Restructuring

Contributed by Elizabeth Hendee
Last month, in Davis v. All Points Packaging & Distribution, Inc. (In re Quebecor World (USA), Inc.), Nos. 08-10152 (JMP), 10-01009 (SHL) (Bankr. S.D.N.Y. Apr. 22, 2013), the United States Bankruptcy Court for the Southern District of New York issued proposed findings of fact and conclusions of law finding that a payment made by Quebecor World (USA), Inc., the debtor, to All Points Packaging & Distribution, Inc. was not made in the the ordinary course of business and, thus, constituted an avoidable preference under section 547 of the Bankruptcy Code.
This story began in 2005 when All Points first supplied Quebecor, a printing company, with shrink wrap materials.  For the next few years, All Points and Quebecor’s relationship was relatively uneventful – All Points regularly invoiced Quebecor for shrink wrap materials, and Quebecor regularly paid the invoices, typically 55-60 days after the invoice date.  On July 31, 2007, All Points sent Quebecor an invoice as it usually did.  This invoice was for approximately $75,000.  91 days later, on October 30, 2007, Quebecor paid that invoice by a check in the amount of $67,078.19.  For the purposes of this case, this transaction was important for two reasons.  First, in the July 31 invoice, All Points had overcharged Quebecor for shrink wrap materials.  Second, Quebecor’s October 30 payment fell within the ninety-day “preference period” prior to its January 21, 2008 chapter 11 filing.
Section 547 of the Bankruptcy Code provides that, subject to certain exceptions, a debtor or trustee may avoid a transfer made within the 90 days prior to the debtor’s bankruptcy filing if the transfer was made by the debtor to an unsecured creditor on account of antecedent debt for the benefit of the debtor or a creditor.  Here, the parties agreed that the October 30 payment satisfied the basic requirements of section 547.  All Points, however, contended that the payment could not be avoided pursuant to section 547 because it fell within the “ordinary course of business” exception found in section 547(c)(2) of the Bankruptcy Code.  Pursuant to the “ordinary course of business” exception, a debtor or trustee may not avoid a transfer if “such transfer was made 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 “made in the ordinary course of business or financial affairs of the debtor and the transferee” or “made according to ordinary business terms.”
To determine whether a transfer qualifies for the “ordinary course of business” exception, courts consider, among other things, the parties’ prior course of dealing, the amount of the payment, the timing and circumstances of the payment, the presence of unusual debt collection practices, and changes in the means of payment.  The creditor bears the burden of establishing a baseline of dealing between the parties so that the court can adequately compare the parties’ usual payment practices with the practices used during the preference period.  The late payment of an invoice, though facially unordinary, may fall within the “ordinary course of business” exception if the creditor is able to establish that the debtor typically paid its invoices late.  To determine whether a late payment is “ordinary,” courts compare the average amount of time that historically lapsed in between the issuance of an invoice and the payment of that invoice with the average amount of time that lapsed in between the issuance of the invoice in question and the payment of that invoice.
In this case, the payment in question was made approximately 90 days after the date of the invoice.  Typically, Quebecor paid All Points’ invoices about 55-60 days after the invoices were issued.  Accordingly, the timing of the payment appeared to fall outside of the ordinary course of the companies’ dealings.  Here, however, there was a logical explanation for the delayed payment.  In the July 30 invoice, All Points had overcharged Quebecor by approximately $7,000.  This error was evidenced by a credit memo issued on October 30, the date Quebecor paid the July invoice.  According to All Points, Quebecor’s payment was delayed because it took the companies some time to correct the July 30 invoice.
The court did not find All Points’ argument compelling.  According to the court, when determining whether a payment falls within the ordinary course of business exception, courts should consider when the payment was actually made, not when the payment would have been made had events turned out as the parties intended.  Here, the payment was actually made approximately 30 days after Quebecor typically paid such invoices.  This discrepancy was significant and suggested that the payment did not fall within the “ordinary course of business” exception.
Even though the court did not accept All Points’ argument of “justified lateness,” it appears the court would consider such an argument if it was supported by substantial evidence.  The only evidence All Points presented that supported its justified lateness argument was the July 30 credit memo.  The court notes that All Points presented no evidence of any communications between the parties related to the billing error, no evidence that All Points attempted to obtain payment from Quebecor within the 55-60 day period following the invoice date, no evidence as to when All Points notified Quebecor of the billing error, and “no evidence as to why it took 90 days to correct” that error.  Would things have turned out differently if All Points had presented such evidence?  We may never know, but the court’s discussion of the evidence All Points failed to present suggests, at a minimum, that the court would have considered such evidence had it been presented.  As Quebecor demonstrates, for now, at least, “non-ordinary” payments, even if justified, may not fall within the ordinary course of business exception in the Southern District of New York.