Affirming Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., a district judge in Brooklyn graphically demonstrated how a bankruptcy judge has discretion in deciding what test to apply and in finding the facts with regard to the “ordinary course” defense to a preference under Section 547.
The appeal involved three creditors who had been sued for a combined $260,000 in preferences. Among them, the suppliers had received scores of payments from the debtor. Judge Grossman granted the defendants’ summary judgment motions and dismissed the complaints. Ryniker v. P. Kaufmann Inc. (In re Décor Holdings Inc.), 20-08125, 2022 BL 39210, 2022 Bankr. Lexis 303 (Bankr. E.D.N.Y. Feb. 3, 2022). To read ABI’s report, click here.
To no avail, the trustee appealed to District Judge Hector Gonzalez. Among other things, Judge Gonzalez had been chief of the narcotics division in the office of the U.S. Attorney in Manhattan before his appointment to the bench. The appeal was reassigned to Judge Gonzalez one month after he received his commission on April 18, 2022.
The appeal turned on the debtors’ payment histories and the “ordinary course” defense under Section 547(c)(2)(A). It gives a creditor 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.
In his August 9 opinion, Judge Gonzalez said that the ordinary course defense “is not governed by a specific test, but generally involves using the debtor’s payment history to calculate a baseline for the companies’ dealings and then comparing preference period payments to that baseline to see if they differ substantially.”
There are two tests generally applied: the average lateness test and the total range test. Judge Gonzalez said that the “Bankruptcy Court has the sole discretion to determine which test or methodology to apply.” Bankruptcy Judge Grossman had decided that the creditors had good defenses under both tests.
On the average lateness test, the court considers how quickly bills were paid before the preference period with the delay in payments in the 90 days before bankruptcy. For the three defendants, the comparisons were: (1) 40.5 days before the preference period compared to 36.7 days in the preference period; (2) 39.3 days before the preference period and 46.2 days in the preference period; and (3) 47.5 days before the preference period and 45.2 days in the preference period.
Like Bankruptcy Judge Grossman, Judge Gonzalez said the payments established the ordinary course defense because they “were within the acceptable range.”
The creditors also had good defenses under the average lateness test, also known as the bucketing test. Quoting Judge Grossman, Judge Gonzalez said:
[T]he 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 . . . . A range from the Baseline Period that captures around 80% of the payments would be an appropriate[ly] sized bucket.
Judge Grossman found that the bucketing test was satisfied because it encompassed 82% of the payments in two of the cases and all but one in the third.
Affirming Judge Grossman, Judge Gonzalez also found “that under an alternative Bucketing Test, the payments made during the Preference Period fall within an acceptable range and accordingly, were made in the ordinary course of business.”
Affirming Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., a district judge in Brooklyn graphically demonstrated how a bankruptcy judge has discretion in deciding what test to apply and in finding the facts with regard to the “ordinary course” defense to a preference under Section 547.
The appeal involved three creditors who had been sued for a combined $260,000 in preferences. Among them, the suppliers had received scores of payments from the debtor. Judge Grossman granted the defendants’ summary judgment motions and dismissed the complaints.