Pidcock v. Sturm Ruger & Co. (In re ASPC Corp.)

658 B.R. 455

IN RE: ASPC CORP., Debtor.

John B. Pidcock, not individually but as Trustee of the ASPC Creditor Trust, Plaintiff, v. Sturm Ruger & Company, Inc., Defendant.

Case No. 18-52736

Adv. Pro. No. 20-2077

United States Bankruptcy Court, S.D. Ohio, Eastern Division

Singed March 29, 2024

Counsel for the Plaintiff: Thomas R. Fawkes, Douglas L. Lutz.

Counsel for the Defendant: Loriann E. Fuhrer, Larry J. McClatchey, Matthew M. Zofchak.

MEMORANDUM OPINION ON MOTION FOR SUMMARY JUDGMENT

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

The issue in this adversary proceeding is whether certain alleged preferential transfers were made according to ordinary business terms within the meaning of § 547(c)(2)(B) of the Bankruptcy Code. The plaintiff, John B. Pidcock, is the trustee of the creditor trust formed under the Chapter 11 plan of ASPC Corp., which at the time of the alleged preferential transfers was known as AcuSport Corporation ("AcuSport"). The defendant, Sturm Ruger & Company, Inc. ("Ruger"), is a small firearms manufacturer. Before its liquidation, AcuSport was a wholesaler and distributor of Ruger's firearms.

AcuSport made prepetition wire transfers exceeding $3 million to Ruger as payment for Ruger's firearms. Pidcock seeks to avoid those transfers as preferential under § 547(b) of the Bankruptcy Code. Ruger moves for summary judgment on the ground that AcuSport made the transfers according to ordinary business terms, meaning § 547(c)(2)'s ordinary course of business defense bars Pidcock from avoiding the transfers. Whether Ruger is entitled to summary judgment turns on two sets of questions:

First, in arguing that the transfers in question were made according to ordinary business terms, Ruger presented evidence of payments from both retailers and wholesalers like AcuSport to manufacturers in Ruger's own small firearms industry. Was it proper for Ruger to only present evidence on payments made to manufacturers in its own industry? Or, as Pidcock argues, should Ruger have presented evidence of payments made by companies in AcuSport's durable goods wholesalers industry as well?

Second, Ruger asserts that the Court should determine whether the transfers at issue were made according to ordinary business terms based on the number of days AcuSport's invoices were outstanding compared to a range of days that invoices are typically outstanding in the relevant industry. Is this an appropriate metric for determining ordinariness? Or, as Pidcock argues, should the Court focus on other evidence, including how other firearms manufacturers adjust credit limits—as compared to how Ruger adjusted AcuSport's credit limit during the preference period?

For the reasons explained below, the Court answers both sets of questions in favor of Ruger. First, the Court concludes that Ruger relied on the appropriate industry by producing evidence of the timing of payments from both wholesalers and retailers to manufacturers in the small firearms industry. Second, the Court also finds that by comparing the number of days AcuSport's invoices were outstanding to the average number of days in which receivables are collected by other small firearms manufacturers, Ruger used an appropriate benchmark for measuring whether the payments it received from AcuSport were made according to ordinary business terms. And Pidcock has done nothing to establish that Ruger's reduction of AcuSport's credit limits was extraordinary in the industry. Thus, because Ruger's evidence makes clear that AcuSport's payments to it were made according to ordinary business terms, and because Pidcock has failed to show any genuine issue of material fact exists, Ruger is entitled to summary judgment.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine this matter under 28 U.S.C. § 1334(b) and the general order of reference entered in this judicial district in accordance with 28 U.S.C. § 157(a). This is a core proceeding. See 28 U.S.C. § 157(b)(2)(F).

The Court also has the constitutional authority to enter a final order in this adversary proceeding for two reasons. First, Ruger filed a proof of claim, and bankruptcy courts have the constitutional authority to finally adjudicate preference actions against parties that have filed proofs of claim. In re Quebecor World (USA), Inc., 518 B.R. 757, 760 n.1 (Bankr. S.D.N.Y. 2014). Second, parties may consent to bankruptcy courts' entry of final orders adjudicating matters, Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 699, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015), and the parties have consented to the Court's entry of a final order here, see Joint Am. Prelim. Pretrial Statement at 2.

III. Procedural History

AcuSport filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 1, 2018 ("Petition Date"). Less than a year later, the Court confirmed AcuSport's liquidating Chapter 11 plan, approving the formation of a creditor trust and appointing Pidcock as the trustee of that trust. As trustee, Pidcock was tasked with pursuing claims held by AcuSport's bankruptcy estate, including preferential transfer claims like the one he brought against Ruger.

