Opinion · Court of Appeals for the Seventh Circuit
In the Matter of Tolona Pizza Products Corporation, Debtor-Appellant
3 F.3d 1029
- Type
- Opinion
- Court
- Court of Appeals for the Seventh Circuit
- Jurisdiction
- Federal
- Date
- 1993-08-19
- Topic
- bankruptcy
ruling that the payments in question had followed ordinary business terms, despite noting that “the checks ... cleared and as a result Tolona’s debts to Rose were paid in full.” | holding that the “bar on suits against individual 4 defendants” applies to the ADA | arguing that in this set of cases the evidentiary value of compliance with industry norms lends great support to the rule | holding that the defendant’s executive vice president’s testimony about how many days between invoice date and payment prevailed in the wider industry was sufficient evidence to find that the preferential payments were objectively ordinary | finding that the evidence showed that “payment within 30 days is within the outer limits of normal industry practices” | noting that it can be “difficult to identify the industry whose norm shall govern,” and further “there can be great variance in billing practices within an industry.” | questioning whether the appropriate industry included “the [sellers] of sausages to makers of pizza? The [sellers] of sausages to anyone? The [sellers] of anything to makers of pizza?” | noting the difficulty of defining the relevant industry but also of synthesizing an industry standard when practices may vary widely from firm to firm | finding a different ordinary course range when “parties have established a practice that deviates from the strict terms of their written contract” | noting the absence of evidence that "the dealings were designed to put [the creditor] ahead of other creditors of [the debtor] or that other creditors of [the debtor] would have been surprised to learn that [the creditor] had been so forbearing in its dealings with [the debtor]” | “stating [one] ... function of the subsection is to allay the concerns of creditors that one or more of their number may have worked out a special deal with the debtor, before the preference period, designed to put that creditor ahead of the other in the event of bankruptcy.” | testimony of the creditor’s executive vice president based on his personal knowledge regarding the practices of his competitors sufficient under section 547(c)(2)(C) | “[T]he creditor must show that the payment received was made in the ordinary business terms in the industry.” | “‘ordinary business terms’ refers to the range of terms that encompasses the practices in which firms similar in some general way to the creditor engage ... ” | “Not only is it difficult to identify the industry whose norm shall govern ..., but there can be great variance in billing practices within an industry.” | ordinary business terms means the “range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage.” | testimony of creditor’s executive vice-president, who had extensive experience in the industry, was sufficient to prove industry standard | “[A] ‘late’ payment really isn’t late if the parties have established a practice that deviates from the strict terms of their written contract” | "only dealings so idiosyncratic" fall outside scope of subsection C (emphasis added) | “Claim construction seeks to ascribe to claim terms the meaning 4 a person of ordinary skill in the art at the time of invention would have given them.” | “If the debtor and creditor dealt on terms that the creditor testifies were normal for them but that are wholly unknown in the industry, this casts some doubt on his (self-serving) testimony.” | “firms similar in some general way to the creditor" | debtor was pizza maker and creditor was sausage supplier | “[One] ... function of the subsection is to allay the concerns of creditors that one or more of their number may have worked out a special deal with the debtor, before the preference period, designed to put that creditor ahead of the other in the event of bankruptcy.” | personal knowledge of creditor’s executive vice-president
Citator
- Authority status
- pending
- Cited by
- 196 opinions
MATTER OF TOLONA PIZZA PRODUCTS CORP.,3 F.3d 1029(7th Cir. 1993)
IN THE MATTER OF TOLONA PIZZA PRODUCTS CORPORATION, DEBTOR-APPELLANT.
No. 92-3386.
United States Court of Appeals, Seventh Circuit.
Argued May 6, 1993.
Decided August 19, 1993.
Page 1030
Richard S. Alsterda, argued, Alexis R. Logan, Coffield, Ungaretti, Harris Slavin, Chicago, IL, for Tolona Pizza Products Corp.
Before POSNER, FLAUM, and RIPPLE, Circuit Judges.
[2] Tolona, a maker of pizza, issued eight checks to Rose, its sausage supplier, within 90 days before being thrown into bankruptcy by its creditors. The checks, which totaled a shade under $46,000, cleared and as a result Tolona's debts to Rose were paid in full. Tolona's other major trade creditors stand to receive only 13 ¢ on the dollar under the plan approved by the bankruptcy court, if the preferential treatment of Rose is allowed to stand. Tolona, as debtor in possession, brought an adversary proceeding against Rose to recover the eight payments as voidable preferences. The bankruptcy judge entered judgment for Tolona. The district judge reversed. He thought that Rose did not, in order to comply with section 547(c)(2)(C), have to prove that the terms on which it had extended credit to Tolona were standard terms in the industry, but that if this was wrong the testimony of Rose's executive vice-president, Stiehl, did prove it. The parties agree that the other requirements of section 547(c)(2) were satisfied.
