                                                                                                                           Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-11-2005

In Re: Alghny Health
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-1200




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"In Re: Alghny Health " (2005). 2005 Decisions. Paper 1454.
http://digitalcommons.law.villanova.edu/thirdcircuit_2005/1454


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                                                      NOT PRECEDENTIAL

             UNITED STATES COURT OF APPEALS
                  FOR THE THIRD CIRCUIT


                            No. 04-1200


                        IN RE:

                            ALLEGHENY HEALTH EDUCATION
                            AND RESEARCH FOUNDATION, et al.,

                                                                 Debtors

      RISK MANAGEMENT ALTERNATIVES, INC., successor
              to United Creditors Alliance Corp.,

                                                     Appellant

                                 v.

     WILLIAM J. SCHARFFENBERGER, as Chapter 11 Trustee of
        Allegheny Health, Education and Research Foundation




ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE
           WESTERN DISTRICT OF PENNSYLVANIA

                     (Dist. Court No. 03-CV-0074)
              District Court Judge: Terrence F. McVerry


                 Submitted pursuant to LAR 34.1(a)
                         January 18, 2005


         Before: ALITO, McKEE, and SMITH, Circuit Judges.
                  (Opinion Filed: March 11, 2005)
                                OPINION OF THE COURT


PER CURIAM:

       Allegheny Health, Education and Research Foundation, Allegheny University of

the Health Sciences, Allegheny University Medical Practices, Allegheny Hospitals, and

Centennial and Allegheny University Hospitals-East (collectively, “the Debtors”) filed a

voluntary petition for bankruptcy relief under Chapter 11 on July 21, 1998. William J.

Scharffenberger, the Chapter 11 Trustee (“the Trustee”) of Allegheny Health, Education

and Research Foundation, filed this action to avoid several transfers of money made to

United Creditors Alliance Corporation (“United Creditors”) under the theory that the

transfers were “preferential” under 11 U.S.C. 547(b). The Trustee also sought to recover

the transfers from United Creditors pursuant to 11 U.S.C. §550(a)(1). Risk Management

Alternatives, Inc. is the listed defendant only because it is the successor-in-interest to

United Creditors; for the sake of simplicity we will therefore refer to both entities as

United Creditors.

       On February 26, 2002, the Bankruptcy Court held a bench trial on all outstanding

matters in the case. In a Memorandum Opinion and Order of the Court dated April 17,

2003, the Bankruptcy Court held that five of the twelve payments, that is, those listed as

Checks A, H, I, K and L on the table in the parties’ stipulations, were recoverable by the

Trustee from United Creditors pursuant to §550(a)(1). The Bankruptcy Court also denied


                                              -2-
United Creditors’ Motion for Reconsideration with prejudice.

       United Creditors filed a Notice of Appeal with the Bankruptcy Court. On

December 24, 2003, the District Court entered its Memorandum Opinion and Order

affirming the Bankruptcy Court Opinion.

       This appeal followed.

                                             I.

       We exercise plenary review over the Bankruptcy Court’s legal determinations and

review the Bankruptcy Court’s factual findings for clear error. Duke Energy Royal, LLC

v. Pillowtex Corp. (In re: Pillowtex, Inc.), 349 F.3d 711, 716 (3d Cir. 2003). A finding of

fact is clearly erroneous when it has no credible evidence to support it or when it has no

rational relationship to the evidence. Kool, Mann, Coffe & Co. v. Coffey, 300 F.3d 340,

353 (3d Cir. 2002).

                                             II.

       The Trustee’s short delay in amending its complaint did not prejudice United

Creditors. United Creditors was informed of the Trustee’s intent to pursue the additional

payments within two weeks after the Trustee first learned of them; the Trustee moved to

amend before the Bankruptcy Court had decided United Creditors’ summary judgment

motion; and United Creditors itself acknowledged the existence of Checks K and L in its

Motion for Summary Judgment.




                                            -3-
                                            III.

