In Re Hechinger Inv

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

6-7-2007

In Re Hechinger Inv

Precedential or Non-Precedential: Precedential

Docket No. 06-2166

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

__________

Nos. 06-2166 and 06-2229

__________

IN RE: HECHINGER INVESTMENT COMPANY

OF DELAWARE, INC., ET AL.

Debtors

HECHINGER INVESTMENT COMPANY OF

DELAWARE, INC.

v.

UNIVERSAL FOREST PRODUCTS, INC.,

Appellant No. 06-2166

__________

(continued)

_____________

IN RE: HECHINGER INVESTMENT COMPANY

OF DELAWARE, INC., ET AL.

Debtors

HECHINGER INVESTMENT COMPANY OF

DELAWARE, INC.

v.

UNIVERSAL FOREST PRODUCTS, INC.

Hechinger Liquidation Trust, as successor in

interest to Hechinger Investment Company of

Delaware Inc., et al., Debtors in Possession,

Appellant No. 06-2229

__________

On Appeal from the United States District Court

for the District of Delaware

(D.C. Civil No. 05-cv-00497)

District Judge: Honorable Kent A. Jordan

2

__________

Argued on March 28, 2007

Before: RENDELL and CHAGARES,* Circuit Judges.

(Filed: June 7, 2007)

Kevin J. Mangan

Monzack & Monaco

1201 North Orange Street

400 Commerce Center

Wilmington, DE 19899

-and-

(continued)

__________________

* The Honorable Maryanne Trump Barry participated in

the oral argument and panel conference and joined in

the decision on this case, but discovered facts causing

her to recuse from this matter prior to filing of the

Opinion. The remaining judges are unanimous in this

decision, and this Opinion and Judgment are therefore

being filed by a quorum of the panel.

3

Michael S. McElwee [ARGUED]

Barnum, Riddering, Schmidt & Hewlett

333 Bridge Street, N.W., Suite 1700

Grand Rapids, MI 49504

Counsel for Appellant/Cross Appellee

Universal Forest Products, Inc.; and Hechinger

Liquidation Trust, as successor in interest to

Hechinger Investment Company of Delaware Inc., et al.,

Debtors in Possession

Joseph L. Steinfeld, Jr. [ARGUED]

Karen M. Scheibe

A.S.K. Financial

2600 Eagan Woods Drive, Suite 220

Eagan, MN 55121

Counsel for Appellee/Cross Appellant

Hechinger Investment Company of Delaware, Inc.

__________

OPINION OF THE COURT

__________

RENDELL, Circuit Judge.

This case arises out of the bankruptcy proceedings of

Hechinger Investment Company of Delaware, Inc.

(“Hechinger”). Hechinger filed a complaint in the Bankruptcy

Court against its creditor, Universal Forest Products (“UFP”), to

avoid and recover preferential transfers from UFP, pursuant to

4

11 U.S.C. §§ 547 and 550. The Bankruptcy Court rejected

UFP’s defenses that the transfers were either contemporaneous

exchanges for new value under Bankruptcy Code § 547(c)(1) or

made in the ordinary course of business under § 547(c)(2), and

denied UFP’s motion for an adverse evidentiary inference

against Hechinger on the ground of spoliation. It also denied

Hechinger’s motion for prejudgment interest. The District Court

affirmed. Both sides now appeal.

I.

UFP, a leading manufacturer of treated lumber products,

began its business relationship with Hechinger some 15 years

prior to Hechinger’s June 11, 1999 bankruptcy filing. Prior to

February 1999, Hechinger was one of UFP’s biggest customers.

However, Hechinger’s financial condition worsened in 1999 and

UFP became concerned about continuing to sell goods to

Hechinger on credit.

On February 4, 1999, UFP and Hechinger had a meeting

to discuss Hechinger’s financial situation and possible solutions

in order to allow the companies to maintain their business

relationship during the upcoming spring season, when

Hechinger’s demand for lumber products was the greatest. Prior

to this meeting, Hechinger had an open line of credit with UFP

on terms of “1% 10 days, net 30, with a 7-day mail float.”

