[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________ FILED
U.S. COURT OF APPEALS
No. 08-11098 ELEVENTH CIRCUIT
May 11, 2009
________________________
THOMAS K. KAHN
CLERK
D. C. Docket No. 07-01594-CV-AR-W
BKCY No. 01-70115-CMS
IN RE: GLOBE MANUFACTURING CORP.,
d.b.a. Globe Elastics Co., Inc.,
Debtor.
__________________________________________________
CARRIER CORPORATION,
Plaintiff-Appellant-
Cross-Appellee,
versus
DENNIS J. BUCKLEY,
Litigation Trustee,
Defendant-Appellee-
Cross-Appellant.
________________________
Appeals from the United States District Court
for the Northern District of Alabama
_________________________
(May 11, 2009)
Before MARCUS, ANDERSON and CUDAHY,* Circuit Judges.
CUDAHY, Circuit Judge:
Section 547(b) of the Bankruptcy Code authorizes a trustee to avoid certain
property transfers made by a debtor within 90 days before bankruptcy. The Code
makes an exception, however, for transfers made in the ordinary course of business.
In the present case, the bankruptcy trustee for Globe Holding and its subsidiary
Globe Manufacturing (which we will refer to collectively as Globe), brought an
action to recover payments made by Globe to Carrier Corporation, one of Globe’s
unsecured creditors, just prior to the filing of Globe’s bankruptcy petition. Carrier
argues both that these payments were not preferential and that the payments were not
avoidable because they were made in the ordinary course of business. Following a
trial, the bankruptcy court granted judgment for the trustee, but declined to award
prejudgment interest. In re Globe Holdings, Inc., 366 B.R. 186 (Bankr. N.D. Ala.
2007). The district court affirmed. We affirm as well.
I.
Prior to its dissolution, Globe manufactured spandex in its three textile plants,
*
Honorable Richard D. Cudahy, United States Circuit Judge for the Seventh Circuit,
sitting by designation.
2
the oldest of which was located in Fall River, Massachusetts. About six months
before it declared bankruptcy, Globe executed a contract for Carrier to install a
commercial climate control system in its Fall River plant in exchange for
approximately $ 1.25 million to be paid in six installments.
On January 13, 2001, Globe filed a voluntary Chapter 11 petition.1 During the
90-day period prior to the filing of Globe’s petition, Globe had made two payments
totaling $ 615,831 to Carrier. These two payments were made an average of 28 days
late under the terms of the contract. (The other installment payments–two of which
were made well before the preference period, and two of which were made by a third
party–are not at issue here.)
At the time of its bankruptcy petition, Globe owed approximately $146 million
in senior secured debt. The Bankruptcy Court approved the sale of substantially all
of Globe’s assets to a competitor for approximately $52 million, $42 million of which
was paid to the senior secured lenders, leaving them with a deficiency of over $100
million on their secured claims. Subsequently, Globe’s trustee filed a complaint
against Carrier pursuant to Section 547(b) to recover the two payments that were
made within 90 days of Globe’s bankruptcy petition.
1
A month before its voluntary petition, certain junior lenders filed an involuntary Chapter
11 petition, which was dismissed when Globe filed its own voluntary petition.
3
II.
We review the district court’s decision to affirm the bankruptcy court de novo,
which allows us to access the bankruptcy court’s judgment anew, employing the same
standard of review the district court itself used. See In re Issac Leaseco, Inc., 389
F.3d 1205, 1209 (11th Cir. 2004); In re Club Assoc., 951 F.2d 1223, 1228 (11th Cir.
1992). Thus, we review the bankruptcy court’s factual findings for clear error, and its
legal conclusions de novo. In re Club Assoc., 951 F.2d at 1228-29.
Carrier argues that the payments the trustee seeks to recover were not
preferential because Carrier would have been able to become a secured creditor if it
had not been paid, and that the payments are not avoidable because they were made
in the ordinary course of business. Neither of these arguments has merit.
A.
