UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 97-20699
GASMARK LIMITED LIQUIDATING TRUST
Plaintiff
VERSUS
LOUIS DREYFUS NATURAL GAS CORPORATION
Defendant - Appellee-Cross-Appellant
VERSUS
BRENDA HEROD, Trustee for Gasmark Limited Liquidating Trust
Trustee - Appellant-Cross-Appellee
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In The Matter Of: GASMARK LTD
Debtor
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BRENDA HEROD, Trustee for Gasmark Limited Liquidating Trust
Plaintiff - Appellant
VERSUS
DEKALB ENERGY COMPANY
Defendant - Appellee
Appeals from the United States District Court
for the Southern District of Texas
October 30, 1998
Before REAVLEY, DAVIS, and DUHÉ, Circuit Judges.
JOHN M. DUHÉ JR., Circuit Judge:
This case involves questions of proof of insolvency and the
affirmative defense of payment in the ordinary course of business
in the context of a bankruptcy trustee’s effort to avoid payments
made by the debtor shortly before filing for bankruptcy. The
district court found that insolvency was established and that the
ordinary course of business defense prevailed. We affirm in part
and reverse and remand in part.
I
FACTUAL BACKGROUND
GasMark, Ltd. purchased natural gas and resold it to
consumers. Louis Dreyfus Natural Gas Corporation (“LDNG”) and
DeKalb Energy Company (“DeKalb”) delivered gas to GasMark in
October of 1992. DeKalb sent an invoice to GasMark on November 9,
1992 that was due on November 30, 1992. GasMark paid the invoice
on December 8, 1992. GasMark paid LDNG on February 28, 1993.
GasMark filed for bankruptcy on March 2, 1993. GasMark’s
bankruptcy trustee (“trustee”) sued under 11 U.S.C. § 547(b) to
avoid both payments as preferential transfers. DeKalb asserted the
ordinary course of business defense to preferential transfers under
11 U.S.C. § 547(c)(2), and requested a jury trial. The suits
against DeKalb and LDNG were consolidated.
2
The trustee moved for summary judgment against LDNG, and for
partial summary judgment on DeKalb’s ordinary course of business
defense. The trial judge determined that the trustee had proven
GasMark’s insolvency at the time of the payments, but had not shown
that the payment to DeKalb was outside the ordinary course. The
court ordered LDNG to repay the preference amount plus interest.
The trustee moved to clarify, alter, or amend, asserting that
DeKalb had not moved for summary judgment, that the trustee had not
presented all evidence in opposition to the ordinary course
defense, and that the burden rested on DeKalb to prove that the
payment was in the ordinary course of business. In response, the
judge allowed DeKalb 30 days to move for summary judgment on the
ordinary course defense. DeKalb timely filed the motion.
Following consideration of the summary judgment motions without
oral argument, the judge issued a second opinion mirroring the
findings of the first, and granting summary judgment to the trustee
against LDNG, and granting summary judgment to DeKalb against the
trustee.
II
ANALYSIS
We review a grant of summary judgment de novo, viewing the
facts and inferences in the light most favorable to the nonmovant.
See Hall v. Gillman Inc., 81 F.3d 35, 36-37 (5th Cir. 1996).
Summary judgment is appropriate if the record discloses “that there
is no genuine issue as to any material fact and the moving party is
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entitled to judgment as a matter of law.” R. Bankr. P. 7056
(stating that Fed. R. Civ. P. 56(c) applies in adversary
proceedings); Fed. R. Civ. P. 56(c); accord Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986). A genuine issue of material
fact exists only if “there is sufficient evidence favoring the non-
moving party for a jury to return a verdict for that party. If the
evidence is merely colorable, or is not significantly probative,
summary judgment may be granted.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 249-50 (1986) (citations omitted). The moving party
bears the burden of establishing that there is no genuine issue of
material fact. See id. at 256. The moving party may also
establish its entitlement to summary judgment by showing an absence
of evidence supporting the nonmoving party’s case. See Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986).
A
CLAIM AGAINST LDNG
Under §547(b),
the trustee may avoid any transfer . . .-
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the
debtor . . . ;
(3) made while the debtor was insolvent;
(4) made-
(A) on or within 90 days before the date of the
filing of the petition; . . .
(5) that enable such creditor to receive more than such
creditor would receive if-
(A) the case were a case under chapter 7 of this
title . . . .
