Ryan v. Foxworth Galbraith Lumber Company

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
JACK’S CONSTRUCTION, INC.,
Debtor. 	No. 7-07-11967-SL
KIERAN F. RYAN,
Chapter 7 Trustee,
Plaintiff,
v.
FOXWORTH-GALBRAITH LUMBER
COMPANY,
Defendant. 	Adv. No. 09-1117-S
MEMORANDUM OPINION ON DEFENDANT’S
MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on Defendant Foxworth-
Galbraith Lumber Company’s (“Foxworth”) Motion for Summary
Judgment (“Motion”)(doc 19) with accompanying Memorandum and
Exhibits (docs 20 and 21), Plaintiff’s Response with attached
Exhibit (doc 23) and Foxworth’s Reply with attached Exhibit (doc
26). 	Among Defendant’s exhibits are two affidavits of Marla
Hoover (docs 20-26 and 26-1) and the affidavit of Billie Hall
(doc 20-25). 	This is a core proceeding to determine, avoid, and
recover a preference. 	28 U.S.C. § 157(b)(2)(F). 	For the reasons
set forth below, the Court finds that Foxworth’s Motion is well
taken and should be granted.
INTRODUCTION
One of the purposes of bankruptcy law is to
provide fair remedies to creditors generally, and a
corollary of this principle is to prevent, within
limits, a debtor from giving preferred treatment to
some creditors in derogation of the interests of other,
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similarly situated creditors. 	A debtor might be
motivated to prefer one creditor or some creditors over
his creditors generally for a number of reasons,
including personal and business connections. 	The
supervision of the bankruptcy court generally prevents
unwarranted preferential treatment. 	But the law has
long recognized and addressed the concern that a debtor
could circumvent this policy by making preferential
transfers before filing his bankruptcy petition.
The power and duty to address preferential
transfers in Chapter 7 cases is initially vested in a
trustee appointed by the bankruptcy court to supervise
the bankruptcy estate. 	As discussed infra, the
Bankruptcy Code provides that a transfer to any
creditor less than 90 days before filing a bankruptcy
petition can be set aside if it meets other statutory
criteria (including generally that the transfer is made
for the benefit of a creditor on account of a
pre-existing debt, while the debtor was insolvent, and
results in the creditor receiving more than she would
if the debtor's assets were liquidated in bankruptcy).
Rupp v. United Security Bank (In re Kunz), 489 F.3d 1072, 1074-75
(10th Cir. 2007). 	The statute that allows this recovery, and
creates the relevant defenses asserted by Foxworth provides:
§ 547. Preferences.
(a) ...
(b) Except as provided in subsections (c) and (i) of
this section, the trustee may avoid any transfer of an
interest of the debtor in property--
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed
by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made--
(A) on or within 90 days before the date of
the filing of the petition; or
(B) between ninety days and one year before
the date of the filing of the petition, if
such creditor at the time of such transfer
was an insider; and
(5) that enables such creditor to receive more
than such creditor would receive if--
(A) the case were a case under chapter 7 of
this title;
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(B) the transfer had not been made; and
(C) such creditor received payment of such
debt to the extent provided by the provisions
of this title.
(c) The trustee may not avoid under this section a
transfer--
(1) ...
(2) to the extent that such transfer was in
payment of a debt incurred by the debtor in the
ordinary course of business or financial affairs
of the debtor and the transferee, and such
transfer was--
(A) made in the ordinary course of business
or financial affairs of the debtor and the
transferee; or
(B) made according to ordinary business
terms[.]
Summary judgment is proper when there is no genuine issue as
to any material fact and the moving party is entitled to a
judgment as a matter of law. 	Bankruptcy Rule 7056(c).
determining the facts for summary judgment purposes, the Court
may rely on affidavits made with personal knowledge that set
forth specific facts otherwise admissible in evidence and sworn
or certified copies of papers attached to the affidavits.
Fed.R.Civ.P. 56(e). 	When a motion for summary judgment is made
and supported by affidavits or other evidence, an adverse party
may not rest upon mere allegations or denials. 	Id. 	Rather,
“Rule 56(e) ... requires the nonmoving party to go beyond
thepleadings and by her own affidavits, or by the ‘depositions,
answers to interrogatories, and admissions on file,’ designate
‘specific facts showing that there is a genuine issue for
trial.’” 	Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
“Rule 56(e) permits a proper summary judgment motion to be
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opposed by any of the kinds of evidentiary materials listed in
Rule 56(c), except the mere pleadings themselves.” 	Id. 	The
court does not try the case on competing affidavits or
depositions; the court's function is only to determine if there
is a genuine issue for trial. 	Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 249 (1986).
