Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:Appellants G.H. Leidenheimer Baking Company Ltd. and Patton Sausage Co. bring this consolidated appeal, challenging the lower courts’ treatment of preference payments each received from a grocery store chain before it filed bankruptcy. Debtor SGSM, which operated a chain of grocery stores, continued to pay many suppliers during the 90-day preference period prior to its filing for Chapter 11 bankruptcy relief. Leidenheimer and Patton, in turn, continued to supply SGSM stores with bakery goods and meats and were paid accordingly. The preference period lasted from Dec. 25, 1998, to March 25, 1999. SGSM made six payments totaling $49,246.78 to Leidenheimer during the preference period. In an adversary proceeding brought by SGSM’s liquidation agent, Leidenheimer asserted that the payments were subject to both the subsequent advance and ordinary course of business defenses. The bankruptcy court allowed only the subsequent advance defense as to all six payments. After deducting subsequent new value from each SGSM payment, $8,014.09 remained avoidable by the trustee as a preference. Patton received eight payments for a total of $140,162.56 during the preference period. The bankruptcy court, in another adversary proceeding, accorded these payments the same legal status as those to Leidenheimer. After the court allowed only a subsequent advance defense as to all eight payments, Patton was ordered to return $47,437.31 as a preference. The district court affirmed the bankruptcy court in both cases, rejecting the ordinary course defense as to all payments and further holding that Leidenheimer and Patton were prohibited by law from applying two preference defenses in tandem to the same payment. HOLDING:With respect to Patton, the court affirms the judgments of the bankruptcy and district courts, and with respect to Leidenheimer, the court affirms as modified, reducing the judgment against Leidenheimer to $7,761.50. Leidenheimer asserted an ordinary course of business defense to all six payments made by SGSM. The bankruptcy court conducted its analysis according to Gulf City Seafoods Inc. v. Ludwig Shrimp Co. (In Re: Gulf City Seafoods), 296 F.3d 363 (5th Cir. 2002), and determined that the average time between invoice and payment during the prepreference period was 21 days and the median was 17 days. In the preference period, however, the average jumped to 38.67 days, with a median of 37. The court examined each set of invoices and payments individually and concluded that only the payment made Feb. 19, 1999 (discharging invoices an average of 25.22 days old), was made in the parties’ ordinary course of business. The parties agreed that the relevant industry is grocery direct store delivery (DSD). To prove that the SGSM payments were made in the ordinary course for the industry, Leidenheimer offered testimony from two experts: Nicholas Pyle and John Stephens. Pyle is a lobbyist for a bakers’ trade group, and Stephens is the president and owner of a seafood supply company. The bankruptcy court refused to qualify Pyle as an expert and did not permit him to testify. The court also refused to qualify Stephens as an expert. The basis of Pyle’s testimony derived largely from Internet research and from speaking with members of other relevant trade associations, not from any personal experience in the industry. “The evidentiary deficiencies of his qualifications speak for themselves.” Stephens evinced a lack of expert knowledge necessary to establish DSD or baked goods industry credit terms favorable to Leidenheimer. Consequently, the court did not clearly err in holding that Leidenheimer failed to meet its burden of proof on the objective prong of the ordinary course of business defense. Having failed to substantiate SGSM’s payments as within the ordinary course of business defense, Leidenheimer and Patton resort to the subsequent advance defense. This defense aims to protect creditors who have furnished and been paid for ongoing supplies or revolving credit to a debtor in distress, because such transactions fortify the debtor’s business and may avert bankruptcy. Payments made by SGSM during the preference period were followed by subsequent product deliveries. The Garland approach (In Re: Thomas Garland, 19 B.R. 920 (Bankr. E.D. Mo. 1982)), which allowed excess new value to cancel out prior payments still exposed as preferences, was followed by the lower courts and confirms that subsequent new value was applied to each of the payments at issue. As the ordinary course of business defense was inapplicable to the suppliers, the lower courts properly applied the subsequent advances defense to Leidenheimer and Patton. A bankruptcy appellate panel for the 10th U.S. Circuit Court of Appeals held, in Gonzales v. Nabisco Div. of Kraft Foods Inc. (In Re: Furr’s Supermarkets Inc.), 317 B.R. 423 (B.A.P. 10th Cir. 2004), that transfers of baked goods which were “damaged, out of date, or were overstocked items” should not be included in the new value calculation, because, lacking value, they were not a potentially avoidable transfer. The return of worthless goods “does not dilute the new value” provided by Leidenheimer. The total exposure of Leidenheimer should be decreased to $7,761.50. OPINION:Jones, CJ; Jones, CJ, DeMoss and Clement, JJ.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 1 article* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.