132 F.

3d 104
31 Bankr.Ct.Dec. 1156, Bankr. L. Rep. P 77,589

In re HEALTHCO INTERNATIONAL, INC., Debtor.

William A. BRANDT, Jr., Trustee, Plaintiff, Appellee,
v.
REPCO PRINTERS & LITHOGRAPHICS, INC., Defendant,
Appellant.
No. 97-9005.

United States Court of Appeals,

First Circuit.
Heard Nov. 5, 1997.
Decided Dec. 22, 1997.

Duane L. Coleman, with whom Larry E. Parres, St. Louis, MO, and
Lewis, Rice & Fingersh, L.C. were on brief, for appellant.
Daniel C. Cohn, with whom David B. Madoff and Cohn & Kelakos, LLP,
Boston, MA, were on brief, for appellee.
Before SELYA, Circuit Judge, COFFIN, Senior Circuit Judge, and
STAHL, Circuit Judge.
SELYA, Circuit Judge.

Repco Printers & Lithographics, Inc. (Repco) asserts a right to retain a payment
made to it by Healthco International, Inc. (Healthco) shortly before Healthco
commenced insolvency proceedings. The bankruptcy court agreed with Repco
but the Bankruptcy Appellate Panel of the First Circuit (BAP) did not. Repco
appeals. After ironing out a procedural wrinkle, we uphold the BAP's core
determination that the disputed payment was not a transfer "in the ordinary
course of business" within the meaning of 11 U.S.C. 547(c)(2)(1994).
Nevertheless, because the BAP misgauged the posture of the case, we vacate
its judgment and remand for further proceedings.

I. BACKGROUND

We draw our account from the stipulated record, which is comprised of twentyfive uncontested statements of fact and thirteen exhibits (including various
depositions and affidavits).

In better days, Healthco functioned as a major distributor of dental equipment

and supplies. In August 1992, James Mills, chief executive officer of Healthco's
parent company, contacted Fred Zaegel, Repco's owner, to explore a business
relationship. Mills, who knew Zaegel both professionally and socially,
proposed that Repco (headquartered in St. Louis) print Healthco's product
catalog. Zaegel agreed. From that time forward, Repco handled virtually all of
the diverse printing needs of Boston-based Healthco.

During this interlude, Repco extended credit to Healthco in accordance with

standard printing industry practice: Repco would bill contemporaneously for
each service, and would anticipate receiving payment in sixty days, on average,
notwithstanding contrary credit terms expressed in its invoices.1 For its part,
Healthco customarily would accumulate invoices and then pay some (but not
all) of the accumulation by mailing Repco a lump-sum company check. Over
the period from the fall of 1992 until early April of the following year,
Healthco paid one hundred fourteen Repco invoices with sixteen different
checks, totalling around $400,000.

Whenever Repco's cash flow ebbed, it was Zaegel's practice to contact

customers and solicit payment of outstanding invoices that were at least sixty
days old. To this end, Zaegel called Healthco's treasurer, Arthur Souza, on four
occasions. Each time, Souza arranged for a check to be cut shortly thereafter.

Despite these periodic payments, some of Repco's unrequited invoices were

almost two hundred days old by late March. Zaegel tried to prompt Souza once
again, but experienced difficulty in reaching him. Zaegel then called Healthco's
chief financial officer, James Moyle. Zaegel, who never before had made a
dunning call to Moyle, politely informed him that Healthco was holding
numerous Repco invoices that were substantially overdue.2 At the conclusion
of this five-minute conversation, Moyle stated that he would investigate the
matter.

Moyle vouchsafed in his affidavit that he considered Repco to be "Healthco's

most pivotal vendor in the company's effort to overcome its financial
problems," presumably because Repco was about to undertake the printing and
distribution of Healthco's quarterly catalog. He asked Souza how much
Healthco owed Repco and what was "the fastest way" to pay the debt. Souza

replied that Healthco had in hand $235,558.64 in outstanding Repco invoices

and that wire transfer would be the quickest payment method. Moyle directed
Souza to wire the full amount. Repco received the funds on April 13, 1993.
That payment satisfied in one fell swoop sixty-eight invoices ranging from
brand new to two hundred days old.
8

Healthco sought the protection of the bankruptcy court on June 9, 1993. The
firm's ledgers disclosed that it had made only two other wire transfers in
satisfaction of antecedent debts during the previous ninety days. The record
confirms that Healthco's trustee in bankruptcy, William A. Brandt, Jr.,
successfully challenged both of the other payments as voidable preferences.