The Bankruptcy Code authorizes bankruptcy trustees to “avoid any transfer of
an interest of the debtor in property” if five conditions are met. In brief, the trustee
must show that the payment was (1) to the creditor, (2) on account of a previous debt,
(3) made while the debtor was insolvent, (4) made 90 days before the bankruptcy
petition was filed and (5) effective in enabling the creditor to receive more than it
would have received had the debtor’s estate been liquidated under Chapter 7. 11
4
U.S.C. § 547(b).1
Only the last of these conditions is relevant here: to avoid a transfer, the trustee
must show that the transfer enabled the creditor to improve its position vis-à-vis other
creditors. § 547(b)(5); see generally Barash v. Pub. Fin. Corp., 658 F.2d 504, 509
(7th Cir. 1981) (“Section 547(b)(5) is directed at transfers which enable creditors to
receive more than they would have received had the estate been liquidated and the
disputed transfer not been made.”). Carrier argues that the two payments Globe made
approximately two months before it declared bankruptcy did not improve its position
because it could have become a secured creditor by exercising its right to perfect a
lien on Globe’s Massachusetts textile plant. This argument is wide of the mark for
two reasons.
First, and most obviously, while Carrier could have taken steps to become a
secured creditor, it did not do so. By its terms, the parties’ contract is governed by
Massachusetts law, under which a lien exists only following a proper recording of
1
The purpose of this provision is to provide assurance to unsecured creditors–who might
otherwise feel the need to race to the courthouse to dismember the debtor to protect their
interests–and to ensure that all creditors share equally. See Union Bank v. Wolas, 502 U.S. 151,
161 (1991) (citing H.R. Rep. No. 95-595, p.177-78 (1977), U.S.C.C.A.N. 1978, p. 6137-38); see
also In re Xonics Imaging, Inc., 837 F.2d 763, 765 (7th Cir. 1988) (“If there were no rule against
preferences, an insolvent debtor, teetering on the edge of bankruptcy and besieged by creditors,
might have an incentive to buy off the most importunate of his creditors, necessarily at the
expense (the debtor being insolvent) of other creditors, in the hope of keeping afloat a little
longer. Knowing that the debtor might do such a thing, an unsecured creditor who sensed that a
debtor might be about to go belly-up would have a strong incentive to petition him into
bankruptcy so that the debtor could not deplete the assets available to pay this creditor by paying
another unsecured creditor instead.”).
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notice of the parties’ contract. See Tremont Tower Condo., LLC v. George B.H.
Macomber Co., 767 N.E. 2d 20, 23 (Mass. 2002); see also Admiral Drywall, Inc. v.
Cullen, 56 F.3d 4 (1st Cir. 1995) (noting that Massachusetts law does not recognize
the existence of an equitable mechanic’s lien). Thus, while a contractor “has a
statutory right to ... a lien ... the lien itself does not exist until the contractor does
something to assert that right.” Tremont, 767 N.E. 2d at 25. In the present case,
Carrier admits that it took no steps to assert its right to a lien, stating that it “saw no
need.” (Carrier Reply at 2.) This admission vitiates its claim that Globe’s payments
immediately prior to its bankruptcy petition did not improve Carrier’s position
relative to other creditors.2
A second problem with Carrier’s argument is that even if it had perfected a lien
against Globe’s Massachusetts plant, there would have been no equity to which the
lien could attach. Under Massachusetts law, a mechanic’s lien is subordinate to a duly
registered mortgage. Mass. Gen. Laws ch. 254, § 7(a). In the present case, the sale of
2
Carrier also argues that the payments are not avoidable because the Bankruptcy Code
provides that a Trustee may not avoid payments that “fix[] ... a statutory lien.” 11 U.S.C. §
547(c)(6). Carrier’s argument is briefed in the most cursory fashion, and is therefore waived. See,
e.g., Tallahassee Memorial Regional Medical Center v. Bowen, 815 F.2d 1435, 1446 n.16 (11th
Cir. 1987). At any rate, the argument also lacks merit. Again, Carrier was not a statutory
lienholder. Carrier appears to rely on Cimmaron Oil Co. v. Cameron Consultants, Inc., 71 B.R.
1005, 1010 (N.D. Tex. 1987), as authority for the proposition that federal bankruptcy law
relieves it of the need to comply with state statutory procedures for perfecting its liens. (We say
“appears” because, again, its brief is far from pellucid.) For the sake of completeness, therefore,
we note that the Fifth Circuit has rejected Cimmaron’s interpretation of Section 547(c)(6). See In
re Ramba, Inc., 416 F.3d 394, 401 (5th Cir. 2005). Were this issue properly raised, we would be
inclined to reject this aspect of Cimmaron as well.
