USCA1 Opinion
UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT
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No. 97-9005
IN RE: HEALTHCO INTERNATIONAL, INC.,
Debtor.
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WILLIAM A. BRANDT, JR., TRUSTEE,
Plaintiff, Appellee,
v.
REPCO PRINTERS & LITHOGRAPHICS, INC.,
Defendant, Appellant.
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APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
OF THE FIRST CIRCUIT
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Before
Selya, Circuit Judge,
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Coffin, Senior Circuit Judge,
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and Stahl, Circuit Judge.
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Duane L. Coleman, with whom Larry E. Parres and Lewis, Rice
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& Fingersh, L.C. were on brief, for appellant.
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Daniel C. Cohn, with whom David B. Madoff and Cohn &
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Kelakos, LLP, were on brief, for appellee.
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December 22, 1997
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SELYA, Circuit Judge. Repco Printers & Lithographics,
SELYA, Circuit Judge.
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Inc. (Repco) asserts a right to retain a payment made to it by
Healthco International, Inc. (Healthco) shortly before Healthco
commenced insolvency proceedings. The bankruptcy court agreed
with Repco but the Bankruptcy Appellate Panel of the First
Circuit (BAP) did not. Repco appeals. After ironing out a
procedural wrinkle, we uphold the BAP's core determination that
the disputed payment was not a transfer "in the ordinary course
of business" within the meaning of 11 U.S.C. 547(c)(2)(1994).
Nevertheless, because the BAP misgauged the posture of the case,
we vacate its judgment and remand for further proceedings.
I. BACKGROUND
I. BACKGROUND
We draw our account from the stipulated record, which
is comprised of twenty-five uncontested statements of fact and
thirteen exhibits (including various depositions and affidavits).
In better days, Healthco functioned as a major
distributor of dental equipment and supplies. In August 1992,
James Mills, chief executive officer of Healthco's parent
company, contacted Fred Zaegel, Repco's owner, to explore a
business relationship. Mills, who knew Zaegel both
professionally and socially, proposed that Repco (headquartered
in St. Louis) print Healthco's product catalog. Zaegel agreed.
From that time forward, Repco handled virtually all of the
diverse printing needs of Boston-based Healthco.
During this interlude, Repco extended credit to
Healthco in accordance with standard printing industry practice:
2
Repco would bill contemporaneously for each service, and would
anticipate receiving payment in sixty days, on average,
notwithstanding contrary credit terms expressed in its invoices.1
For its part, Healthco customarily would accumulate invoices and
then pay some (but not all) of the accumulation by mailing Repco
a lump-sum company check. Over the period from the fall of 1992
until early April of the following year, Healthco paid one
hundred fourteen Repco invoices with sixteen different checks,
totalling around $400,000.
Whenever Repco's cash flow ebbed, it was Zaegel's
practice to contact customers and solicit payment of outstanding
invoices that were at least sixty days old. To this end, Zaegel
called Healthco's treasurer, Arthur Souza, on four occasions.
Each time, Souza arranged for a check to be cut shortly
thereafter.
Despite these periodic payments, some of Repco's
unrequited invoices were almost two hundred days old by late
March. Zaegel tried to prompt Souza once again, but experienced
difficulty in reaching him. Zaegel then called Healthco's chief
financial officer, James Moyle. Zaegel, who never before had
made a dunning call to Moyle, politely informed him that Healthco
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1Repco's invoices bore a net ten days legend. The record
reflects, however, that this credit term was honored mainly in
the breach; most of Repco's customers (and, indeed, the majority
of firms purchasing services in the competitive printing
industry) ignored this stricture.
3
was holding numerous Repco invoices that were substantially
overdue.2 At the conclusion of this five-minute conversation,
Moyle stated that he would investigate the matter.
Moyle vouchsafed in his affidavit that he considered
Repco to be "Healthco's most pivotal vendor in the company's
effort to overcome its financial problems," presumably because
Repco was about to undertake the printing and distribution of
Healthco's quarterly catalog. He asked Souza how much Healthco
owed Repco and what was "the fastest way" to pay the debt. Souza
replied that Healthco had in hand $235,558.64 in outstanding
Repco invoices and that wire transfer would be the quickest
payment method. Moyle directed Souza to wire the full amount.
