
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                FOR THE FIRST CIRCUIT                              _________________________          No. 97-9005                        IN RE:  HEALTHCO INTERNATIONAL, INC.,                                       Debtor.                              _________________________                           WILLIAM A. BRANDT, JR., TRUSTEE,                                 Plaintiff, Appellee,                                          v.                        REPCO PRINTERS & LITHOGRAPHICS, INC.,                                Defendant, Appellant.                              _________________________                      APPEAL FROM THE BANKRUPTCY APPELLATE PANEL                                 OF THE FIRST CIRCUIT                              _________________________                                        Before                                Selya, Circuit Judge,                                       _____________                            Coffin, Senior Circuit Judge,                                    ____________________                              and Stahl, Circuit Judge.                                         _____________                              _________________________               Duane L. Coleman, with whom  Larry E. Parres and Lewis, Rice               ________________             _______________     ___________          & Fingersh, L.C. were on brief, for appellant.          ________________               Daniel  C.  Cohn, with  whom  David  B.  Madoff and  Cohn  &               ________________              _________________      _______          Kelakos, LLP, were on brief, for appellee.          ____________                              _________________________                                  December 22, 1997                              _________________________                    SELYA, Circuit  Judge.  Repco Printers & Lithographics,                    SELYA, Circuit  Judge.                           ______________          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                                        ____________________               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                                        ____________________               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                                                                    ___ ___          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.                                                                  ______          Repco Printers & Lithographics, Inc. (In re Healthco), No. MW 96-          ____________________________________  ______________          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                                             ___          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                                                                        ___          Martin v.  Bajgar (In re  Bajgar), 104  F.3d 495,  497 (1st  Cir.          ______     ______  _____________                                        ____________________               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                 ______     _________________________          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                                            ___ ________     _________          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                   ___  _________________________    _________________          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                                                           ___ ____________          Corp. v. United Parcel Serv. (In re Yurika Foods Corp.), 888 F.2d          _____    ___________________  ________________________          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.                                                                ________          Banco Santander P.R., 902 F.2d 148, 152 (1st Cir. 1990).          ____________________                    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.                                                              ___ ______          Tully  (In re Tully), 818  F.2d 106, 109  (1st Cir. 1987) (citing          _____   ___________          Anderson v. City of Bessemer  City, 470 U.S. 564, 574-75 (1985));          ________    ______________________          see also RCI Northeast Servs. Div. v. Boston Edison Co., 822 F.2d          ___ ____ _________________________    _________________          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,                                        ____________________               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                          ___   ____  ______    _______          (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          ________________________________          sometimes will indicate the absence  of factual discord, that  is          far from universally  true.  See Vetter v.  Frosch, 599 F.2d 630,                                       ___ ______     ______          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                                                           ________________          oral  or documentary  evidence,  shall not  be  set aside  unless          ______________________________          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          ___ _______________   _____          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.                                                     ___  _____________          Taylor, 54  F.3d 967,  971 (1st Cir.  1995) (warning  that "[t]he          ______          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                                               ___          (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,                                ________________    _______________________          Inc.,  972 F.2d  453, 459  (1st Cir.  1992) (quoting  Merchant v.          ____                                                  ________          Ruhle, 740 F.2d 86, 92 (1st Cir. 1984)).          _____                    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.                        ___                                        ____________________               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                                                        _________  __          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                          ___  ___________________                    _____          Software Corp. v.  Curtis Mfg. Co. (In re  First Software Corp.),          ______________     _______________  ___________________________                                          11          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                                        ____________________               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                        ___ _______________   _____          contrast, very old  and very new invoices comprised  no more than          fifteen percent of any group of invoices previously paid.                                          12          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.                                                              ___ _________          v. Massachusetts Dep't  of Pub. Welfare, 840 F.2d  996, 1011 (1st             ____________________________________          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                                                  ___ ______     __________          Co. (In  re  Roblin  Indus.),  78  F.3d 30,  40  (2d  Cir.  1996)          ___  ______________________          (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                                        ____________________               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.          __________________________________          1990)   is not implicated here.  See supra note 2.                                           ___ _____                                          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                    _________________________________________________    __          costs.          costs.          _____                                          15
