Faulkner v. Broadway Festivals, Inc.
The recent bankruptcy case for Northern District of Texas, Faulkner v. Broadway Festivals, Inc., Adv. Proc. 20-05031 (Bankr. N.D. – Tex., January 11, 2022), addresses preferential transfer issues.
This case focuses on avoidance and recovery of preferential transfers under §§547 and 550 of the Bankruptcy Code. The opinion is a ruling on a motion for summary judgment brought by Plaintiff Dennis Faulkner, the Trustee of the Reagor-Dykes Auto Group Creditors Liquidating Trust (“Trustee”). Defendant Broadway Festivals, Inc. (“Broadway”) opposes the motion, asserting the defenses that the “transfer” was made as part of a contemporaneous exchange under § 547(c)(1) or made in the ordinary course under §547(c)(2). Ultimately, the Court denies summary judgment, finding that the transaction satisfies the ordinary course defense.
Broadway, a 501(c)(3) charitable organization, annually hosts the “Fourth on Broadway” Independence Day fireworks show and celebration in Lubbock, Texas. Each year, Broadway solicits financial support from local businesses and community organizations to cover the costs of the celebration and offers promotional benefits in exchange. Reagor-Dykes Imports (“Reagor-Dykes”), one of the debtors in the underlying jointly administered bankruptcy cases related to this adversary proceeding, agreed to sponsor the fireworks “extravaganza” for the 2018 Fourth on Broadway celebration. For its sponsorship, Broadway placed the Reagor-Dykes logo on its print, online, and television advertisements; it provided Reagor-Dykes with VIP tickets to the event; and it allowed personnel of Reagor-Dykes an opportunity to address attendees and advertise at the celebration.
Reagor-Dykes had also sponsored the fireworks in 2017, for which it paid $20,000 on May 24, 2017, well in advance of the event. Broadway invoiced Reagor-Dykes for its sponsorship of the 2018 fireworks on May 14, 2018, in the amount of $25,000 (“2018 Transfer”). Unlike in 2017, Reagor-Dykes paid the 2018 invoice on July 13, 2018, after the July 4 celebration.
On August 1, 2018, Reagor-Dykes filed its chapter 11 bankruptcy petition. On July 31, 2020, the Trustee filed his complaint against Broadway, seeking to avoid the $25,000 payment made to Broadway for the 2018 Fourth on Broadway fireworks sponsorship, asserting that the payment is a preferential transfer. On August 31, 2021, the Trustee filed this motion seeking summary judgment on his preferential transfer claim and the affirmative defenses asserted by Broadway.
The Trustee argues he is entitled to summary judgment on his preference claim under § 547(b) to avoid the 2018 Transfer. Under § 547(b), a trustee may avoid a transfer of a debtor’s interest in property if the transfer was:
- to or for the benefit of a creditor;
- for or on account of an antecedent debt owed by the debtor before such transfer was made;
- made while the debtor was insolvent;
- on or within 90 days before the date of the filing of the petition; or
- between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
- that enables such creditor to receive more than such creditor would receive if—
- the case were a case under chapter 7 of this title;
- the transfer had not been made; and
- such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. §547(b)
Reagor-Dykes’s 2018 Transfer was made for the benefit of a creditor because it was made to Broadway in exchange for the benefits provided to Reagor-Dykes for its sponsorship. Reagor-Dykes made the transfer within the 90 days before it filed bankruptcy. Under § 547(f), Reagor-Dykes is presumed to have been insolvent at the time of transfer. And the $25,000 payment is more than Broadway would recover under chapter 7 had it not been paid. Broadway does not dispute these conclusions.