Repco received the funds on April 13, 1993. That payment
satisfied in one fell swoop sixty-eight invoices ranging from
brand new to two hundred days old.
Healthco sought the protection of the bankruptcy court
on June 9, 1993. The firm's ledgers disclosed that it had made
only two other wire transfers in satisfaction of antecedent debts
during the previous ninety days. The record confirms that
Healthco's trustee in bankruptcy, William A. Brandt, Jr.,
successfully challenged both of the other payments as voidable
preferences.
II. PROCEDURAL HISTORY
II. PROCEDURAL HISTORY
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2The record indicates that Zaegel was unaware of Healthco's
financial problems at this time; that he discussed the past-due
invoices cordially with Moyle; and that he neither threatened to
cut off printing services nor demanded an immediate payment.
4
In due season, the trustee brought this adversary
proceeding seeking to recover the $235,558.64 payment. Repco
defended on three grounds: (1) that Healthco was solvent at the
time of the transfer, (2) that the transfer was "made in the
ordinary course of business" within the meaning of 11 U.S.C.
547(c)(2), and (3) that in all events Repco's services provided
"subsequent new value" within the meaning of 11 U.S.C.
547(c)(4). The parties stipulated that Repco had conferred new
value in the amount of $31,977.38, reducing the trustee's claim
against Repco to $203,581.26 and removing the "new value" issue
from the case. The bankruptcy court then bifurcated the two
remaining issues, reserving the solvency question for later
adjudication and proceeding to tackle the applicability vel non
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of Repco's "ordinary course of business" defense.
The parties cross-moved for summary judgment on this
issue. After the bankruptcy court denied both motions, the
parties submitted the issue on the stipulated record described
above. On July 17, 1996, the bankruptcy court dismissed the
trustee's complaint. The court's two-paragraph rescript reads in
its entirety:
A trial was scheduled in this matter for May
1, 1996. However, the parties filed a motion
to submit the matter on stipulated facts and
exhibits, which was granted on April 20,
1996.
In consideration of said facts and exhibits,
the complaint is dismissed by virtue of the
ordinary course of business defense. A
separate order will issue.
The trustee filed a timely notice of appeal and the
5
parties opted to have the appeal heard by the BAP (in lieu of the
district court).3 For reasons that are not readily apparent, the
parties mutually invited de novo review of the bankruptcy court's
decision. The BAP accepted the invitation, determined that the
wire transfer had not been made in the ordinary course of
business, and ruled that the payment was "preferential, and
subject to recovery by the Trustee under Section 547." Brandt v.
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Repco Printers & Lithographics, Inc. (In re Healthco), No. MW 96-
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026, slip op. at 12 (B.A.P. 1st Cir. 1997). This appeal ensued.
III. STANDARD OF REVIEW
III. STANDARD OF REVIEW
Bankruptcy cases differ from most other federal cases
in that the court of appeals does not afford first-instance
appellate review. Rather, Congress has provided for intermediate
review, conferring on district courts and federal bankruptcy
appellate panels the authority to hear appeals from bankruptcy
court decisions, but preserving to the parties a right of further
review in the courts of appeals. See 28 U.S.C. 158. Whether
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such an appeal comes to us by way of the district court or the
BAP, our regimen is the same: we focus on the bankruptcy court's
decision, scrutinize that court's findings of fact for clear
error, and afford de novo review to its conclusions of law. See
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Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497 (1st Cir.
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3In this circuit, bankruptcy appellate panels have had a
mixed history. After a short-lived experiment, the use of such
panels was discontinued in 1983. The First Circuit Judicial
Council revivified the BAP structure on July 1, 1996, giving
interested parties the option of electing intermediate appellate
review before a BAP panel rather than before a federal district
court.
6
1997); Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st
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Cir. 1994). Since this is exactly the same regimen that the
intermediate appellate tribunal must use, we exhibit no
particular deference to the conclusions of that tribunal (be it
the district court or the BAP). See Palmacci v. Umpierrez, 121
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F.3d 781, 785 (1st Cir. 1997).