Under this arrangement, Hechinger could earn a 1% price

reduction for invoices paid within the “discount period,”

5

namely, ten days plus a seven-day grace period for payments

made by mail. App. 207. Hechinger had up to 30 days to pay

in order for the payment to be considered prompt. Id.

Hechinger paid UFP by check accompanied by remittance

advices that matched each payment to particular previous

invoices. During the three years prior to Hechinger’s

bankruptcy filing, Hechinger made most of its payments to UFP

within the “discount period.” App. 906. As of February 4,

1999, Hechinger’s account reflected no amount past due, and

$37,148 coming due within the next 30 days. App. 713.

At the February 4 meeting, UFP presented Hechinger

with four different options to allow the business relationship of

the parties to continue. Hechinger agreed to a $1 million credit

limit for future purchases and its credit terms were reduced to

“1%, 7 days, net 8,” meaning that Hechinger could earn a 1%

price reduction for invoices paid within the seven day “discount

period,” and had up to eight days to pay in order for the payment

to be considered prompt. Hechinger also agreed to remit

payments to UFP by wire transfer, instead of check. Hechinger

wired payments in lump sum amounts of $500,000 or

$1 million, prior to sending remittance advices to UFP. The

changed terms of Hechinger’s credit arrangements with UFP

required Hechinger to make larger and more frequent payments

to UFP because Hechinger placed orders for between $160,000

and $250,000 worth of product per day. Hechinger made a total

of 22 wire transfers during the “preference period,” which ran

from March 13 to June 11, 1999. This equates to a wire nearly

6

every 2.9 days. Hechinger usually made wire transfers in the

amount of the credit limit, which was $1 million for most of this

period.1 The payments reduced the outstanding balance in

Hechinger’s UFP account and replenished Hechinger’s

$1 million line of credit, so that Hechinger could order

additional goods from UFP.2

At the time that Hechinger made each wire transfer, it did

not know which shipments were covered by the transfer.

Hechinger sent remittance advices to UFP after making

payments, in order to explain how UFP should match the

payments to the invoices that UFP created. According to these

remittance advices, some of Hechinger’s payments during the

preference period were “advance payments,” meaning payments

made prior to shipment of the goods. Hechinger’s payments

during the preference period were usually made up to ten days

1

Hechinger’s credit limit was briefly reduced to $500,000 and

was returned to $1 million on April 8. App. 1333. For four or

five days after the limit was returned to $1 million, Hechinger

continued to send wires in the amount of the previous credit

limit of $500,000, but later began sending $1 million wires.

2

There is a dispute between the parties as to whether they

intended unshipped orders to have counted against Hechinger’s

available credit. UFP argues that the parties agreed that both

shipped and unshipped orders were counted against the credit

limit, while Hechinger argues that only shipped orders were

included.

7

before shipment, to eight days after shipment, with the greatest

concentration of payments occurring on the date of shipment.

App. 905.

Hechinger filed for Chapter 11 bankruptcy protection on

June 11, 1999. On June 5, 2001, Hechinger filed a complaint

against UFP to avoid and recover preferential transfers under 11

U.S.C. § 547 and § 550. Hechinger originally sought to recover

$16,703,604.57, the full amount of the payments made to UFP

during the 90-day period prior to Hechinger’s June 11, 1999

filing. Before trial, Hechinger conceded that $6,576,603.36 of

these payments were advance payments and therefore, by

definition, not recoverable under § 547 as payments for or on

account of an antecedent debt. The parties also stipulated that

the “net preference” at issue at trial, potentially subject to UFP’s

§ 547(c)(1) and § 547(c)(2) defenses, was $1,004,216.03 and

that Hechinger had established a prima facie case under § 547(b)

that these transfers were avoidable. App. 39.

Prior to trial, UFP filed a spoliation motion with the

Bankruptcy Court, asking the Court to draw an adverse

inference against Hechinger because, prior to the filing of its

complaint, Hechinger destroyed documents that might have

helped UFP prove that Hechinger intended its preference period

payments to be contemporaneous exchanges for new value

under § 547(c)(1). The Court denied the motion, without

discussion, in October 2004.

