires that the repayment of the 2008 Loan be examined by a subjective test and an objective test. These tests were discussed in the recent case of In re ACP Ameri-Tech Acquisition, LLC. The bankruptcy court in ACP Ameri-Tech explained:
In re ACP Ameri-Tech, 2012 WL 481582, at *8 (footnote omitted).
In a footnote, the bankruptcy court further explained:
Id. at fn. 21 (footnote added).
The Court applies the subjective test first to determine whether the repayment of the 2008 Loan was "ordinary" as between the Debtor and Anthony.
"There is no `precise legal test' for [determining] whether payments are in the ordinary course of business"
Generally, this analysis requires a creditor to establish a "baseline of dealing" between the parties. In order to establish a "baseline of dealing," a creditor must show a history of the transactions between the debtor and the creditor demonstrating that the payments made during the preference period were similar to the payments made before the preference period. When analyzing the history of the transactions between a debtor and a creditor, courts generally consider:
In re ACP Ameri-Tech, 2012 WL 481582, at *8; See also Friede Goldman Halter, Inc. v. Aircomfort, Inc. (In re The Consolidated FGH Liquidating Trust), 392 B.R. 648, 660 (Bankr. S.D. Miss. 2008); Torch Offshore, Inc. v. A & B Bolt & Supply, Inc. (In re Torch Offshore, Inc.), 2009 WL 2849028, at *2 (Bankr. E.D. La. Feb. 19, 2009); Compton v. Plains Marketing, LP (In re Tri-Union Development Corp.), 349 B.R. 145, 150 (Bankr. S.D. Tex. 2006); Bison Building Holdings, Inc. v. Tomball Forest, LTD. (In re Bison Building Holdings, Inc.), 473 B.R. 168, 177 (Bankr. S.D. Tex. 2012).
The Court will now look to see if there is a genuine issue as to the existence of a consistent "baseline of dealing" between the Debtor and Anthony prior to and during the preference period. This task requires the Court to consider several key factors in connection with the parties' business relationship. These factors, as mentioned previously include: (1) length of time of transaction, (2) amount or form of tender, and (3) unusual collection or repayment activity and circumstances of payment.
Attached as Exhibit B to the Response of H. Kenneth Lefoldt Liquidating Agent for Prevalence Health, LLC in Opposition to Michael L. Anthony's Motion for Summary Judgment (#37) is Anthony's Responses to Plaintiff's First Set of Requests for Admissions, Interrogatories and Requests for Production (collectively, Anthony's RFA). In Anthony's RFA, Anthony admitted the following: that on January 28, 2008, he paid the Debtor $125,000,
Anthony made one other unsecured loan to the Debtor prior to the 2008 Loan. On February 27, 2006, the Debtor signed a promissory note in favor of Anthony in the amount of $200,000, payable on demand and bearing interest at 8% (2006 Loan). The 2006 Loan was repaid by the Debtor two months later or 61 days later on April 27, 2006, when the Debtor paid Anthony $201,333.05.
In In re Torch Offshore, the court applied the four factors and found that when compared to the timing of the payments made during the preference period, there was a significant difference in the timing of the payments to the creditor before the preference period. The court held that "[a]lthough it is only one factor, the extreme difference in the time period for payment by the debtor, from an average of 80.6 days prior to the preference period and an average of 172.25 during the preference period, shows a significant enough difference in payment activity to outweigh the other factors."
Like the court in Torch Offshore, the Court finds that in the case at bar, when comparing the time period for the payment made in the 2008 Loan with the time period for the payments made in the 2006 Loan, there is a significant difference in the time periods: 212 days versus 61 days. Consequently, the Court cannot find that Anthony has established a consistent "baseline of dealing" between the parties regarding the repayment of the 2008 Loan.
As noted above, Anthony made one other unsecured loan to the Debtor during his five-plus years of employment with the Debtor. The amount and form of repayment of the 2006 Loan differs considerably from the 2008 Loan. The parties entered into the 2006 Loan on February 27, 2006, when the Debtor signed a promissory note in favor of Anthony in the amount of $200,000, payable on demand and bearing interest at 8%.
In order to fund the 2006 Loan, Anthony borrowed money from FCB in the form of two separate lines of credit. The first loan had an interest rate which ranged from 7.50% to 7.75%; the second loan, from 8.00% to 8.25%. When the Debtor paid an interest payment to Anthony in the amount of $1,553.05,
In comparison, the 2008 Loan was also funded by a loan Anthony obtained from FCB. The 2008 Loan was also an unsecured demand note for a total amount of $175,000 at the rate of 7% per annum. However, unlike the 2006 Loan, the proceeds of the 2008 Loan were paid to the Debtor in two disbursements. The first disbursement of $125,000 was given to the Debtor the day after the note was signed. The second disbursement of $50,000 was given to the Debtor a month later.
In August of 2008, Anthony made a demand on the Debtor for repayment of the 2008 Loan. On August 29, 2008, a check was drawn on the Debtor's account for the principal amount of the note, $175,000. The Debtor's check was made payable to FCB. Thus, unlike the 2006 Loan, the Debtor made its payment of $175,000 directly to FCB to satisfy Anthony's loans at FCB.
Because the Debtor made direct interest payments to FCB on Anthony's loan, Anthony accepted less than what he was owed by the Debtor according to the terms of the 2008 Loan. This occurred because the loan Anthony had made with FCB carried a variable interest rate which changed from 6.5% to 5%, and, therefore, the interest payments the Debtor made to FCB were based on a lower interest rate of 6.5% to 5% and not the higher interest rate of 7% as stated in the 2008 Loan.