Broadway’s sole objection to the Trustee’s substantive preference claim is that the 2018 Transfer was not made on account of an antecedent debt. Broadway pointed to the 2018 Fourth on Broadway
flyer as well as the affidavit of Don Caldwell, Broadway’s CEO, to support its contention that Reagor-Dykes received consideration in the form of ongoing promotional benefits beyond July 4, 2018. The Court quickly rejected this assertion, finding that whether Reagor-Dykes received some additional benefit beyond July 4 is not a material fact on the question of when the debt was incurred. According to the Court, both the celebration flyer and Don Caldwell’s affidavit make clear that the vast majority of benefits received on account of Reagor-Dykes’s sponsorship occurred before or on July 4, that those benefits were what Reagor-Dykes bargained for, and that additional benefits lasting beyond July 4 were at most incidental.
Finding that the Trustee had satisfied the elements of §547(b), the Court turned to Broadway’s affirmative defenses under §547(c).
Contemporaneous Exchange Under §547(c)(1)
The Court first considered Broadway’s argument that the 2018 Transfer was a “contemporaneous exchange for new value” under §547(c)(1). Even if all the elements of § 547(b) are met, a transfer may not be avoided if it meets the elements of the “contemporaneous exchange for new value” preferential-transfer exception.
Under this exception, a trustee may not avoid a transfer that was: “(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact [was] a substantially contemporaneous exchange.” The purpose of the contemporaneous exchange for new value defense is to encourage creditors to continue to deal with financially-distressed debtors, as long as their transactions involve true exchanges of equally-valued consideration. Silverman Consulting, Inc. v. Canfor Wood Prods. Mktg. (In re Payless Cashways, Inc.), 306 B.R. 243, 249 (B.A.P. 8th Cir. 2004), aff’d, 394 F.3d 1082 (8th Cir. 2005). To succeed on a § 547(c)(1) defense, a defendant must prove (1) intent, (2) contemporaneousness, and (3) new value.
Looking first at intent, the Court found that the undisputed evidence demonstrated that the parties did not intend for the 2018 Transfer to be a contemporaneous exchange. Broadway sent an invoice to Reagor-Dykes well in advance of the July 4 celebration and well before Reagor-Dykes made its payment. Further, Broadway’s transaction list reveals that it receives most of its payments from its contributors some time after it sends invoices. These facts, according to the Court, make clear that the parties expected a gap between payment and consideration received and did not intend for a contemporaneous exchange.
Although its finding regarding intent was enough to reject the contemporaneous exchange defense, the Court went on to consider the contemporaneousness element of the defense. In so doing, the court found that not only did the parties not intend for the 2018 Transfer to be a contemporaneous exchange, but that the exchange also was not substantially contemporaneous in practice. The Court focused on the fact that the delay in time for payment was not caused by unexpected or uncontrollable circumstances. The testimony of Don Caldwell indicated that a gap between payment and receipt of consideration was normal practice and common.
Finally, the Court additionally found that Broadway had failed to prove that the 2018 Transfer was made for new value received.
Ordinary Course of Business Defense Under §547(c)(2)
The Court then turned to the “Ordinary Course of Business” defense. Even if all the elements of § 547(b) are met, a transfer may not be avoided if it meets the elements of the “ordinary course of business” preferential-transfer exception. Under this exception, a trustee may not avoid a transfer:
to the extent that such transfer was 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—
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.
The ordinary course of business defense provides a safe haven for a creditor who continues to conduct normal business on normal terms.” Templeton v. O’Cheskey (In re Am. Hous. Found.), 785 F.3d 143, 160 (5th Cir. 2015) (quoting Gulf City Seafoods, Inc. v. Ludwig Shrimp Co., Inc. (In re Gulf City Seafoods, Inc.), 296 F.3d 363, 367 (5th Cir. 2002)).
