Matter of Tolona Pizza Products Corp.

Within 90 days prior to declaring bankruptcy, Tolona Pizza Products Corp. (Tolona) (plaintiff) made eight payments to its sausage supplier, Rose Packing Co., Inc. (Rose) (defendant), an unsecured creditor. Rose’s invoices included a due date of seven days, and the payments were made between 12 and 32 days after the invoice. However, over the course of Tolona’s business dealings with Rose, Tolona’s payments were generally made after 21 days and sometimes after 30 days—in any case, later than the 21-day threshold under which Rose allowed most of its customers to delay payments. The checks represented a full payment to Rose. However, allowing the payment to stand would put Tolona’s other creditors in the much less favorable position of receiving only 13 cents on the dollar under the reorganization plan. Tolona therefore brought an adversary proceeding to recover the payments on the ground that they constituted voidable preferences. The bankruptcy court ruled in favor of Tolona. Rose appealed. The district court reversed the bankruptcy court, finding that an exception to the preference rule—transfers in the ordinary course of business—was applicable, in part because Rose’s executive vice president had testified that Tolona’s payment times were consistent with industry-wide norms. Tolona appealed. The United States Court of Appeals for the Seventh Circuit granted certiorari.