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Payments May be Ordinary, Even When the Payment Practices Differ in the Preference and Base Period, If there Is a Change in the Defendant’s Ownership

Satija v. C-T Plaster, Inc. (In re Sterry Indus.), Nos. 13-11818-TMD, 15-01108-TMD, 2016 Bankr. LEXIS 2268 (U.S. Bankr. W.D. Tex. June 9, 2016)

Debtor Sterry Industries, Inc. a pool installer had a long standing business relationship with a subcontractor Defendant Hines/Harvey Interests, LLC dba Cen-Tex Plaster, Inc to install the permanent liner in the pools constructed by the Debtor. The business was carried out in the following manner: The Debtor would fax a work order to Cen-Tex specifying where and when to install the liner. Cen-Tex would then install the liner and send an invoice to Sterry. As soon as the liner was installed, Sterry would fill the pool and then will look for payment from the owner. Payment terms were Net 30. About six months before Sterry’s bankruptcy, Cen-Tex was sold to a new owner, and the business practice between Cen-Tex and Sterry changed: the invoice payment deadline changed from Net 30 to due upon receipt, instead of waiting for Sterry to mail the check, Cen-Tex would send a representative to pick up each check at Sterry’s office. During the first three months after Cen-Tex changed owners, Sterry paid the invoices within 1, 4, 9, 17, and 7 days. During the preference period, the time gap between the invoice and payment dates lengthened to 22, 14, and 18 days.

The bankruptcy trustee sought to recover the payments made during the preference period as preference pursuant to Sec. 547(b). The Defendant contended that the alleged payments were made in the ordinary course of business and hence not avoidable pursuant to Sec. 547 (c) (3). The Trustee contended that changing the invoice to read due upon receipt instead of Net 30 took the payments on those invoices outside of the ordinary course. The Trustee also argued that sending someone to collect checks in person was a coercive practice that would take the payments outside of the ordinary course of business.
The Court found that the timing and manner of payments between Sterry and Cen-Tex in the three months prior to the preference period was substantially the same as during the preference period; someone would come in and pick up the check for Cen-Tex within a few weeks of the invoice date during both pre-preference and preference period, the payments were made in 30 days during the both periods. So, the alleged payments were made in the ordinary course of business. The Court stated that the payments at issue might look preferential, if it had to look at the entire payment history between Cen-Tex and Sterry, without considering the ownership change, because Sterry began paying its invoices timely only three months before the preference period. However, the Court concluded that it cannot ignore the ownership change which brought an agreed change in the business relationship between the two entities. Since this new business relationship began three months prior to the preference period, that three-month period of time was the relevant baseline to compare to the preference period.

The Court further rejected the Trustee’s collection pressure argument and reasoned that while sending someone to pick up a check in person is certainly more coercive than sending an invoice and demanding a check in the mail, this collection method was not so coercive here as to take these payments outside of the ordinary course of business. Since, this practice began with the ownership change three months before the preference period; it became ordinary to these parties.

The Court also rejected the Trustee’s argument relating to the payment terms and held that according to witnesses for both parties, “Due upon Receipt” meant the same thing as “Net 30”. Sterry had to pay the invoice within 30 days. Therefore, the language change did not alter, and so was not outside, the course of business between Cen-Tex and Sterry. The Court concluded that the Trustee was not entitled to recover the alleged transfers as the Defendant has successfully established an ordinary course of business defense to the preference action.