IN RE PILLOWTEX CORP.

427 B.R. 301

In re PILLOWTEX CORPORATION, et al., Debtors John Wahoski, as Liquidating Trustee of Pillowtex Corporation, Plaintiff, v. Classic Packaging Company, Defendant.

Bankruptcy No. 03-12339 (PJW). Adversary No. 05-30182(KJC).

United States Bankruptcy Court, D. Delaware.

April 14, 2010.

COPYRIGHT MATERIAL OMITTED

Christopher Martin Winter, Duane Morris LLP, Donna L. Harris, Erika Yvonne Tross, Gilbert R. Saydah, Jr., Thomas F. Driscoll, III, William H. Sudell, Jr.,^* Morris, Nichols, Arsht & Tunnell LLP, Elio Battista, Jr., Blank Rome LLP, Wilmington, DE, Gilbert R. Saydah, Jr., Kelley Drye & Warren LLP, Matthew D. Siegel, Debevoise & Plimpton LLP, New York, NY, Jae-Sun Chung, Mi Chi To, Sean Mack, Debevoise & Plimpton, for Debtors.

Andrew R. Remming, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, for Plaintiff.

MEMORANDUM¹

KEVIN J. CAREY, Bankruptcy Judge.

BACKGROUND

On July 30, 2003 (the "Petition Date"), Pillowtex Corporation and related entities (the "Debtors" or "Pillowtex") filed voluntary chapter 11 bankruptcy petitions. The Debtors and the Official Committee of Unsecured Creditors (the "Committee") filed a Joint Plan of Liquidation (the "Plan"), which was confirmed by Order dated February 13, 2007, and the Plan became effective on June 29, 2007.

During the pending chapter 11 case, the Committee filed a number of adversary proceedings seeking to avoid preferential and fraudulent transfers. The confirmed Plan established a Liquidating Trust and provided for the vesting of the right to continue the adversary proceedings in the Liquidating Trust upon the effective date of confirmation. The parties in the adversaries signed stipulations agreeing to substitute "John Wahoski, as Liquidating Trustee of Pillowtex Corporation" as plaintiff, in the place of the Committee.²

One of those adversaries, filed on November 18, 2005, was against Classic Packaging Company ("Classic"). Prior to the Petition Date, Classic produced plastic bags and packaging for the Debtors, printed with Pillowtex brand names on them. The complaint against Classic set forth three counts: (i) Count One seeks to avoid and recover "at least" $61,761.32 paid by the Debtors to Classic during the ninety (90) day period before the Petition Date (the "Transfers") as preferential transfers pursuant to Bankruptcy Code §§ 547 and 550, (ii) Count Two seeks to avoid and recover the Transfers as fraudulent transfers pursuant to Bankruptcy Code §§ 548 and 550, and (iii) Count Three seeks to disallow Classic's claims pursuant to Bankruptcy Code § 502(d) (the "Complaint"). See 11 U.S.C. §§ 547, 548 & 502(d). On December 27, 2005, Classic filed an answer to the Complaint asserting, among other things, the affirmative defense that the Transfers were made in the ordinary course of business pursuant to § 547(c)(2) of the Bankruptcy Code. See 11 U.S.C. § 547(c)(2)(2003).³

Currently before the Court is Classic's motion, filed on July 10, 2006, seeking the following relief: (i) summary judgment on Count One and Count Three of the Complaint pursuant to Fed.R.Civ.P. 56, and (ii) dismissal of Count Two of the Complaint pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6)(D.I.33)(the "Motion"). Classic argues that judgment should be entered in its favor on Count One because the Transfers were made in the ordinary course of business and cannot be avoided pursuant to Bankruptcy Code § 547(c)(2). In support of its Motion, Classic provided affidavits by Classic's vice president, Ken Pilla, and controller, Linda Turgeon, along with Classic's "Terms and Conditions" with the Debtors, the Debtors' payment history, work orders, production and shipment dates. Classic also argues that, because the relief in Count Three is dependent on avoidance of the Transfers under Count One, then summary judgment in its favor on Count Three must follow.

Further, Classic argues for dismissal of Count Two because the Plaintiff failed to satisfy the pleading requirement of Fed. R.Civ.P. 9(b), and failed to state a claim on which relief can be granted under Fed. R.Civ.P. 12(b)(6).