6
Globe’s assets left Globe’s senior secured lenders with a deficiency of over $100
million on their secured claims. Thus, there is no merit to Carrier’s suggestion that
it would have been paid in full even if the preferential payments had not been made.
B.
Carrier’s argument that Globe’s payments, even if preferential, are not
avoidable because they were made in the ordinary course of business is somewhat
more compelling, but also ultimately unavailing.
The version of the Code that was in effect at the time this action was
commenced provided that a trustee may not avoid a payment on a debt that was
incurred in the ordinary course of business, paid in the ordinary course of business
and paid in accordance with ordinary business terms. Pub. L. No. 95-598, 11 U.S.C.
former § 547(c)(2), 92 Stat. 2549, 2598 (1978) (amended 2005).3 The legislative
history explains that section 547(c)(2) is intended to encourage normal credit
transactions and the continuation of short-term credit dealings with troubled debtors
so as to postpone, rather than hasten, bankruptcy to the extent that this result does not
3
The 2005 amendments to the Bankruptcy Code modified 547(c)(2). See Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, April 20, 2005, 119
Stat 23. Prior to 2005, to establish an “ordinary course” defense, a creditor had to show both that
the transfer was made in the ordinary course and according to ordinary terms. The 2005
amendment allows a creditor to prevail by showing either that the course or the terms were
ordinary. Since this case was commenced prior to the October 17, 2005, the effective date of the
amendments, we apply the prior statute and the case law interpreting it.
7
detract from the policy of the preference section of discouraging unusual action by
either the debtor or its creditors during the debtor’s slide into bankruptcy. S. Rep. No.
95-989, at 88, as reprinted in 1978 U.S.C.C.A.N. 5787, 5874; see also In re
Milwaukee Cheese Wisconsin, Inc., 112 F.3d 845, 848 (7th Cir. 1997) (“The
exceptions in § 547(c) identify cases where there is little risk that the pre-bankruptcy
payments will give rise to [a] race [to get one’s debt repaid] and to the concomitant
costly self-protection.”).
The phrases “ordinary course of business” and “ordinary business terms” are
not defined by the Code. Courts have interpreted the “ordinary course of business”
requirement to be subjective in nature insofar as it requires courts to consider whether
the transfer was ordinary in relation to the “other business dealings between that
creditor and that debtor.” In re Fred Hawes Org., Inc., 957 F.2d 239, 244 (6th Cir.
1992); see also In re Issac Leaseco, 389 F.3d at 1210; In re Molded Acoustical
Prods., Inc., 18 F.3d 217, 223-28 (3d Cir. 1994). The “ordinary business terms”
requirement, by contrast, is objective in nature, requiring proof that the payment is
ordinary in relation to prevailing industry standards. See In re Issac Leaseco, 389
F.3d at 1210; see also Advo-Sys., Inc. v. Maxway Corp., 37 F.3d 1044, 1048 & n.3
(4th Cir. 1994) (citing cases interpreting the “ordinary terms” requirement). The
creditor has the burden of proof with respect to both requirements. 11 U.S.C. §
8
547(g); In re Issac Leaseco, 389 F.3d at 1210.
The fact that the payments at issue here were not only preferential within the
meaning of § 547(b) but also late makes it difficult to show that they were made in
the “ordinary course of business.” “[U]ntimely payments are more likely to be
considered outside the ordinary course of business and avoidable as preferences.” In
re Craig Oil, 785 F.2d 1563, 1567-68 (11th Cir. 1986); see also In re Fred Hawes,
957 F.2d at 244. As Judge Posner has explained,
It may seem odd that paying a debt late would ever be regarded as a preference
to the creditor thus paid belatedly. But it is all relative. A debtor who has
entered the preference period—who is therefore only 90 days, or fewer, away
from plunging into bankruptcy—is typically unable to pay all his outstanding
debts in full as they come due. If he pays one and not the others ... the payment
though late is still a preference to that creditor ... The purpose of the preference
statute is to prevent the debtor during his slide toward bankruptcy from trying
to stave off the evil day by giving preferential treatment to his most
importunate creditors, who may sometimes be those who have been waiting
longest to be paid.