II. PROCEDURAL HISTORY

9

In due season, the trustee brought this adversary proceeding seeking to recover
the $235,558.64 payment. Repco defended on three grounds: (1) that Healthco
was solvent at the time of the transfer, (2) that the transfer was "made in the
ordinary course of business" within the meaning of 11 U.S.C. 547(c)(2), and
(3) that in all events Repco's services provided "subsequent new value" within
the meaning of 11 U.S.C. 547(c)(4). The parties stipulated that Repco had
conferred new value in the amount of $31,977.38, reducing the trustee's claim
against Repco to $203,581.26 and removing the "new value" issue from the
case. The bankruptcy court then bifurcated the two remaining issues, reserving
the solvency question for later adjudication and proceeding to tackle the
applicability vel non of Repco's "ordinary course of business" defense.

10

The parties cross-moved for summary judgment on this issue. After the
bankruptcy court denied both motions, the parties submitted the issue on the
stipulated record described above. On July 17, 1996, the bankruptcy court
dismissed the trustee's complaint. The court's two-paragraph rescript reads in its
entirety:

11trial was scheduled in this matter for May 1, 1996. However, the parties filed a
A
motion to submit the matter on stipulated facts and exhibits, which was granted on
April 20, 1996.
12 consideration of said facts and exhibits, the complaint is dismissed by virtue of
In
the ordinary course of business defense. A separate order will issue.
13

The trustee filed a timely notice of appeal and the parties opted to have the
appeal heard by the BAP (in lieu of the district court).3 For reasons that are not
readily apparent, the parties mutually invited de novo review of the bankruptcy

court's decision. The BAP accepted the invitation, determined that the wire
transfer had not been made in the ordinary course of business, and ruled that the
payment was "preferential, and subject to recovery by the Trustee under Section
547." Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco ), No.
MW 96-026, slip op. at 12 (1st Cir. BAP 1997). This appeal ensued.
III. STANDARD OF REVIEW
14

Bankruptcy cases differ from most other federal cases in that the court of
appeals does not afford first-instance appellate review. Rather, Congress has
provided for intermediate review, conferring on district courts and federal
bankruptcy appellate panels the authority to hear appeals from bankruptcy
court decisions, but preserving to the parties a right of further review in the
courts of appeals. See 28 U.S.C. 158. Whether such an appeal comes to us by
way of the district court or the BAP, our regimen is the same: we focus on the
bankruptcy court's decision, scrutinize that court's findings of fact for clear
error, and afford de novo review to its conclusions of law. See Martin v. Bajgar
(In re Bajgar ), 104 F.3d 495, 497 (1st Cir.1997); Grella v. Salem Five Cent
Sav. Bank, 42 F.3d 26, 30 (1st Cir.1994). Since this is exactly the same
regimen that the intermediate appellate tribunal must use, we exhibit no
particular deference to the conclusions of that tribunal (be it the district court or
the BAP). See Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir.1997).

15

We now move from the general to the specific. The crucial issue in this
adversary proceeding revolves around Repco's access to the "ordinary course of
business" defense under 11 U.S.C. 547(c)(2). A bankruptcy court's
construction of this statute presents a question of law and thus engenders
plenary review. See Fidelity Sav. & Inv. Co. v. New Hope Baptist, 880 F.2d
1172, 1174 (10th Cir.1989). A bankruptcy court's assessment in connection
with whether the statutory defense appertains in a given case is a horse of
different hue; the findings which collectively comprise such an assessment are
factbound and thus engender clear-error review. See Yurika Foods Corp. v.
United Parcel Serv. (In re Yurika Foods Corp.), 888 F.2d 42, 45 (6th Cir.1989).
Here, the court's rendition of the statute is unexceptional and the only
justiciable issue relates to whether the challenged transfer, as a factual matter,
comes within the statutory sweep. Hence, the bankruptcy court's decision
normally would be reviewable for clear error. This means, of course, that a
reviewing court "ought not to upset findings of fact or conclusions drawn
therefrom unless, on the whole of the record, [the appellate judges] form a
strong, unyielding belief that a mistake has been made." Cumpiano v. Banco
Santander P.R., 902 F.2d 148, 152 (1st Cir.1990).