[3] Rose's invoices recited "net 7 days," meaning that payment was due within seven days. For years preceding the preference period, however, Tolona rarely paid within seven days; nor did Rose's other customers. Most paid within 21 days, and if they paid later than 28 or 30 days Rose would usually withhold future shipments until payment was received. Tolona, however, as an old and valued customer (Rose had been selling to it for fifteen years), was permitted to make payments beyond the 21-day period and even beyond the 28-day or 30-day period. ThePage 1032eight payments at issue were made between 12 and 32 days after Rose had invoiced Tolona, for an average of 22 days; but this actually was an improvement. In the 34 months before the preference period, the average time for which Rose's invoices to Tolona were outstanding was 26 days and the longest time was 46 days. Rose consistently treated Tolona with a degree of leniency that made Tolona (Stiehl conceded on cross-examination) one of a "sort of exceptional group of customers of Rose . . . fall[ing] outside the common industry practice and standards."
[4] It may seem odd that paying a debt late would ever be regarded as a preference to the creditor thus paid belatedly. But it is all relative. A debtor who has entered the preference period — who is therefore only 90 days, or fewer, away from plunging into bankruptcy — is typically unable to pay all his outstanding debts in full as they come due. If he pays one and not the others, as happened here, the payment though late is still a preference to that creditor, and is avoidable unless the conditions of section 547(c)(2) are met. One condition is that payment be in the ordinary course of both the debtor's and the creditor's business. A late payment normally will not be. It will therefore be an avoidable preference.
[5] This is not a dryly syllogistic conclusion. The purpose of the preference statute is to prevent the debtor during his slide toward bankruptcy from trying to stave off the evil day by giving preferential treatment to his most importunate creditors, who may sometimes be those who have been waiting longest to be paid. Unless the favoring of particular creditors is outlawed, the mass of creditors of a shaky firm will be nervous, fearing that one or a few of their number are going to walk away with all the firm's assets; and this fear may precipitate debtors into bankruptcy earlier than is socially desirable.In re Xonics Imaging, Inc.,supra,837 F.2d at 765;In re Fred Hawes Organization, Inc.,supra,957 F.2d at 243n. 5.
[6] From this standpoint, however, the most important thing is not that the dealings between the debtor and the allegedly favored creditor conform to some industry norm but that they conform to the norm established by the debtor and the creditor in the period before, preferably well before, the preference period. That condition is satisfied here — if anything, Rose treated Tolona more favorably (and hence Tolona treated Rose less preferentially) before the preference period than during it.
[7] But if this is all that the third subsection of 547(c)(2) requires, it might seem to add nothing to the first two subsections, which require that both the debt and the payment be within the ordinary course of business of both the debtor and the creditor. For, provided these conditions are fulfilled, a "late" payment really isn't late if the parties have established a practice that deviates from the strict terms of their written contract. But we hesitate to conclude that the third subsection, requiring conformity to "ordinary business terms," has no function in the statute. We can think of two functions that it might have. One is evidentiary.In re Loretto Winery, Ltd.,107 B.R. 707,710(9th Cir. BAP 1989);In re Morren Meat PoultryCo.,92 B.R. 737,740-41(W.D.Mich. 1988); DeSimone,supra,at 127-28. If the debtor and creditor dealt on terms that the creditor testifies were normal for them but that are wholly unknown in the industry, this casts some doubt on his (self-serving) testimony. Preferences are disfavored, and subsection C makes them more difficult to prove. The second possible function of the subsection is to allay the concerns of creditors that one or more of their number may have worked out a special deal with the debtor, before the preference period, designed to put that creditor ahead of the others in the event of bankruptcy. It may seem odd that allowing late payments from a debtor would be a way for a creditor to make himself more rather than less assured of repayment. But such a creditor does have an advantage during the preference period, because he can receive late payments then and they will still be in the ordinary course of business for him and his debtor.
[8] The functions that we have identified, combined with a natural reluctance to cut out and throw away one-third of an important provision of the Bankruptcy Code,Page 1033persuade us that the creditor must show that the payment he received was made in accordance with the ordinary business terms in the industry. But this does not mean that the creditor must establish the existence of some single, uniform set of business terms, as Tolona argues. DeSimone,supra,at 127. Not only is it difficult to identify the industry whose norm shall govern (is it, here, the sale of sausages to makers of pizza? The sale of sausages to anyone? The sale of anything to makers of pizza?), but there can be great variance in billing practices within an industry. Apparently there is in this industry, whatever exactly "this industry" is; for while it is plain that neither Rose nor its competitors enforce payment within seven days, it is unclear that there is a standard outer limit of forbearance. It seems that 21 days is a goal but that payment as late as 30 days is generally tolerated and that for good customers even longer delays are allowed. The average period between Rose's invoice and Tolona's payment during the preference period was only 22 days, which seems well within the industry norm, whatever exactly it is. The law should not push businessmen to agree upon a single set of billing practices; antitrust objections to one side, the relevant business and financial considerations vary widely among firms on both the buying and the selling side of the market.
