Opinion
No. 7-01-10779 SA, Adv. No. 03-1123 M
December 5, 2003
Paul D. Barber, Albuquerque, NM, for the Trustee
James C. Jacobsen, Albuquerque, NM, for the State Fair
MEMORANDUM OPINION
THIS MATTER is before the Court on New Mexico State Fair's Motion for Summary Judgment (the "Motion") filed on August 19, 2003. The Plaintiff, Yvette Gonzales, Trustee of the Debtor (" Trustee") filed a Response and Opposition to Defendant's Motion for Summary Judgment on September 17, 2003 (the "Response"). On February 7, 2003, the Trustee filed a Complaint to Avoid Preferential Transfers (the "Complaint") against the New Mexico State Fair (" State Fair"). The State Fair seeks summary judgment on the Complaint arguing that as a state agency, it can assert sovereign immunity from suits in this Court. In the alternative, the State Fair argues that the payment at issue was made in the ordinary course of business and is, therefore, not an avoidable preference under 11 U.S.C. § 547(c)(2). After reviewing the motions and memoranda, considering the applicable code sections and relevant case law, and being otherwise informed, the Court finds the undisputed material facts as follows:
1. This bankruptcy was filed on February 8, 2001 under Chapter 11 of the Bankruptcy Code. The case converted to Chapter 7 on December 19, 2001.
2. On or about August 24, 2000, the State Fair entered into a Sponsorship Agreement with the Debtor (the "Sponsorship Agreement") wherein the Debtor agreed to provide the State Fair $25,000.00 in financial support and $25,000.00 in media promotions and advertising. In return, the Debtor received 50,000 State Fair tickets with an option to purchase additional tickets at a discount for resale. Also under the Sponsorship Agreement, the Debtor was designated an official sponsor of the 2000 State Fair and the State Fair Rodeo, was given exhibit space, and was allowed to hang banners in Tingley Coliseum, the Horse Arena, and the Beef Barn.
3. The Sponsorship Agreement required the Debtor to pay the financial commitment of $25,000.00 on or before September 30, 2000. However, the Debtor paid the $25,000.00 on January 8, 2001, less than 90 days before the bankruptcy filing.
4. The State Fair filed an administrative claim in this bankruptcy for additional State Fair admission tickets acquired and resold by the Debtor pursuant to the Sponsorship Agreement.
5. From 1994 until approximately June of 1999, the Debtor generally paid its bills in full when due or within a reasonable time thereafter. Affidavit of Sandra Dunlap, Ex. 3 to Trustee's Response at ¶ 3 (hereinafter, "Dunlap Affidavit"). From late 1999 to the date the petition was filed, the Debtor's cash flow situation worsened. Dunlap Affidavit at ¶ 5.
6. In late 1999 and early 2000, in response to insufficient cash flow from operations, the Debtor stopped mailing automatically generated checks to its vendors, as was its usual practice, because there were insufficient funds to cover all checks generated. Dunlap Affidavit ¶ 6. Instead, the Debtor began holding checks until a decision was made to pay the vendor. Pending that decision, the printed but unmailed checks were put into a locked filing cabinet, under Dunlap's supervision. Dunlap Affidavit ¶ 7.
7. In September of 2000, the Debtor's management created an Ad Hoc Committee to determine in any given week which vendors to pay and in what amount. The Committee held meetings at least weekly. Dunlap Affidavit ¶ 9. Each Monday the Director of Cash Management, Sandra Dunlap, would provide the Committee with an estimate of the cash receipts for the week in order to determine which vendors could be paid. Dunlap Affidavit ¶ 10. The Debtor would then void the check written previously and held in the locked cabinet and issue a new check with a current date to the vendor for the amount owed. Dunlap Affidavit ¶ 8.
8. The Debtor issued check number 25128603 to the State Fair on November 10, 2000 in the amount of $25,000.00, which the Debtor held in the locked cabinet. The check was later voided, and on January 3, 2001 the Debtor issued check number 25136601 to the State Fair in the amount of $25,000.00, which was honored on January 8, 2001. Affidavit of Rachel Kefauver Ex. 4 to Trustee's Response ¶ 6 (hereinafter, "Kefauver Affidavit").