After Ruger filed a proof of claim in an amount exceeding $1 million, Pidcock brought this adversary proceeding against Ruger by filing a complaint (Doc. 1) ("Complaint"), which contained six counts and requested the following relief:

(I) avoidance of transfers as preferential under § 547(b) of the Bankruptcy Code; (II) recovery of the transfers from Ruger under § 550(a);

(III) disallowance of Ruger's proof of claim under § 502(d);

(IV) a judgment declaring "that the 'Aggregate Free Goods Claim,' and the property constituting the same," is property of the estate of AcuSport under § 541;

(V) a declaratory judgment that any previously effectuated setoff of the Aggregate Free Goods Claim against Ruger's pre-Petition Date claim is null and void, and that Ruger does not have a right of setoff; and

(VI) an order requiring Ruger to turn over cash or property having an economic value equal to the Aggregate Free Goods Claim.

Compl. at 9-14.

Ruger answered the Complaint (Doc. 5) ("Answer"), then filed its motion for summary judgment (Doc. 18) ("Summary Judgment Motion"). Pidcock responded to the Summary Judgment Motion (Doc. 20) ("Response"), and Ruger replied (Doc. 23) ("Reply"). As stated, Ruger moves for summary judgment on Count I of the Complaint—seeking avoidance of alleged preferential transfers—based on § 547(c)(2)'s ordinary course of business defense. Ruger also seeks summary judgment on Counts II and III of the Complaint, on the ground that those claims for relief are tied to the preference claim asserted in Count I. And if that preference claim fails, Ruger argues, then so too must the claims asserted in Counts II and III. Summ. J. Mot. at 10.

In his Response, Pidcock "concede[d] Counts IV-VI and consent[ed] to the prior setoff of the free goods balance against [Ruger's] general unsecured claim." Resp. at 2. Ruger is therefore entitled to summary judgment on Counts IV-VI. Pidcock further concedes that Ruger relies on facts sufficient to allege a new value defense under § 547(c)(4)¹ in the amount of $12,629.46, Resp. at 15, and Ruger only asserts a new value defense in the amount of $3,498.49. Summ. J. Mot. at 5. So all that remains for the Court to decide is whether the avoidance and recovery of AcuSport's alleged preferential transfers is barred by the ordinary course of business defense.

Although the Court heard oral argument on the Summary Judgment Motion, no transcript of the argument has been prepared. The recording of the oral argument will be cited as "Oral Arg. at [timestamp]."

IV. Background

Ruger is a small firearms manufacturer, and before its liquidation, AcuSport was an authorized distributor of Ruger's firearms. Summ. J. Mot. at 2. During the 90-day period before the Petition Date ("Preference Period"), AcuSport made several wire transfers to Ruger ("Transfers") on account of firearms Ruger shipped to it under their distribution agreements. Although the Complaint identified the amount of the Transfers as "not less than $3,033,264.49," Compl. at 6, Ruger stated that the actual amount should be $3,028,994.88, Summ. J. Mot. at 3 n.1, and Pidcock agreed that this is the correct amount, Resp. at 2 n.1.

The Bankruptcy Code enables preference defendants to avoid liability for preferential transfers through several affirmative defenses. See 11 U.S.C. § 547(c). "The preference defenses in § 547(c) were enacted to encourage creditors to continue doing business with [ ] debtors under usual practices." Auriga Polymers Inc. v. PMCM2, LLC as Tr. for Beaulieu Liquidating Tr., 40 F.4th 1273, 1288 (11th Cir. 2022) (citing In re BFW Liquidation, LLC, 899 F.3d 1178, 1193 (11th Cir. 2018)); see also In re Beaulieu Grp., LLC, 616 B.R. 857, 875 (Bankr. N.D. Ga. 2020) (same). In other words, "preference defenses are designed 'to encourage creditors to continue to sell on credit to a buyer slipping into bankruptcy and perhaps prevent the bankruptcy altogether.' " Steege v. Canon U.S.A., Inc. (In re Calumet Photographic, Inc.), 594 B.R. 879, 883 (Bankr. N.D. Ill. 2019) (quoting Deborah L. Thorne, Inequality Among Preference Defendants: How Is That Fair?, Am. Bankr. Inst. J., Nov. 2014, at 24). Cf. Harrah's Tunica Corp. v. Meeks (In re Armstrong), 291 F.3d 517, 525 (8th Cir. 2002) ("The purpose of the § 547(c) exceptions at issue is to encourage creditors to continue doing business with troubled debtors who may then be able to avoid bankruptcy altogether.") (cleaned up).

One preference defense found in § 547(c)(2) is the ordinary course of business defense, which absolves a defendant of preference liability if the transfer at issue satisfies either the subjective or objective test set forth in the statute. The subjective test asks whether the transfer at issue was made in "the ordinary course of business or...