We now move from the general to the specific. The
crucial issue in this adversary proceeding revolves around
Repco's access to the "ordinary course of business" defense under
11 U.S.C. 547(c)(2). A bankruptcy court's construction of this
statute presents a question of law and thus engenders plenary
review. See Fidelity Sav. & Inv. Co. v. New Hope Baptist, 880
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F.2d 1172, 1174 (10th Cir. 1989). A bankruptcy court's
assessment in connection with whether the statutory defense
appertains in a given case is a horse of different hue; the
findings which collectively comprise such an assessment are
factbound and thus engender clear-error review. See Yurika Foods
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Corp. v. United Parcel Serv. (In re Yurika Foods Corp.), 888 F.2d
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42, 45 (6th Cir. 1989). Here, the court's rendition of the
statute is unexceptional and the only justiciable issue relates
to whether the challenged transfer, as a factual matter, comes
within the statutory sweep. Hence, the bankruptcy court's
decision normally would be reviewable for clear error. This
means, of course, that a reviewing court "ought not to upset
findings of fact or conclusions drawn therefrom unless, on the
whole of the record, [the appellate judges] form a strong,
7
unyielding belief that a mistake has been made." Cumpiano v.
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Banco Santander P.R., 902 F.2d 148, 152 (1st Cir. 1990).
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This familiar standard is not diluted merely because
parties proceed on a stipulated record. We long have held that a
bankruptcy court's factual findings are entitled to the deference
inherent in clear-error review even when they do not implicate
live testimony, but, rather, evolve entirely from a paper record
that is equally available to the reviewing court. See Boroff v.
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Tully (In re Tully), 818 F.2d 106, 109 (1st Cir. 1987) (citing
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Anderson v. City of Bessemer City, 470 U.S. 564, 574-75 (1985));
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see also RCI Northeast Servs. Div. v. Boston Edison Co., 822 F.2d
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199, 202 (1st Cir. 1987) (explaining that "findings of fact do
not forfeit `clearly erroneous' deference merely because they
stem from a paper record").4 The soundness of this approach is
confirmed by Rule 7052 of the Federal Rules of Bankruptcy
Procedure, which expressly adopts Rule 52(a) of the Federal Rules
of Civil Procedure. The latter rule, in its latest incarnation,
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4To be sure, occasional statements of this court, if wrested
from context, might appear to suggest de novo review in such
circumstances. See, e.g., Brewer v. Madigan, 945 F.2d 449, 452
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(1st Cir. 1991). Context provides a clearer perspective. In the
cases in which we purposed to scrutinize a paper record de novo,
there were no facts in dispute. Although a stipulated record
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sometimes will indicate the absence of factual discord, that is
far from universally true. See Vetter v. Frosch, 599 F.2d 630,
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632 (5th Cir. 1979) ("Many cases are tried on depositions,
counter-affidavits, and stipulated records, where the parties
know there are issues of fact which must be resolved, but are
content to have them resolved on the basis of written, as opposed
to oral, testimony and evidence."). Here, the existence of
genuine factual issues is made manifest by the bankruptcy court's
well-founded denial of the parties' cross-motions for summary
judgment.
8
provides in pertinent part: "Findings of fact, whether based on
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oral or documentary evidence, shall not be set aside unless
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clearly erroneous, and due regard shall be given to the
opportunity of the trial court to judge of the credibility of the
witnesses." (Emphasis supplied).
Notwithstanding the obvious applicability of the
"clearly erroneous" standard to the case at hand, there is a rub.
The parties both urged the BAP to review the bankruptcy court's
decision de novo and to resolve the issue of whether Healthco's
transfer of funds to Repco escapes classification as a preference
without affording any special respect to the bankruptcy court's
factual determinations. The BAP yielded to this importuning.
See In re Healthco, supra, slip op. at 5. What is more, the
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litigants are united in their insistence that we, too, should
essay plenary, nondeferential review of the bankruptcy court's
decision.
Under these peculiar circumstances, we are tempted
simply to honor the parties' request. Cf. United States v.