8

A trial in the Bankruptcy Court commenced on February

25, 2005, with the main issue being UFP’s contention that

$1,004,216 in payments were not avoidable based on

§ 547(c)(1) and § 547(c)(2) of the Bankruptcy Code. These

sections provide that:

(c) The trustee may not avoid under this

section a transfer--

(1) to the extent that such transfer was--

(A) intended by the debtor and the creditor

to or for whose benefit such transfer was

made to be a contemporaneous exchange

for new value given to the debtor; and

(B) in fact a substantially

contemporaneous exchange;

(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;

9

Accordingly, UFP urged that, although the payments may have

been on account of antecedent debts, they were nonetheless not

avoidable because they were contemporaneous exchanges for

new value under § 547(c)(1), and, alternatively, because they

were made in the ordinary course of business under § 547(c)(2).

The Bankruptcy Court entered judgment in favor of

Hechinger on June 16, 2005 in the amount of $1,004,216. With

respect to whether the transfers were intended as

contemporaneous exchanges for new value under § 547(c)(1),

the Court stated that “the nature of a credit relationship is

inconsistent with the intent which is required in order to sustain

the § 547(c)(1) defense.” In re Hechinger Inv. Co. of Del., 326

B.R. 282, 289 (Bankr. D. Del. 2005). It also concluded that the

transfers were not made in the ordinary course of business

between the parties under § 547(c)(2)(B) because the transfers

were made under vastly different conditions from those that had

previously governed the relationship of the parties. Id. at 292.

The Court further found that the transfers were not made

according to ordinary business terms under § 547(c)(2)(C)

because the terms varied substantially from those normally

employed by UFP with other customers similar to Hechinger.

Id. at 293. Hechinger had requested prejudgment interest to

compensate it in full for the “value” of the payments it

recovered, but the Bankruptcy Court denied this request without

any discussion. Id. at 294.

Both parties appealed the adverse rulings to the District

Court. Challenging the Bankruptcy Court’s rejection of UFP’s

contemporaneous exchange defense under § 547(c)(1), UFP

argued that the Bankruptcy Court’s ruling was grounded in an

error of law regarding the nature of the transactions and the

intent required under § 547(c)(1). The District Court disagreed,

concluding that the Bankruptcy Court did not commit legal error

10

in stating that “the § 547(c)(1) defense may not be applied to

credit transactions.” In re Hechinger Inv. Co. of Del., 339 B.R.

332, 336 (D. Del. 2006). The District Court did not read this

statement as a legal pronouncement that credit transactions are

categorically excluded from § 547(c)(1). Rather, it understood

this passage to signify that the Bankruptcy Court had found that

the parties intended a credit, rather than a cash, relationship. Id.

The District Court then rejected UFP’s other challenges to the

judgment of the Bankruptcy Court and Hechinger’s challenge to

the denial of prejudgment interest, and affirmed the Bankruptcy

Court’s order. Id. at 36-38. This appeal followed.

II.

The District Court had jurisdiction over the appeal of the

Bankruptcy Court’s orders pursuant to 28 U.S.C. § 158(a)(1).

We have jurisdiction to review the District Court’s decision

pursuant to 28 U.S.C. § 158(d)(1). “Our review of the District

Court's decision effectively amounts to review of the bankruptcy

court’s opinion in the first instance,” In re Hechinger Inv. Co. of

Del., 298 F.3d 219, 224 (3d Cir. 2002), because our standard of

review is “the same as that exercised by the District Court over

the decision of the Bankruptcy Court,” In re Schick, 418 F.3d

321, 323 (3d Cir. 2005).

We review the Bankruptcy Court’s findings of fact for

clear error and exercise plenary review over questions of law.

In re Fruehauf Trailer Corp., 444 F.3d 203, 209-10 (3d Cir.

2006). We review the Bankruptcy Court’s denial of an award of

prejudgment interest for abuse of discretion. In re Investment

Bankers, Inc., 4 F.3d 1556, 1566 (10th Cir. 1993). We also

review the denial of UFP’s motion seeking an evidentiary

inference based on spoliation of evidence for abuse of

11

discretion. See Complaint of Consol. Coal Co., 123 F.3d 126,

131 (3d Cir. 1997) (reviewing district court’s decision on

spoliation motion for abuse of discretion).