16

This familiar standard is not diluted merely because parties proceed on a

stipulated record. We long have held that a bankruptcy court's factual findings
are entitled to the deference inherent in clear-error review even when they do
not implicate live testimony, but, rather, evolve entirely from a paper record
that is equally available to the reviewing court. See Boroff v. Tully (In re Tully
), 818 F.2d 106, 109 (1st Cir.1987) (citing Anderson v. City of Bessemer City,
470 U.S. 564, 574-75, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985)); see
also RCI Northeast Servs. Div. v. Boston Edison Co., 822 F.2d 199, 202 (1st
Cir.1987) (explaining that "findings of fact do not forfeit 'clearly erroneous'
deference merely because they stem from a paper record").4 The soundness of
this approach is confirmed by Rule 7052 of the Federal Rules of Bankruptcy
Procedure, which expressly adopts Rule 52(a) of the Federal Rules of Civil
Procedure. The latter rule, in its latest incarnation, provides in pertinent part:
"Findings of fact, whether based on oral or documentary evidence, shall not be
set aside unless clearly erroneous, and due regard shall be given to the
opportunity of the trial court to judge of the credibility of the witnesses."
(Emphasis supplied).

17

Notwithstanding the obvious applicability of the "clearly erroneous" standard

to the case at hand, there is a rub. The parties both urged the BAP to review the
bankruptcy court's decision de novo and to resolve the issue of whether
Healthco's transfer of funds to Repco escapes classification as a preference
without affording any special respect to the bankruptcy court's factual
determinations. The BAP yielded to this importuning. See In re Healthco,
supra, slip op. at 5. What is more, the litigants are united in their insistence that
we, too, should essay plenary, nondeferential review of the bankruptcy court's
decision.

18

Under these peculiar circumstances, we are tempted simply to honor the parties'
request. Cf. United States v. Taylor, 54 F.3d 967, 971 (1st Cir.1995) (warning
that "[t]he problem with wishes is that they sometimes come true") (citing
Aesop). For one thing, the bankruptcy court's failure to articulate any
particularized factual findings not only contradicts the rules of practice, see Fed.
R. Bankr.P. 7052 (adopting Fed.R.Civ.P. 52(a)'s requirement that "the court
shall find the facts specially"), but also makes clear-error review exceptionally
difficult. 5 For another thing, the parties invited the BAP to indulge in de novo
review and, at oral argument in this court, they continued to urge that we follow
that course. Declining to do so would risk "plac[ing] a premium on agreeable
acquiescence to perceivable error as a weapon of appellate advocacy." Dedham
Water Co. v. Cumberland Farms Dairy, Inc., 972 F.2d 453, 459 (1st Cir.1992)
(quoting Merchant v. Ruhle, 740 F.2d 86, 92 (1st Cir.1984)).

19

This is an interesting concatenation of events, but we need not decide whether

we should hold the parties to the invited error; in this instance, all roads lead to
Rome because our choice between the two standards of review will not affect
the outcome on appeal. In short, this case is sufficiently plain that, whether we
bow to the parties' wishes and afford de novo review or bow to convention and
employ the more deferential "clearly erroneous" rubric, we, like the BAP,
would be compelled to set aside the bankruptcy court's contrary determination.

