- Gulf Fleet Liquidating Trustee (Alan Goodman) Prevails in Three Hotly Contested Preference Actions.
- June 6, 2014 | Author: Alan H. Goodman
- Law Firm: Breazeale, Sachse & Wilson, L.L.P. - Baton Rouge Office
Gulf Fleet Holdings, Inc. and its affiliated debtors ("Gulf Fleet") owned and operated a fleet of offshore fast supply vessels that supported oil and gas exploration and production companies and other oilfield services companies. Gulf Fleet also operated an independent vessel brokerage business. Gulf Fleet filed for Chapter 11 relief on May 14, 2010 in the U.S. Bankruptcy Court for the Western District of Louisiana (the "Court"). Upon the confirmation of Gulf Fleet's liquidating plan in May 2011, Alan Goodman was appointed as the Liquidating Trustee for the Gulf Fleet Liquidating Trust and tasked with pursuing avoidance actions and other causes of action reserved in the plan for the benefit of the unsecured creditors.
Recently, on March 21, 2014, Mr. Goodman (as the plaintiff-trustee) secured victories in three preference actions when the Court ruled in his favor and found that the ordinary course defenses raised by each of the transferees of the preferential payments were without merit. The Court's Reasons for Decision in each of the three cases can be located as follows: Goodman, Trustee v. Reama, Inc. (In re Gulf Fleet Holdings, Inc.), Adv. Proc. No. 12-5046 (Docket No. 27); Goodman, Trustee v. Adriatic Marine, LLC (In re Gulf Fleet Holdings, Inc.), Adv. Proc. No. 12-5009 (Docket No. 28); and Goodman, Trustee v. Candy Fleet, LLC (In re Gulf Fleet Holdings, Inc.), Adv. Proc. No. 12-5010 (Docket No. 67). Mr. Goodman's counsel was Christopher Caplinger, Esq.
The Court's three opinions reveal that it took a balancing approach in determining whether the transferees had a meritorious ordinary course defense instead of looking strictly at the average invoice-to-payment dates that proliferate many preference cases. The issue in each case was whether the transfers were made in the ordinary course of business of the transferee-defendant and Gulf Fleet (and not whether the debts were incurred and the payments were made according to ordinary industry terms). In these cases, a unique circumstance was that the days-to-pay from invoice to payment were rather normal in 2008 when Gulf Fleet's financial condition was not strained; increased substantially in 2009 as the debtor's financial condition worsened; and then, in early 2010, decreased when Gulf Fleet's management and owner caused Gulf Fleet to borrow more money, thereby permitting Gulf Fleet to pay trade vendors for a short time before the bankruptcy during the preference period. How the Court dealt with this and the other unique issues in each case are described below.
Goodman, Trustee v. Adriatic Marine, LLC (In re Gulf Fleet Holdings, Inc.), Adv. Proc. No. 12-5009.
The defendant-transferee, Adriatic Marine, LLC, leased its vessels to operators through Gulf Fleet, who acted as a broker, from 2008 to 2010. The Trustee brought a preference action challenging 4 invoices totaling $148,487.
During the pre-preference period (often referred to by courts as the "Historical Period"), the parties' relationship was reflected by 2 invoices: one dated March 26, 2008 for $49,017 and one dated November 2009 for $19,824. During the Preference Period, Adriatic issued Gulf Fleet 4 invoices, which Gulf Fleet paid between 73 and 83 days after the invoice date. The invoices included the terms "net 30" and listed a due date 30 days after the date of the invoice.
Despite Adriatic's arguments, the Court found that the two invoices in the Historical Period did not provide a sufficient pattern (baseline) of recurring transactions to support an ordinary course defense for three reasons. First, a nearly two year gap existed between the first and second payment. Second, the second invoice was paid within 56 days of invoice date, which differs from the 73 to 84 days-to-pay for the Preference Period. Finally, the total value of the two payments during the Historical Period were substantially smaller than the payments during the Preference Period.
With no "baseline of dealing" established, the Court looked to the terms of the parties' agreement as reflected in invoices to see if the Preference Period payments were consistent with the parties' agreement. Adriatic argued that Preference Period payments were consistent with the parties' terms, because the "net 30 day" term meant that Gulf Fleet was to pay Adriatic 30 days from its receipt of payment from the ultimate customer and not 30 days from the original invoice date. Indeed, Gulf Fleet's former CFO testified that it typically paid boat owners such as Adriatic upon receiving payment from the ultimate customer.
However, the Court found that prior to June 2009, Gulf Fleet's policy was to pay boat owners approximately 7 days after receiving payment from the ultimate customer. Gulf Fleet abandoned this policy in the second half of 2009 as its financial condition worsened and began paying boat owners 30 days after receipt from the customer. In early 2010, Gulf Fleet received an "extraordinary" infusion of capital from its owner and used this money to pay stale invoices and the turn-around time for payments was "compressed." Thus, because Adriatic could not establish a baseline and could not prove that the Preference Period payments were consistent with the parties' agreement, Adriatic could not rely on the ordinary course defense to shield the payments from avoidance by the Trustee.