A. The Contemporaneous Exchange Defense

To prove that the transfers were not avoidable because

they fell within the contemporaneous exchange defense under

§ 547(c)(1), UFP had to show that the transfers were (i) intended

by the debtor and the creditor to be a contemporaneous

exchange for new value given to the debtor; and (ii) in fact a

substantially contemporaneous exchange. In re Spada, 903 F.2d

971, 974 -75 (3d Cir. 1990). “The critical inquiry in

determining whether there has been a contemporaneous

exchange for new value is whether the parties intended such an

exchange.” Id. at 975.

The Bankruptcy Court found that the disputed transfers

were not intended by the parties to be contemporaneous

exchanges because the transfers were credit transactions. In

reaching this result, the Court relied upon several factually

distinguishable cases, none of which stand for the proposition

that parties can never intend credit transactions to be

contemporaneous exchanges under § 547(c)(1)(A).3 We

3

The Court cited Kallen v. Litas, 47 B.R. 977 (N.D. Ill.

1985), and two later cases that cite Kallen, for the proposition

that it is “well established that the § 547(c)(1) defense may not

be applied to credit transactions.” In re Hechinger Inv. Co., 326

B.R. at 289. However, this was not the holding in Kallen. The

Kallen Court stated that § 547(c)(1) “was meant to apply to cash

or quasi-cash transactions,” but did not rely on any distinction

between cash and credit transactions in its holding. Kallen,

12

disagree with the Bankruptcy Court’s conclusion. Indeed, it

would appear that § 547(c)(1) covers little other than credit

transactions. The § 547(c)(1) defense applies only to transfers

that the debtor has shown are payments on an “antecedent debt”

under § 547(b). See 11 U.S.C. § 547(b)(2) (definition of

avoidable transfers). If there is no delay between when the debt

arises and payment of the obligation, then the transfer is outside

the scope of § 547(b), and § 547(c)(1) is not implicated. The

existence of a delay between the creation of a debt and its

payment is a hallmark of a credit relationship, which is, by

definition, a relationship in which the creditor entrusts the

debtor with goods without present payment. OXFORD ENGLISH

DICTIONARY (2d ed. 1989) (defining “credit” as “[t]rust or

confidence in a buyer’s ability and intention to pay at some

future time, exhibited by entrusting him with goods, etc. without

present payment.”).

We do not think that the District Court’s interpretation of

the Bankruptcy Court’s order – namely, as concluding that the

parties intended to have a credit relationship – necessarily

47 B.R. at 983 & n.7.

The Bankruptcy Court also relied upon In re Contempri

Homes, Inc., 269 B.R. 124 (Bankr. M.D. Pa. 2001), in which the

court rejected the defendant’s § 547(c)(1) defense based on a

finding that both parties intended the debtor’s payments to be

applied to old invoices. Id. at 129. The court did not, however,

find that the parties lacked the requisite intent based on the fact

that the transactions were styled as “credit transactions.”

Instead, the court concluded that the parties could not have

intended a contemporaneous exchange because the invoices to

which the payments were applied were “dated,” “old” and

“aged.” Id. at 128.

13

resolves the question. The inquiry still remains: even if a credit

relationship was intended, was it nonetheless their intent that the

ongoing payments would be contemporaneous exchanges for

new value? A court may find the parties intended a

contemporaneous exchange for new value even when the

transaction is styled as a “credit” transaction. See In re Payless

Cashways, Inc., 306 B.R. 243 (8th Cir. BAP 2004), aff’d, 394

F.3d 1082 (8th Cir. 2005). The question is one of intent, and

although a delay between the incurrence of the debt and its

payment can evidence that the exchange was not intended to be

contemporaneous, the passage of time does not necessarily

negate intent. In In re Payless Cashways, for example, the

debtor generally paid the creditor for specific shipments some

time after the goods were shipped, but before or at the time that

the shipments arrived at the debtor’s facility. Id. at 247. The

court concluded that the parties intended the transfers to be part

of a contemporaneous exchange for new value. The court noted

that the debtor and creditor agreed to credit terms that would

match up the date of the actual delivery of the goods purchased

by the debtor with the date of the debtor’s obligation to wire

payment for the goods to the creditor. Id. at 246. The court also

put great weight on the fact that the contracts were “destination

contracts,” meaning that the creditor could have refused to

deliver the goods if the debtor had failed to make payment

before the delivery arrived. Id. at 250, 254.

