In the case of Huffman v. New Jersey Steel Corp. the United States Bankruptcy Court at Roanoke, Virginia, reviewed payments made by a debtor, a steel fabricator, for steel reinforcing rods, in regard to a complaint of preferential transfer.
The Court found as fact that the debtor fabricated "rebar" or steel reinforcing rods, for use in construction projects. The debtor obtained "rebar" from the creditor; this was the subject of this avoidance complaint. A large portion of the debt incurred by the debtor to the creditor during the preference period arose after a mistake made by the two companies, when the debtor ordered "six loads" of rebar, which the creditor interpreted as "six train-car loads", not "six truck loads". What began as a mistake was later ratified by the creditor when it continued to deal with the debtor, filled the debtor's orders and did not immediately request additional security.
The trustee and the creditor agreed that the transfers at issue were preferential as defined in the Bankruptcy Code. The trustee, however, disagreed with the creditor that the transfers were made in the ordinary course of business, and thus an exception pursuant to Bankruptcy Code §547 (b).
The trustee argued that the mistaken order was not in ordinary course because it was much larger than previous orders and resulted in the debtor's exceeding the credit limit that the creditor had established.
The creditor argued that it accepted the increase in credit and continued to ship. It further argued that it was lenient with credit terms, and presented evidence consistent with the same. The creditor also argued that it was not unusual in the industry for substantial purchases to be made at one time given the nature of the fabricating business.
The Court found that the parties entered into a transaction through a mutual mistake of fact, but that rather than rescind, the parties elected to carry out the terms of the agreement. The Court noted that such conduct was consistent with the understanding of the parties to treat the transaction as ordinary. Also, the agreement to continue was at arms length between two independent commercial entities in the marketplace. The Court found no evidence that ratification after discovery of the mistake was used to give the creditor an advantage over other creditors. The Court stated that although ratification of an agreement borne of mutual mistake of fact may not be common, but in the context of this case it was ordinary.
The Court next looked at the payments made and determined that there had been a long-standing relationship between the parties, and that payments occurred ordinarily, by check, within 54 to 67 days of invoice. Those payments made in that manner were made an exception as ordinary, the four payments made within a different time frame or by wire transfer were not.