Unlike the majority of ordinary course of business cases, this case does not involve payments that were made by a debtor in a manner inconsistent with the express terms of a note or other financial arrangement,
Consequently, the Court cannot find that the amount or form of payment established an undisputed "baseline of dealing" between the Debtor and Anthony so as to show that the 2008 Loan was repaid in the ordinary course of business between the Debtor and Anthony.
Because the facts before the Court do not give rise to the typical debtor and creditor relationship where the creditor is an unrelated third-party and where the note requires payment in regular installments, the Court will combine the last two factors for determining a "baseline of dealing" and address them together.
"The court will normally compare the collection activities that preceded each challenged transfer with the pattern of collection activities occurring prior to the preference period to see if the collection activities that preceded the alleged preferences fall within that pattern." 5 Collier on Bankruptcy ¶ 547.04[2][a] at 547-56.
In the case at bar, there were no stereotypical "collection activities" because the 2006 Loan and the 2008 Loan were demand notes and because Anthony was an insider. However, the Court finds that the circumstances under which the payment was made, a small corporation making payments to an insider, did give rise to unusual collection efforts and payment practices.
As president and chief operating officer of the Debtor, Anthony reviewed the Debtor's monthly financial statements which were prepared by the Debtor's comptroller.
In his deposition, Anthony testified as to the circumstances surrounding the repayment of the 2008 Loan:
The Court finds that because of the small size of the Debtor and the positions of authority Anthony held in the Debtor, the collection activities of Anthony were unusual. As the president and board member of the Debtor, Anthony had intimate knowledge of the day-to-day affairs of the Debtor. Therefore, unlike the employee in In re Desktop Engineering Solutions Inc.
Consequently, the Court finds that Anthony has not shown the existence of a genuine issue as to whether the preference met the subjective test, that is, that the payment of the 2008 Loan was "ordinary as between the parties." The Court will now look to see if Anthony can meet the objective test to show that the payment of the 2008 Loan was "ordinary in the industry."
The objective test focuses on whether the payment arrangement conforms to ordinary business terms. The Fifth Circuit addressed the objective test in Gulf City Seafoods, supra:
In re Gulf City Seafoods, 296 F.3d at 367-69 (citations and footnotes omitted).
The Fifth Circuit went on to discuss how a court should define the industry whose standard should be used for comparison. "In our view, for an industry standard to be useful as a rough benchmark, the creditor should provide evidence of credit arrangements of other debtors and creditors in a similar market, preferably both geographic and product." Id. at 369 (footnote omitted).
As Anthony testified in his deposition, the Debtor was in the business of providing various health care benefits to individuals. However, Anthony did not offer any evidence that in the health care business, it is the industry standard for insiders to provide loans to his/her employer and for an insider to dictate when the loans should be repaid.
The only proof Anthony does submit in support of his position that his 2008 Loan was the standard in any industry is his own testimony in his Affidavit of Michael L. Anthony
The Court finds that Anthony's conclusory, self-serving statements are insufficient to meet his burden of producing evidence of an industry standard—in either the health care industry or any industry for that matter. In re Bison Building, 473 B.R. at 177. See Marshall v. East Coast Parish Hosp. Serv. Dist., 134 F.3d 319, 324 (5th Cir 1998) (conclusory, unsupported statements are insufficient); See also Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), 463 B.R. 302, 306 (Bankr. D. Del. 2012) (conclusory allegation in a supporting affidavit was "insufficient evidence to establish the ordinary course of business.").
The Court finds that Anthony has not met his burden under the objective standard which would allow the Court to "satisfy himself or herself that there exists some basis in the practices of the industry to authenticate the credit arrangement at issue."
Anthony relies on the unpublished opinion of In re Desktop Engineering Solutions Inc.
As noted previously, the terms and payments of the two loans made by Anthony to the Debtor were not consistent as in Desktop Engineering. In addition, unlike the employee in Desktop Engineering, Anthony was an insider who had knowledge of when the Debtor had sufficient funds on hand to repay the 2008 Loan and had the authority to direct the repayment of the loan.
For these reasons and those stated above, Anthony did not meet the subjective test for establishing the ordinariness of the repayment. In addition, Anthony failed to meet the objective test because he failed to prove that the 2008 Loan was an industry norm. Consequently, unlike the employee in Desktop Engineering, Anthony has failed to meet his burden of showing the existence of an issue as to the ordinary course of business exception.
In the Trustee's Motion, the Trustee asserts that there is no dispute as to any material fact; therefore, the Trustee is entitled to a judgment as a matter of law that the 2008 Loan is an avoidable preference. In Anthony's Motion, Anthony asserts that there is no dispute as to any material facts; therefore, Anthony is entitled to a judgment as a matter of law that the 2008 Loan is not an avoidable because of the ordinary course of business defense.
The Court agrees with both the Trustee and Anthony that there is no genuine issue of material facts. As noted above, Anthony concedes the facts that prove that the 2008 Loan was a preference as defined under § 547(b). Therefore, to survive the Trustee's Motion, the burden then shifted to Anthony to produce evidence creating a fact issue as to whether the 2008 Loan was repaid in the ordinary course of business under § 547(c)(2).
The Court finds that Anthony has not met his burden of production that the 2008 Loan was made in the ordinary course of business as required under § 547(c)(2). Therefore, the Court finds that Anthony's Motion is not well taken and should be denied. The Court further finds that the Trustee's Motion is well taken and should be granted. The Trustee is entitled to a judgment as a matter of law that the 2008 Loan is an avoidable preference under § 547(b) and that he is entitled to recover from Anthony the $175,000 payment under § 550(a)(1).
A separate judgment consistent with this opinion will be entered in accordance with Rules 7054 and 9021 of the Federal Rules of Bankruptcy Procedure.