Similarly, the Bankruptcy Court in In re CCG 1355, Inc.,

276 B.R. 377, 386 (Bankr. D.N.J. 2002), found that a debtor’s

payment, made seven to eleven days after shipment of the goods

but prior to receipt of the creditor’s invoices, was intended by

the parties as a “contemporaneous exchange” for new value

under § 547(c)(1)(A). The court did not specify whether the

debtor had arranged credit terms with the creditor. See also In

14

re Bridge Inform. Sys., Inc., 321 B.R. 247, 256 (Bankr. E.D. Mo.

2005) (finding that parties intended a contemporaneous

exchange for new value when they agreed that debtor would pay

creditor within one business day following its receipt of invoice

for services provided the previous week); In re Anderson-Smith

& Assoc., Inc., 188 B.R. 679, 689 (Bankr. N.D. Ala. 1995)

(finding that parties intended a contemporaneous exchange for

new value when creditor refused to deliver goods without

debtor’s assurance of payment). The payments at issue in the

present case were, for the most part, made even closer to the

date of shipment than the payments in In re Payless Cashways

and In re CCG. The parties stipulated that over half of the

payments that Hechinger sought to avoid were made within five

days of the date of the invoice (which was also the date that the

orders were shipped). App. 219. The Bankruptcy Court,

however, did not address the evidence that the “outstanding

debt” to which the transfers were applied was in most cases less

than six days old. Instead, the Court categorized the transfers at

issue as credit transactions and then found, as a matter of law,

that this finding compelled it to conclude that the debtor did not

intend the transfers to be part of a contemporaneous exchange

for new value.

We conclude that the Bankruptcy Court erred in holding

that the fact that the parties had a credit relationship precluded,

as a matter of law, a finding that Hechinger intended the

transfers to be part of a contemporaneous exchange for new

value. We do not opine as to whether there is sufficient

evidence in the record for the Bankruptcy Court to have found

that UFP failed to prove that the transfers were intended to be

15

contemporaneous exchanges for new value.4 Rather, we

conclude only that the Bankruptcy Court did not make the

necessary finding as to what the parties intended. Instead, the

Court decided that Hechinger did not intend a contemporaneous

exchange based on the erroneous legal conclusion that the

existence of a credit relationship between the parties was

determinative. Whether the parties intended a contemporaneous

exchange is a question of fact to be decided in the first instance

by the factfinder. In re Spada, 903 F.2d 971, 975 (3d Cir. 1990)

(“The determination of such intent is a question of fact.”). We

will accordingly remand to the District Court with instructions

to remand to the Bankruptcy Court to consider whether

Hechinger and UFP intended the transfers at issue to be

contemporaneous exchanges for new value, with the

understanding that transfers made under “credit” terms are not,

as matter of law, categorically excluded from the scope of the

§ 547(c)(1) defense to avoidance.

4

We do note that Hechinger arguably may have intended that

its transfers would be part of a contemporaneous exchange for

“new value” in the form of a renewed line of credit, which

Hechinger received on the date of the payment and immediately

made use of by charging new shipments to its account with

UFP. See In re Roemig, 123 B.R. 405, 408 (Bankr. D.N.M.

1991) (finding $41.40 of debtors’ payment to pay down line of

credit was intended as a “contemporaneous exchange for new

value” because debtors transferred money to pay down their

credit card on the same day as they charged a purchase of this

amount to their credit card).

16

B. The Ordinary Course of Business Defense

To prove that the transfers were not avoidable by

Hechinger as preferential transfers under § 547(c)(2), UFP had

the burden to prove that the transfers were “(A) incurred in the

ordinary course of both the debtor’s and the creditor’s business;

(B) made and received in the ordinary course of their respective

businesses; and (C) ‘made according to ordinary business

terms.’” In re Molded Acoustical Products, Inc., 18 F.3d 217,

219 (3d Cir. 1994) (quoting 11 U.S.C. § 547(c)(2)). Neither

“ordinary course of business” nor “ordinary business terms” is

defined in the Bankruptcy Code. In re J.P. Fyfe, Inc., 891 F.2d

66, 70 (3d Cir. 1989). The parties agreed that UFP proved the

first element. The trial therefore focused on subsections B

and C.

