Yesterday, we analyzed a case where hounding a debtor for payment and shortening credit terms defeated the “ordinary course” defense and saddled the supplier with a $3.5 million preference judgment, even though none of the payments was late.
Today, we review an “ordinary course” opinion by Bankruptcy Judge Robert E. Grossman where there was no unusual collection activity, the suppliers did not know the debtor was in financial trouble, and the suppliers did not pressure the debtor to pay during the so-called 90-day preference period before bankruptcy.
Judge Grossman, of Central Islip, N.Y., upheld the “ordinary course” defense under Section 547(c)(2)(A) and dismissed a passel of preference complaints on summary judgment.
After confirmation of a chapter 11 plan, the trustee of a creditor’s trust sued several suppliers for a preference. For simplicity, we shall refer to the plan trustee as the debtor.
Previously, Judge Grossman ruled on motions for partial summary judgment that the debtor had established all of the elements of a preference under Section 547(b). In his February 3 opinion, Judge Grossman reviewed the undisputed facts about the debtor’s payment history to apply the “ordinary course” defense under Section 547(c)(2)(A).
Section 547(c)(2) gives the supplier a defense:
to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.
Citing the Collier treatise, Judge Grossman said that Section 547(c)(2)(A) is a subjective test designed to protect customary credit transactions paid in the ordinary course of business of the debtor and the supplier. He said that the defense provides “a level of predictability so that suppliers such as the Defendants are permitted to keep payments that would otherwise be deemed preferences.”
Citing legislative history, Judge Grossman said that Congress intended for the defense to discourage “unusual activity” by either the debtor or creditors in the slide toward bankruptcy.
All of the suppliers in the cases before him had been dealing with the debtor for years and had scores of transactions among them.
In reviewing credit history, Judge Grossman said there are two predominant tests: the average-lateness method and the total-range method. The former compares the average days to pay in the pre-preference period to those in the preference period.
The total-range method comes into play if the averages are skewed by “outliers.” Under the “total range of payments” test, Judge Grossman said:
[T]the Court reviews all of the payments made during the Baseline Period (which is agreed by all parties as the two years prior to the 90-day preference period) and determines the range of payments from the earliest to the latest. If the payments made during the preference period fit within the range, they are protected by the ordinary course of business defense. If the Court finds that the range of payments during the Baseline Period is too broad, the Court may adopt the bucketing analysis. Under the bucketing analysis, the Court reviews the payments made during the baseline period and groups them into buckets by age, then applies an appropriately sized bucket to the preference period payments to determine what is ordinary and what is not. As this Court previously stated, a range from the Baseline Period that captures around 80% of the payments would be an appropriate size bucket. [Citation omitted.]
Judge Grossman sided with the suppliers and decided to apply the average-lateness test, because it “is more likely to ‘weed out’ payments that could skew the analysis.”
In the cases before him, the average lateness in the two years before the preference period ranged between 39 and 47 days. In the preference period, payments ranged between four days early to seven days late.
Judge Grossman cited the Seventh and Eighth Circuits for holding that deviations of five to seven days from the pre-bankruptcy average were not enough to deprive the supplier of the defense. In the cases before him, he saw no reason to go beyond the average-lateness test to uphold the suppliers’ defenses.
Had he employed the bucketing analysis, the result would be the same, Judge Grossman said. Eighty-two percent of the payments before the preference period would encompass all but one of the payments made in the preference period. In the case of that one payment, it was also covered by the new value defense.
Judge Grossman gave judgment to the suppliers on the preference claims. The debtor also had lodged fraudulent transfer claims.
Judge Grossman dismissed the fraudulent transfer claims because the allowance of the ordinary course defenses established that the suppliers had provided reasonably equivalent value.
Yesterday, we analyzed a case where hounding a debtor for payment and shortening credit terms defeated the “ordinary course” defense and saddled the supplier with a $3.5 million preference judgment, even though none of the payments was late.
Today, we review an “ordinary course” opinion by Bankruptcy Judge Robert E. Grossman where there was no unusual collection activity, the suppliers did not know the debtor was in financial trouble, and the suppliers did not pressure the debtor to pay during the so-called 90-day preference period before bankruptcy.
Judge Grossman, of Central Islip, N.Y., upheld the “ordinary course” defense under Section 547(c)(2)(A) and dismissed a passel of preference complaints on summary judgment.