Healthco v. Repco Printers

USCA1 Opinion









UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT

_________________________


No. 97-9005


IN RE: HEALTHCO INTERNATIONAL, INC.,

Debtor.

_________________________

WILLIAM A. BRANDT, JR., TRUSTEE,

Plaintiff, Appellee,

v.

REPCO PRINTERS & LITHOGRAPHICS, INC.,

Defendant, Appellant.

_________________________

APPEAL FROM THE BANKRUPTCY APPELLATE PANEL

OF THE FIRST CIRCUIT

_________________________

Before

Selya, Circuit Judge, _____________

Coffin, Senior Circuit Judge, ____________________

and Stahl, Circuit Judge. _____________

_________________________

Duane L. Coleman, with whom Larry E. Parres and Lewis, Rice ________________ _______________ ___________
& Fingersh, L.C. were on brief, for appellant. ________________
Daniel C. Cohn, with whom David B. Madoff and Cohn & ________________ _________________ _______
Kelakos, LLP, were on brief, for appellee. ____________

_________________________

December 22, 1997

_________________________













SELYA, Circuit Judge. Repco Printers & Lithographics, SELYA, Circuit Judge. ______________

Inc. (Repco) asserts a right to retain a payment made to it by

Healthco International, Inc. (Healthco) shortly before Healthco

commenced insolvency proceedings. The bankruptcy court agreed

with Repco but the Bankruptcy Appellate Panel of the First

Circuit (BAP) did not. Repco appeals. After ironing out a

procedural wrinkle, we uphold the BAP's core determination that

the disputed payment was not a transfer "in the ordinary course

of business" within the meaning of 11 U.S.C. 547(c)(2)(1994).

Nevertheless, because the BAP misgauged the posture of the case,

we vacate its judgment and remand for further proceedings.

I. BACKGROUND I. BACKGROUND

We draw our account from the stipulated record, which

is comprised of twenty-five uncontested statements of fact and

thirteen exhibits (including various depositions and affidavits).

In better days, Healthco functioned as a major

distributor of dental equipment and supplies. In August 1992,

James Mills, chief executive officer of Healthco's parent

company, contacted Fred Zaegel, Repco's owner, to explore a

business relationship. Mills, who knew Zaegel both

professionally and socially, proposed that Repco (headquartered

in St. Louis) print Healthco's product catalog. Zaegel agreed.

From that time forward, Repco handled virtually all of the

diverse printing needs of Boston-based Healthco.

During this interlude, Repco extended credit to

Healthco in accordance with standard printing industry practice:


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Repco would bill contemporaneously for each service, and would

anticipate receiving payment in sixty days, on average,

notwithstanding contrary credit terms expressed in its invoices.1

For its part, Healthco customarily would accumulate invoices and

then pay some (but not all) of the accumulation by mailing Repco

a lump-sum company check. Over the period from the fall of 1992

until early April of the following year, Healthco paid one

hundred fourteen Repco invoices with sixteen different checks,

totalling around $400,000.

Whenever Repco's cash flow ebbed, it was Zaegel's

practice to contact customers and solicit payment of outstanding

invoices that were at least sixty days old. To this end, Zaegel

called Healthco's treasurer, Arthur Souza, on four occasions.

Each time, Souza arranged for a check to be cut shortly

thereafter.

Despite these periodic payments, some of Repco's

unrequited invoices were almost two hundred days old by late

March. Zaegel tried to prompt Souza once again, but experienced

difficulty in reaching him. Zaegel then called Healthco's chief

financial officer, James Moyle. Zaegel, who never before had

made a dunning call to Moyle, politely informed him that Healthco




____________________

1Repco's invoices bore a net ten days legend. The record
reflects, however, that this credit term was honored mainly in
the breach; most of Repco's customers (and, indeed, the majority
of firms purchasing services in the competitive printing
industry) ignored this stricture.

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was holding numerous Repco invoices that were substantially

overdue.2 At the conclusion of this five-minute conversation,

Moyle stated that he would investigate the matter.

Moyle vouchsafed in his affidavit that he considered

Repco to be "Healthco's most pivotal vendor in the company's

effort to overcome its financial problems," presumably because

Repco was about to undertake the printing and distribution of

Healthco's quarterly catalog. He asked Souza how much Healthco

owed Repco and what was "the fastest way" to pay the debt. Souza

replied that Healthco had in hand $235,558.64 in outstanding

Repco invoices and that wire transfer would be the quickest

payment method. Moyle directed Souza to wire the full amount.