The only elements at issue between the trustee and LDNG are whether
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GasMark was insolvent on the date of GasMark’s payment to LDNG, and
whether LDNG received more that it would have if the case were
under Chapter 7. We conclude that the district judge did not err
in granting the trustee summary judgment.
Insolvency is a “financial condition such that the sum of
[the] entity’s debts is greater than all of [its] property, at a
fair valuation . . . .” 11 U.S.C.A. § 101(32)(1993). A debtor is
presumed insolvent on and during the 90 days before filing for
bankruptcy. See 11 U.S.C.A. § 547(f) (1993). “[A] presumption
imposes on the party against whom it is directed the burden of
going forward with evidence to rebut or meet the presumption, but
does not shift to such party the burden of proof in the sense of
the risk of nonpersuasion . . . .” Fed. R. Evid. 301. The party
seeking to rebut the presumption must introduce some evidence to
show that the debtor was solvent at the time of the transfer; mere
speculative evidence of solvency is not enough. See Sandoz v. Fred
Wilson Drilling Co. (In the Matter of Emerald Oil Co.), 695 F.2d
833, 839 (5th Cir. 1983) (emphasis added). Summary judgment in
favor of the trustee is appropriate when the party seeking to rebut
the presumption fails, see id. at 834-39 (affirming summary
judgment in an avoidance of preference case based solely on the
presumption), or when there is no genuine issue of material fact
concerning insolvency and the trustee is entitled to judgment as a
matter of law, see R. Bankr. P. 7056; Celotex Corp. v. Catrett, 477
5
U.S. 317, 322 (1986). To avoid summary judgment in this case, LDNG
must raise a genuine issue of material fact concerning whether it
rebutted the presumption. Also, since the trustee provided
affirmative evidence of insolvency and did not rely only on the
presumption, LDNG must raise a genuine issue of material fact
concerning GasMark’s insolvency.
The trustee submitted affirmative evidence of insolvency.
Certified Public Accountant (“CPA”) Loretta Cross affirmed that on
the date of GasMark’s payment to LDNG, GasMark’s balance sheet, at
fair valuation, showed $24,514,000 in assets and $41,528,000 in
liabilities, creating a $17,014,000 deficit.
LDNG objects to the trustee’s reliance on the balance sheet
method of valuation. LDNG argues that, because GasMark is a
broker, many of its assets are soft assets that do not appear on a
balance sheet.1 Therefore, the fair valuation should be based on
a going concern value. We need not resolve the issue of the proper
method of valuation, since we find that even LDNG’s going concern
value evidence does not raise a genuine issue of material fact
concerning whether LDNG rebutted the presumption of GasMark’s
insolvency, or GasMark’s insolvency in fact.
1
Gene Stoever, a CPA and LDNG’s expert witness, testified that
assets not typically reported on a broker’s balance sheet include
“the company’s contracts, contractual relationships and strategic
alignments, its market position, its competitive ability, its
internal operating systems, its computer system and programs, the
management and personnel of the enterprise, their contacts and
other similar attributes . . . .”
6
To establish a genuine issue of material fact LDNG offers
three items of evidence. First, CPA and expert witness Gene
Stoever affirmed that based on GasMark’s December 1992 Business
Overview, “a potential purchaser . . . would have attributed value
to the company in excess of the net partner’s equity as stated on
GasMark’s balance sheet.” Second, a New York State Electric & Gas
Co. (“NYSEG”) interoffice memo dated February 25, 1993 states that
“[b]ased on the numbers available at this time, GasMark produces a
16% return on a $22 million investment.” LDNG argues that because
GasMark’s deficit was approximately $17 million, this translates to
a going concern value of $5 million. However, the memo also states
that this result is based on projections provided to NYSEG
(presumably by GasMark), and expresses concern about the integrity
of the projections. Third, a letter from John Barr, the Managing
Director of an investment bank retained by NYSEG to undertake a
financial and strategic analysis of GasMark as a potential
investment opportunity, states that “in or about February 1993,
GasMark’s equity had a positive value in the merger market as of
that time.” However, Barr qualifies this statement by claiming
that the letter does not constitute or reflect an opinion or
valuation analysis, and by emphasizing that Barr performed only a
very preliminary analysis and ceased when NYSEG decided not to
pursue any potential investment in GasMark.