9. Fair sponsors typically delay payment of financial commitments beyond the time set forth in their sponsorship agreements. Affidavit of Rick L. Scroggins, Ex. A to State Fair's Memorandum in Support of the Motion ¶ 7 (hereinafter, "Scroggins Affidavit"). Receipt of the Debtor's late payment of $25,000.00 was consistent with the normal business affairs of the State Fair. Scroggins Affidavit ¶ 8.
DISCUSSION
Summary judgment shall be entered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Bankr.Proc. 7056(c). In determining whether summary judgment should be granted, the Court will view the record in the light most favorable to the party opposing summary judgment. In re Steele 292 B.R. 422, 426 (Bankr. D. Colo. 2003) (citing In re Harris, 209 B.R. 990, 995 (10th Cir. BAP 1997)).
II. Sovereign Immunity
The State Fair argues that as a state agency, it is immune from suits under the Eleventh Amendment to the U.S. Constitution. The State Fair argues that the sovereign immunity defense is available against the Trustee's action to recover preferential transfers because § 106(a) of the Bankruptcy Code, abrogating sovereign immunity, is considered by many courts to be unconstitutional. See Straight v. Wyoming Dept. of Transportation (In re Straight), 248 B.R. 403, 416 (10th Cir. BAP 2000) (concluding that Congress' Article I power does not include the power to abrogate sovereign immunity). This conclusion is based on the Supreme Court opinion, Seminole Tribe v. Florida, 517 U.S. 44, 55, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996) and its progeny. In Seminole Tribe the Supreme Court concluded that the Indian Commerce Clause, which authorizes Congress to "regulate Commerce . . . with the Indian Tribes," U.S. Const., Art. I, § 8, does not grant Congress the power to abrogate sovereign immunity. Many Circuit Courts of Appeal, including the Tenth Circuit Bankruptcy Appellate Panel, have concluded that Congress may not validly abrogate state sovereign immunity in the Bankruptcy Code reasoning that Congress' power to "establish . . . uniform Laws on the subject of Bankruptcies . . . " U.S. Const. Art. I, § 8, cl. 4, also stems from Article I of the Constitution. See e.g. Nelson v. La Crosse County Dist. Attorney (In re Nelson), 301 F.3d 820, 832 (7th Cir. 2002); Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111, 1121 (9th Cir. 2000); Sacred Heart Hosp. of Norristown v. Pennsylvania (In re Sacred Heart Hosp. of Norristown), 133 F.3d 237, 243 (3rd Cir. 1998); Fernandez v. PNL Asset Mgmt. Co. LLC (In re Fernandez), 123 F.3d 241, 245 (5th Cir.), amended by 130 F.3d 1138, 1139 (5th Cir. 1997); Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C.) 119 F.3d 1140, 1145-46 (4th Cir. 1997), cert. denied, 523 U.S. 1075, 118 S.Ct. 1517, 140 L.Ed.2d 670 (1998); Straight 248 B.R. at 416 (10th Cir. BAP 2000) (all concluding that Article I does not give Congress power to abrogate sovereign immunity in the bankruptcy context). Following this line of cases, the State Fair argues that summary judgment should be granted dismissing this proceeding because it is immune from suit in bankruptcy court and that immunity has not been validly abrogated.
Section 106(a) states in pertinent part:
(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:
(1) [Section] . . . 547 of this title.
