THOMAS L. SALADINO, Chief Bankruptcy Judge.
This matter is before the court on the plaintiff's motion for summary judgment (Fil. No. 13) and resistance by the defendant (Fil. No. 20). Donald L. Swanson and Elizabeth A. Hoffman represent the plaintiff, and T. Randall Wright represents the defendant. Evidence and briefs were filed and, pursuant to the court's authority under Nebraska Rule of Bankruptcy Procedure 7056-1, the motion was taken under advisement without oral arguments.
The motion is denied.
The creditors' committee filed this adversary proceeding to recover approximately $27,000 in alleged preferential transfers under a "payment rights purchase and sale agreement" between EBF and the debtor, and now moves for summary judgment. EBF resists the motion, arguing that the agreement was for a sale of future receipts and was not a loan, that EBF was automatically perfected under the U.C.C. when the parties entered into the agreement, and that the payments were made in the ordinary course of the parties' business. The nature of the agreement is a legal question for the court. The § 547(c)(2) defense, as discussed below, requires a factual inquiry and cannot be decided on summary judgment.
Summary judgment is proper if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a) (made applicable to adversary proceedings in bankruptcy by Fed. R. Bankr. P. 7056); see, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). On a motion for summary judgment, "facts must be viewed in the light most favorable to the nonmoving party only if there is a `genuine' dispute as to those facts." Ricci v. DeStefano, 557 U.S. 557, 586 (2009) (quoting Scott v. Harris, 550 U.S. 372, 380 (2007)). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Id. (quoting Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the evidence are the province of the fact-finder at trial and not of the judge at the summary judgment stage. Anderson v. Liberty Lobby, Inc., 477 U.S. at 250, 255.
The following facts are uncontroverted for purposes of these motions:
1. Cornerstone Tower Services, Inc. ("Cornerstone"), was formed in 1997 and is in the business of erecting and maintaining communication towers, such as cell phone towers.
2. Cornerstone filed a Chapter 11 bankruptcy petition on May 13, 2016.
3. The Official Committee of Unsecured Creditors ("Committee" or "the plaintiff") is acting on behalf of Cornerstone. The Committee was assigned "[a]ll avoidance claims under Chapter 5 (11 U.S.C. § 501 et al.)" pursuant to the terms of the Second Amended Plan confirmed in the underlying bankruptcy case on May 26, 2017.
4. On March 18, 2016, 54 days prior to Cornerstone's bankruptcy filing and within the 90-day preference period, the debtor entered into a "Payment Rights Purchase and Sale Agreement" with EBF ("Agreement").
5. The Agreement provides as follows:
6. The sale was defined as follows:
7. The purchase price was $75,000 for which EBF purchased 15% of the debtor's Future Receipts until EBF received a total of $105,000 from the debtor. EBF paid the purchase price to Cornerstone, and thereafter received daily amounts of $875 for 31 business days.
8. Cornerstone engaged in similar transactions with three other companies — LG Funding, Kalamata Capital and Windset Capital. It appears that these transactions all took place during the last two quarters of 2015 and the first quarter of 2016.
9. The Agreement contains a security agreement that secures Cornerstone's payment and performance obligations to EBF, and a guaranty by the debtor's principal.
10. The guaranty provides that "Guarantor's obligations are due at the time of any Event of Default under the Agreement." Such "Events of Default" include, among others, (i) interruption, suspension, dissolution or termination of the debtor's business and (ii) default of any term, covenant, or condition with EBF.
11. On May 19, 2016, six days after the bankruptcy filing, EBF filed a UCC financing statement to perfect a security interest in:
12. Another of Cornerstone's creditors, Kalamata Capital LLC, filed a UCC financing statement concerning Cornerstone's interests in existing and future contract rights, accounts receivable, and proceeds therefrom, on November 27, 2015.
13. EBF filed a proof of claim in Cornerstone's bankruptcy case on August 25, 2016, in the amount of $83,765.00.
14. EBF did not take any action to exclude any portion of Cornerstone's receipts from the bankruptcy estate.
15. EBF received $27,125.00 in payments during the 90 days prior to the petition date.
16. EBF is listed as an unsecured creditor under the Plan.
17. On September 1, 2017, the Committee filed this adversary proceeding against EBF for recovery of the payments made during the preference period.
18. Cornerstone's schedules declare that, on the bankruptcy filing date, it had total asset values of $1,566,097.28 and total debts of $2,593,694.93, leaving the debtor insolvent at that time by more than a million dollars.
This action was brought to avoid and recover allegedly preferential transfers under §§ 547 and 550 of the Bankruptcy Code. The preference statute is in place to protect debtors and ensure an orderly distribution of assets.
Wells Fargo Home Mortgage, Inc. v. Lindquist, 592 F.3d 838, 842 (8th Cir. 2010).