To satisfy its burden of proof with respect to an ordinary course of business defense, a Defendant must either satisfy the subjective test of § 547(c)(2)(A) or the objective test of § 547(c)(2)(B) of the “ordinary course of business” exception. “[T]he objective test seeks to determine whether [the transfers] were ‘ordinary in the industry.’” Reed v. Walton (In re BFN Operations LLC), 607 B.R. 551, 561 (Bankr. N.D. Tex. 2018) (quoting In re ACP Ameri-Tech Acquisition, LLC, No. 09-90082, 2012 WL 481582, at *7 (Bankr. E.D. Tex. Feb. 14, 2012)). The subjective test examines whether the transfers were ordinary in light of “each party’s respective practices.” In re C.W. Mining Co., 798 F.3d 983, 989 (10th Cir. 2015).
Broadway argued that the 2018 Transfer was subject to the “ordinary course of business” exception under the subjective test. Complicating the analysis, the issue arises as to whether a defendant transferee can ever successfully claim the exception under the subjective test if there are no prior dealings between the parties. “With a first-time transaction, there is no baseline history between
the parties and arguably no way to prove that the transaction at issue is “ordinary” as between the parties.” *11. Despite authority suggesting that some transaction history is required, Broadway relied on four circuit-level cases that contrarily hold that a single payment with no transaction history may be sufficient to establish the ordinary-course exception under the subjective test. See Jubber v. SMC Elec. Prods. Inc. (In re C.W. Mining Co.), 798 F.3d 983, 989 (10th Cir. 2015); Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys., Inc.), 482 F.3d 1118, 1125 (9th Cir. 2007); Kleven v. Household Bank F.S.B., 334 F.3d 638, 642–43 (7th Cir. 2003); Gosch v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir. 1990). Ultimately, the Court agreed with these cases, while noting that in this case, this was actually the second transaction between the parties, not the first.
The Court appeared to struggle some with the analysis, going to great lengths to analyze factors that should be considered. In particular, the Court identified the following factors:
(1) the length of time the parties were engaged in the transaction;
(2) whether the amount or form of tender differs from past practices;
(3) whether the payment by the debtor is unusual or the payee’s collection efforts are unusual;
(4) the circumstances under which the payment was made; and
(5) whether the creditor-transferee took advantage of the debtor’s known deteriorating financial condition
(citing In re C.W. Mining Co., 798 F.3d 983, 990 (10th Cir. 2015)).
Ultimately, the Court found that the statute does not limit the application of the exception to parties with a lengthy transactional history. “The statute does not explicitly state that, for the subjective test, the deal be proved as ordinary between the debtor and the transferee, which would arguably require some history of dealings to satisfy.” Id., at 988-999. Citing from In re C.W. Mining, the Court noted that “[a] first-time debt may be ordinary when compared to the debtor’s and the transferee’s past practices with other similarly situated counterparties.” Id. at 990, and “[o]r the parties may have a written agreement that outlines the terms of the deal.” Id. at 991. Finally, the court found that “[t]he inquiry under § 547(c) is whether the transaction would have occurred absent the debtor’s impending bankruptcy filing. Id. at 988 n.3.
Analyzing the facts with these principals in mind, the Court found that the ordinary course of business exception was satisfied. The Court stated:
Broadway’s relationships and dealings with potential sponsors, particularly major sponsors, are hardly “ordinary” compared to a true vendor-vendee relationship. But what has been “ordinary” for the parties is that, upon Reagor-Dykes’s promise to sponsor the fireworks, Broadway sends an “invoice” to document the promise with no expectation that the contribution will be made anytime soon. It was ordinary for Broadway’s large “customers” to “pay” their invoices well beyond thirty days of being invoiced.
The Court went on to reject the notion that the payment of the invoice after the event rather than before amounted to a meaningful difference. The Court concluded that “[f]or a prominent car dealership in Lubbock, Texas, this deal is as ordinary as a once-a-year deal can be.”
Preferential transfer analysis can be very fact-intensive. Parties should be prepared to demonstrate that the nature of their activities with respect to a transfer occurring within the requisite period prior to a bankruptcy filing were, in fact, ordinary – or at least in the words of this court “as ordinary as they can be.”