Starting with subsection B of the defense, UFP argued

that all payments made by Hechinger within the new credit

terms (i.e., within eight days of the invoice date) presumptively

qualified as payments made in the “ordinary” course of the

parties’ business under § 547(c)(2)(B).5 UFP maintained that In

5

Although $ 265,099.00 of the amount at issue in this case was

paid outside of credit terms (i.e., nine or more days after the date

of invoice), UFP contends that these late payments should also

be considered “ordinary” because the percentage of late

payments that Hechinger made during the preference period was

roughly equivalent to the historical percentage. However, these

late payments, like the timely payments at issue, were made

according to the “extreme” new credit terms instituted by UFP

in February, 1999. The Bankruptcy Court found that all of the

transfers made under these new terms were not made according

to the ordinary course of business.

17

re Daedalean, Inc., 193 B.R. 204, 212 (Bankr. D. Md. 1996),

established this presumption of ordinariness. However, the

Daedalean Court did not address the presumptive ordinariness

of payments made within agreed credit terms in its holding

because all of the payments at issue in the case were made

outside of the agreed terms. We agree with the Bankruptcy

Court that we should not apply such a presumption; rather, each

fact pattern must be examined to assess “ordinariness” in the

context of the relationship of the parties over time.6

The Bankruptcy Court examined the relationship between

the parties and concluded that the payments made by Hechinger

to UFP during the preference period were not “made in the

ordinary course of business or financial affairs of the debtor and

the transferee” within the meaning of § 547(c)(2)(B) because the

changes UFP had imposed on Hechinger were “so extreme, and

so out of character with the long historical relationship between

these parties.” In re Hechinger Inv. Co., 326 B.R. at 292. UFP

likens this case to In re Tennessee Valley Steel Corp., 201 B.R.

927 (Bankr. E.D. Tenn. 1996), where the court found that the

debtor’s preference period payments were made within the

ordinary course of the parties’ dealings, even though the

payments made during the preference period were not as timely

as before, and some were even made several days after the

invoice due date. However, In re Tennessee Valley did not

6

Other courts have also declined to adopt a presumption that

payments made within credit terms are ordinary. See In re TWA,

Inc. Post Confirmation Estate, 327 B.R. 706, 709 (Bankr.

D. Del. 2005) (finding that transfer made during the preference

period was not ordinary because, although it was made within

the contract terms, the history of dealings between the parties

was that of payments being made well outside such terms).

18

involve any change in the parties’ credit terms during or

immediately before the beginning of the preference period. If

Hechinger and UFP had not changed their credit terms

immediately prior to the beginning of the preference period, the

accelerated timing of Hechinger’s payments during this period

would be less significant. Here, however, where there were

changes in the credit arrangements that were “so extreme, and

so out of character with the long historical relationship between

these parties,” this change and the resultant change in the timing

of Hechinger’s payments was appropriately considered by the

Bankruptcy Court. See In re M Group, Inc., 308 B.R. 697, 702

(Bankr. D. Del. 2004) (finding that payments were not ordinary

under §547(c)(2)(B) where “payment schedules here were

altered as bankruptcy became a possibility” and the ordinary

course of business between the parties consisted of making

payments on a much more random and haphazard basis than

occurred during the preference period).

This case is more closely analogous to In re Roberds,

Inc., 315 B.R. 443 (Bankr. S.D. Ohio 2004). There, the court

found that the creditor failed to prove that the transfers were

made and received in the ordinary course of the parties’

respective businesses under § 547(c)(2)(B) because the creditor

changed the parties’ credit arrangements during the preference

period. During the period after the change:

(1) the credit limit of $750,000 was vigorously

enforced by the Creditor; (2) credit holds,

involving individual negotiations resulting in

payments satisfactory to the Creditor prior to the

shipment of furniture, were in effect; (3) payment

terms were changed; (4) the Debtor paid, on

average, earlier than Net 30 terms; and (5) other

19

creditors were being significantly delayed, or

denied, in the receipt of their payments while this

Creditor was receiving accelerated payments and-

none of these events had ever occurred in the

parties’ history.