The Committee asserts the matter falls squarely within the elements of § 547(b) and the defense of § 547(c)(2) does not apply. EBF argues that the agreement is a true sale, not a loan, and is not subject to a preference action because the receipts were not property of the bankruptcy estate.
In the Eighth Circuit, the governing law on the sale vs. loan question is Lange v. Inova Capital Funding, LLC (In re Qualia Clinical Serv., Inc.), 441 B.R. 325 (B.A.P. 8th Cir.), aff'd, 652 F.3d 933 (8th Cir. 2011), where the Bankruptcy Appellate Panel affirmed the bankruptcy court's ruling that the recourse provisions in Inova's invoice purchase agreement placed the risk of non-collection on Qualia, so the agreement was a disguised loan rather than a true sale.
In contrast to Inova's agreement and its explicit recourse provisions, EBF's agreement does not contain any such language. Rather, it specifically states that it is intended to be a sale and not a loan:
Payment Right Purchase & Sale Agreement, ¶ 2.2 (Ex. A, Fil. 15).
The terms of the agreement establish that it is governed by Florida law. Id. at ¶ 4.5. Florida law looks to the substance of the transaction, rather than to the form, to determine usury, and the intent of the parties controls in determining whether there has been a sale or a loan subject to usury laws. In re Assist-Med., Inc., No. 16-31624-H5-11, 2017 WL 5900538, at *3 (Bankr. S.D. Tex. Nov. 27, 2017) (citing Indian Lake Estates, Inc. v. Special Investments, Inc., 154 So.2d 883 (Fla. Dist. Ct. App. 1963) and Griffin v. Kelly, 92 So.2d 515 (Fla. 1957)).
Specific factors that courts have analyzed in conducting a sale-or-loan analysis include:
Wawel Sav. Bank v. Jersey Tractor Trailer Training, Inc. (In re Jersey Tractor Trailer Training, Inc.), No. 06-02003 (MBK), 2007 WL 2892956, at *7 (Bankr. D.N.J. Sept. 28, 2007) (citing Robert D. Aicher & William J. Fellerhoff, Characterization of a Transfer of Receivables as a Sale or a Secured Loan Upon Bankruptcy of the Transferor, 65 Am. Bankr. L.J. 181, 186-94 (1991)), aff'd, No. ADV 06-2003 (MBK), 2008 WL 2783342 (D.N.J. July 15, 2008), aff'd in part, vacated in part, remanded, 580 F.3d 147 (3d Cir. 2009).
Recourse, the seller bearing the risk of account non-payment, the seller's indemnification of the buyer's loss or expense arising from the agreement, and the buyer's option to have the seller repurchase certain accounts are relevant factors in determining whether the agreement is a true purchase. Wiers Farm, Inc. v. Waverly Farms, Inc., Case No. 8:09-cv-1742-T-30TBM, 2011 WL 1296867 at *3 (M.D. Fla. Mar. 31, 2011) (decided under PACA).
The eight Jersey Tractor Trailer Training factors listed above tend to weigh in EBF's favor and support a finding that the transaction was a true sale. First, the document clearly states it was a sale and not a loan, and there is no evidence the parties operated to the contrary. The second factor, recourse, is discussed below. Third, Cornerstone was obligated under the agreement to collect and deposit the receivables into an EBF-approved bank account and permit EBF to make daily withdrawals of the agreed payment of $875. Fourth, there is no evidence regarding whether EBF investigated any of Cornerstone's account debtors. EBF asserts that although it was authorized to do so, such investigation was unnecessary because the creditworthiness of individual accounts was irrelevant as EBF purchased a percentage of the debtor's total receivables.
Fifth, EBF could withdraw only a designated amount from Cornerstone's bank account each day. The balance remained in Cornerstone's possession. Sixth, nothing in the agreement gives EBF the authority to unilaterally change the purchase price. Seventh, concerning Cornerstone's right to alter or compromise unilaterally the terms of the transferred assets, Cornerstone specifically assigned those rights to EBF by agreeing to irrevocably appoint EBF as its agent and attorney-in-fact with full authority to, among other things, collect the amounts due under the agreement from customers or account debtors. Eighth, there is no provision in the agreement for Cornerstone to buy back its accounts.
