|Business Credit Articles
A primary policy underlying section 547(c)(2) (C) of the Bankruptcy Code is to prevent parties from creating unique payment terms that would allow the debtor to manipulate the timing of the payments so that it appears that those payments are consistent with debtor's overall payment history. In In re Bridge Information Systems, 331 B.R. 774, the court concluded that the supplier failed to establish its practice of allowing the debtor to direct which payments should apply to which invoices was objectively ordinary within the computer resale industry.
In Bridge, the plan administrator for the debtor filed an adversary complaint against the supplier seeking to recover payments that the debtor made to the supplier as preferential transfers. The supplier claimed that the plan administrator may not avoid the payments under the ordinary course of business defense.
The debtor and the supplier entered into an agreement where the supplier agreed to resell computer components parts and systems to the debtor. The terms of the agreement required the debtor to remit payment on each invoice within thirty days of its receipt of the invoice. The agreement also mandated that the debtor remit payment directly to supplier�s bank. The agreement also allowed the debtor to match each payment with any outstanding invoice.
During the ninety day preference period the debtor made eight payments to the supplier totaling $2,155,105.80. The plan administrator attempted to avoid these payments as preferential transfers under 11 U. S.C. � 547(b). The parties stipulated that the debtor was insolvent at the time it remitted each of the payments to the supplier. The plan administrator demonstrated that the debtor remitted each of the payments after it had received the computer product and the corresponding invoice, that the debtor made each of the payment during the ninety day preference period, and the debtor made each of the payments to the supplier.
The court stated that the plan administrator must also show that the debtor made each of the payments on account of an antecedent debt as required by 11 U.S.C. � 547 (b)(2). The payment summary provided by the supplier's general manger indicated that the debtor remitted payment to the supplier after the thirty day due date for the vast majority of invoices in both the prepreference and preference period. However, the debtor also made some of the payments before the thirty day due date.
The court reasoned that a debt is incurred on the date upon which the debtor first becomes legally obligated to pay it. A debtor incurred a debt on an obligation once the creditor would have a claim against the debtor�s estate if the debtor fails to pay for the goods or services provided. Because the debtor�s obligation to pay the creditor arises as soon as it receives the goods or service in question, the debtor incurred a debt when it received the goods or services even if payment was not due until a later date. Since the debtor made the payments after it received the computer components, even if the payments were made prior to the thirty day due date, each of the payments was on account of an antecedent debt.
The supplier argued that even if the payments were preferential, the plan administrator could not avoid the payments under the ordinary course of business defense. The supplier introduced the testimony of its general manager in support of its ordinary course defense. The general manager testified that the debtor remitted payment to the supplier on an average of 44 days after it received the invoice during the preference period compared to an average of 42.68 days during the preference period. Also, the range of time between the debtor�s payment and receipt of invoice during the pre-preference period was 14 to 105 days compared to a range 21 to 77 days during the preference period.
However, the court stated that the supplier failed to show that the terms under which the debtor remitted the payments were objectively ordinary. The supplier must established that the payments were objectively ordinary in relation to the standards and terms prevailing among similarly situated companies within the relevant industry with respect to the type of transaction in which the debtor made the payment.
Here, the supplier failed to demonstrate that its practice allowing the debtor to direct how the supplier would apply each payment fell within the general range of terms within the computer resale industry. The supplier's general manger failed to testify as to the industry practice concerning the method by which suppliers apply a customer's payment to outstanding invoices. The supplier's controller testified that the supplier had no written policy concerning how it would apply each payment with respect to outstanding invoices. Rather, customers would remit payment direct to its bank and the bank would then inform the supplier that a customer remitted a payment and which invoices the payment covered.
The court concluded that the supplier could not rely solely on its own policy to meet its burden of proof. Rather, the supplier was required to produce evidence of industry practice concerning how suppliers apply a customer's payment to outstanding invoices to establish the general terms prevailing with in the industry.
The supplier did not provide any evidence concerning how creditors apply customer's payments within the computer resale industry beside its own informal policy. Thus, it failed to establish that its practice of allowing the debtor to direct which payments should apply to which invoices fell within the general terms prevailing in the computer resale industry.