On October 2, 2013, Judge Mary F. Walrath issued an opinion in the case of Burtch v. Texstars, Inc. (In re AE Liquidation, Inc.), Adv. Proc. No. 10-55502. A copy of the opinion may be found here. The case involved a preference claim asserted by the Chapter 7 Trustee against Texstars, Inc (“Texstars”).
The Trustee claimed that Texstars had received $781,702.61 in preferential transfers. When the parties were unable to resolve the matter, the case went to trial. During the pretrial conference, the Trustee conceded that Texstars had $164,654 in new value. Accordingly, the issues at trial revolved around whether the remaining payments were made in the ordinary course of business. In particular, the sole issue was whether the payments were made in the ordinary course of business as between the parties pursuant to Section 547(c)(2)(A) of the Bankruptcy Code.
The Court’s opinion examined each element of the course of business in turn. First, the Court looked at the length of the relationship between the debtor and Texstars, and found that the two years the parties had engaged in business was sufficient to establish a course of dealing. Second, the Court examined the similarity of the transfers during the pre-preference and preference period, and found the 10% to 15% difference in payment timing to be insufficient to take the payments outside the norm where payments were made between 1 and 456 days after invoice historically. Moreover, the Court confirmed that the operative date for looking at timing was the “clear date” as Texstars proposed and not the “check cut date” as the Trustee had proposed.
The Court also examined the manner in which payments were tendered. In this case, the very last payment received by Texstars was by wire transfer. This differed from all other historical payments, all of which had been by check. Nonetheless, the Court found this difference to be immaterial where Texstars had not requested to be paid by wire. While there was some evidence that a few checks were overnighted to Texstars, the Court nonetheless found that based on the timing analysis, the fact that some checks were overnighted was still insufficient to render the payments outside the ordinary course of business.
The Trustee also argued that Texstars had engaged in undue collection efforts. In the lead up to bankruptcy, the debtor had sent correspondence to Texstars that the debtor would be winding down, or reducing production of airplanes, and would not accept further deliveries of airplane parts from Texstars. Texstars sent a letter to the debtor indicating that while Texstars would “rightsize” production to meet the reduced demand by the debtor, a restart of full production would require the debtor to bring all accounts and outstanding amounts current. After examining this correspondence, and comparing it with a demand for payment letter issued by Texstars to the debtor in a prior year, the Court found that while the “rightsizing” letter did complain about the debtor not keeping its accounts current, it did not constitute a demand for payment.
In sum, the Court found no evidence that Texstars attempted to take advantage of the debtor’s deteriorating condition, and found that Texstars met its burden under 547(c)(2) of showing that the alleged preferential payments were made in the ordinary course of business between the parties.