In a 24 page decision released April 13, 2017, Judge Walrath of the Delaware Bankruptcy Court denied a motion for summary judgment in a preference action brought by Charles Stanziale as the chapter 7 Trustee of Powerwave Technologies against Superior Technical Resources – Adversary Proceeding Case No. 15-50085. Judge Walrath’s opinion is available here (the “Opinion”). Judge Walrath held that “genuine factual disputes precluding summary judgment”. Opinion at *6. While we have summarized a large number of opinions on preference actions, this is one of the most informative opinions released by the Delaware Bankruptcy Court in recent memory.
The Opinion provides an in depth analysis of the most common defense to preference actions – the Ordinary Course of Business defense. Judge Walrath discusses the Subjective test in detail and a quick overview of the Objective test, quickly passing over the New Value defense as “the Court must deny the Defendant’s Motion for Summary Judgment as to the new value defense until the ordinary course of business defense is determined.” Opinion at *23.
Judge Walrath analyzes how a number of different factors contribute to a determination of whether a transaction was made in the ordinary course of business under the Subjective Test. As she says, “[W]hether a given transaction was within the subjective ordinary course of business that had developed between the parties is a broad, fact-based inquiry requiring historic examination of the parties’ pre-preference period relations.” Opinion at *10 (quoting Moltech Power Sys., Inc. v. Tooh Dineh Indus., Inc. (In re Moltech Power Sys., Inc.), 327 B.R. 675, 680 (Bankr. N.D. Fla. 2005)). The factors she considers are:
- The Historical Period: “It is well-established that the historical period should encompass ‘the time period when the debtor was financially healthy.’” Opinion st *9 (citing Davis v. R.A. Brooks Trucking Co. (In re Quebecor World (USA), Inc.), 491 B.R. 379, 387 (Bankr. S.D.N.Y. 2013)).
- Ordinariness of the Transfers “Payments made during the preference period do not have to ‘possess a rigid similarity to each past transaction’; however, there must be ‘some consistency.’” Opinion at *10-11 (quoting Menotte v. Oxyde Chem., Inc. (JLS Chem. Corp.), 424 B.R. 573, 581 (Bankr. S.D. Fla. 2010)). Judge Walrath addresses five different methods for comparing transacitons within the preference period against those made prior to the preference period.
- Range Method: Judge Walrath opined that “there is a material issue of fact as to the proper baseline and the range method’s applicability.” Opinion at *12. Judge Walrath compared a number of different cases in which the Range Method was discussed. In some, it was applied (see, e.g., Am. Home Mortg., 476 B.R. 124, 138 (Bankr. D. Del. 2012)), in others, it was determined to be too broad (see, e.g. Quebecor, 491 B.R. at 387). Judge Walrath held that “there are genuine disputes of material fact regarding the range method’s appropriateness, which preclude summary judgment in this case.” Opinion at *14.
- Batch Method: When multiple invoices are paid with each payment, a party can calculate the average age of invoices paid in each batch and, from these, derive a standard deviation range, which can then be compared to the payments made in the preference period.
- Days Sales Outstanding Method: The DSO Method involves multiplying the total amount of an invoice by the number of days that it took to be paid. That number is then divided by the total amount of the invoices in that batch.
- Inter-quartile Range Method: This method involves calculating the range and excluding the fastest and slowest paid quartiles (25%), and considering only the range that includes 50% of pre-preference payments. There is no precedent in Delaware for the use of this methodology.
- Standard Deviation Method: This method involves calculating the average days between invoice and payment, and calculating the standard deviation of the average days to payment. The argument is that all payments made within one standard deviation of the average are ordinary, and the remainder are not.
- Unusual collection activity: “Subsection 547(c)(2) protects those payments that do not result from unusual or extraordinary debt collection practices.” Opinion at *17 (citing McCarthy v. Navistar Fin. Corp. (In re Vogel Van & Storage, Inc.), 210 B.R. 27, 36 (N.D.N.Y. 1997)). This includes a change in credit terms and defendant’s collection activities.
With all of these issues involving disputes of material fact, Judge Walrath opined that she was unable to issue summary judgment as to whether the subjective test protects any of the allegedly preferential payments from recovery.
Judge Walrath quickly moves through the objective test, holding that (1) a sufficiently detailed basis is needed to establish the relevant industry, (2) expert testimony is not required, and (3) there should be sufficient statistical data or supporting basis for the evidence related to the objective standard. As the parties disagreed about the relevant industry or NAICS classification, summary judgment could not be entered on this issue either.
While this Opinion doesn’t create precedent that can be used to obtain a final resolution for defendants, it does define the issues that the Court will consider in ruling on a motion for summary judgment. If you are a bankruptcy practitioner, or the defendant of a preference action, this Opinion should be considered required reading.