Opinion
Civil Action H-03-210.
August 31, 2004
Opinion on Summary Judgment
1. Introduction.
A failing company sold one of its divisions. As part of the deal, the purchaser agreed to assume the division's debts. Shortly after the sale, the seller filed for bankruptcy. The trustee seeks to avoid several payments to the division's creditors by the seller and purchaser.
2. Background.
In 2000, Patterson Energy offered to buy the drilling fluids division of Ambar, Inc. At the time, all of the fluid division's assets were encumbered by Citibank.
Patterson wanted the assets free of the lien, so it paid Ambar $15.6 million — enough to pay the Citibank lien. Once it was paid, Citibank released the lien.
Patterson also assumed the trade debts of the division as consideration for the deal. It wanted to ensure ordinary payments to the division's creditors in hopes of continuing those relationships. In fact, Patterson renamed the division Ambar Drilling Fluids LP, LLP, to reduce confusion and aid a smooth transition.
After the deal closed, Patterson paid ten of the division's creditors through its new subsidiary. They had delivered drilling mud, equipment, vehicles, and workers for the division's customers' projects.
On November 21, 2000, Ambar, Inc., now called Ramba Inc., filed for bankruptcy. Its trustee seeks to avoid as preferences some of the payments made by Patterson and Ambar to creditors within 90 days of Ramba's bankruptcy. See 11 U.S.C. § 547(b).
3. Claims.
The creditors argue that the payments were not preferential for several reasons: (1) the payments were made in the ordinary course of business, (2) the value of Patterson's payments would be subject to the Citibank lien and not part of the Ramba estate, (3) that the payments were in exchange for the partial release of the lien, adding value to the estate, (4) that they were entitled to liens with the payments in exchange for the release of those liens, and (5) they did not receive more than what they would have been entitled to in a liquidation.
4. Ordinary Course.
The creditors contend that the payments from Patterson and Ramba should not be avoided because they were made in the ordinary course of business. The trustee argues that the transactions were extraordinary; that is, most of the payments were made by a third-party pursuant to a debt assumption agreement.
The trustee cannot avoid the payments if the debt, the timing of its payment, and the terms of its payment were ordinary. See 11 U.S.C. § 547(c)(2). There is not a "precise" way to determine ordinariness. See In re Fulghum Const. Corp., 872 F.2d 739, 743 (6th Cir. 1989). The most obvious indices are the timing of the payment and relevant industry standards. See Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991); Gasmark Ltd. Liquidating Trust v. Louis Dreyfus Gas, 158 F.3d 312, 317 (5th Cir. 1998).
The trustee argues that Patterson's payments are avoidable because third-party payments are not routine. However, it is common that creditors could be paid by a third-party, especially when the division has been sold. Creditors often require debtors to secure a letter of credit from a bank. If the debtor defaults, the bank pays the debt. In a hyper-technical sense, creditors that receive payments from the debtor's bank account are paid by a third-party — the money comes from the bank, not the debtor. In practical terms, the payments made by Patterson and Ambar should be treated as if they came from the same entity. See In re Food Catering, 971 F.2d 396 (9th Cir. 1992).
Factually, the parties admitted that the industry standard for paying invoices is 120 days. Most of the bills were paid in that period; those paid later were in line with Ambar's historical payments.
(a) GeoResources.
GeoResources provided drilling mud, called Red Lenox, to Ambar. The trustee seeks to avoid three payments — one from Ambar and two from Patterson — that total $142,583.58.
Of the 37 payments made during the preference period, 23 were received within 120 days of the invoice. The remaining 14 were paid within 240 days. Although these payments were outside the industry standard, they reflected historical relations between GeoResources and Ambar. Between 1998 and 1999, 41% of the payments were received after 120 days. During the preference period, only 37% of the payments were "late." Based on the evidence, the 14 payments were customary variations from the industry standard.
(b) M-1.
The trustee wants to avoid six payments made to M-1 that total $739,082.74. The payments were split between Ambar and Patterson.
Historically, M-1 received 98% of the payments within 150 days. During the preference period, it increased to 99%. Historically, Ambar paid 84% of its invoices within 120 days, but it paid 72% of its invoices within 130 days during the preference period. The 10-day delay is commercially reasonable considering there were 1,723 invoices paid between 1998 and 2000.