In ruling on a motion for summary judgment, the trial court
views the evidence and draws reasonable inferences therefrom in
the light most favorable to the nonmoving party. 	Mountain
Highlands, LLC v. Hendricks, 616 F.3d 1167, 1169-70 (10th Cir.
2010) (citing Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th
Cir. 2005)). 	On those issues for which it bears the burden of
proof at trial, the nonmovant “must go beyond the pleadings and
designate specific facts so as to make a showing sufficient to
establish the existence of an element essential to [its] case in
order to survive summary judgment.” 	Id. at 1170 (quoting Cardoso
v. Calbone, 490 F.3d 1194, 1197 (10th Cir. 2007)) (internal
quotation marks omitted). 	“[F]ailure of proof of an essential
element renders all other facts immaterial.” 	Id. (quoting Koch
v. Koch Indus., Inc., 203 F.3d 1202, 1212 (10th Cir.), cert.
denied, 531 U.S. 926 (2000)).
As discussed below, the Court finds that Foxworth has
established that there is no genuine issue of fact that the
payments challenged by the Plaintiff were made in the ordinary
course of business or financial affairs of Jack’s Construction,
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1The ordinary course of business exception is an affirmative
defense. 	Jagow v. Grunwald (In re Allied Carrier’s Exchange,
Inc.), 375 B.R. 610, 615-16 (10 th Cir BAP 2007)(citing Clark v.
Balcor Real Estate Fin., Inc. (In re Meridith Hoffman Partners),
12 F.3d 1549, 1553 (10th Cir. 1993)). 	The Tenth Circuit has held
that the ordinary course of business exception contains a
subjective test in subsection [A] and an objective test in
subsection [B]. 	Payne v. Clarendon Nat’l Ins. Co. (In re Sunset
Sales, Inc.), 220 B.R. 1005, 1020 (10th Cir. BAP 1998)(Decided
pre-BAPCPA). 	The subjective test examines whether the transfers
at issue were “ordinary as between the parties” and the objective
test examines whether the transfers were “ordinary in the
industry.” 	Id. 	The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (“BAPCPA”) substituted “or” for “and”
between subsections 547(c)(2)(A) and (B), thereby considerably
lightening the creditor’s burden in defeating preference claims.
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Inc. and Foxworth. 	The Court will therefore not address
Foxworth’s second defense that the payments were also made
according to ordinary business terms.
FACTS
Foxworth admitted all of the allegations in the Complaint
dealing with the parties, jurisdiction, venue, core status, and
admitted receipt of $51,992 within 90 days of the petition on
account of antecedent debt. 	Foxworth denied that the payments
were preferences, lacked information on the Debtor’s insolvency,
and denied that it received more than it would in a liquidation,
and denied that the Plaintiff could recover. 	Foxworth also
asserted Section 547(c)(2) as an affirmative defense.
Foxworth then filed its Motion seeking summary judgment on
its Section 547(c)(2)(A) & (B) defenses 1. 	Foxworth claims, and
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2The Motion contains four facts. 	The fourth fact deals with
general industry practice. 	This is not relevant to the §
547(c)(2)(A) defense, so the Court does not need to address it or
Plaintiff’s objection to it.
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the Court also finds, that there are three 2 material undisputed
facts.
The first proposed fact is that Foxworth sold construction
materials to Debtor from its Alamogordo store in the ordinary
course of Foxworth’s and Debtor’s business and financial affairs.
Plaintiff stipulated that this was undisputed.
The second proposed fact is that Debtor had an open account
with Foxworth for over 17 years. 	Because of a computer
changeover in 2004, Foxworth can only produce details of its open
account transactions with Debtor for a period of about four
years, from October 2004 until the filing of the bankruptcy
petition in August 2007. 	Plaintiff claims that this is
“disputed,” but provides no citation to the record to show a
contrary fact. 	Plaintiff also states that Foxworth could only
produce business records for four years and that any “evidence”
of a business relationship before that time is “uncertain and
unreliable.”
