Bankruptcy Law

James Cole, Esquire

When there is no change in payment practices for more than one year before Chapter 11 case filed, plaintiff cannot overcome ordinary-course-of-business defense merely by proof of larger invoices and payments in the 90-day look back period than those in the time before the look back period.  Continentalafa Liquidation Trust v. Human Resources Staffing (In re Continentalafa Dispensing Co.) adv. no. 10-4213-659 (Bankr. E.D. Mo., May 9, 2011). 

Plaintiff was a liquidation trust created by the confirmed Creditors’ Committee Chapter 11 plan.  Defendant provided temporary employees for the debtor pre-petition.  Under the avoidance powers vested in the trust by the plan, Plaintiff sued to recover over $100,000 of payments made in the 90-day look back period just before the chapter 11 case was filed; the defense was primarily ordinary course of business pursuant to Section 547(c)(2). 

On cross-motions for summary judgment, the uncontested facts showed that payment practices in the year before the 90-day look back period were the same as during the look back period.  Plaintiff stressed that the amount of many payments in the look back period was larger than payments in the year before the look back period.  The court found the increase reflected debtor’s use of more temps during the look back period, not a change in payment practices.  Judgment was entered for defendant.

Earmarking doctrine does not apply when funds for payment of third party was result of customer payments, not loan from new creditor.  Also, commingling another entity’s funds with debtor’s funds in debtor’s bank accounts destroyed ability to determine that entity’s money constituted non-estate funds. DeWoskin v. Imaging Advantage, LLC (In re Visionary Imaging,
Inc.), 450 B.R. 876 (Bankr. E.D. Mo. May 9, 2011).

Debtor arranged to provide radiologists’ services to community hospitals.  Invoices were sent by, and payments were made to, a related entity, Western Physicians Data Services, Inc., which shared employees and office space with debtor.  Defendant Imaging, also provided radiologists’ services to community hospitals and used Western Physicians for invoices and payments.  Western Physicians deposited many payments into debtor’s bank accounts, whether or not debtor was owed all the money that was deposited.  Some of that money was owed to Imaging Advantage, but no accounting was presented to the court.  Payments from debtor to defendant were made before and during the preference look back period in amounts apparently unrelated to receivables for radiologists’ services or any other match with amounts that may have been claimed as defendant’s money.

The Chapter 7 trustee sued to recover over $233,000 paid to defendant Imaging in the 90-day look back period before an involuntary bankruptcy was filed against debtor.  On cross-motions for summary judgment, defendant claimed that the transferred funds came within the ‘earmarking’ doctrine, in that they were supposed to flow through debtor to defendant. The court found that the doctrine was inapplicable because it is limited to a new creditor’s loaning money to pay an obligation owed to an existing creditor without debtor having any control over the funds.  The uncontested facts showed otherwise here.  Defendant further asserted that the money it received in the look back period was never debtor’s money to begin with.  The court found that under the uncontested facts, defendant allowed its money to be commingled with debtor’s, under debtor’s control, without any restrictions on its use.  Moreover, because there was no ability to trace defendant’s funds after they were deposited, any claim that they were held in trust was lost.  Judgment was rendered for plaintiff.