Id. at 467 (internal footnote omitted). Based on these factual

findings, the court concluded that the creditor failed to prove

that the transfers that occurred during this portion of the

preference period were made and received in the ordinary course

of the parties’ businesses under §547(c)(2)(B).

Like the debtor in Roberds, Hechinger was pressured to

make accelerated payments during the preference period

because of UFP’s vigorous enforcement of its credit limit.

During the preference period, 96.5% of Hechinger’s payments

were made 0-10 days from invoice, while during the comparable

three-month periods in 1996, 1997 and 1998, 10% of

Hechinger’s payments were made 0-10 days from the date of

invoice. App. 1342. During the preference period, Hechinger’s

outstanding daily balance with UFP ranged from $1 million

owed to a $1 million credit balance. During the same 90-day

period in 1998, Hechinger’s daily balance was always greater

than $1 million and was generally between $3 million and $4

million. Id.

UFP argues that this alteration in terms was not that

significant because, previously, the parties had operated under

an even more accelerated payment schedule and had used a wire

transfer. In June of 1998, it was agreed that Hechinger would

make payments within five days of the invoice date and

Hechinger sent UFP a check for $1,433,800 via FedEx overnight

delivery on June 9. App. 449, 958-60. However, these

20

arrangements were as a result of an “unusual dispute regarding

some past due invoices” and were not the terms employed by the

parties during the rest of their fifteen year relationship.

Appellee Br. 51 nn. 10 & 11.

The Bankruptcy Court did not find the credit limit

imposed on Hechinger to be the deciding factor in its

determination that the transfers did not fall within the

§ 547(c)(2) defense to preference avoidance. Rather, the

Bankruptcy Court considered the credit limit as well as the other

changes in the credit arrangements of the parties, such as the

change in terms to 1% 7 days, net 8 and the requirement that

Hechinger make payments by wire transfer. In re Hechinger

Inv. Co., 326 B.R. at 292. The Bankruptcy Court also properly

considered the length of time the parties had engaged in the type

of dealing at issue, the way the payments were made, whether

there appeared to be any unusual action by either the debtor or

creditor to collect or pay on the debt, and whether the creditor

did anything to gain an advantage in light of the debtor's

deteriorating financial condition. See In re Logan Square E.,

254 B.R. 850, 855 (Bankr. E.D. Pa. 2000) (listing such factors

as appropriate considerations in determining whether transfers

are “ordinary”). Each of these factors weighed in favor of a

finding that the disputed transfers were not “ordinary” under

§547(c)(2)(B). In essence, a month before the beginning of the

preference period, UFP tightened its credit terms, imposed a

credit limit, required Hechinger to make payments by wire

transfer in large, lump-sum amounts, and required Hechinger to

send remittance advices after making payment on invoices. This

was not the ordinary course of dealing between the parties. The

Bankruptcy Court did not clearly err in finding that the new

credit arrangements between the parties were “extreme” and

“out of character with the long historical relationship between

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these parties.” Based on this finding, the Court properly

concluded that UFP failed to prove that the transfers were

“made in the ordinary course of business or financial affairs of

the debtor and the transferee.”

The Bankruptcy Court also noted that UFP failed to

prove the third element of the § 547(c)(2) defense, namely, that

the transfers were made according to “ordinary business terms.”

We need not, however, discuss this aspect of its ruling because

UFP’s failure to demonstrate that the transfers were “made in

the ordinary course of business or financial affairs of the debtor

and the transferee” precludes the § 547(c)(2) defense altogether.

C. The Spoliation Motion

UFP also appeals the Bankruptcy Court’s denial of its

motion for an evidentiary inference in its favor that Hechinger

intended its transfers during the preference period to be

contemporaneous exchanges for new value under §547(c)(1)

because, it argued, Hechinger improperly destroyed records

prior to discovery that might have assisted UFP in proving

Hechinger’s intent. Hechinger acknowledged that it destroyed

various records in September 1999, after filing for bankruptcy,

in order to reduce the amount of space occupied by the

company.