Repco received the funds on April 13, 1993. That payment

satisfied in one fell swoop sixty-eight invoices ranging from

brand new to two hundred days old.

Healthco sought the protection of the bankruptcy court

on June 9, 1993. The firm's ledgers disclosed that it had made

only two other wire transfers in satisfaction of antecedent debts

during the previous ninety days. The record confirms that

Healthco's trustee in bankruptcy, William A. Brandt, Jr.,

successfully challenged both of the other payments as voidable

preferences.

II. PROCEDURAL HISTORY II. PROCEDURAL HISTORY

____________________

2The record indicates that Zaegel was unaware of Healthco's
financial problems at this time; that he discussed the past-due
invoices cordially with Moyle; and that he neither threatened to
cut off printing services nor demanded an immediate payment.

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In due season, the trustee brought this adversary

proceeding seeking to recover the $235,558.64 payment. Repco

defended on three grounds: (1) that Healthco was solvent at the

time of the transfer, (2) that the transfer was "made in the

ordinary course of business" within the meaning of 11 U.S.C.

547(c)(2), and (3) that in all events Repco's services provided

"subsequent new value" within the meaning of 11 U.S.C.

547(c)(4). The parties stipulated that Repco had conferred new

value in the amount of $31,977.38, reducing the trustee's claim

against Repco to $203,581.26 and removing the "new value" issue

from the case. The bankruptcy court then bifurcated the two

remaining issues, reserving the solvency question for later

adjudication and proceeding to tackle the applicability vel non ___ ___

of Repco's "ordinary course of business" defense.

The parties cross-moved for summary judgment on this

issue. After the bankruptcy court denied both motions, the

parties submitted the issue on the stipulated record described

above. On July 17, 1996, the bankruptcy court dismissed the

trustee's complaint. The court's two-paragraph rescript reads in

its entirety:

A trial was scheduled in this matter for May
1, 1996. However, the parties filed a motion
to submit the matter on stipulated facts and
exhibits, which was granted on April 20,
1996.

In consideration of said facts and exhibits,
the complaint is dismissed by virtue of the
ordinary course of business defense. A
separate order will issue.

The trustee filed a timely notice of appeal and the

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parties opted to have the appeal heard by the BAP (in lieu of the

district court).3 For reasons that are not readily apparent, the

parties mutually invited de novo review of the bankruptcy court's

decision. The BAP accepted the invitation, determined that the

wire transfer had not been made in the ordinary course of

business, and ruled that the payment was "preferential, and

subject to recovery by the Trustee under Section 547." Brandt v. ______

Repco Printers & Lithographics, Inc. (In re Healthco), No. MW 96- ____________________________________ ______________

026, slip op. at 12 (B.A.P. 1st Cir. 1997). This appeal ensued.

III. STANDARD OF REVIEW III. STANDARD OF REVIEW

Bankruptcy cases differ from most other federal cases

in that the court of appeals does not afford first-instance

appellate review. Rather, Congress has provided for intermediate

review, conferring on district courts and federal bankruptcy

appellate panels the authority to hear appeals from bankruptcy

court decisions, but preserving to the parties a right of further

review in the courts of appeals. See 28 U.S.C. 158. Whether ___

such an appeal comes to us by way of the district court or the

BAP, our regimen is the same: we focus on the bankruptcy court's

decision, scrutinize that court's findings of fact for clear

error, and afford de novo review to its conclusions of law. See ___

Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497 (1st Cir. ______ ______ _____________
____________________

3In this circuit, bankruptcy appellate panels have had a
mixed history. After a short-lived experiment, the use of such
panels was discontinued in 1983. The First Circuit Judicial
Council revivified the BAP structure on July 1, 1996, giving
interested parties the option of electing intermediate appellate
review before a BAP panel rather than before a federal district
court.

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1997); Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st ______ _________________________

Cir. 1994). Since this is exactly the same regimen that the

intermediate appellate tribunal must use, we exhibit no

particular deference to the conclusions of that tribunal (be it

the district court or the BAP). See Palmacci v. Umpierrez, 121 ___ ________ _________

F.3d 781, 785 (1st Cir. 1997).