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Taylor, 54 F.3d 967, 971 (1st Cir. 1995) (warning that "[t]he
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problem with wishes is that they sometimes come true") (citing
Aesop). For one thing, the bankruptcy court's failure to
articulate any particularized factual findings not only
contradicts the rules of practice, see Fed. R. Bankr. P. 7052
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(adopting Fed. R. Civ. P. 52(a)'s requirement that "the court
shall find the facts specially"), but also makes clear-error
9
review exceptionally difficult.5 For another thing, the parties
invited the BAP to indulge in de novo review and, at oral
argument in this court, they continued to urge that we follow
that course. Declining to do so would risk "plac[ing] a premium
on agreeable acquiescence to perceivable error as a weapon of
appellate advocacy." Dedham Water Co. v. Cumberland Farms Dairy,
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Inc., 972 F.2d 453, 459 (1st Cir. 1992) (quoting Merchant v.
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Ruhle, 740 F.2d 86, 92 (1st Cir. 1984)).
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This is an interesting concatenation of events, but we
need not decide whether we should hold the parties to the invited
error; in this instance, all roads lead to Rome because our
choice between the two standards of review will not affect the
outcome on appeal. In short, this case is sufficiently plain
that, whether we bow to the parties' wishes and afford de novo
review or bow to convention and employ the more deferential
"clearly erroneous" rubric, we, like the BAP, would be compelled
to set aside the bankruptcy court's contrary determination.
IV. THE MERITS
IV. THE MERITS
In order to guard against favoritism in the face of
looming insolvency, the Bankruptcy Code provides that certain
payments made by the debtor within ninety days preceding the
institution of bankruptcy proceedings are voidable as
preferences. See 11 U.S.C. 547(b). This rule is not ironclad.
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5Of course, if a reviewing court determines that a
bankruptcy court's findings are too indistinct, it may decline to
proceed further and remand for more explicit findings. This
avenue was open to the BAP and it is equally open to us.
10
Thus, the Code holds harmless transfers made by the debtor during
the ninety-day preference period if certain criteria are
satisfied. Specifically, a bankruptcy trustee may not annul a
preference-period transfer to the extent that the transfer was
(A) in payment of a debt incurred by the
debtor in the ordinary course of business . .
. [between] the debtor and the transferee;
(B) made in the ordinary course of business .
. . of the debtor and the transferee; and
(C) made according to ordinary business
terms[.]
11 U.S.C. 547(c)(2). The rationale behind this carve-out is
clear: because "the general policy of the preference section
[is] to discourage unusual action by either the debtor or his
creditors during the debtor's slide into bankruptcy," the
ordinary course exemption promotes the corresponding
congressional desire "to leave undisturbed normal financial
relations." H.R. Rep. No. 595 (1977), reprinted in 1978
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U.S.C.C.A.N. 5963, 6329.
The statute itself is uninstructive as to the
definition of the term "ordinary course of business." Courts
abhor interpretive vacuums, and they have filled this one,
articulating several factors that bear upon whether a particular
transfer warrants protection under section 547(c)(2). These
factors include the amount transferred, the timing of the
payment, the historic course of dealings between the debtor and
the transferee, and the circumstances under which the transfer
was effected. See In re Yurika Foods, 888 F.2d at 45; First
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Software Corp. v. Curtis Mfg. Co. (In re First Software Corp.),
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81 B.R. 211, 212 (Bankr. D. Mass. 1988). After considering the
record evidence in light of these factors, we are firmly
convinced that the transfer from Healthco to Repco was
extraordinary and that the bankruptcy court clearly erred in
finding otherwise. We explain briefly.
The amount of the payment was uncommonly large;
Healthco never before had made a lump-sum payment to Repco in an
amount approaching $235,000.6 Put another way, the payment was
nearly ten times as large as the average of the payments
previously made by the debtor to Repco. Then, too, the timing of
the payment was highly suspicious. It lumped old and new bills,
and in the process, liquidated several invoices that were by
accounting standards ancient (i.e., more than ninety days old)
and several that were prepubescent (i.e., less than thirty days
old).7 There were, moreover, virtually no significant
similarities between the challenged payment and the antecedent
course of dealings between the parties. For example, the
disputed transfer marked the first occasion that Healthco
ventured to pay all its outstanding Repco invoices, the first
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6To be sure, as Repco points out, the magnitude of the
payment is attributable in some measure to a single invoice in
the sum of $96,689.19. This circumstance does not contradict the
conclusion that the payment was abnormal. The fact remains that
Healthco remitted over $235,000 in satisfaction of sixty-eight
separate Repco invoices, thereby dwarfing earlier remittances as
to both the number of invoices and the total dollars involved.