In Schmid v. Milwaukee Electric Tool Corp., 13 F.3d 76

(3d Cir. 1994), we explained the history of the “spoliation

inference:”

Since the early 17th century, courts have admitted

evidence tending to show that a party destroyed

evidence relevant to the dispute being litigated.

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Such evidence permitted an inference, the

“spoliation inference,” that the destroyed

evidence would have been unfavorable to the

position of the offending party.

Id. at 78 (internal citation omitted). We found that the “key

considerations in determining whether such a sanction is

appropriate should be: (1) the degree of fault of the party who

altered or destroyed the evidence; (2) the degree of prejudice

suffered by the opposing party; and (3) whether there is a lesser

sanction that will avoid substantial unfairness to the opposing

party and, where the offending party is seriously at fault, will

serve to deter such conduct by others in the future.” Id. at 79.

Neither of the first two factors identified in Schmid favors

UFP. There is no evidence that Hechinger intentionally

destroyed documents that it knew would be important or useful

to UFP in defending against a preference action. In fact, there

is no evidence that any of the documents destroyed would have

been useful to UFP. There was also no showing that UFP was

prejudiced because UFP did not identify any evidence that was

destroyed by Hechinger that would have aided UFP. Any

finding that this conduct prejudiced UFP would be purely

speculative. Therefore, the Bankruptcy Court had little basis for

granting UFP’s spoliation motion and we will not disturb the

Court’s denial of that motion.

D. Denial of Prejudgment Interest

Hechinger appeals the Bankruptcy Court’s denial of its

request for prejudgment interest pursuant to 11 U.S.C. § 550(a).

Section 550(a) provides that:

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(a) Except as otherwise provided in this section,

to the extent that a transfer is avoided under

section 544, 545, 547, 548, 549, 553(b), or 724(a)

of this title, the trustee may recover, for the

benefit of the estate, the property transferred, or,

if the court so orders, the value of such property,

from--

(1) the initial transferee of such transfer or the

entity for whose benefit such transfer was

made; or

(2) any immediate or mediate transferee of

such initial transferee.

(emphasis added). There is no reference to prejudgment interest

in the Bankruptcy Code, but courts have relied on the word

“value” in § 550(a) as authorizing an interest award. In re Art

Shirt Ltd., Inc., 93 B.R. 333, 341 n.9 (E.D. Pa. 1988). “[T]he

award of prejudgment interest in a preference action is within

the discretion of the bankruptcy court.” In re USN Commc’n,

Inc., 280 B.R. 573, 602 (Bankr. D. Del. 2002) (collecting courts

of appeals cases). However, “[d]iscretion must be exercised

according to law, which means that prejudgment interest should

be awarded unless there is a sound reason not to do so.” In re

Milwaukee Cheese Wis., Inc., 112 F.3d 845, 849 (7th Cir. 1997).

As Hechinger notes, the Bankruptcy Court gave no

reason for its decision to deny Hechinger’s motion for

prejudgment interest. We therefore cannot determine from the

record before us whether the Court had a “sound reason” to deny

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Hechinger’s request. We will accordingly vacate the order of

the District Court affirming the denial of Hechinger’s request for

prejudgment interest. We will instruct the District Court to

remand to the Bankruptcy Court for an explanation of its

reasons for denying Hechinger’s request for prejudgment

interest.

III.

For the reasons set forth above, we will VACATE the

order of the District Court insofar as it affirms the order of the

Bankruptcy Court entering judgment in favor of Hechinger and

denying Hechinger’s prejudgment interest request. We will

REMAND this matter to the District Court with instructions to

remand to the Bankruptcy Court for a finding as to whether

Hechinger intended the transfers at issue to be contemporaneous

exchanges for new value, with the understanding that “credit”

transactions are not categorically excluded from §547(c)(1), and

for an explanation of the Court’s reasons for denying

Hechinger’s request for prejudgment interest. We will AFFIRM

the District Court’s order insofar as it affirms the Bankruptcy

Court’s denial of UFP’s spoliation motion.

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