In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th Cir. 1993) (Posner, J.); see
also In re Issac Leaseco, 389 F.3d at 1212 (“A creditor who tolerates unusual delays
in payment from a debtor on the verge of bankruptcy may be dependent on the debtor
and aiding the debtor in forestalling the inevitable to the detriment of less dependent
creditors.”).
9
Of course, the fact that a payment is late does not necessarily show that the
payment was unusual from the debtor’s perspective. To the contrary, a creditor may
present evidence to rebut the presumption that a particular late payment was out of
the ordinary. In the present case, however, there was no evidence that the parties had
dealt with each other at all before they executed the contract under which Globe
made the preferential payments. Where parties have no extensive history of credit
transactions to which a disputed payment can be related, their express agreement
furnishes “the most informative evidence left to consider” of the ordinariness of a
transaction from the parties’ perspective. In re Fred Hawes, 957 F.2d at 245. Here,
the contract called for payment 30 days from the date of the invoice, and Globe’s
payments were approximately one month late on average. While Globe’s two other
payments to Carrier were also late, we cannot say, based on this record, that this is
enough to prove that the late payments were ordinary from the parties’ perspective.
Even assuming that Carrier had shown that Globe’s preferential payments were
made in the “ordinary course of business,” it has not shown that these payments were
made according to “ordinary business terms.” There are at least two purposes for the
“ordinary terms” requirement. The first purpose is evidentiary: if a creditor testifies
that it dealt with the debtor on terms that are wholly unknown in the industry, then
the evidence of industry norms casts some doubt on the creditor’s testimony. The
10
second purpose is to obviate the risk that certain creditors may work out a special deal
to be paid ahead of the others in the event of bankruptcy. See In re Tolona Pizza, 3
F.3d at 1032.
To satisfy the “ordinary terms” requirement, the creditor must characterize the
payment practices of its industry with specificity, and present specific data to support
its characterization. See Advo-Sys., 37 F.3d at 1050-51; see also In re U.S. Interactive,
Inc., 321 B.R. 388, 393 (Bankr. D. Del. 2005) (creditor’s characterization of industry
norm must be “supported by specific data”); In re Merry-Go-Round Enters., Inc., 272
B.R. 140, 148 (Bankr. D. Md. 2000) (specificity is particularly important because it
is to be expected that the creditor’s expert’s testimony would be favorable to the
creditor’s position). This is particularly true where the parties have not dealt
extensively with one another in the past. Where, as here, “the relationship between
the parties is of recent origin, or formed only after or shortly before the debtor sailed
into financially troubled seas, the credit terms will have to endure a rigorous
comparison to credit terms used generally in a relevant industry.” In re Molded
Acoustical Prods., 18 F.3d at 225; see also In re Issac Leaseco, 389 F.3d at 1211
(where the parties’ business relationship lasted only six months, “the bankruptcy
court had no choice but to evaluate their dealings strictly according to industry
standards.”).
11
In the present case, Carrier neither characterized industry payment practices
with adequate specificity, nor did it offer specific evidence in support of its
characterization of industry norms. Carrier presented testimony from two witnesses,
neither of whom had much to say about payment norms within the industry. The first
witness, Christopher O’Connor, was a Carrier regional manager who oversaw the
Globe installation project. O’Connor admitted that he was not responsible for issuing
invoices and processing payments, and had nothing at all to say about how Carrier’s
practices compared with industry norms. (Indeed, Carrier’s counsel objected when
Globe attempted to elicit such information from O’Connor on cross-examination.)
The second witness, David Witham, was an engineer who had worked as a
consultant on the Globe installation project. Witham was ostensibly called as an
expert on industry payment practices. However, he admitted that he was not involved
in sending out invoices or processing payments, that he did not know when invoices
were actually paid, and that he would become aware of payment issues only when
someone told him that there was a problem. Thus, while Witham testified that the
payments at issue here were not unusual for the industry, his own testimony
undermined the basis for this conclusion.
