Miller v. Direct Results Radio, Inc. (In re Diversified Mercury Commc'ns, LLC)

646 B.R. 403

IN RE: DIVERSIFIED MERCURY COMMUNICATIONS, LLC, et al.,

Debtors.

George L. Miller, solely in his capacity as chapter 7 trustee of Diversified Mercury Communications, LLC and DTR Advertising, Inc., Plaintiff,

v.Direct Results Radio, Inc., Defendant.

Case No. 19-10757 (KBO) (Jointly Administered)

Adv. Proc. No. 21-50249 (KBO)

United States Bankruptcy Court, D. Delaware.

Signed December 1, 2022

David W. Carickhoff, Bryan J. Hall, Archer & Greiner P.C., Wilmington, DE, for Plaintiff.

Mary F. Caloway, Pachulski Stang Ziehl & Jones, Wilmington, DE, for Defendant.

OPINION ²

Karen B. Owens, United States Bankruptcy Judge

I. INTRODUCTION

In this proceeding, the chapter 7 trustee (the " Trustee ") for the jointly administered estates of Diversified Mercury Communications, LLC (" DMC ") and DTR Advertising, Inc. (" DTR " and together with DMC, the " Debtors ") seeks to avoid and recover an alleged preferential transfer in the amount of $493,349.34 (the " Transfer ") made to Direct Results Radio, Inc. (" Direct Results ") by DMC. While the Trustee has adequately shown that the Transfer was preferential under section 547(b),³ it cannot be avoided because of the ordinary course of business defense of section 547(c)(2)(A).

II. FACTS

Prior to their bankruptcy filings, the Debtors were a full-service direct response media agency with various businesses, including short form, long form, and digital advertising media businesses, under the name "Mercury Media."⁴ Direct Results is a direct marketing company that focuses on designing and implementing ad campaigns to help various advertisers acquire new customers. It specializes in audio advertising, which includes advertisements on platforms such as radio, podcasts, streaming, and satellite stations.

The Debtors and Direct Results began their business relationship in August 2015 by entering into a Client Share Agreement.⁵ Pursuant to the agreement, Direct Results provided "Radio Buying Services"⁶ on behalf of the Debtors for the Debtors’ client, Financial Engines (formally known as the Mutual Fund Store). In return, the Debtors reimbursed Direct Results for agreed upon expenses and paid them fifty percent of the commission the Debtors earned from Financial Engines.⁷ Throughout their relationship, the Debtors primarily acted as Financial Engines’ "account manager," and Direct Results served as Financial Engines’ "media manager."⁸ In practice, this meant that the Debtors maintained the client relationship with Financial Engines, while Direct Results negotiated directly with broadcasters to book Financial Engines’ advertisement spots.⁹ Direct Results also invoiced and paid the broadcasters for their advertisement services.¹⁰

In order to coordinate the payment, Direct Results collected from the broadcasters all relevant invoices for services rendered during a broadcast month¹¹ and reconciled them. This process generally took forty-five days. Following its completion, Direct Results issued one invoice to the Debtors for the aggregate monthly amount owed to the broadcasters plus its commission. Each invoice included, among other things, an invoice date, invoice number, the due date, the relevant monthly service period, and the total amount due.¹² Direct Results sent its invoices to the Debtors monthly via email, and payment was due thirty days from that sent date. Once payment was received, Direct Results then paid the broadcasters.

The Debtors¹³ made twenty payments to Direct Results between March 17, 2017 and December 28, 2018 (the " Historical Period ").¹⁴ All payments were made by check except for one wire transfer.¹⁵ Direct Results received the payments 28 to 74 days after the invoice was sent, averaging 45.81 days.¹⁶ From invoice date, Direct Results received payment 64 to 96 days, averaging 80.76 days.¹⁷ The Debtors’ checks were honored and cleared their bank account 1 to 7 days after receipt.¹⁸

In the months preceding the fall of 2018, the Debtors were financially distressed and insolvent.¹⁹ They began a formal winddown process by retaining professional advisors, legal counsel, and other consultants to effectuate a sale of the Debtors’ assets outside of bankruptcy.²⁰ There is no evidence to suggest that Direct Results knew about the Debtors’ declining financial condition. The parties’ business relationship continued as normal. On October 15, Direct Results emailed the Debtors the invoice that relates to the Transfer.²¹ Specifically, the invoice was for $493,349.34 on account of Financial Engines’ advertisements that ran during the August broadcast month (the " August Invoice ").²² The August Invoice was dated August 26, 2018 and payment was due November 15.²³ On November 13, Direct Results emailed the Debtors an invoice for Financial Engines’ advertisements that ran during the September broadcast month (the " September Invoice ").²⁴ The total invoice amount was $664,980.17, with payment was due December 14.²⁵