IV. THE MERITS

20

In order to guard against favoritism in the face of looming insolvency, the

Bankruptcy Code provides that certain payments made by the debtor within
ninety days preceding the institution of bankruptcy proceedings are voidable as
preferences. See 11 U.S.C. 547(b). This rule is not ironclad. Thus, the Code
holds harmless transfers made by the debtor during the ninety-day preference
period if certain criteria are satisfied. Specifically, a bankruptcy trustee may not
annul a preference-period transfer to the extent that the transfer was

21 in payment of a debt incurred by the debtor in the ordinary course of business ...
(A)
[between] the debtor and the transferee;
(B) made in the ordinary course of business ... of the debtor and the transferee; and
22
(C) made according to ordinary business terms[.]
23
24

11 U.S.C. 547(c)(2). The rationale behind this carve-out is clear: because "the
general policy of the preference section [is] to discourage unusual action by
either the debtor or his creditors during the debtor's slide into bankruptcy," the
ordinary course exemption promotes the corresponding congressional desire
"to leave undisturbed normal financial relations." H.R.Rep. No. 595 (1977),
reprinted in 1978 U.S.C.C.A.N. 5963, 6329.

25

The statute itself is uninstructive as to the definition of the term "ordinary

course of business." Courts abhor interpretive vacuums, and they have filled
this one, articulating several factors that bear upon whether a particular transfer
warrants protection under section 547(c)(2). These factors include the amount
transferred, the timing of the payment, the historic course of dealings between
the debtor and the transferee, and the circumstances under which the transfer
was effected. See In re Yurika Foods, 888 F.2d at 45; First Software Corp. v.
Curtis Mfg. Co. (In re First Software Corp.), 81 B.R. 211, 212
(Bankr.D.Mass.1988). After considering the record evidence in light of these
factors, we are firmly convinced that the transfer from Healthco to Repco was

extraordinary and that the bankruptcy court clearly erred in finding otherwise.
We explain briefly.
26

The amount of the payment was uncommonly large; Healthco never before had
made a lump-sum payment to Repco in an amount approaching $235,000.6 Put
another way, the payment was nearly ten times as large as the average of the
payments previously made by the debtor to Repco. Then, too, the timing of the
payment was highly suspicious. It lumped old and new bills, and in the process,
liquidated several invoices that were by accounting standards ancient (i.e., more
than ninety days old) and several that were prepubescent (i.e., less than thirty
days old).7 There were, moreover, virtually no significant similarities between
the challenged payment and the antecedent course of dealings between the
parties. For example, the disputed transfer marked the first occasion that
Healthco ventured to pay all its outstanding Repco invoices, the first time that
Healthco wired funds to Repco, and the first time that Healthco's chief financial
officer interceded to effectuate a payment to Repco. Inasmuch as the hallmark
of a payment in the ordinary course is consistency with prior practice, see
WJM, Inc. v. Massachusetts Dep't of Pub. Welfare, 840 F.2d 996, 1011 (1st
Cir.1988), this string of "firsts" is telling.

27

The circumstances surrounding the wire transfer clinch the matter. Healthco
owed money to hundreds of creditors. Of these, it paid only Repco, Kerr
Manufacturing, and Clarke Industries in full by wire transfer during the
preference period. All three of these businesses had detectable links to
Healthco's principals: Thomas Hicks, chairman and chief executive officer of
the firm that owned Healthco Holding Co. (which, in turn, owned Healthco),
was a director and beneficial owner of Kerr's parent corporation; James Mills,
chairman of Healthco Holding Co., chaired the board of Clarke's parent
company and served as its chief executive officer; and as mentioned above,
Mills also had a longstanding relationship with Repco's proprietor. Apart from
these special relationships, there is no reasonable explanation for preferment of
the three creditors. This is especially true of Repco; as Zaegel himself testified
during his deposition, it is general industry custom to "pay the printer last."