This evidence does not create a genuine issue of material
fact since it is speculative and does not address GasMark’s
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insolvency on February 28, the date of the payment at issue. See
Sandoz v. Fred Wilson Drilling Co. (In the Matter of Emerald Oil
Co.), 695 F.2d 833, 839 (5th Cir. 1983) (noting that the evidence
must show insolvency at the time of transfer, and that speculative
evidence is not sufficient to rebut the presumption of insolvency).
The trustee relied on the 23% Chapter 7 liquidation estimate
for unsecured creditors contained in GasMark’s Chapter 11
reorganization plan to prove that LDNG received more than it would
have received in a Chapter 7 proceeding. LDNG claims that the
trustee did not carry her burden. First, LDNG argues that the
liquidation estimate is hearsay. We find this argument
unpersuasive. See, e.g., Maloney-Crawford, Inc. v. Huntco Steel,
Inc. (In re Maloney-Crawford, Inc.), 144 B.R. 531, 535 (Bankr. N.D.
Okla. 1992) (using the estimated Chapter 7 liquidation analysis in
the debtor’s disclosure statement to determine if the creditor
received more than under Chapter 7); Knapp v. Applewhite (In re
Knapp), 119 B.R. 285, 288 (Bankr. M.D. Fla. 1990) (same); Chemold
Sys., Inc. v. Powers (In re Chemold Sys., Inc.), 124 B.R. 573, 577
(Bankr. D. Kan. 1991), aff’d, 137 B.R. 971, 975 (D. Kan.
1992)(same); Billings v. Key Bank of Utah (In re Granada, Inc.),
115 B.R. 702, 708 (Bankr. D. Utah), rev’d on other grounds, 156
B.R. 303 (D. Utah 1990) (same). Second, LDNG argues that there is
a fact issue concerning whether GasMark’s February 28 payment to
LDNG constituted 100% of the money owed to LDNG by GasMark. This
argument is irrelevant, since even if the payment was only a
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portion of the total amount owed, LDNG received a preference as to
that portion. See Palmer Clay Prods. v. Brown, 297 U.S. 227, 229
(1936) (noting that part payment can be a preference because “where
the creditor’s claim is $10,000, the payment on account $1000, and
the distribution in bankruptcy 50 per cent., the creditor to whom
the payment on account is made receives $5,500, while another
creditor to whom the same amount was owing and no payment on
account was made will receive only $5,000."). The trustee did not
fail to carry her burden, and there is no genuine issue of material
fact that LDNG received more than Chapter 7 liquidation value.
We affirm summary judgment for the trustee because LDNG did
not raise a genuine issue of material fact concerning GasMark’s
insolvency or concerning whether LDNG received more than Chapter 7
liquidation value.
B
CLAIM AGAINST DEKALB
A creditor can defend against avoidance of an alleged
preference payment by proving that the debtor made the payment in
the ordinary course of business between the debtor and creditor and
according to ordinary business terms, for a debt incurred in the
ordinary course between the debtor and creditor. See 11 U.S.C.A.
§ 547(c)(2)(B)-(C) (1993). The parties do not dispute that the
debt repaid was incurred in the ordinary course between GasMark and
DeKalb.
There is no “precise legal test” for whether payments are in
9
the ordinary course of business. Lovett v. St. Johnsbury Trucking,
931 F.2d 494, 497 (8th Cir. 1991) (quoting In re Fulghum Const.
Corp., 872 F.2d 739, 743 (6th Cir. 1989)). Rather, “the analysis
focuses on the time within which the debtor ordinarily paid the
creditor[] . . . and whether the timing of the payments during the
90-day period reflected ‘some consistency’ with that practice.”
Id.
All of the Circuits that have grappled with the meaning of
ordinary business terms, except for the Eleventh Circuit, look to
“customary terms and conditions used by other parties in the same
industry facing the same or similar problems.” Lawson v. Ford
Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 39 (2d Cir.
1996). Only the Eleventh Circuit finds that the conduct of the
debtor and creditor in question is sufficient to establish ordinary
business terms. See id.
GasMark contracted with DeKalb for the purchase of natural
gas. Their 1990 contract required GasMark to pay DeKalb “by the
last day of the month following deliveries, or fifteen (15) days
from date of invoicing, whichever comes later, by wire transfer.”