The U.S. Supreme Court is set to address this issue in its review of Hood v. Tennessee Student Assistance Corp. (In re Hood), 319 F.3d 755 (6th Cir. 2003), cert. granted, 124 S.Ct. 45, 71 USLW 3724 (Sept. 30, 2003). In contrast to the other Circuit opinions, the Sixth Circuit in Hood concluded that § 106(a) was a valid abrogation of state sovereign immunity based on the Constitution's uniformity requirement in Article 1 § 8. Id. at 762. See also Mayes v. Cherokee Nation (In re Mayes), 294 B.R. 145, 161 (10th Cir. BAP 2003) (McFeeley dissenting) (agreeing with the Sixth Circuit's conclusion in Hood that Congress validly abrogated sovereign immunity under § 106(a)); See also, Flores v. Ill. Dept. of Public Health (In re Flores), 300 B.R. 599, 609 (Bankr. D. Vt. 2003) (finding that Congress' abrogation of sovereign immunity was "effected within its constitutionally granted powers under the Bankruptcy Clause of the Constitution."). Hopefully, the Supreme Court will recognize § 106(a) as a valid use of Congress' mandate to provide a single federal forum to ensure uniform procedural treatment of every type of claimant in bankruptcy and uphold § 106(a). Mayes, 294 B.R. at 162 (McFeeley dissenting) (noting that allowing states to assert immunity in bankruptcy defeats the very purpose of uniform bankruptcy law, the avoidance of preferences among creditors). See also Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (stating that equality of distribution among creditors is a central policy of the Bankruptcy Code), cited in Mayes, 294 B.R. at 162 n. 34 (J. McFeeley, dissenting). While the Court feels bound to follow Straight supra, it cannot help but note what strange and inconsistent results are the offspring of such a holding. However, in this case, the Court need not rely solely on whether the State Fair's ability to assert sovereign immunity has been abrogated.
The Trustee makes two arguments that the State Fair's sovereign immunity defense fails regardless of whether immunity has been abrogated. First, the Trustee argues that the State Fair cannot assert sovereign immunity because it is not a governmental entity due to its proprietary nature and independent status under state law. Alternatively, the Trustee argues that the State Fair has waived its immunity by filing an administrative claim thereby subjecting itself to the Court's jurisdiction in all matters pertaining to that claim. See 11 U.S.C. § 106(b).
The Court will first address whether the State Fair is an arm of the state and able to assert immunity.
Under the Bankruptcy Code, "governmental unit" is defined as follows:
United States; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States . . ., a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government. 11 U.S.C. § 101(27).
The plain language of this section clearly recognizes a state or a department, agency, or instrumentality of a state as a governmental unit for the purposes of the Bankruptcy Code. See Wyoming Dept. of Transportation v. Straight (In re Straight), 143 F.3d 1387, 1390 (10th Cir. 1998) (finding that Department of Transportation was state agency). "State agency" under New Mexico law means "any department, institution, board, bureau, commission, district or committee of the government of the state of New Mexico and means every office or officer of any of the above." NMSA § 6-3-1 (2003 Repl. Pamp.). The State Fair was created as "a body politic and corporate and separate and confirmed as a governmental instrumentality for the purpose of carrying out the provisions of Chapter 46, Laws of 1913 (Sections 16-6-1 et seq.)." NMSA § 16-6-14 (1999 Repl. Pamp.). The State Fair has been considered an arm of the state by the New Mexico courts in determining tort liability. See Baca v. State of New Mexico et al., 121 N.M. 395, 397, 911 P.2d 1199, 1201 (Ct.App. 1996) (upholding finding that State Fair waived immunity under State Tort Claims Act). Therefore, despite its unique nature, the Court concludes that the State Fair is an arm of the state of New Mexico and is entitled to assert the sovereign immunity defense.
The governing body of the State Fair is the state fair commission, which was created by the New Mexico legislature under Chapter 16 of the New Mexico statutes. It must submit to the governor a financial statement showing all funds received and disbursed, all assets and liabilities, along with a detailed account of its transactions. NMSA § 16-6-6 (1999 Repl. Pamp.)." The state fair commission is administratively attached,. . . to the tourism department." NMSA § 16-6-5 (Repl. Pamp.). The state fair commission may carry out its duties independently without approval or control of the tourism department; but it must submit its budgetary requests and reports through the department. NMSA § 9-1-7 (2003 Repl. Pamp.).
II. Waiver of Sovereign Immunity
The Trustee argues that even if the State Fair is a state agency and immune from suit, it has waived that immunity in this case. Section 106(b) of the Code states:
A governmental unit that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and arose out of the same transaction or occurrence out of which the claim of such governmental unit arose.