Federal Rule of Civil Procedure 56(e)(2) provides:
Opposing Party's Obligation to Respond. When a motion
for summary judgment is properly made and supported, an
opposing party may not rely merely on allegations or
denials in its own pleading; rather, its response must-
-by affidavits or as otherwise provided in this rule--
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set out specific facts showing a genuine issue for
trial. 	If the opposing party does not so respond,
summary judgment should, if appropriate, be entered
against that party.
Fed.R.Civ.P. 56(e)(2) (2009)(amended December 1, 2010). See also
NM LBR 7056-1 (Facts disputed by nonmovant must cite to record to
demonstrate dispute. 	Movant’s facts are deemed admitted unless
specifically controverted.) 	The Court finds that Plaintiff
relied “merely on allegations or denials” to controvert this fact
and therefore did not meets his burden under the rule to set out
specific facts showing a genuine issue for trial. 	If Plaintiff
had evidence to the contrary, it needed to point it out or file
an affidavit. 	Montgomery v. Ellis, 364 F.Supp. 517, 527 (N.D.
Al. 1973)(If non-movant had any facts to support its theory, it
should have set them out in an affidavit; a party cannot withhold
evidence until trial, but most show at summary judgment that
there is a reasonable dispute of facts.) 	The second fact is
deemed admitted under the local rule.
Furthermore, Plaintiff is incorrect that there is no
“evidence.” 	The record contains three affidavits that are
competent evidence that clearly demonstrates the business
practices of the parties. 	The affidavits state that the practice
has remained the same for seventeen years. 	Finally, four years
of records is a sufficient sample, when combined with the
affidavits, to discern prior practice. 	See Simon v. Gerdau
MacSteel, Inc. (In re American Camshaft Specialties, Inc.), ___
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B.R. ___, 2011 WL 486587 at * 1, 4 and 5 (Bankr. E.D. Mich.
2011)(Parties had a twenty-year business relationship; court
granted summary judgment for creditor on basis of deposition of a
twenty-year employee of the creditor that testified that for the
entire history the debtor had not paid according to invoices, but
paid at about 60 days; and, that employee’s affidavit attached
exhibits documenting the prior one year of transactions.); Burtch
v. Detroit Forming, Inc. (In re Archway Cookies), 435 B.R. 234,
243 (Bankr. D. Del. 2010):
In this case, the parties' relationship was
established over a two-year period and during their
relationship there were 117 transactions between the
parties. 	Based on the length of their business
relationship and the numerous transactions between the
parties, the Court finds that this relationship was of
sufficient length to establish an ordinary course of
dealing between the parties.
(Footnote omitted.) 	(Footnote cites cases that find
relationships of 15 months, 2 years, and 3 years sufficient, but
also cites cases that find relationships of 1 year, 16 months and
90 days or less insufficient.)
The third proposed fact is that the ordinary course of
business and financial affairs for Foxworth and Debtor was as
follows: Debtor purchased materials on its open account; Foxworth
provided the materials and invoiced Debtor monthly; Debtor paid
Foxworth as it was able, based on when Debtor’s customers paid
it. 	Plaintiff agrees that Debtor had an account with Foxworth
and that Debtor purchased materials on open account. 	Plaintiff
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3Plaintiff did not move to strike any affidavit or specific
portion of any affidavit. 	Generally, unless a nonmovant moves to
strike or files a formal objection that details the specific
paragraphs sought to be stricken and the reasons why, there is a
waiver and the trial court is free to consider all evidence
before it. 	See Associated Press v. Cook, 513 F.2d 1300, 1303
(10 th Cir. 1975); Perma Research and Development Co. v. Singer
Co., 410 F.2d 572, 579 (2d Cir. 1969). 	See also Servants of the
Paraclete, Inc. v. Great American Ins. Co., 866 F.Supp. 1560,
1564 (D. N.M. 1994)(“The United States Court of Appeals for the
Tenth Circuit has explicitly held that legally insufficient
affidavits under Rule 56(c) are subject to a motion to strike.”);
and Wright, Miller and Kane, 10B Federal Practice & Procedure §
2738 (3d ed)(text accompanying n.51). 	The Court can, however,
ignore statements in affidavits for which there is obviously no
foundation. 	Perma Research, 410 F.2d at 579.