7As the BAP noted, roughly fifty percent of the invoices
satisfied by the wire transfer fell into one of these two
categories. See In re Healthco, supra, slip op. at 10. By
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contrast, very old and very new invoices comprised no more than
fifteen percent of any group of invoices previously paid.
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time that Healthco wired funds to Repco, and the first time that
Healthco's chief financial officer interceded to effectuate a
payment to Repco. Inasmuch as the hallmark of a payment in the
ordinary course is consistency with prior practice, see WJM, Inc.
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v. Massachusetts Dep't of Pub. Welfare, 840 F.2d 996, 1011 (1st
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Cir. 1988), this string of "firsts" is telling.
The circumstances surrounding the wire transfer clinch
the matter. Healthco owed money to hundreds of creditors. Of
these, it paid only Repco, Kerr Manufacturing, and Clarke
Industries in full by wire transfer during the preference period.
All three of these businesses had detectable links to Healthco's
principals: Thomas Hicks, chairman and chief executive officer
of the firm that owned Healthco Holding Co. (which, in turn,
owned Healthco), was a director and beneficial owner of Kerr's
parent corporation; James Mills, chairman of Healthco Holding
Co., chaired the board of Clarke's parent company and served as
its chief executive officer; and as mentioned above, Mills also
had a longstanding relationship with Repco's proprietor. Apart
from these special relationships, there is no reasonable
explanation for preferment of the three creditors. This is
especially true of Repco; as Zaegel himself testified during his
deposition, it is general industry custom to "pay the printer
last."
Other circumstances associated with the challenged
transfer highlight the importance of Repco's special
relationship. Souza, Healthco's treasurer, testified that by
13
February 1993 decisions about which creditors were to be paid
when were being made by a committee of Healthco executives; yet
Moyle overrode this mechanism to effect the Repco payment. At
the same time, it was clear both from Zaegel's kid-glove approach
and from the competitive nature of the printing industry that
Repco's continued service did not hinge upon Healthco's payment
of all outstanding debt as celeritously as possible. Thus,
Moyle's claim that he directed the payment to be made because
Repco was "pivotal" to Healthco's operations is entitled to very
little weight.
We need go no further. The circumstantial evidence
fully persuades us that the debtor deviated sharply from its
customary business practices to favor a select trio of creditors,
Repco included. This is precisely the type of preferment
taking care of a few well-connected vendors while playing
hardball with the general multitude that the drafters of the
Bankruptcy Code intended to curtail. See Lawson v. Ford Motor
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Co. (In re Roblin Indus.), 78 F.3d 30, 40 (2d Cir. 1996)
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(explaining that "equality of distribution among creditors of the
debtor" is one goal of the preference provision) (quoting
legislative history).8
Repco's other arguments are unconvincing and we reject
them without elaboration. It suffices to say that the
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8The other main goal of the preference provision
precluding the debtor "from trying to stave off the evil day by
giving preferential treatment to his most importunate creditors,"
In re Tolona Pizza Prods. Corp., 3 F.2d 1029, 1032 (7th Cir.
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1990) is not implicated here. See supra note 2.
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14
circumstances surrounding the challenged transfer amply evince
its extraordinary nature. Therefore, we affirm the BAP's
determination that, contrary to the bankruptcy court's view, the
challenged transfer was not made in the ordinary course of
business.
Unlike the BAP, however, we do not believe that such a
determination clears the way for judgment on the trustee's claim.
The bankruptcy court reserved the issue of Healthco's insolvency
an essential element of the preference claim and that issue
remains open. Consequently, we must vacate the BAP's judgment to
that extent and remand to the BAP with directions that it, in
turn, remand the cause to the bankruptcy court for further
proceedings.
Affirmed in part, vacated in part, and remanded. No
Affirmed in part, vacated in part, and remanded. No
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costs.
costs.
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15