It is undisputed that the preference action is property of the estate. See United States v. Pullman Construction Industries, Inc., 153 B.R. 539, 541 (N.D. Ill. 1993) (finding Debtor's preference claim for pre-petition tax payments was property of the estate). However the State Fair disputes the Trustee's assertion that the claims filed by the State Fair are sufficiently related to the preference action to constitute a waiver under § 106(b). The State Fair argues that its administrative claim for amounts due for additional tickets purchased by the Debtor under the Sponsorship Agreement is unrelated to the action to recover an alleged preferential payment. However, the Court must examine the source of the State Fair's claim compared to the basis for the preference action when determining whether they are sufficiently related to meet the requirements of waiver. The test for waiver under § 106(b) is the same as the test for compulsory counterclaims under Federal Rule of Civil Procedure 13.
To determine whether the trustee's claims against a governmental unit arise out of the same transaction or occurrence as the claims filed by the governmental unit, courts apply the logical relationship test of Fed.R.Civ.P. 13(a). . . . A logical relationship exists "when the counter claim arises from the same aggregate set of operative facts as the initial claim, in that the same operative facts serve as the basis of both claims or the aggregate core of facts upon which the claim rests activates legal rights otherwise dormant in the defendant."
Warfield v. The Navajo Nation (In re Davis Chevrolet, Inc.), 282 B.R. 674, 678 (Bankr. D. Ariz. 2002), quoting, Schulman v. State of California (In re Lazar), 237 F.3d 967, 979 (9th Cir. 2001), cert. denied, 534 U.S. 992, 122 S.Ct. 458, 151 L.Ed.2d 377 (2001). Here, the preference action is based on a payment made by the Debtor to the State Fair under the Sponsorship Agreement. The State Fair's claim stems from the Debtor's obligations to pay for additional tickets purchased pursuant to the Sponsorship Agreement. Clearly there is a logical relationship between the claim and the preference action because of their common origin, the Sponsorship Agreement. Consequently, the Court holds that the State Fair has waived its immunity for purposes of adjudicating this preference action. See Pullman Construction Industries, Inc., 153 B.R. at 541-42 (finding that United States waived its immunity with regard to preference claim for pre-petition tax payments made to cover shortfall in non trust fund tax payments when it filed a proof of claim for unpaid pre-petition and post-petition taxes).
III. Ordinary Course of Business Exception
Having determined that the Trustee can bring this preference action against the State Fair, the Court must turn to the substantive requirements of a preference. Section 547 of the Code provides as follows:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The Trustee bears the burden to establish all of the elements of a preference by a preponderance of the evidence. 11 U.S.C. § 547(g); see U.S. v. Pullman Construction Industries, Inc., 210 B.R. 302, 306 (N.D. Ill. 1997).
Under Section 547(f),". . . the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition." 11 U.S.C. § 547(f). In this case, the element of subsection (3) is met because the transfer occurred within 90 days before the bankruptcy was filed.
The State Fair does not concede that the Trustee has met her burden to show that the $25,000.00 payment meets all of the other criteria of § 547(b). However, the State Fair argues that even if the payment is determined to be a preference, the payment should not be recoverable under the exception set forth in § 547(c)(2) because as a matter of law it was made in the ordinary course of business.
Section § 547(c)(2) provides the relevant exception:
(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 State Fair bears the burden of proof on each element of this exception. 11 U.S.C. § 547(g). Neither party disputes that this was a debt incurred in the ordinary course of business of the Debtor and the State Fair. The parties focus their dispute on whether the payment was made in the ordinary course of business of these parties under subsection (B), and whether the payment was made according to ordinary business terms under subsection (C).
