United States: Conex Bankruptcy – Summary Judgment In A Preference Action

Last Updated: December 22 2014
Article by L. John Bird

In an 18 page opinion released December 18, 2014 in the Conex Holdings bankruptcy (Bank. D. Del. 11-10501), Judge Sontchi of the Delaware Bankruptcy Court analyzed the "ordinary course of dealings" defense to a preference action between the Debtors and Industrial Specialists Inc, the preference defendant ("Defendant"), in granting summary judgment in favor of the Defendant.  Judge Sontchi's opinion is available here (the "Opinion").

Background

On February 21, 2011, involuntary petitions for relief under chapter 11 were filed against Conex and certain affiliates.  On February 24, 2011, the involuntary chapter 11 cases were consensually converted to voluntary cases under chapter 7.  Charles A. Stanziale, Jr. (the "Trustee") was appointed as the Debtors' chapter 7 trustee.  As part of the Trustee's responsibilities, he is tasked with recovering transfers made by the Debtors within the 90 days before the Debtors' bankruptcy filing.  These transfers are presumed by the Bankruptcy Code to be "preferences".   In addition to our various blog posts about preference actions, we have created a short guide to defending a preference action.  Our Preference Reference can be downloaded as a PDF here.

In December 2012, the Trustee brought this preference action against the Defendant, seeking to avoid and recover $1,181,583.84.  After completing discovery, the Defendant filed its motion for summary judgment, which led to the entry of the Order.  Judge Sontchi cited heavily to the case Hechinger Liquidation Trust v. Universal Forest Prod., Inc. (In re Hechinger Inv. Co. of Delaware, Inc.), 326 B.R. 282 (Bankr. D. Del. 2005) aff'd sub nom. In re Hechinger Inv. Co. of Delaware Inc., 339 B.R. 332 (D. Del. 2006) aff'd in part, vacated in part, remanded sub nom. In re Hechinger Inv. Co. of Delaware, Inc., 489 F.3d 568 (3d Cir. 2007).

Judge Sontchi's Ruling

The Trustee raised two main arguments against the Defendant's ordinary course of business defense, each of which was addressed in the Order. The Trustee argued first that the historical timing of payments was different than the timing of the payments during the 90-day period before the bankruptcy (the "Preference Period").  The Trustee also argued that because the Defendant recently changed names, the previous course of business should not be considered in the Court's analysis.

Judge Sontchi held, however, that the Defendant's submission of uncontroverted evidence that it was the same entity, despite the change in its name, was sufficient to defeat the Trustee's claim that two separate companies were recipients of payments.  Opinion at *17.  Thus, Judge Sontchi considered the entire history of dealings between the Defendant and the Debtor – 20 payments over roughly 16 months.  The Court performed a "subjective" analysis rather than an"objective" analysis.  (A complete description of both types of analysis and the burden on the defendant for each is included within the Preference Reference).

In this case, the 7 payments during the Preference Period were made an average of 7 days slower than payments in the pre-preference period and in a slightly narrower range (27 days as compared to 54 days).  The interpretation of how the days until payment are calculated and what was the 'ordinary course' were the only questions the Court had to address on this point.  Opinion at * 10-11.   The Trustee raised the argument that the analysis of "ordinary" should be determined by the "dollar-weighted days" (or "DSO") until payment, citing to Hechinger for support of this method.  However, as stated by Judge Sontchi, "the Hechinger Court did not use, nor mention, the DSO methodology in its analysis (or any other statistical calculation, for that matter) in determining whether preferential transfers were within the ordinary course. Nor will this Court."  Opinion at *15-16.  Judge Sontchi then quickly granted the motion for summary judgment, holding that "[b]ased on the length of relationship between the Debtor and Defendant, the timing of payments, and the historical billing practices, the Court finds that the Transfers were made in the ordinary course of business...."  Opinion at *18.

The determination in this case hinged upon the ordinary course of business of the Debtors and the Defendant.  As stated by the Court, "this inquiry is intensely fact specific."  Opinion at *13.  Unless both parties in a preference action are willing to settle the dispute, there is no way to avoid the expense and burden of discovery when the ordinary course of business defense is relied upon.  This is something all preference defendants should keep in mind when considering their litigation strategy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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