28

Other circumstances associated with the challenged transfer highlight the

importance of Repco's special relationship. Souza, Healthco's treasurer, testified
that by February 1993 decisions about which creditors were to be paid when
were being made by a committee of Healthco executives; yet Moyle overrode
this mechanism to effect the Repco payment. At the same time, it was clear
both from Zaegel's kid-glove approach and from the competitive nature of the
printing industry that Repco's continued service did not hinge upon Healthco's
payment of all outstanding debt as celeritously as possible. Thus, Moyle's claim

that he directed the payment to be made because Repco was "pivotal" to

Healthco's operations is entitled to very little weight.
29

We need go no further. The circumstantial evidence fully persuades us that the

debtor deviated sharply from its customary business practices to favor a select
trio of creditors, Repco included. This is precisely the type of preferment-taking care of a few well-connected vendors while playing hardball with the
general multitude--that the drafters of the Bankruptcy Code intended to curtail.
See Lawson v. Ford Motor Co. (In re Roblin Indus.), 78 F.3d 30, 40 (2d
Cir.1996) (explaining that "equality of distribution among creditors of the
debtor" is one goal of the preference provision) (quoting legislative history).8

30

Repco's other arguments are unconvincing and we reject them without

elaboration. It suffices to say that the circumstances surrounding the challenged
transfer amply evince its extraordinary nature. Therefore, we affirm the BAP's
determination that, contrary to the bankruptcy court's view, the challenged
transfer was not made in the ordinary course of business.

31

Unlike the BAP, however, we do not believe that such a determination clears
the way for judgment on the trustee's claim. The bankruptcy court reserved the
issue of Healthco's insolvency--an essential element of the preference claim-and that issue remains open. Consequently, we must vacate the BAP's judgment
to that extent and remand to the BAP with directions that it, in turn, remand the
cause to the bankruptcy court for further proceedings.

32

Affirmed in part, vacated in part, and remanded. No costs.

Repco's invoices bore a net ten days legend. The record reflects, however, that
this credit term was honored mainly in the breach; most of Repco's customers
(and, indeed, the majority of firms purchasing services in the competitive
printing industry) ignored this stricture

The record indicates that Zaegel was unaware of Healthco's financial problems
at this time; that he discussed the past-due invoices cordially with Moyle; and
that he neither threatened to cut off printing services nor demanded an
immediate payment

In this circuit, bankruptcy appellate panels have had a mixed history. After a
short-lived experiment, the use of such panels was discontinued in 1983. The
First Circuit Judicial Council revivified the BAP structure on July 1, 1996,

giving interested parties the option of electing intermediate appellate review

before a BAP panel rather than before a federal district court
4

To be sure, occasional statements of this court, if wrested from context, might

appear to suggest de novo review in such circumstances. See, e.g., Brewer v.
Madigan, 945 F.2d 449, 452 (1st Cir.1991). Context provides a clearer
perspective. In the cases in which we purposed to scrutinize a paper record de
novo, there were no facts in dispute. Although a stipulated record sometimes
will indicate the absence of factual discord, that is far from universally true.
See Vetter v. Frosch, 599 F.2d 630, 632 (5th Cir.1979) ("Many cases are tried
on depositions, counter-affidavits, and stipulated records, where the parties
know there are issues of fact which must be resolved, but are content to have
them resolved on the basis of written, as opposed to oral, testimony and
evidence."). Here, the existence of genuine factual issues is made manifest by
the bankruptcy court's well-founded denial of the parties' cross-motions for
summary judgment

Of course, if a reviewing court determines that a bankruptcy court's findings are

too indistinct, it may decline to proceed further and remand for more explicit
findings. This avenue was open to the BAP and it is equally open to us

To be sure, as Repco points out, the magnitude of the payment is attributable in

some measure to a single invoice in the sum of $96,689.19. This circumstance
does not contradict the conclusion that the payment was abnormal. The fact
remains that Healthco remitted over $235,000 in satisfaction of sixty-eight
separate Repco invoices, thereby dwarfing earlier remittances as to both the
number of invoices and the total dollars involved

As the BAP noted, roughly fifty percent of the invoices satisfied by the wire
transfer fell into one of these two categories. See In re Healthco, supra, slip op.
at 10. By contrast, very old and very new invoices comprised no more than
fifteen percent of any group of invoices previously paid

The other main goal of the preference provision--precluding the debtor "from
trying to stave off the evil day by giving preferential treatment to his most
importunate creditors," In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th
Cir.1993)--is not implicated here. See supra note 2