A Chapter 7 trustee could recover $56,000 in transfers the debtor made to one of its creditors during the 90-day “preferential period” leading up to its bankruptcy filing, a U.S. Bankruptcy Court judge has ruled.
Section 547(b) of the U.S. Bankruptcy Code authorizes a bankruptcy trustee to avoid preferential transfers made by a debtor within 90 days before the petition if it can show that the transfers were made to satisfy a preexisting debt; the debtor was presumed to be insolvent at the time of the transfers; and the creditor recovered more of the debt than it would have through the debtor’s bankruptcy liquidation.
Here, the debtor, seafood distributor National Fish and Seafood, filed for bankruptcy on May 29, 2019. Over the prior three months, one of its vendors, defendant Northern Ocean Liquidating Corp., inquired multiple times about the status of past-due invoices; changed purchase terms; and on April 23, 2019, halved the debtor’s line of credit, apparently because Northern Ocean learned that the debtor was not paying its invoices from other creditors and might be selling its business.
After that reduction, the debtor made three transfers to Northern Ocean for $56,213.
In an adversary proceeding brought by Chapter 7 trustee John O. Desmond, Northern Ocean argued that §547(c)(2)(A) of the Bankruptcy Code exempted the transfers from recovery because they were made in the ordinary course of business.
But Judge Christopher A. Panos, comparing the debtor and creditor’s dealings during the preference period to their customary dealings during a multi-year “baseline” period leading up to that point, disagreed.
“While there is testimony that the credit limit imposed by [Northern Ocean] on the Debtor depended on the dollar value of the sale and was set ‘sale to sale,’ the record does not contain any documentary evidence showing fluctuations in the credit limit between the parties,” Panos wrote, granting the trustee’s motion for summary judgment. “[Northern Ocean’s] action was in direct response to bad credit reports from other companies and a rumor of a sale. I find that … [t]hese three transfers were made outside of the ordinary course of dealings between the Debtor and [Northern Ocean].”
Panos also found that while it was a “very close call,” another $52,000 in transfers made earlier during the preference period were not made outside the ordinary course of business.
The 27-page decision is In re: National Fish and Seafood, Inc., Lawyers Weekly No. 04-005-24.
‘Pragmatic balance’
Boston attorney Jonathan M. Horne, who represented the trustee, called the decision a mixed result for the parties but noted that Panos struck a “pragmatic balance that gives creditors flexibility to continue to do business with, but not run roughshod over, a distressed counterparty.”
Defense counsel Charles R. Bennett Jr. of Boston did not respond to interview requests.
Other local bankruptcy attorneys said it was a useful ruling.
Alex F. Mattera of Boston explained that disputes over allegedly preferential transfers during the period leading up to a bankruptcy filing usually settle, given how fact-specific they are and the subjective nature of the standard applied by the court in determining if a transfer occurred in the ordinary course of business.
Accordingly, he said, it is rare to get a written decision in a case like National Fish.
“It costs money to develop cases and try them, and that eats into the recovery,” he said. “This really mitigates toward settlement. … So I would say this is a hugely helpful case to the bar [because] there’s not a lot of caselaw, especially in our district, on what constitutes the ordinary course.”
Needham attorney Adam J. Ruttenberg said that when he began practicing bankruptcy law, a defendant had to prove the disputed transaction was made in the ordinary course of business both under the subjective standard employed here — in which the court fashions a baseline period to define the ordinary course of business and determine whether the disputed transactions fall within that pattern — and an objective test that focuses on general practices in the particular industry.
I would say this is a hugely helpful case to the bar [because] there’s not a lot of caselaw, especially in our district, on what constitutes the ordinary course [of business].
“Now you only have to prove one, and the defendant made a tactical choice to address only the subjective standard and not objective,” he said. “It may be that they didn’t have the necessary testimony to support the objective standard because they couldn’t use that prong without having an expert witness. But it was interesting to me that they made that choice.”
Ruttenberg also said it had been generally understood that when a creditor altered its activity during the preference period to try harder to collect a debt, it would be more difficult to use the “ordinary course of business defense,” yet here Northern Ocean was able to successfully assert it for transfers made during the first part of the preference period before it cut the credit limit.