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disputes that “Debtor paid Foxworth as it was able, based on when
Debtor’s customers paid it.” 	Plaintiff points to no contrary
evidence in the record however, so this fact is also deemed
admitted.
Plaintiff further tries to dispute the fact by attacking the
affidavits 3: “The Trustee objects to Foxworth’s supporting
affidavits purporting to have personal knowledge about the
Debtor’s state of mind or reasons for making payments, as the
affiants have not demonstrated any foundation for being able to
do so.” 	Apparently by “state of mind” Plaintiff is referring to
the one common statement in all three affidavits about making
payments; that is, when Debtor received payments from its
customers, it paid Foxworth. 	The Court does not understand this
to be a statement of Debtor’s state of mind; rather, it is a
statement about ability to pay a debt one owes. 	It is common
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knowledge that if one does not have money, one cannot pay bills.
Although Plaintiff did not file a cross motion for summary
judgment, he asserted nine additional facts that he considers
material and undisputed. 	The Court finds that these additional
facts do not create a genuine issue of material fact as to
Foxworth’s defense.
The first three facts are two allegations in the complaint
admitted by Foxworth: the amount of the debt and the fact that it
was antecedent. 	The third is that Debtor was insolvent at the
time of the payments. 	This third fact cites only to § 547(f),
which is a rebuttable presumption that every debtor is insolvent
for ninety days before bankruptcy. 	A presumption is not a fact.
In any event, whether debtor was insolvent is irrelevant if the
challenged payments were ordinary course business payments.
Plaintiff’s fourth fact is that Debtor’s credit application
had different terms. 	It did. 	However, “[i]t is what is normal
between the two parties that controls, not necessarily the
printed words of an invoice.” 	Tomlins v. BRW Paper Co., Inc. (In
re Tulsa Litho Co.), 229 B.R. 806, 809 (10th Cir. BAP
1999)(decided under former law).
When applying the subjective test of subsection
[(A)], courts compare transfers from the pre-preference
period with transfers during the preference period and
weigh the following four primary factors: “(1) the
length of time the parties were engaged in the
transaction in issue; (2) whether the amount or form of
tender differed from past practices; (3) whether the
debtor or creditor engaged in any unusual collection or
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payment activity; and (4) the circumstances under which
the payment was made.” 	Sunset Sales, 220 B.R. at
1020–21. 	When considering the first two factors, if
there are no prior transactions, courts should
generally look to see whether the debtor adhered to the
contract payment terms. 	Id. at 1021.
Id. at 809. 	See also American Camshaft, ___ B.R. at ___, 	2011
WL 486587 at *6:
In this case, the evidence is uncontroverted that
the Debtor was historically past invoice terms in
making its payments to Gerdau, but that it had
ordinarily paid around 60 days. During the one year
before the 90 day preference period, the average time
was 59 days, and during the 90 day preference period,
it was 63 days. 	That is not a material change,
especially when the lag time between the invoice date
and payment date lengthened, rather than shortened.
Similarly, the range of dates of payments in the year
before the preference period was 44 to 74 days. During
the 90 day preference period, it was 56 to 74 days.
Again, not a material change. 	To the extent that the
timing of payments is important in considering the
subjective component under § 523(a)(2)(A) [sic], the
timing in this case tends to suggest that the payments
to Gerdau during the 90 day preference period were
consistent with the past practices of the Debtor and
Gerdau.
Foxworth had thousands of transactions with Debtor. 	The Court
finds that evidence of practice overrides the printed terms on
the credit agreement.
Plaintiff’s fifth fact is that each preferential payment was
substantially late. 	Foxworth’s response is that all of Debtor’s
payments for seventeen years were late. 	This is demonstrated in
the tables on pages 6 and 7 of the Motion, which summarize Ms.
Hoover’s detailed analysis of all invoices from October, 2004 to
the petition date. 	The tables also demonstrate that during the
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preference period, the lateness had actually decreased over prior
periods. 	See also Foxworth’s Reply, doc 26 at 11 (Percentage of
payments later than 115 days dropped constantly from 2004 to the
preference period.) 	See Menotte v. Oxyde Chemicals, Inc. (In re
JSL Chemical Corp.), 424 B.R. 573, 579 (Bankr. S.D. Fla. 2010):
“[U]ntimely payments are more likely to be considered
outside the ordinary course of business and avoidable
as preferences.” [Marathon Oil Co. v. Flatau (In re]
Craig Oil [Co.)], 785 F.2d [1563] at 1567–68 [(11 th Cir.