       The critical issue in this appeal is whether United Creditors was required to

introduce evidence that the disputed payments were not unusual by the relevant standard

of the industry. We find that United Creditors was so required and thus will affirm the

Bankruptcy Court’s Opinion.

       United Creditors argues that Checks A, H, I, K and L were all subject to the

“ordinary course of business” exception contained in 11 U.S.C. § 547(c)(2):

       (c) The trustee may not avoid under this section a transfer –
       (2) to the extent that such transfer was –
               (A) in payment of a debt incurred by the debtor in the ordinary course of
               business or financial affairs of the debtor and the transferee;
               (B) made in the ordinary course of business or financial affairs of the debtor
               and the transferee; and
               (C) made according to ordinary business terms[.]

The Trustee admits that it cannot escape subsections (c)(2)(A) and (c)(2)(B), as the

transfers were in payment of a debt incurred by the Debtors in the ordinary course of both

the Debtors’ and United Creditors’s businesses, and the transfers were made and received

in the ordinary course of the respective businesses. However, the Trustee argues that

United Creditors has no affirmative defense because it cannot satisfy the third condition

of the statute: the transfers were not “made according to ordinary business terms.” 11

U.S.C. §547(c)(2)(C).

       United Creditors counters that the transfers were, in fact, made according to

ordinary business terms because the transfers were ordinary in the context of its pre-



                                             -4-
preference period relationship with the Debtors, and that the pre-preference period

relationship was long enough to make industry standard evidence unnecessary. United

Creditors bases its argument upon this Court’s opinion in Fiber Lite Corp. v. Molded

Acoustical Products, Inc. (In re Molded Acoustical Products, Inc.), 18 F.3d 217 (3d Cir.

1994), which, United Creditors contends, abrogates the need for Section 547(c)(2)(C)

proof beyond the parties’ payment history where the parties have had a long-standing and

consistent relationship. In fact, Molded Acoustical does no such thing.

       Under Molded Acoustical, a creditor has no affirmative defense to a Section

547(b) avoidance action unless the creditor proves that the preferential transfers in

question were made “in harmony with the range of terms prevailing as some relevant

industry’s norms.” 18 F.3d at 226. When a creditor and a debtor have had “an enduring,

steady relationship,” meaning that the terms of the relationship did not change

“significantly” during the pre-petition insolvency period, then the creditor will be able to

depart “substantially” from the range of terms prevailing as the relevant industry’s norms

and still enjoy the protection of Subsection (C). Id. Moreover, “[the longer] the pre-

insolvency relationship between the debtor and the creditor, the more the creditor will be

allowed to vary its credit terms from the industry norm yet remain within the safe harbor

of §547(c)(2).” Id. at 225. But while a creditor may, under the right circumstances, depart

substantially from the relevant industry’s norm for credit terms, it is possible for even

longstanding credit terms to “depart so grossly from what has been established as the



                                             -5-
pertinent industry’s norms that they cannot be seriously considered usual and equitable

with respect to other creditors.” Id. at 226. In other words, “even when the

debtor/creditor relationship has been well-settled prior to the debtor’s insolvency,” the

relevant industry’s norm can never be wholly abandoned. Id.

       The question of what constitutes the relevant “ordinary business terms” in a

particular debtor/creditor relationship is peculiarly factual. There is no rigid rule

applicable across all industries, or even across one industry in particular, as to how much

credit terms in a relationship may vary from an industry’s norms after the relationship has

existed for a given unit of time. Here, United Creditors could not prevail under

§547(c)(2)(C) without presenting any evidence regarding the relevant industry’s norm

given the Bankruptcy Court’s credible factual findings that (1) the number of days to pay

varied dramatically throughout the Debtors’ relationship with United Creditors, (2) the

relevant payment history was only ten months of a two-year relationship, and (3) the

business terms United Creditors describes as “ordinary” depart grossly from the standard

time to pay in the relevant industry.

       After considering all of the arguments raised on appeal, we therefore affirm the

Order of the District Court.