“There are people who might take from this that [Northern Ocean] shouldn’t have done that because they would have a stronger defense,” he said. “But for all we know, had they not cut the credit limit, then at the time of the bankruptcy filing they could have been owed a lot more money by the debtor.”
Ronald W. Dunbar Jr. of Boston observed that Northern Ocean had closely monitored its receivables from the debtor and regularly changed payment terms to insure payment well before the preference period, enabling it to convince the court that most of its practices during the preference period indeed were within the ordinary course of business.
Had there been evidence that Northern Ocean had reduced the credit line in the past, the judge may have found all payments to be within the ordinary course of business, he added.
“It is a good lesson for collection departments that if they maintain a close eye on receivables and consistently employ aggressive collection practices, they can avoid preference claims should a customer end up in bankruptcy,” he said.
Preferential transfers?
Northern Ocean sold fish products to the debtor since 1995.
During the 90-day period leading up to the May 2019 petition date, the debtor made 10 payments to Northern Ocean totaling $285,388.
Northern Ocean had also maintained a practice of offering customers “Net 30 Days” payment terms — meaning payment was due within 30 days of invoice — unless there were extenuating circumstances such as bad credit reporting or troubles listed on credit reports.
In re: National Fish and Seafood, Inc
THE ISSUE: Could a Chapter 7 trustee recover $56,000 in transfers that the debtor made to one of its creditors during the 90-day “preferential period” leading up to its bankruptcy filing?
DECISION: Yes (U.S. Bankruptcy Court)
LAWYERS: Zachary J. Gregoricus and Jonathan M. Horne, of Murtha Cullina, Boston (trustee)
Charles R. Bennett Jr. of Murphy & King, Boston (defense)
That was apparently consistent within seafood industry practices, and it represented payment terms with the debtor from January 2016 to January 2018, with the debtor, on average, taking 36 days to pay.
As early as 2017, Northern Ocean apparently learned from credit agencies that the debtor was paying other creditors late and, in January 2018, changed payment terms to net 14 days and imposed other payment terms at different times that year.
From Nov. 2, 2018, to Feb. 27, 2019, with one exception, Northern Ocean required payment within net five days.
During the preference period, the first three invoices were net-five-day terms and 13 more were net-15-day terms.
Additionally, during the preference period, Northern Ocean had numerous communications with the debtor about the status of invoices that were past due and was told on one occasion that the debtor’s cashflow had been very tight recently but their accounts receivable was very high.
On March 13, 2019, Northern Ocean informed the debtor it would hold two purchase orders until an additional wire transfer was received, and on April 23, Northern Ocean in an email cut the debtor’s line of credit from $100,000 to $50,000, allegedly because it learned that the debtor was not paying its invoices to other companies and because of rumors that the debtor was selling its business.
Northern Ocean’s principal, James LeBoeuf, apparently was concerned about more of his company’s money “going out the door” and said he would like to receive payment of the debtor’s oldest invoice to keep Northern Ocean’s exposure under $50,000.
Accordingly, three transfers totaling $56,213 were made to Northern Ocean after April 23.
Following the bankruptcy filing, the trustee initiated an adverse proceeding seeking to recover all transfers made during the preference period. The parties agreed that some transfers within the period were not preferential, leaving roughly $108,000 in dispute.
The trustee moved for summary judgment.
Split decision
Panos ruled that the $52,000 in disputed transfers made before Northern Ocean reduced the debtor’s line of credit were not prohibited preferential transfers.
Panos said he inferred from exchanges between Northern Ocean and the debtor that Northern Ocean was closely managing its exposure during that period but was working to supply the debtor and actually provided increased payment terms.
“From the summary judgment record, these activities appear to be generally consistent with [Northern Ocean’s] practices and, while a very close call, did not appear to be unusual behavior intended so [Northern Ocean] would gain an advantage at the expense of a Debtor in financial difficulties,” Panos wrote.
But the transfers made after Northern Ocean reduced the credit limit were a different story, the judge continued.
Despite testimony that the credit limit was set sale to sale, Panos noted a lack of evidence of fluctuation in the past, creating an inference that Northern Ocean took action to minimize its potential exposure should the debtor file for bankruptcy.
Accordingly, Panos ordered that a “judgment in favor of the Trustee in the amount of $56,213.70 consistent with this decision will enter.”