[9] We conclude that "ordinary business terms" refers to therangeof terms that encompasses the practices in which firms similar in some general way to the creditor in question engage, and that only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary and therefore outside the scope of subsection C.In re SPW Corp.,96 B.R. 676,681-82(Bankr.N.D.Tex. 1989);In re White,64 B.R. 843,850(Bankr.E.D.Tenn. 1986);In re Economy Milling Co.,37 B.R. 914,922(D.S.C. 1983). Stiehl's testimony brought the case within the scope of "ordinary business terms" as just defined. Rose and its competitors pay little or no attention to the terms stated on their invoices, allow most customers to take up to 30 days to pay, and allow certain favored customers to take even more time. There is no single set of terms on which the members of the industry have coalesced; instead there is a broad range and the district judge plausibly situated the dealings between Rose and Tolona within it. These dealings are conceded to have been within the normal course of dealings between the two firms, a course established long before the preference period, and there is no hint either that the dealings were designed to put Rose ahead of other creditors of Tolona or that other creditors of Tolona would have been surprised to learn that Rose had been so forbearing in its dealings with Tolona.
[10] Tolona might have argued that the district judge gave insufficient deference to the bankruptcy judge's contrary finding. The district judge, and we, are required to accept the bankruptcy judge's findings on questions of fact as long as they are not clearly erroneous. Fed.R.Bankr.P.8013;In re Bonnett,895 F.2d 1155,1157(7th Cir. 1989). But since Tolona did not argue that the district judge had applied an incorrect standard of review, we need not decide whether the district judge overstepped the bounds. Which is not to say that he did. While he did not intone the magic words "clear error," he may well have believed that the record as a whole left no doubt that Tolona's dealings with Rose were within the broad band of accepted practices in the industry. It is true that Stiehl testified that Tolona was one of an exceptional group of Rose's customers with whom Rose's dealings fell outside common industry practice. But the undisputed evidence concerning those dealings and the practices of the industry demonstrates that payment within 30 days is within the outer limits of normal industry practices, and the payments at issue in this case were made on average in a significantly shorter time.
[11] The judgment reversing the bankruptcy judge and dismissing the adversary proceeding is
[12] AFFIRMED.
[15] The bankruptcy court discussed in some detail the evidence offered by Rose to show conformity to the standard terms of the industry. As the bankruptcy judge characterized it, what little evidence was offered was ambiguous. One of Rose's salesmen testified that few of Rose's customers paid within the 7-day terms of its contracts but three-quarters paid within 21 days. An accounts receivable clerk testified that most local accounts paid within 14 days. Most importantly, the executive vice-president of Rose, Dwight Stiehl, testified that Tolona's credit practices conformed to industry-wide norms. But, the bankruptcy court pointed out, Stiehl's answer did not explainwhichcredit practices of Rose — either the contractual terms that stated "net 7 days" or the special exceptions for late customers — were generally applied in the industry. Furthermore, Stiehl conceded, inconsistently with his other testimony, that Tolona was one of an "exceptional group of customers of Rose . . . fall[ing] outside the common industry practice and standards." In light of these anomalies in the evidence, the bankruptcy judge concluded that Rose had failed to establish that Tolona's payments fit the industry practice.
[16] Under Bankruptcy Rule 8013, the district court on appeal must defer to the bankruptcy court's findings of fact unless they are clearly erroneous.See, e.g., In re Bonnett,895 F.2d 1155,1157-58(7th Cir. 1989) (reversing a district court's reversal of a bankruptcy court's decision because the former incorrectly applied a de novo standard of review to the latter's factual determinations);In re Kimzey,761 F.2d 421,423(7th Cir. 1985) ("[T]he district court must accept the bankruptcy court's findings of fact unless they are clearly erroneous. The court of appeals also must restrict its review of factual findings to this narrow standard.") (citations omitted). The district judge in this case made no such determination, but instead held, without elaboration, that the bankruptcy court had "misinterpreted" Stiehl's testimony. The district court chose not to address the difficulties that the bankruptcy court identified in Stiehl's testimony, nor did it mention any other testimony that would have supported Rose's contention. Rather, it simply announced that Stiehl's statements supported a conclusion that Rose's credit practices used with Tolona were no different from those applied generally in the industry.
[17] I do not believe that such a summary reversal of a bankruptcy court's findings of fact should stand. The district judge devoted most of his opinion to a defense of the view, which the court's decision now rejects, that section 547(c)(2)(C) does not mandate an examination of "objective" industry standards if the debtor and the creditor had their own established course of dealing. Only in the final two paragraphs of its opinion did the district court touch upon the alternate theory that Stiehl's testimony indicated that Tolona's payment schedule actually did conform to industry-wide norms. Given the peremptory rejection of the bankruptcy court's findings without a determination of clear error, I would reverse the district court's decision and reinstate the decision of the bankruptcy court.Page 1035
- Contrary to the position of the majority, I believe that Tolona did raise this issue on appeal. Part II of Tolona's brief recited the bankruptcy court's conclusion that Rose had failed to carry its burden of proof, and further explained why that conclusion was justified on the record. While admittedly Tolona did not invoke the words "clear error," it indicated its belief that the bankruptcy court's factual determinations should have been upheld, and, equivalently, that the district court paid them insufficient deference. ↩