We now move from the general to the specific. The

crucial issue in this adversary proceeding revolves around

Repco's access to the "ordinary course of business" defense under

11 U.S.C. 547(c)(2). A bankruptcy court's construction of this

statute presents a question of law and thus engenders plenary

review. See Fidelity Sav. & Inv. Co. v. New Hope Baptist, 880 ___ _________________________ _________________

F.2d 1172, 1174 (10th Cir. 1989). A bankruptcy court's

assessment in connection with whether the statutory defense

appertains in a given case is a horse of different hue; the

findings which collectively comprise such an assessment are

factbound and thus engender clear-error review. See Yurika Foods ___ ____________

Corp. v. United Parcel Serv. (In re Yurika Foods Corp.), 888 F.2d _____ ___________________ ________________________

42, 45 (6th Cir. 1989). Here, the court's rendition of the

statute is unexceptional and the only justiciable issue relates

to whether the challenged transfer, as a factual matter, comes

within the statutory sweep. Hence, the bankruptcy court's

decision normally would be reviewable for clear error. This

means, of course, that a reviewing court "ought not to upset

findings of fact or conclusions drawn therefrom unless, on the

whole of the record, [the appellate judges] form a strong,


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unyielding belief that a mistake has been made." Cumpiano v. ________

Banco Santander P.R., 902 F.2d 148, 152 (1st Cir. 1990). ____________________

This familiar standard is not diluted merely because

parties proceed on a stipulated record. We long have held that a

bankruptcy court's factual findings are entitled to the deference

inherent in clear-error review even when they do not implicate

live testimony, but, rather, evolve entirely from a paper record

that is equally available to the reviewing court. See Boroff v. ___ ______

Tully (In re Tully), 818 F.2d 106, 109 (1st Cir. 1987) (citing _____ ___________

Anderson v. City of Bessemer City, 470 U.S. 564, 574-75 (1985)); ________ ______________________

see also RCI Northeast Servs. Div. v. Boston Edison Co., 822 F.2d ___ ____ _________________________ _________________

199, 202 (1st Cir. 1987) (explaining that "findings of fact do

not forfeit `clearly erroneous' deference merely because they

stem from a paper record").4 The soundness of this approach is

confirmed by Rule 7052 of the Federal Rules of Bankruptcy

Procedure, which expressly adopts Rule 52(a) of the Federal Rules

of Civil Procedure. The latter rule, in its latest incarnation,

____________________

4To be sure, occasional statements of this court, if wrested
from context, might appear to suggest de novo review in such
circumstances. See, e.g., Brewer v. Madigan, 945 F.2d 449, 452 ___ ____ ______ _______
(1st Cir. 1991). Context provides a clearer perspective. In the
cases in which we purposed to scrutinize a paper record de novo,
there were no facts in dispute. Although a stipulated record ________________________________
sometimes will indicate the absence of factual discord, that is
far from universally true. See Vetter v. Frosch, 599 F.2d 630, ___ ______ ______
632 (5th Cir. 1979) ("Many cases are tried on depositions,
counter-affidavits, and stipulated records, where the parties
know there are issues of fact which must be resolved, but are
content to have them resolved on the basis of written, as opposed
to oral, testimony and evidence."). Here, the existence of
genuine factual issues is made manifest by the bankruptcy court's
well-founded denial of the parties' cross-motions for summary
judgment.

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provides in pertinent part: "Findings of fact, whether based on ________________

oral or documentary evidence, shall not be set aside unless ______________________________

clearly erroneous, and due regard shall be given to the

opportunity of the trial court to judge of the credibility of the

witnesses." (Emphasis supplied).

Notwithstanding the obvious applicability of the

"clearly erroneous" standard to the case at hand, there is a rub.

The parties both urged the BAP to review the bankruptcy court's

decision de novo and to resolve the issue of whether Healthco's

transfer of funds to Repco escapes classification as a preference

without affording any special respect to the bankruptcy court's

factual determinations. The BAP yielded to this importuning.

See In re Healthco, supra, slip op. at 5. What is more, the ___ _______________ _____

litigants are united in their insistence that we, too, should

essay plenary, nondeferential review of the bankruptcy court's

decision.

