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In re Tolona Pizza Products Corp., Not Reported in F.Supp., 1992 WL 220720

Facts

Rose Packing Company began doing business with Tolona Pizza Products in late 1984, selling specialized and non-specialized meat products. Payments were typically made later than the net 7-day terms specified in invoices, with an average payment interval of 26.6 days over several years. Tolona frequently failed to pay within 21 days, but Rose continued to ship goods due to their valued customer relationship. An involuntary bankruptcy petition was filed against Tolona on February 14, 1989, and within the 90 days prior to this, Tolona made several payments to Rose.

Rose is a processor of pork products that began doing business with Tolona in late 1984. Rose sold Tolona a specialty meat product as well as other non-specialized products. Because the specialized meat product was produced only for Tolona, the minimum quantity Tolona had to buy was 1000 pounds.

Issue

The main legal issue is whether the payments made by Tolona to Rose within 90 days of the bankruptcy filing were made according to ordinary business terms, thereby constituting a preference under 11 U.S.C. § 547.

The bankruptcy court found, however, that those payments were not made according to ordinary business terms under the third prong.

Rule

Under 11 U.S.C. § 547(c)(2), a trustee cannot avoid a transfer if it was made in payment of a debt incurred in the ordinary course of business, made in the ordinary course of business, and made according to ordinary business terms.

That section provides that a trustee cannot avoid under subsection (b) a transfer that 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.

Analysis

The court analyzed the payment history between Tolona and Rose, noting that the payments made during the 90-day preference period were consistent with their previous dealings. The court found that the average payment interval of 22 days during the preference period was not significantly different from the average payment history of 26.6 days prior to the bankruptcy, thus satisfying the ordinary business terms requirement.

The record shows that Tolona frequently failed to pay within 21 days. Rose continued to ship goods to Tolona because Tolona was a valued customer and previous representations made by Tolona concerning payment were considered reliable. During the period between Dec. 9, 1985 and October 19, 1988 sixty-seven shipments were made to Tolona. The length of payment on these respective invoices ranged from 6 to 53 days, with the average length of payment at 26.6 days. Thus, Rose has satisfied the requirements of 547(c)(2).

Conclusion

The court reversed the bankruptcy court's decision, holding that the payments made by Tolona to Rose were made according to ordinary business terms and therefore were not voidable preferences.

We hold that Rose did prove its defense under § 547(c)(2). Tolona's payments to Rose during the 90–day period were made 'according to ordinary business terms' because 'the manner, form, and timing of these payments were consistent with the practice both parties followed previously.'

Who won?

Rose Packing Company prevailed in the case because the court found that the payments made by Tolona were consistent with the ordinary business practices established in their long-standing relationship.

Rose, however, contends that the payments were made in the ordinary course of business under § 547(c)(2).

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