Recourse requirements in a contract, which may be characterized as repurchase obligations, collectibility guarantees, or reserves from the purchase price to be released only as receivables come in, often are viewed as indicative of a loan rather than a sale. "`Recourse' refers . . . to the liability of a seller of receivables to the purchaser if the underlying obligors fail to pay the receivables." LifeWise Master Funding v. Telebank, 374 F.3d 917, 925 (10th Cir. 2004). "Where the lender has purchased the accounts receivable, the borrower's debt is extinguished and the lender's risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of non-performance by the account debtor." Endico Potatoes, Inc. v. CIT Grp./Factoring, Inc., 67 F.3d 1063, 1069 (2d Cir. 1995) (decided in the PACA context). "If the lender holds only a security interest, however, the lender's risk is derivative or secondary, that is, the borrower remains liable for the debt and bears the risk of non-payment by the account debtor, while the lender only bears the risk that the account debtor's non-payment will leave the borrower unable to satisfy the loan." Id.
In the parties' agreement in this case, there is no designated provision for recourse against Cornerstone as there was in the Qualia case, where Qualia was obligated to buy back any account for various reasons, including default by Qualia. However, Cornerstone did execute a blanket security agreement for EBF, and Cornerstone's president signed a personal guaranty of Cornerstone's performance. The agreement provides certain protections for EBF against default or adverse action by Cornerstone:
Payment Rights Purchase & Sale Agreement (Ex. A, Fil. 15).
Nothing in the agreement can be construed to be an obligation to repurchase accounts, a guarantee of the collectibility of individual accounts, a reserve to be released only when receivables are paid, or any other sort of recourse. EBF can withdraw only a percentage of daily receipts. The security agreement and personal guaranty come into effect only in the event of default by Cornerstone, which addresses such significant situations as Cornerstone going out of business, selling its assets, not making its receivables available to EBF, or otherwise harming EBF's interest. Under the terms of the parties' agreement, EBF does not have a right of recourse.
Therefore, the court finds that the agreement in this case is properly classified as a sale rather than a loan. That does not end the matter, however, because the court also finds that EBF's security interest was unperfected, so the debtor retained its rights and titles to the accounts and they are property of the bankruptcy estate. Fla. Stat. Ann. § 679.3181(2) (West) ("For purposes of determining the rights of creditors of, and purchasers for value of an account or chattel paper from, a debtor who has sold an account or chattel paper, while the buyer's security interest is unperfected, the debtor is deemed to have rights and title to the account or chattel paper identical to those the debtor sold.").
EBF argues that under the terms of the agreement, it purchased a "stream of payments" rather than accounts. The agreement provides EBF will collect a percentage "of the proceeds of each future sale" by Cornerstone. On this motion, EBF attempts to distinguish its purchase of future sale proceeds from the purchase of accounts receivable by asserting that Cornerstone sold it "a general intangible under which the account debtor's principal obligation is a monetary obligation." This is the definition of a payment intangible under the UCC. EBF argues that because it does not have the right to sue any specific account debtor for non-payment, it does not have an interest in Cornerstone's accounts, but instead has a right to a "carved-out payment stream." The distinction is important because a security interest in accounts needs to be perfected by filing, while a security interest in payment intangibles is automatically perfected upon attachment.
The definition section of Revised Article 9 does little to help determine whether the assets at issue are accounts or intangibles. All that it really makes clear is that an account is not an intangible. "Account" means:
Fla. Stat. Ann. § 679.1021(1)(b) (West).
A payment intangible is "a general intangible under which the account debtor's principal obligation is a monetary obligation." Fla. Stat. Ann. § 679.1021(iii) (West). A general intangible is "any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software." Fla. Stat. Ann. § 679.1021(pp) (West).
The tenor of the case law available on this issue suggests that payment intangibles are more aptly found where the assets are payment rights under chattel paper or structured settlements. See, e.g., NetBank, FSB v. Kipperman (In re Commercial Money Center, Inc.), 350 B.R. 465 (B.A.P. 9th Cir. 2006) (holding that payment streams stripped from the underlying equipment leases were payment intangibles, not chattel paper); Wiersma v. O.H. Kruse Grain & Milling (In re Wiersma), 324 B.R. 92 (B.A.P. 9th Cir. 2005) (citing a U.C.C. Official Comment that once a claim arising in tort is settled and reduced to a contractual obligation to pay, the right to payment becomes a payment intangible), aff'd in part, rev'd in part, 483 F.3d 933 (9th Cir. 2007). In contrast, where the payment obligation pledged as collateral is a contractual one, the asset is an account. U.S. Claims, Inc. v. Flomenhaft & Cannata, LLC, 519 F.Supp.2d 515 (E.D. Pa. 2006) (holding that law firm's unmatured contingency fee agreements were accounts rather than general intangibles). Indeed, the Commercial Money Center court even stated that "[m]ost monetary obligations are `accounts.'" 350 B.R. at 476. EBF's argument on this point is a novel one, but there is no evidence the payment rights purchased by EBF are not accounts, even if the contract does not refer to them as such. A right to payment arising from a future sale seems the very definition of an account receivable. Further, EBF's attempt to classify its collateral as the future "receipts" (as opposed to the right to receive the future payments) is not helpful The payments received by Cornerstone — i.e. the receipts — are in the form of money deposited into a designated bank account. Money is expressly excluded from the definition of a general intangible (and, thus, from the definition of a payment intangible). The asset purchased by EBF appears to be either an account or money, and any attempt to classify it otherwise is just semantics. Accordingly, EBF's security interest was unperfected and the receivables were property of Cornerstone's estate, which means the trustee's "strong-arm" powers can be utilized to avoid pre-petition transfers of the debtor's property.