Subsection (B) of Section 547(c)(2) creates a subjective test, i. e., whether the transfer was ordinary as between the parties, but Subsection (C) creates an objective test, i. e., whether the transfer was ordinary in the industry. See, e. g., Payne v. Clarendon National Ins. Co. (In re Sunset Sales, Inc.), 220 B.R. 1005, 1020 (10th Cir. BAP 1998) citing In re Midway Airlines, Inc., 69 F.3d 792, 797-98 (7th Cir. 1995) (describing two tests and noting that the exception should be narrowly construed). To determine if payments are ordinary between the parties as required under the subjective test, courts consider (1) the length of time the parties were engaged in the transaction in issue; (2) whether the amount or form of tender differed from past practices; (3) whether the debtor or creditor engaged in any unusual collection or payment activity; and (4) the circumstances under which the payment was made. Sunset Sales 220 B.R. at 1020-21. These factors are determined by comparing pre-preference period transfers with preference period transfers between the parties. Id. at 1021.
The Court finds that issues of material fact exist as to whether this payment was in the ordinary course of business of the Debtor and the State Fair. First, the State Fair has failed to present any evidence of prior practices, if any, between these parties and has given no information about the length of time that these parties were engaged in these types of transactions. As for the third and fourth factors, the Trustee presented evidence that the Debtor was engaged in unusual payment activity when the payment was made by using an Ad Hoc Committee to decide which bills to pay and holding checks issued for payment until cash flow covered the amount. Dunlap Affidavit ¶ 6-10. Moreover, the Trustee showed that the Debtor paid the State Fair using this unusual procedure. Kefauver Affidavit ¶ 6.
Transfers made in the ordinary course of dealing must be ordinary both from the transferee's perspective and the debtor's perspective. In re Milwaukee Cheese Wisconsin, Inc., 112 F.3d 845, 848 (7th Cir. 1997). The State Fair presented a statement by its Director of Budget and Finance that the payment was consistent with the normal business affairs of the State Fair. Scroggins Affidavit ¶¶ 8, 9. Scroggins also stated that sponsors typically delay payment of financial commitments and that payments in January are not unusual. Scroggins Affidavit ¶ 7. Although receipt of late payments may have been normal course for the State Fair, this is insufficient to show as a matter of law, that this payment was made according to ordinary terms on the part of both the State Fair and the Debtor. See Sunset Sales, 220 B.R. at 1021 (finding that late payments are typically not "ordinary," unless the creditor establishes that a pattern of late payments was ordinary between the parties); Kroh Brothers Development Co. v. National Fidelity Life Ins. Co. (In re Kroh Brothers Development Co.), 115 B.R. 1011, 1020 (Bankr. W. D. Mo. 1990) (holding that transfers to lender were not in ordinary course where debtor held checks for several weeks before payment due to insufficient funds to clear checks).
Certainly the Debtor's use of a committee to decide which bills to pay raises the danger that the preference section seeks to avoid, that is, using limited cash resources to favor one creditor over another. See Meridith Hoffman Partners, 12 F.3d at 1554 (finding that escrow arrangement between creditor and debtor under which creditor must approve expenditures was not according to ordinary business terms and posed danger that preference section seeks to avoid). Therefore, the State Fair has not shown that it is entitled to summary judgment that this payment was made in the ordinary course of business under subsection (B). Having determined that material fact issues exist with regard to subsection (B) of the exception, the Court does not need to determine whether fact issues are presented under subsection (C).
The Court grants the State Fair's Motion in part, finding that the State Fair is a governmental entity protected by sovereign immunity under the Eleventh Amendment. However, the Court denies in part the State Fair's Motion to dismiss this action for lack of jurisdiction because the State Fair waived its sovereign immunity by filing the administrative claim for amounts due under the Sponsorship Agreement. Finally, the Court denies the remainder of the State Fair's Motion as to the substantive elements of the Trustee's preference action, finding that there are material facts issues as to whether the payment of $25,000.00 made on January 5, 2001 falls under the exception to preferences for payments made in the ordinary course of business.
The State Fair has also asked this court to limit the amount that the Trustee can recover to the amount remaining after its claim is offset under 11 U.S.C. § 106(c). Because the Court has not ruled that the Trustee may recover on the preference claim, it is premature to rule on this issue.
The Court will issue an appropriate order in accordance with this memorandum opinion.