The Court's decision considered the totality of Gulf Fleet's unique financial circumstances, rather than just the mathematical approach of the average days-to-pay in determining that Adriatic did not qualify for the ordinary course defense. The facts were unique in that the days-to-pay were "compressed" during the Preference Period due to the capital infusion by Gulf Fleet's owner. Thus, while Gulf Fleet's creditors likely perceived that Gulf Fleet's financial condition was healthier in early 2010 because it was able to pay its invoices faster, the payments due to the capital infusion actually made the payments "extraordinary" and took them outside the ordinary course.
Goodman, Trustee v. Candy Fleet, LLC (In re Gulf Fleet Holdings, Inc.), Adv. Proc. No. 12-5010.
The defendant-transferee, Candy Fleet, LLC, was also a vessel owner that leased its vessels through Gulf Fleet to operators. From January 2008 through April 13, 2010, Gulf Fleet paid Candy Fleet approximately $6.1 million for vessels brokered by Gulf Fleet. The parties agreed that Candy Fleet would not receive payment until Gulf Fleet invoiced and received payment from its end customer. The Trustee brought a preference action challenging three payments made during the Preference Period totaling $166,625.
Candy Fleet contended that the Preference Period payments were made in the ordinary course because, like the payments during the Historical Period, the challenged payments were made on a "pay when paid" basis after Gulf Fleet received payments from the end customer and the average time of payment during the Preference Period (22.5 days) was not significantly different from the payments made during the Historical Period (14.6 days).
The Trustee argued that Candy Fleet's position ignored the changes in Gulf Fleet's payment practices from 2008 to 2009. In this regard, the Trustee argued that the average days-to-pay (i) increased from 13 days in 2008 to 22 days during the first four months of 2009, (ii) increased to 113 days from May 2009 through December 2009 and (iii) decreased during the Preference Period to 22.5 days.
The Court found that the transfers to Candy Fleet were not shielded from avoidance by the asserted ordinary course defense, because the average days-to-pay for the three payments during the Preference Period (22.5 days) differed materially from the average days-to-pay during 2008 (13 days), which was a time period when Gulf Fleet's financial condition was relatively stable. The Court also determined that the period of 2009 could not be used as an appropriate baseline for two reasons. First, Gulf Fleet began facing liquidity problems in 2009 and delayed payments to vessel owners and the days-to-pay increased from an average of 13 days in 2008 to 113 days in second half of 2009. Second, a wholesale comparison of the average days-to-pay of the Historical Period to the Preference Period would ignore Gulf Fleet's owner's capital infusion, which allowed Gulf Fleet to pay old invoices more rapidly than the 113 days-to-pay average in the second half of 2009. Again, this average decreased to 22.5 days during the Preference Period.
Once again, the Court examined the totality of Gulf Fleet's financial condition throughout the entire Historical Period and how its financial condition was reflected in the timing of its payments to vendors. In so doing, the Court found a substantial disconnect between Gulf Fleet's payment practices during the Historical Period and the Preference Period - even if the differences in the mathematical average days-to-pay were arguably not substantial. This approach allowed the Court to account for Gulf Fleet's unique circumstances in holding that the transfers to Candy Fleet were not shielded from avoidance by the asserted ordinary course defense.
Goodman, Trustee v. Reama, Inc. (In re Gulf Fleet Holdings, Inc.), Adv. Proc. No. 12-5046.
The defendant-transferee, Reama, Inc., provided welding and repair services to Gulf Fleet from 2008 through 2010. The Trustee brought a preference action challenging five payments during the preference period totaling $85,121.86.
During the Historical Period, Gulf Fleet had made 9 payments to Reama covering 13 invoices. The days-to-pay during the Historical Period ranged from 18 to 250 days with an average days-to-pay of 103 days. During the Preference Period, Gulf Fleet had made 5 payments to Reama and the days-to-pay ranged from 46 to 85 days with an average days-to-pay of 62 days.
Based on the foregoing, the Court found that although the Preference Period payments fell within the 18 to 250 days-to-pay range of the Historical Period, the range was "too broad to serve as a baseline for judging the payments made during the preference period" and capture payments that "skew" the analysis of what is ordinary. Therefore, the Historical Period proposed by Reama could not be used as a baseline to compare the Preference Period payments.
The Court also found that there were 3 payments on 5 invoices during the six months immediately preceding the Preference Period totaling $44,270.24 with days-to-pay ranging from 69 to 75 days (with an average of 72 days-to-pay), which could be used as a baseline. Based on this baseline, the Court concluded that (i) any payments during the Preference Period that were made with a days-to-pay of less than 69 days were not made in the ordinary course in light of the parties' Historical Period payment history, which on average was characterized by longer payment delays than the payments during the Preference Period and (ii) payments during the Preference Period that exceeded 69 days but did "not materially depart from the 72 day average delay period of the baseline" are subject to the ordinary course defense.
The Court looked past the average days-to-pay during the Historical Period (103 days) to identify a more appropriate and logical baseline of dealing that could be used to compare the payments made during the Preference Period. The Court found that 13 of the invoices at issue totaling $65,235.11 were paid with a delay of less than 69 days and were not paid in the ordinary course whereas 8 of the invoices at issue were paid with a delay that exceeded 69 days (but did not materially depart from the average of 72 days) and were therefore paid in the ordinary course and were shielded from avoidance by the Trustee.