Preference Defendant's "Insufficient" Affidavit as to Ordinary Business Terms Prompts Court to Grant of Summary Judgment in Favor of Plaintiff
In re Just for Feet, Inc., 375 B.R. 129 (Bankr D. Del. 2007) (Judge Judith K. Fitzgerald)
In these adversary proceedings in the United States Bankruptcy Court for the District of Delaware, the Court granted summary judgment in favor of the plaintiff, Charles R. Goldstein, Chapter 7 Trustee of the Estate of Just for Feet, Inc., with respect to the defendants’ ordinary course of business defense under 11 U.S.C. § 547(c)(2). The Court’s ruling was based on the defendants’ failure to prove the “ordinary business terms” element of the defense. Although the defendants’ produced an affidavit from their president in support of the industry terms prong of the ordinary course of business defense, the Court found the affidavit to be insufficient where it merely stated that the affiant was familiar with industry billing practices and that the transfers in question were made in a fashion consistent with those practices. The affidavit failed to identify what the practices were in the defendants’ industry and what the practices were between the debtor and the defendants.
In 2001, the Chapter 7 Trustee of the Estate of Just for Feet, Inc. commenced two adversary proceedings seeking to avoid and recover allegedly preferential transfers from Hickory Brands, Inc. in one adversary proceeding and Spectrum Sports, Inc, which was a division of Hickory Brands, in the second. Together, between the two adversary proceedings, the trustee sought to avoid almost $2 million in payments. In 2005, the trustee and the plaintiff each filed motions for summary judgment, with the defendants moving for summary judgment on their ordinary course of business and subsequent new value defenses under 11 U.S.C. §§ 547(c)(2) and (4).
Several months after the parties filed their motions, the Court was advised that the matters had settled. However, seven months later, with no motion to approve a settlement having been filed, the Court ordered that a certificate of completion of briefing be filed, after which the Court would take the matters under advisement.
In this opinion by Judge Judith K. Fitzgerald, the Court expressed frustration at the widely disparate factual representations contained in the respective motions of the trustee and the defendants, noting that “despite two law clerks and the undersigned collectively having spent hundreds of hours trying to piece together the evidence, the task has proved impossible and the effort has been a lost cause and one the court will not repeat.”
Holding that the defendants’ evidence in favor of their motions was insufficient to prove their ordinary course defenses under the pre-BAPCPA version of 11 U.S.C. § 547(c)(2), the Court nonetheless assumed (but did not decide) section 547(c)(2)(B) was satisfied, but found the evidence in support of the industry standard under section 547(c)(2)(C) to be inadequate. In support of the motions, the defendants had offered an affidavit of the president of Hickory Brands, stating that the billing practices between the debtor and the defendants were consistent with the practices in the defendants’ industry.
According to the affidavit, Hickory Brands was in the business of manufacturing and shipping footwear accessories. The affiant further represented that he had been involved in that industry for seventeen years, and that he was familiar with the billing practices in the industry. Without stating what the industry practices were, or what the practices were between the parties, the affiant stated that the course of conduct between the debtor and the defendants was consistent with practices in the industry. The Court rejected the sufficiency of the affidavit, finding that its failure to match industry practices with the practices between the parties was insufficient to establish the defendants’ defense. Therefore, the Court granted summary judgment in favor of the trustee.
However, the Court reserved judgment on the subsequent new value defense and scheduled a trial on that issue. The Court noted, however, that the parties were only approximately $10,000 apart on the issue of the Hickory Brands’ liability after new value, and suggested that settlement would be worthwhile. The Court also commented that it was unclear from the record what the parties’ positions were, if any, on Spectrum’s liability after the application of subsequent new value.