(c) AmChem.
The trustee wants to avoid one payment of $87,967.95 from Patterson to AmChem. The payment covered materials shipped in May and June 2000. While AmChem was paid in 180 days, it was not extraordinary. It had received a payment that late before the preference period.
(d) Danos and Curole.
Danos provided marine equipment — potable water, forklifts, and personnel — to Ambar. It is unclear which payments the trustee seeks to avoid, but Danos received 89 during the preference period. All of them were paid within 180 days, with 96% falling between 60 and 180 days. Historically, 90% were paid within 180 days, and 89% were made between 60 and 180 days. The payments made to Danos were customary.
(e) Enterprise.
Enterprise had a lease agreement with Ambar to provided about 54 vehicles at various times. The trustee seeks to avoid four checks totaling $41,159.97. The lease required that Ambar pay the full amount of the invoice on the 20th day of the month. Historically, Ambar, like other creditors of Enterprise, failed to do that, and its payments during the preference period were no different.
The average time between invoice and payment for the four checks was 59 days. While the payments for the previous two years averaged 25 days, most were less than the balance due — by a large amount. The questioned payments were typically late and satisfied the debts left by the earlier ones.
(f) Milwhite.
It is unclear whether the trustee still wants to avoid payments to Milwhite. When asked to clarify the payments he contested, the trustee said that four of the payments are subject to the ordinary course defense.
Regardless of the confusion, the 241 payments made to Milwhite during 2000 were made within 120 days. The payments comport with the industry standard.
(g) Excalibar.
Excalibar supplied Ambar with drilling materials, like barite, since 1993. The trustee wants to avoid a check for $116,520.98, reflecting the payment of 68 invoices.
While the check covered many invoices, it was ordinary. The earliest invoices it covered were 35-days-old. Although the average days to payment during the preference period was 17, Ambar had waited at least 30 days to pay invoices in the past. In June 2000, before the statutory preference period began, Ambar sent a check for six invoices it received 30 to 34 days earlier. Further, Ambar had a history of paying several invoices with one check, including a payment that covered 61 invoices and another covering 41.
Obviously, Ambar requested several shipments from Excalibar in a short time. Each shipment cost about $1,000. Instead of paying each invoice individually, Ambar waited until there was a substantial amount outstanding. The check in question reflects the parties historical practices and is well within the 120-day industry standard.
(h) Wyo-Ben.
Wyo-Ben provides Bentonite drilling mud to Ambar. The trustee seeks to avoid four payments totaling $267,305.72. All of them came from Patterson.
Ambar's relationship with Wyo-Ben is similar to its relationship with Excalibar. Wyo-Ben provides several, low-cost shipments at one time, and Ambar pays many of the invoices at once. Between May and October of 2000, Wyo-Ben received 6 checks for 124 invoices.
Ambar paid Wyo-Ben on average 113 days after receiving the invoice with the oldest invoice being 147 days. The timing of the payments is commercially reasonable. The average is within the industry standard, and Wyo-Ben three largest clients average payment length is 140, 126, and 133 days respectively. The checks will not be avoided.
(i) Trans-Capital.
Since 1993, Trans-Capital leased commercial vehicles to Ambar. Trans-Capital signed a new lease with the new Patterson subsidiary in exchange for Patterson paying the outstanding September 2000 invoices. The trustee wants to avoid seven checks from Patterson — all signed on the same day — that paid for the rental fees and for repairs. The rental fees were $55,842.93, and the related expenses were $2,441.50.
The rental payment — 96% of the outstanding debt — was made 38 days after Ambar received the invoice. Like with the other creditors, Patterson waited to pay the other minor expenses with one check to reduce transaction costs. The checks were not extraordinary.
5. Intent.
Patterson agreed to pay the claimants to ensure that the business of the division would remain ordinary. As the trustee has conceded, the creditors — except for Trans-Capital, apparently — were not told about the sale of the fluids division because Patterson did not want to jeopardize future relations between the division and the creditors. In sum, they wanted it to be "business as usual." The best way to ensure this was to pay them on schedule.