Having been unsuccessful in its attempt to remove the transaction from preference territory, EBF invokes the ordinary-course-of-business defense. A trustee may not avoid a transfer made for a debt (1) "incurred by the debtor in the ordinary course of business" of both parties, and (2) paid "in the ordinary course of business" of the debtor and transferee or "according to ordinary business terms." § 547(c)(2). The transferee bears the burden of establishing the ordinary-course-of-business defense by a preponderance of the evidence. Gulfcoast Workstation Corp. v. Peltz (In re Bridge Info. Sys., Inc.), 460 F.3d 1041, 1044 (8th Cir. 2006).
"[T]he court must engage in a peculiarly factual analysis" to determine whether a preferential transfer was made within the ordinary course of business between the parties because there is no precise legal test to apply. Cox v. Momar Inc. (In re Affiliated Foods Sw. Inc.), 750 F.3d 714, 719 (8th Cir. 2014). The purpose of this exception to the preference statute is "to leave undisturbed normal financial relations." Harrah's Tunica Corp. v. Meeks (In re Armstrong), 291 F.3d 517, 527 (8th Cir. 2002) (quoting Central Hardware Co. v. Sherwin-Williams Co. (In re Spirit Holding Co.), 153 F.3d 902, 904 (8th Cir.1998)). The court must construe the exception narrowly, "because it places one creditor on better footing than all other creditors." Id. (citing Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1339 (10th Cir. 1996)).
Most of the time, the analysis focuses on the historical aspect of the parties' transactions with each other and whether the transfers at issue were made in the ordinary course of business between the parties prior to the debtor's financial difficulties: "`[T]he cornerstone' of the inquiry is that the creditor must demonstrate `some consistency with other business transactions between the debtor and the creditor.'" Affiliated Foods Sw. Inc., 750 F.3d at 719 (quoting Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir.1991)) and noting that "the analysis focuses on the time within which the debtor ordinarily paid the creditor's invoices, and whether the timing of the payments during the 90-day [preference] period reflected `some consistency' with that practice." Id. (quoting Lovett, 931 F.3d at 498).
If the parties do not have a lengthy history of doing business together, "`the ordinary course of business may be established by the terms of the parties' agreement, until that agreement is somehow or other modified by actual performance.'" Gecker v. LG Funding, LLC (In re Hill), 589 B.R. 614, 627 (Bankr. N.D. Ill. 2018) (quoting Kleven v. Household Bank F.S.B., 334 F.3d 638, 643 (7th Cir. 2003)).
The term "ordinary course of business" implies that the debts were incurred in the routine operations of the debtor and the creditor. Speco Corp. v. Canton Drop Forge, Inc. (In re Speco Corp.), 218 B.R. 390, 398 (Bankr. S.D. Ohio 1998) (citing Youthland, Inc. v. Sunshine Girls of Florida, Inc. (In re Youthland, Inc.), 160 B.R. 311, 314 (Bankr. S.D. Ohio 1993)). A debt will be considered not incurred in the ordinary course of business if creation of the debt is atypical, fraudulent, or not consistent with an arm's-length commercial transaction. Id. (citing Pioneer Technology, Inc. v. Eastwood (In re Pioneer Technology, Inc.), 107 B.R. 698, 702 (B.A.P. 9th Cir. 1988); In re Valley Steel Corp., 182 B.R. 728, 735 (Bankr. W.D. Va. 1995); and McCullough v. Garland (In re Jackson), 90 B.R. 793, 794 (Bankr. D.S.C. 1988)).
EBF and Cornerstone entered into this agreement less than two months before Cornerstone filed for bankruptcy protection.
As noted earlier in this order, the court must undertake a particularly fact-based inquiry into the applicability of § 547(c)(2). Such an inquiry is especially important here where there is no evidence from the debtor regarding the parties' business relationship. Accordingly, the issue of whether the transfers were made in the ordinary course of business will be set for trial.
IT IS ORDERED: The plaintiff's motion for summary judgment (Fil. No. 13) is denied. The Clerk shall schedule this matter for trial.
As the Tenth Circuit Court of Appeals stated:
Jubber v. SMC Elec. Prod., Inc. (In re C.W. Min. Co.), 798 F.3d 983, 989 (10th Cir. 2015).