To prevail on its “ordinary course” defense, the burden is on Carrier to prove
that the payments in question were in accord with industry norms. Indeed, because
12
there was no evidence of the parties’ past dealings, Carrier’s burden is particularly
heavy: its evidence of industry norms must be sufficiently specific to enable the court
to undertake a “rigorous comparison” between the circumstances surrounding the
payments the trustee seeks to recover and the normal credit terms in the relevant
industry. In re Molded Acoustical Prods., 18 F.3d at 225. Here, Carrier presented
nothing but the bottom line conclusion of a witness who admits that he has no real
familiarity with industry payment practices.
Carrier argues that the bankruptcy court was required to credit this conclusion
because the Trustee did not put on any witnesses to rebut Witham’s testimony. This
argument is quite clearly unsupported.4 It was Carrier’s burden to present specific
evidence of industry payment practices. Though his testimony was unrebutted,
Witham was capable only of vague characterizations of the industry and its payment
practices. The bankruptcy court held that this is not enough to satisfy Carrier’s
burden, and we agree.
III.
We also find that the bankruptcy court’s decision not to award prejudgment
4
Indeed, notwithstanding Carrier’s protests to the contrary, it is far from clear from the
transcript that the bankruptcy court actually certified Witham as an expert.
13
interest was reasonable. No provision of the Bankruptcy Code prescribes that the
estate may recover prejudgment interest in an action to avoid a preferential transfer.
5 Collier on Bankruptcy ¶ 550.02[3][b] (15th ed. rev. 2007). However, courts have
the discretion to award such interest as a matter of federal common law. See In re
Hechinger Inv. Co. of Del., Inc., 489 F.3d 568, 579-80 (3rd Cir. 2007); In re
Milwaukee Cheese Wisconsin, 112 F.3d at 849; In re Cybermech, Inc., 13 F.3d 818,
822 (4th Cir. 1994); In re Inv. Bankers, Inc., 4 F.3d 1556, 1566 (10th Cir. 1993).
While a bankruptcy court has the discretion to award prejudgment interest, we
cannot say the court abused its discretion by declining to do so in this case. An award
of prejudgment interest must be equitable. See Osterneck v. E.T. Barwick Indus., Inc.,
825 F.2d 1521, 1536 (11th Cir. 1987). Here, the bankruptcy court found that Carrier’s
position was reasonable, that the parties’ dispute was genuine and that there was no
evidence that either party was responsible for delaying the dispute’s resolution.
The equitable basis for the bankruptcy court’s denial of prejudgment interest
is in tension with the rule that the Seventh Circuit, for example, has apparently
adopted. According the Seventh Circuit rule, interest must be awarded in the ordinary
case, and only considerations such as delay by the trustee can be a basis for declining
to award interest. See In re Milwaukee Cheese Wisconsin, 112 F.3d at 849. The
Milwaukee Cheese rule is based on the proposition that because of the time-value of
14
money, prejudgment interest is necessary to make the trustee whole. This is
indisputable, as far as it goes, but the resulting rule seems inflexible. To say that a
bankruptcy court has discretion to award interest is to say that it has a choice. 1 H.
Hart & A. Sacks, The Legal Process: Basic Problems in the Making and Application
of Law 162 (Tent. Ed. 1958) (“Discretion” is “the power to choose between two or
more courses of action each of which is thought of as permissible.”); see also Macklin
v. Singletary, 24 F.3d 1307, 1311 (11th Cir. 1994) (“under the abuse of discretion
standard of review, there will be occasions in which we affirm the district court even
though we would have gone the other way had it been our call.”) (internal quotation
marks omitted). We believe that a standard of reasonableness is preferable to a more
inflexible rule. Since Carrier’s ordinary course defense fails primarily for evidentiary
reasons, we cannot say that the court’s decision not to award prejudgment interest
was an unreasonable use of its equitable powers.
IV.
The district court affirmed the bankruptcy court’s judgment in its entirety. We
are also persuaded that the bankruptcy court was right to conclude that the Trustee
is entitled to avoid Globe’s preferential payments to Carrier, and that the court did not
abuse its discretion by declining to award prejudgment interest. The judgment of the
15
district court affirming the bankruptcy court is, therefore,
AFFIRMED.
16