Patterson's goals mirror the purposes behind this exception to the trustee's avoidance power. If the creditors were not paid, they would have perfected their liens or raced to the court to ensure payment. In the case of Trans-Capital, it would not have signed a new lease with Patterson if it were not paid. Patterson, with the help of Ambar, paid the debt of the division "to leave undisturbed normal financial relations." Union Bank v. Wolas, 502 U.S. 151, 159 (1991). The most obvious example of Patterson's intent was the name of its new subsidiary — Ambar Drilling Fluids LP, LLP.
All of the payments either comply with the industry standard, comply with the course of dealings between Ambar and the creditor, or are commercially reasonable deviations from the norm. Moreover, the triangular payment structure created by the sale of the division is not extraordinary. To avoid payments because they did not come from the debtor would be a triumph of technique over purpose.
6. The Deal.
Even if the payments were not made in the ordinary course, the equitable remedy is not to avoid them, but to avoid the purchase of the division. The payments were the result of an asset purchase agreement between Ambar, Patterson, and Citibank. Patterson assumed the debts of the division as part of the sale because it wanted to make sure its creditors were paid on time. Without this provision, there may not have been a deal because the value of the division would have been substantially less. A drilling outfit that has difficulty getting basic materials like mud and care is not an attractive asset. Taking money from the creditors would negate a major provision — and motivating factor — of the deal.
If the payments are avoided, Patterson — not the Ramba estate — should get relief. The money Patterson paid to the creditors should be refunded to Patterson, or it should not be bound by the purchase agreement.
The trustee is "double dipping" with this suit. He wants the benefit of the deal — the money Patterson paid Ramba for the division — and the payments to the creditors. He should not get both. If he wants the money from the deal, he cannot avoid the payments to the creditors because those were part of the deal. If he wants to undo the whole deal, Patterson should get back the money it paid Ramba for the division; that is equity.
7. Property.
The creditors also argue that the payments by Patterson should not be avoided because it did not diminish the Ramba estate. They claim that because Citibank had a lien on all of the division's assets, the consideration for the sale — including Patterson's payments to the creditors — would have been the property of Citibank, not Ramba.
The trustee contends that the Ramba estate had the right to receive the money that eventually went to the creditors. He argues that the estate could have distributed the money to all of its creditors instead of it going to a select few. He also claims that Citibank's acceptance of less than the value of its lien created equity in the estate that was then distributed to the unsecured claimants.
The trustee can only avoid the transfer of a debtor's interest in property. See 11 U.S.C. § 547(b). At the time a debtor files for bankruptcy, only its legal, not equitable, interests become part of the estate. See Bergier v. IRS, 496 U.S. 51 (1990); 11 U.S.C. § 541(d).
When it filed for bankruptcy, Ramba had legal title to the assets of the division, but it had no equity in them. The assets were fully encumbered by Citibank's lien. Citibank had all the equity interest in them; that is why Patterson wanted to secure a release from Citibank. Without the release, there was no deal.
In effect, this was an asset sale between Citibank and Patterson; Ramba was involved only because it had legal title and possession of the property. Ramba would not have received the proceeds because they would have gone to pay Citibank's lien.
The trustee says that there is no evidence that the money paid to the creditors would have been subject to Citibank's lien or directly paid to Citibank. In fact, the known evidence contradicts this assertion.
Citibank was involved intimately in this deal. It knew that it would get $15.6 million in exchange for its release, and that these creditors would be paid as part of the sale. Its release was an implicit, if not explicit, approval of the funds going to the creditors rather than Ramba.
Moreover, the only reason Patterson assumed the debt was because it wanted to continue doing business with the creditors. There is no evidence that Patterson would have given that money to Ramba instead or that Citibank would not have demanded that money be paid directly to it.
There is no evidence that money given to the creditors would have been part of the Ramba estate. Citibank ratified Patterson's payments to the creditors rather than that money going to Ramba or taking it for itself.
8. Conclusion.
The payments to the creditors will not be avoided. They were ordinary and did not diminish the value of the Ramba estate. As a result, the creditors' remaining arguments are moot.