The parties stipulated to the history of GasMark’s payments to
DeKalb:
Production Invoice Check/Wire Check Check Check/Wire
Month Date Amount Date Deposited Cleared
7/90 $23,127.80 8/31/90 9/4/90 9/6/90
(Tue)
10
8/90 9/20 & $228,673.22 9/28/90 10/1/90 10/3/90
9/21/90 (Mon.)
9/90 10/19/90 $128,699.30 11/5/90
11/90 12/18/90 $102,381.46 12/31/90*
6/91 7/11/91 $38,484.84^ 7/29/91 8/5/91 8/7/91
(Mon)
10/92 11/9/92 $492,950.92 12/8/92
*$80,727.21 of the 12/31/90 wire was for July 1990 gas; neither
DeKalb nor the trustee have produced an invoice for this gas.
^ DeKalb Denver $22,164.84; DeKalb Canada $16,320.00.
The trustee claims that it was not in the ordinary course of
business for GasMark to pay DeKalb eight days late: at most, over
the course of the relationship, GasMark paid only one or three days
late.2 DeKalb makes two arguments for the payment being in the
ordinary course. First, GasMark’s payment history shows that
deviation from the 1990 contract was the ordinary course between
the parties: in addition to payments made later than the
contractually mandated time, GasMark made several payments by check
when the contract specifically required payment by wire. Second,
2
According to the terms of the contract, GasMark should have paid
for the July 1990 gas by the 8/31/90. GasMark’s check was dated
8/31/91, and was received on or before Tuesday, 9/4/90, the date
DeKalb deposited it. The trustee argues that the payment was not
late or only one day late because of the intervening weekend. [The
trustee mistakenly argues that the check was received Monday,
9/4/90. The stipulations and the calendar agree that September 4,
1990 was actually a Tuesday. This error does not affect the
trustee’s argument, since 9/3 was a holiday]. Similarly, according
to the terms of the contract, GasMark should have paid for the June
1991 gas by July 31, 1991. GasMark’s check was dated 7/29/91, and
was received on or before Monday, 9/5/91, the date DeKalb deposited
it. The trustee argues that the payment was not late, or only
three days late because of the intervening weekend.
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since the contract required payment by wire and the recipient gains
control over the cash when the wire is received, the relevant date
for considering whether payment by check is on time is the date
that the check clears the bank, the time at which the recipient
gains control over the cash. Under this interpretation of the
contract, GasMark paid six, three, five, on time, and seven days
late, in addition to the eight day late December 8, 1992 payment at
issue.
This evidence creates genuine issues of material fact
concerning whether the December 8, 1992 payment was in the ordinary
course of business between GasMark and DeKalb, requiring reversal
of the grant of summary judgment in DeKalb’s favor.
Since the trustee moved for partial summary judgment on the
ordinary course defense, and is entitled to summary judgment if she
can establish that DeKalb can not prove an element of its defense,
we must also examine the ordinary business terms prong of the
ordinary course defense. The trustee argues that the ordinary
business terms prong is objective, looking to the industry in
general, while DeKalb argues that the prong is subjective, looking
only to the conduct between the debtor and creditor. We need not
resolve this conflict, since there exists a genuine issue of
material fact concerning whether the December 8 payment was in
accordance with ordinary business terms, whether the standard is
objective or subjective. If the standard is subjective, the
evidence of conduct between the parties raises a genuine issue of
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material fact for the same reasons we found a fact issue in
relation to the ordinary course prong. If the standard is
objective, the record contains conflicting evidence concerning the
general practice of the industry. The trustee testified that,
based on her long experience in the gas marketing industry, “the
standard practice in the industry is for purchasers . . . to pay
timely according to the payment terms and conditions of the
contracts with their suppliers . . . .” In an affidavit submitted
in opposition to the trustee’s motion for partial summary judgment,
attorney Nora Sams stated:
It is quite common for payments to be made by the gas
purchaser and accepted by the seller on dates later than
the dates provided in the contracts between the
purchasers and sellers. Purchasers generally base their
payments, in part, upon information received from the
pipeline companies charged with moving the natural gas.
Sellers of natural gas are generally not overly concerned
if payments are received from the purchaser after the
time period provided in the contract, so long as payments
are received within a reasonable time after the gas is
delivered to the pipeline.
This conflicting evidence concerning ordinary business practice
creates an issue of fact precluding partial summary judgment in
favor of the trustee.
AFFIRMED in part, REVERSED in part, and REMANDED.
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