The Third Circuit handed down a nonprecedential opinion fleshing out factors to consider in deciding whether preferential payments were made in the ordinary course of business. The opinion suggests that a creditor is unlikely to have an “ordinary course” defense after forcing the debtor to reduce arrears by accelerating payments.
The May 4 opinion by District Judge Robert D. Mariani, sitting by designation, implies that extraordinary measures to reduce a creditor’s exposure aren’t in the “ordinary course.”
The creditor provided relocation services under a contract calling for payment in 30 days. Over the first 18 months, the debtor paid on time.
Six months later, the debtor racked up $1.7 million in payables that were 60 days past due. In a first workout, the creditor required the debtor to pay $200,000 a week plus a $900,000 lump sum.
After the $900,000 payment, the debtor began falling behind again, until the creditor had an $800,000 receivable, of which $600,000 was overdue.
In a second workout, the creditor required the debtor to pay $50,000 a week. After threatening to cease providing services, the creditor forced the debtor to pay $75,000 each week during the 90-day preference period.
The chapter 7 trustee sued the creditor for receipt of 12 preferential payments within 90 days of bankruptcy totaling almost $800,000. After trial, the bankruptcy court allowed a “new value” defense of about $55,000 but held the rest to be recoverable preferences. The creditor appealed but lost in district court.
In the circuit, the creditor argued that all payments within the 90-day preference period were protected by the “ordinary course” defense in Section 547(c)(2), which provides that a trustee may not avoid a transfer if the payment was incurred and made “in the ordinary course of business” or was “made according to ordinary business terms.”
Primarily, the creditor contended that the payments were “ordinary course” because those within the preference period were made 19 days faster than those outside of 90 days and were within the normal range of payments from the debtor to the creditor.
Judge Mariani rejected the argument, saying that the speed of the payments was “only one of several salient facts considered by the bankruptcy court.” He said that the bankruptcy judge “properly found the faster payment rate to be ‘significant,’ in light of the fact that the [creditor] only ‘insisted on a quicker payment schedule as it became aware of [the debtor’s] financial troubles.’”
Judge Mariani also said that the bankruptcy judge “properly found” that threats to cease providing services were not in the ordinary course of business because an “ultimatum” of the sort never had occurred before the preference period. Again quoting the bankruptcy judge, he said that the $75,000 required weekly payment was “‘significantly different from the original credit terms.’”
Noting the creditor’s “new and unusual collection efforts during the preference period,” Judge Mariani upheld the bankruptcy court’s finding that, “taken as a whole,” the creditor’s “conduct in the preference period deviated from the parties’ ordinary course business practices.”