Preference Defendant Wins Summary Judgment On Ordinary Course Of Business Defense
Burtch v. Detroit Forming, Inc. (In re Archway Cookies), Case No. 08-12323 (CSS), Adv. No. 09-51429 (CSS) (September 1, 2010) (J. Sontchi).
On October 6, 2008 (the “Petition Date”), Archway Cookies LLC and Mother’s Cake & Cookie Co. (collectively, the “Debtors”) filed voluntary petitions under Chapter 11 of the Bankruptcy Code. The Debtors subsequently converted the case to one under Chapter 7 on January 9, 2009, and Jeoffrey L. Burtch was appointed the Chapter 7 Trustee (the “Plaintiff” or “Trustee”). On July 15, 2009, the Trustee commenced an adversary proceeding against Detroit Forming, Inc. (“DFI” or the “Defendant”) under 11 U.S.C. §§ 547 and 550 (the “Complaint”) seeking to avoid as preferential six (6) transfers totaling $180,648.17. In October 2009, DFI filed a motion for summary judgment, arguing that the alleged transfers were subject to the ordinary course of business defense.
DFI is a manufacturer of plastic trays used in the food industry and, prior to the Petition Date, DFI provided plastic trays to the Debtors for over two years. The average number of days-to-payment from October 2006 through July 7, 2008 (the “Historical Period”) was 42 with a range of 21 to 177 days. The average number of days from July 8, 2008 through October 6, 2008 (the “Preference Period”) was 47 days, with a range of 33 to 64 days. The Court granted summary judgment on DFI’s behalf, holding that the ordinary course of business defense applied.
The Court considered two factors in reaching this conclusion: (1) the length of the parties’ relationship; and (2) the similarity of the transactions. With respect to the first factor, the Court held that the parties’ two year relationship was “of sufficient length to establish an ordinary course of dealing between the parties.”
Observing that “[c]ourts have found that small derivations in the timing of payments may not be so significant as to defeat the ordinariness of such payments,” the Court concluded that the 5 day difference in the Historical Period average and Preference Period average was not material. Accordingly, the Court granted DFI’s motion for summary judgment. The Trustee argued that a letter sent by DFI’s CFO/Controller during the Historical Period notifying the Debtors that no product would be shipped unless the accounts were current resulted in the type of preferential treatment to DFI § 547 was enacted to prevent. Unpersuaded, the Court stated that the subjective test under § 547(c)(2) “reviews the transactions between the debtor and the defendant, not a debtor’s transactions with all of its creditors.”