On July 20, 2006, the Plaintiff filed its opposition to Classic's Motion (D.I. 36), arguing that: (i) the Transfers were not made in the ordinary course of business established by the parties because the payment terms between Classic and the Debtors changed in April 2003, just one month before the preference period, as evidenced by the Vendor Request Form, an exhibit attached to the Plaintiff's opposition (the "Vendor Request Form"), and (ii) Classic has failed to provide evidence that the Transfers were made according to ordinary business terms.

On July 28, 2006, Classic filed a reply to the Plaintiff's opposition (D.I. 44) providing supplemental affidavits by Linda Turgeon and Ken Pilla, as well as an affidavit by Bill Balkcum, the president of another company packaging company.

The parties subsequently filed a number of related motions, including the Plaintiff's motion to strike portions of Classic's reply, related to the supplemental affidavits (D.I. 48), Classic's motion to strike the Vendor Request Form (D.I. 49), and Classic's motion to have the Court consider the affidavit of Melanie Joyce, a former employee of the Debtors (D.I. 52). On April 11, 2008, the Court entered an Order (the "Procedures Order") addressing the outstanding motions, allowing the parties to conduct additional discovery, and allowing supplemental filings regarding the Motion. The Plaintiff then conducted depositions of Bill Balkcum, Ken Pilla, Linda Turgeon, and Melanie Joyce. The Plaintiff filed a supplemental statement in further opposition to Classic's Motion attaching copies of the four deposition transcripts (D.I. 101) (the "Supplemental Statement"). On July 30, 2008, the Court held oral argument on Classic's Motion.

For the reasons set forth below, the Court will deny Classic's motion for summary judgment on Counts One and Three of the Complaint, and grant Classic's motion to dismiss Count Two of the Complaint.

UNDISPUTED FACTS

From approximately August 2001 until July 30, 2003, the Debtors, a large textile manufacturer, ordered various packaging bags from Classic, a manufacturer of plastic bags and packaging. During the preference period, which dates from May 1, 2003 until July 30, 2003 (the "Preference Period"), the Debtors made the following sixteen (16) payments to Classic:

------------------------------------------------------------------
No.    Dates of                 Check       Payment
       Invoices                  Date        Date4        Amount
------------------------------------------------------------------
 1    04/15/2003              04/29/2003   05/01/2003   $   157.52
------------------------------------------------------------------
 2    04/21/2003              05/01/2003   05/05/2003   $    91.30
------------------------------------------------------------------
 3    04/17/2003-04/21/2003   05/01/2003   05/05/2003   $   497.63
------------------------------------------------------------------
 4    04/24/2003              05/05/2003   05/07/2003   $   910.88
------------------------------------------------------------------
 5    04/30/2003              05/12/2003   05/14/2003   $   558.46
------------------------------------------------------------------
 6    04/24/2003              06/12/2003   05/20/2003   $   218.94
------------------------------------------------------------------
 7    05/07/2003              05/19/2003   05/21/2003   $ 5,211.86
------------------------------------------------------------------
 8    05/02/2003-05/09/2003   05/20/2003   05/22/2003   $ 3,270.32
------------------------------------------------------------------
 9    05/13/2003              05/23/2003   05/29/2003   $    95.67
------------------------------------------------------------------
10    05/13/2003              05/27/2003   05/29/2003   $   552.26
------------------------------------------------------------------
11    05/14/2003              06/02/2003   06/09/2003   $ 1,165.03
------------------------------------------------------------------
12    05/16/2003              06/03/2003   06/09/2003   $   286.26
------------------------------------------------------------------
13    05/21/2003-06/05/2003   06/11/2003   06/13/2003   $37,383.13
------------------------------------------------------------------
14    06/03/2003              06/11/2003   06/13/2003   $ 5,612.91
------------------------------------------------------------------
15    06/26/2003              07/01/2003   07/03/2003   $ 2,557.65
------------------------------------------------------------------
16    06/06/2003-07/09/2003   07/09/2003   07/11/2003   $ 7,824.58
__________________________________________________________________
Total                                                   $66,394.40
------------------------------------------------------------------
 

DISCUSSION

A. Motion for Summary Judgment based on the Ordinary Course of Business Defense of § 547(c)(2) (1) Summary Judgment Standard

Summary judgment is appropriate "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c)(2), made applicable to this adversary proceeding by Fed. R. Bankr.P. 7056. In a motion for summary judgment, the moving party "always bears the initial responsibility of informing the. . . court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

Once the moving party has made a proper motion for summary judgment, the burden shifts to the non-moving party, pursuant to Rule 56(e)(...