Under these peculiar circumstances, we are tempted

simply to honor the parties' request. Cf. United States v. ___ _____________

Taylor, 54 F.3d 967, 971 (1st Cir. 1995) (warning that "[t]he ______

problem with wishes is that they sometimes come true") (citing

Aesop). For one thing, the bankruptcy court's failure to

articulate any particularized factual findings not only

contradicts the rules of practice, see Fed. R. Bankr. P. 7052 ___

(adopting Fed. R. Civ. P. 52(a)'s requirement that "the court

shall find the facts specially"), but also makes clear-error




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review exceptionally difficult.5 For another thing, the parties

invited the BAP to indulge in de novo review and, at oral

argument in this court, they continued to urge that we follow

that course. Declining to do so would risk "plac[ing] a premium

on agreeable acquiescence to perceivable error as a weapon of

appellate advocacy." Dedham Water Co. v. Cumberland Farms Dairy, ________________ _______________________

Inc., 972 F.2d 453, 459 (1st Cir. 1992) (quoting Merchant v. ____ ________

Ruhle, 740 F.2d 86, 92 (1st Cir. 1984)). _____

This is an interesting concatenation of events, but we

need not decide whether we should hold the parties to the invited

error; in this instance, all roads lead to Rome because our

choice between the two standards of review will not affect the

outcome on appeal. In short, this case is sufficiently plain

that, whether we bow to the parties' wishes and afford de novo

review or bow to convention and employ the more deferential

"clearly erroneous" rubric, we, like the BAP, would be compelled

to set aside the bankruptcy court's contrary determination.

IV. THE MERITS IV. THE MERITS

In order to guard against favoritism in the face of

looming insolvency, the Bankruptcy Code provides that certain

payments made by the debtor within ninety days preceding the

institution of bankruptcy proceedings are voidable as

preferences. See 11 U.S.C. 547(b). This rule is not ironclad. ___

____________________

5Of course, if a reviewing court determines that a
bankruptcy court's findings are too indistinct, it may decline to
proceed further and remand for more explicit findings. This
avenue was open to the BAP and it is equally open to us.

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Thus, the Code holds harmless transfers made by the debtor during

the ninety-day preference period if certain criteria are

satisfied. Specifically, a bankruptcy trustee may not annul a

preference-period transfer to the extent that the transfer was

(A) in payment of a debt incurred by the
debtor in the ordinary course of business . .
. [between] the debtor and the transferee;
(B) made in the ordinary course of business .
. . of the debtor and the transferee; and
(C) made according to ordinary business
terms[.]

11 U.S.C. 547(c)(2). The rationale behind this carve-out is

clear: because "the general policy of the preference section

[is] to discourage unusual action by either the debtor or his

creditors during the debtor's slide into bankruptcy," the

ordinary course exemption promotes the corresponding

congressional desire "to leave undisturbed normal financial

relations." H.R. Rep. No. 595 (1977), reprinted in 1978 _________ __

U.S.C.C.A.N. 5963, 6329.

The statute itself is uninstructive as to the

definition of the term "ordinary course of business." Courts

abhor interpretive vacuums, and they have filled this one,

articulating several factors that bear upon whether a particular

transfer warrants protection under section 547(c)(2). These

factors include the amount transferred, the timing of the

payment, the historic course of dealings between the debtor and

the transferee, and the circumstances under which the transfer

was effected. See In re Yurika Foods, 888 F.2d at 45; First ___ ___________________ _____

Software Corp. v. Curtis Mfg. Co. (In re First Software Corp.), ______________ _______________ ___________________________


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81 B.R. 211, 212 (Bankr. D. Mass. 1988). After considering the

record evidence in light of these factors, we are firmly

convinced that the transfer from Healthco to Repco was

extraordinary and that the bankruptcy court clearly erred in

finding otherwise. We explain briefly.

The amount of the payment was uncommonly large;

Healthco never before had made a lump-sum payment to Repco in an

amount approaching $235,000.6 Put another way, the payment was

nearly ten times as large as the average of the payments

previously made by the debtor to Repco. Then, too, the timing of

the payment was highly suspicious. It lumped old and new bills,

and in the process, liquidated several invoices that were by

accounting standards ancient (i.e., more than ninety days old)

and several that were prepubescent (i.e., less than thirty days

old).7 There were, moreover, virtually no significant

similarities between the challenged payment and the antecedent

course of dealings between the parties. For example, the

disputed transfer marked the first occasion that Healthco

ventured to pay all its outstanding Repco invoices, the first
____________________

6To be sure, as Repco points out, the magnitude of the
payment is attributable in some measure to a single invoice in
the sum of $96,689.19. This circumstance does not contradict the
conclusion that the payment was abnormal. The fact remains that
Healthco remitted over $235,000 in satisfaction of sixty-eight
separate Repco invoices, thereby dwarfing earlier remittances as
to both the number of invoices and the total dollars involved.

