Bankruptcy Judge Mary F. Walrath of Delaware wrote an opinion reaffirming the admissibility in evidence of reports from the Risk Management Association to establish the “ordinary course” defense to a preference claim.

The debtor was a supplier to large hospitals in chapter 11. The debtor sued a supplier to recover almost $4.5 million in allegedly preferential transfers made within 90 days of bankruptcy under Section 547. To dismiss the entire complaint, the supplier filed a motion for summary judgment raising two defenses: the “ordinary course” defense under Section 547(c)(2)(B) and the “new value” defense under Section 547(c)(4).

In her August 27 opinion, Judge Walrath ruled in favor of the supplier on both defenses and dismissed the preference complaint.

Objective Ordinary Course

The supplier was raising the so-called objective ordinary course defense under Section 547(c)(2)(B). The subsection gives a preference defendant a defense “to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business . . . and such transfer was . . . made according to ordinary business terms.”

Judge Walrath said the defense is called “objective” because it takes into account “the general practice in the industry.”

Raising the defense to cover about $1.3 million in payments by the debtor within the preference period, the supplier’s expert relied on statistics provided by the Risk Management Association, or RMA. In an industry segment referred to as Medical, Dental, and Hospital Equipment and Supplies Merchant Wholesalers, the RMA reported a sample of 13 suppliers reporting that the range of days to pay invoices was 28 to 76 days.

The supplier’s expert testified that about $1.3 million in payments fell within that range and should be considered defenses to the preference claim to that extent.

The debtor contended that the RMA report was inadmissible hearsay. Rule 803(17) of the Federal Rules of Evidence provides an exception to the hearsay rule for “[m]arket quotations, lists, directories, or other compilations that are generally relied on by the public or by persons in particular occupations.”

Judge Walrath said that the information in the RMA report was compiled from information provided to RMA from “companies in the industry.” She also cited testimony that RMA data “is routinely used by him and others in the industry to determine credit terms.”

Citing three cases, Judge Walrath said that “courts have routinely admitted testimony from experts who relied on RMA data in determining the ordinary repayment terms in various industries.” She therefore held that RMA data was admissible under Rule 803(17).

The debtor argued that a spread of 28 to 76 days was too broad. If the outside date was 55 days after invoicing, the debtor contended that none of the payments would be subject to the ordinary course defense.

To counter the argument, Judge Walrath cited the Third Circuit for saying that industry standards on the ordinary course defense should be “quite accommodating.” In re Molded Acoustical Prods., Inc., 18 F.3d 217, 224 (3d Cir. 1994). Furthermore, she said that the debtor had not rebutted any of the supplier’s evidence on the subject. She also found nothing wrong with a small sample of 13 other suppliers.

Extraordinary Collection Activities

The debtor argued that the payments were not in the ordinary course because the supplier had made “extraordinary” collection efforts.

In response, Judge Walrath said there “was nothing extraordinary about . . . consistently enforcing the Debtors’ credit limit both before and during the Preference Period.” Furthermore, she said that “any evidence of the Defendant’s collection activity, even if extraordinary or unusual, is not relevant to the objective ordinary course of business defense.”

Judge Walrath held that the ordinary course defense was a valid defense to $1.3 million in payments because the supplier had “presented admissible, reliable, and sufficient evidence to establish that [$1.3 million in] alleged preferential transfers [were] . . . made according to ordinary business terms in the industry.”

Regarding the remaining $3 million in allegedly preferential transfers, Judge Walrath identified “credible evidence that [the supplier] provided new value to the Debtors of” more than $4 million. She therefore granted the motion for summary judgment and dismissed the complaint.