Indiana Court Permits ITT Educational Services Trustee to Clawback Preference Transfers from a Leading Publishing Company
March 11, 2021, Southern District of Indiana – Trustee Deborah J. Caruso for the bankruptcy estates of ITT Educational Services, Inc. (“ITT”), ESI Service Corp., and Daniel Webster College, Inc. (collectively, the “affiliated Debtors”) sued Defendant John Wiley & Sons, Inc. (“Wiley”) to recover alleged preference transfer from the Defendant under § 547 of the Bankruptcy Code.
ITT and Wiley executed an agreement for the sale and purchase of textbooks, instructional materials, and other products. (the “Goods”). The agreement provided payment terms of “Net 90” days. The parties neither renewed nor entered into a new written agreement after its expiry.
Following the expiration, the terms between ITT and Wiley were formed by the exchange of orders by ITT, deliveries of ordered Goods by Wiley, and the transmission by Wiley of invoices under the provisions of the applicable version of Article 2 of the Uniform Commercial Code (“UCC”). Under the provisions of UCC, the local law of buyer (ITT) governs in the absence of an affirmative agreement by the parties. According to Ind. Code § 26-1-2-204 through Ind. Code § 26-1-2-207, the parties were to operate under the terms contained in the orders submitted by ITT and the invoices sent by Wiley.
During the pre-preference period, ITT paid Wiley a total of $1,371,941.68, satisfying 570 invoices. The pre-preference invoices included invoices with 90-day terms, 60-day terms, and perhaps other payment terms. Upon review, the Court found the payment range of 61 days to 79 days to be consistent with the parties’ typical payment practices during the pre-preference period. The Court did not find merit in Wiley’s assertion that the baseline between the parties should be developed around the alleged 90-day payment term. The Court stated that a review of the transactions in the pre -preference period established that ITT’s payment practices deviated from the terms of the expired agreement – likely because ITT was under the belief that the payment terms were 60-days.
The Court also did not find merit in Wiley’s assertion that the timing of the large payments during the preference period was consistent with the timing of other large payments during the pre-preference period. The Court concluded that there was a significant change in ITT’s payment pattern during the preference period. Furthermore, according to the Court, the Defendant’s proffered expert witness was less qualified to render a credible opinion regarding the subjective prong of the ordinary course of business defense than the Trustee’s expert.
Next, the Court concluded that Wiley failed to introduce credible, external evidence of practices within the industry and therefore, failed to prove by a preponderance of the evidence that the alleged transfers were protected by the objective ordinary course of business defense. The Court reasoned that the longer custom terms advocated by Defendant were well outside industry standards.
Accordingly, the Court concluded that a total of $205,826.54, less the new value of $8,827.28, for a total of $196,999.26 was avoidable and recoverable from Wiley by the Trustee as preferential transfers.