The Debtors did not timely pay the August Invoice. When payments were late, it was customary for Direct Results’ bookkeeper, Kathryn Ewell, to email the responsible client about the payment status. Consistent with that practice, on November 16, Ms. Ewell, emailed Kelly Rollins, the Debtors’ accounts payable representative, the following message: "I haven't seen payment arrive for the attached invoice. Do you have tracking information you can share?"²⁶ Ms. Rollins did not respond. On November 26, Ms. Ewell sent a second follow up email to Ms. Rollins stating, "I hope you had a good Thanksgiving! Do you have an update on the below?"²⁷ That same day, Ms. Ewell also sent an email to Dan Santa Lucia, an account manager of the Debtors, asking if Ms. Rollins was available since no response had been received to date.²⁸ Neither Ms. Rollins nor Mr. Santa Lucia responded to Ms. Ewell's November 26 emails.

On November 27, Alaina Bihler, an account director of Direct Results, sent an email to Jen Sullivan, a senior director of the Debtors, with the following message:

Hi Jen – Hope you had a great Thanksgiving!

I think Dan is no longer at Mercury – can you help us with August payment for Financial Engines? Kelly has not responded. Invoice due date was 11/15.²⁹

Ms. Sullivan responded same day, copying Ms. Rollins and representing that she would look into the payment status the next day when she returned to the office.³⁰ Also that same day, Ms. Rollins responded, representing that she was not in the office but would get back to Ms. Sullivan.³¹ The next day, November 28, Ms. Rollins confirmed that payment of the August Invoice was scheduled for November 30.³² On November 29, Ms. Ewell sent a further email to Ms. Rollins and copied, among others, Jill Albert (the President of Direct Results) and Beth Vendice (a more senior account director of the Debtors).³³ The email stated, in pertinent part, that:

We need to speed that up. We have stations to pay out by the end of the month once we receive funds.

Please confirm that the payment on the September invoice will go out no later than 12/14, the normal mid-month schedule.³⁴

Ms. Rollins responded that the check would be sent the following day (Friday) for Monday delivery.³⁵ As promised, DMC issued a check on November 30 (the " Check ")³⁶ in the amount of $493,349.34 payable to Direct Results in satisfaction of the August Invoice.³⁷ Direct Results received the Check on Monday, December 3,³⁸ forty-nine days after the August Invoice was sent. It then proceeded to pay relevant broadcasters.³⁹

On December 7, Ms. Ewell emailed Ms. Rollins the following message:

We received the August payment on Monday, thank you!

Do you have an update on September? Please confirm it will be arriving no later than 12/17, since 12/15 lies on the weekend.⁴⁰

Ms. Rollins responded that she did not yet have an update on the September payment.⁴¹ Ms. Albert also emailed Ms. Rollins that same day with the following message:

Will you please let me know when payment will be processed. I appreciate you saying you will let us know when you find out but I don't want to repeat the late payment of last month. I believe all discrepancies are cleared. We need money in house next Friday, 12.14 to make station payments on time and avoid the calls from stations to client... as occurred last month.⁴²

Ms. Albert followed up with another email to Ms. Rollins on December 11:

Would you please send another update on payment status.

We want to avoid a repeat of last month in which stations called the client for payment because we had not received money per the contract.

REMINDER – payment is due this FRIDAY, 12.14.⁴³

While untimely, DMC issued a wire transfer in the amount of $664,980.17 on December 28 to Direct Results for payment of the September Invoice.⁴⁴

On January 2, 2019, Direct Results deposited the Check issued on account of the August Invoice.⁴⁵ Direct Results waited to cash the Check until after the new year for "financial management and tax purposes."⁴⁶ The Check cleared DMC's bank account on January 3,⁴⁷ thirty-one days after Direct Results received the Check and ninety days prior to DMC's Petition Date (as defined below).

III. PROCEDURAL HISTORY

The Debtors continued their winddown process into 2019. In January, they consummated two sales through which they sold substantially all of their assets and paid off their secured lender.⁴⁸ On April 3, 2019 (the " Petition Date "), an involuntary chapter 7 petition was filed with the Court against DMC.⁴⁹ Thereafter, the Order for Relief in an Involuntary Case was entered.⁵⁰ On May 23, 2019, DTR filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code.⁵¹ The Debtors’ chapter 7 cases have been jointly administered, with George L. Miller as the appointed chapter 7 trustee. The claims reconciliation process is complete, and the Debtors’ assets are nearly liquidated. This adversary proceeding is the last remaining.

The Complaint was filed on March 18, 2021.⁵² It asserts four counts by which the Trustee seeks to avoid and recover...