7As the BAP noted, roughly fifty percent of the invoices
satisfied by the wire transfer fell into one of these two
categories. See In re Healthco, supra, slip op. at 10. By ___ _______________ _____
contrast, very old and very new invoices comprised no more than
fifteen percent of any group of invoices previously paid.

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time that Healthco wired funds to Repco, and the first time that

Healthco's chief financial officer interceded to effectuate a

payment to Repco. Inasmuch as the hallmark of a payment in the

ordinary course is consistency with prior practice, see WJM, Inc. ___ _________

v. Massachusetts Dep't of Pub. Welfare, 840 F.2d 996, 1011 (1st ____________________________________

Cir. 1988), this string of "firsts" is telling.

The circumstances surrounding the wire transfer clinch

the matter. Healthco owed money to hundreds of creditors. Of

these, it paid only Repco, Kerr Manufacturing, and Clarke

Industries in full by wire transfer during the preference period.

All three of these businesses had detectable links to Healthco's

principals: Thomas Hicks, chairman and chief executive officer

of the firm that owned Healthco Holding Co. (which, in turn,

owned Healthco), was a director and beneficial owner of Kerr's

parent corporation; James Mills, chairman of Healthco Holding

Co., chaired the board of Clarke's parent company and served as

its chief executive officer; and as mentioned above, Mills also

had a longstanding relationship with Repco's proprietor. Apart

from these special relationships, there is no reasonable

explanation for preferment of the three creditors. This is

especially true of Repco; as Zaegel himself testified during his

deposition, it is general industry custom to "pay the printer

last."

Other circumstances associated with the challenged

transfer highlight the importance of Repco's special

relationship. Souza, Healthco's treasurer, testified that by


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February 1993 decisions about which creditors were to be paid

when were being made by a committee of Healthco executives; yet

Moyle overrode this mechanism to effect the Repco payment. At

the same time, it was clear both from Zaegel's kid-glove approach

and from the competitive nature of the printing industry that

Repco's continued service did not hinge upon Healthco's payment

of all outstanding debt as celeritously as possible. Thus,

Moyle's claim that he directed the payment to be made because

Repco was "pivotal" to Healthco's operations is entitled to very

little weight.

We need go no further. The circumstantial evidence

fully persuades us that the debtor deviated sharply from its

customary business practices to favor a select trio of creditors,

Repco included. This is precisely the type of preferment

taking care of a few well-connected vendors while playing

hardball with the general multitude that the drafters of the

Bankruptcy Code intended to curtail. See Lawson v. Ford Motor ___ ______ __________

Co. (In re Roblin Indus.), 78 F.3d 30, 40 (2d Cir. 1996) ___ ______________________

(explaining that "equality of distribution among creditors of the

debtor" is one goal of the preference provision) (quoting

legislative history).8

Repco's other arguments are unconvincing and we reject

them without elaboration. It suffices to say that the
____________________

8The other main goal of the preference provision
precluding the debtor "from trying to stave off the evil day by
giving preferential treatment to his most importunate creditors,"
In re Tolona Pizza Prods. Corp., 3 F.2d 1029, 1032 (7th Cir. __________________________________
1990) is not implicated here. See supra note 2. ___ _____

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circumstances surrounding the challenged transfer amply evince

its extraordinary nature. Therefore, we affirm the BAP's

determination that, contrary to the bankruptcy court's view, the

challenged transfer was not made in the ordinary course of

business.

Unlike the BAP, however, we do not believe that such a

determination clears the way for judgment on the trustee's claim.

The bankruptcy court reserved the issue of Healthco's insolvency

an essential element of the preference claim and that issue

remains open. Consequently, we must vacate the BAP's judgment to

that extent and remand to the BAP with directions that it, in

turn, remand the cause to the bankruptcy court for further

proceedings.



Affirmed in part, vacated in part, and remanded. No Affirmed in part, vacated in part, and remanded. No _________________________________________________ __

costs. costs. _____






















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