1986)]. 	Nevertheless, a “creditor may overcome the
presumption that late payments are non-ordinary by
showing that it was in the ordinary course of the
parties' business to pay late.” 	Braniff, Inc. v.
Sundstrand Data Control, Inc. (In re Braniff), 154 B.R.
773, 780–81 (Bankr. M.D. Fla. 1993); see also [Kapila
v. Media Buying, Inc. (In re] Ameri P.O.S. [Inc.], 355
B.R. [876] at 885 [(Bankr. S.D. Fla. 2006)](citing
[Logan v. Basic Distribution Corp. (In re ] Fred Hawes
Org.[,Inc.], 957 F.2d [(239)]at 244)(“If paying late
was ordinary for the parties then such payments are not
preferences.”); [Official Comm. of Unsecured Creditors
of the Estate of] CCG 1355, Inc. [v. CRST, Inc. (In re
CCG 1335, Inc.)], 276 B.R. [377] at 383 (“late payments
can be ordinary course if analysis finds them to be
consistent, both before the preference period and
during that period”).
Plaintiff’s sixth and seventh fact focus on a perception
that more checks were in round figures (e.g., $64,000) as Debtor
progressed into bankruptcy. 	Although the Court doubts that this
has any significance, Foxworth corrected the perception by filing
the second Hoover affidavit (doc 26-1) that corrected the amounts
of some checks that had been misreported during or after the
computer accounting system changeover. 	In fact, about one-third
of all checks between 2004 and 2007 were in round numbers.
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Plaintiff’s eighth fact is that Debtor stopped payment on a
check. 	The Court does not understand how a unilateral act of the
Debtor to stop payment on one check before filing bankruptcy
upsets the seventeen years of prior experience between the
parties. 	Furthermore, by stopping payment on the check, it is
not included in Plaintiff’s calculations and is not subject to
recovery.
Plaintiff’s ninth fact is that Foxworth filed two mechanics
liens, one in 2007 and one in 2008, to extract preferential
payments. 	Foxworth argues that the liens were not filed against
Debtor, but rather against the properties. 	This is supported by
Exhibit D, doc 21-3. 	The Court also notes that the one in 2008
was filed after Debtor’s bankruptcy, so hardly could have been an
attempt to extract a payment. 	As to the first lien, there is no
evidence on record of whether this was customary, whether this in
fact was an attempt to coerce Debtor or did coerce Debtor. 	It
was also neither a certified copy or attached to an affidavit.
The Court finds that this possible discrepancy is not material,
especially in light of Ms. Hoover’s uncontested affidavit ¶ 6
that states that Foxworth took no unusual collection efforts
against Debtor.
Under Sunset Sales, the Court must examine the following:
“(1) the length of time the parties were engaged in the
transaction in issue; (2) whether the amount or form of tender
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differed from past practices; (3) whether the debtor or creditor
engaged in any unusual collection or payment activity; and (4)
the circumstances under which the payment was made.” 	220 B.R. at
1020-21. 	Foxworth has shown that the parties were engaged in
similar transactions with similar terms for seventeen years.
Debtor always paid late but averaged about 115 days. 	It always
paid by check and always lumped invoices together. 	Foxworth did
not engage in any unusual collection activity. 	There is no
evidence Foxworth put Debtor on credit hold or threatened or
filed suit. 	The payments were made in ordinary circumstances.
The Plaintiff has not met its burden to overcome Foxworth’s
showing.
CONCLUSION OF LAW
Foxworth has met its burden of proof to establish a defense
to the Plaintiff’s preference recovery power under Section
547(c)(2)(A). 	A judgment for Foxworth will enter.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	April 6, 2011
Copies to:
David T Thuma
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
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Kieran F Ryan
Ryan Law Office
PO Box 26
Las Cruces, NM 88004-0026
David McNeill, Jr
Holt Babington Mynatt P.C.
PO Box 2699
Las Cruces, NM 88004-2699
Office of the United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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