Andrew Cardello 

St. John's University School of Law

American Bankruptcy Institute Law Review Staff 

Section 547 of the United States Code (the “Bankruptcy Code”) allow debtors, subject to exceptions, to avoid and recover certain transfers made prior to the date of petition.[1] One of these exceptions is found in section 547(c)(2)(B) which provides that “[t]he [debtor] may not avoid under this section a transfer. . . in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor, and such transfer was made…according to ordinary business terms.”[2] In Ctr. City Healthcare, LLC v. Medline Indus. (Ctr. City Healthcare, LLC), the United States Bankruptcy Court for the District of Delaware enforced a lenient standard to establish through expert testimony the ordinary course of business exception under section 547(c)(2) of the Bankruptcy Code.[3] The court found the testimony of the transferee's expert was supported by sound data and methodological interpretation, and thus sufficient for the purpose of establishing the “ordinary course of business” under section 547(c)(2).[4] Therefore, $1,297,376.50 of the alleged transfers that were made according to the “ordinary course of business” as established through the expert's testimony were not avoidable under section 547(c)(2)(B).[5]

Between April 1, 2019 and June 30, 2019, the Debtors, operators of two Philadelphia hospitals and affiliated physician groups, made certain transfers “to the Defendant for goods and/or services provided to them, pursuant to invoices or statements submitted by the Defendant.”[6] In June and July of 2019, the Debtors filed petitions for  relief under chapter 11 of the Bankruptcy Code.[7] Subsequently, the Debtors brought an adversary proceeding seeking to avoid and recover the transfers totaling $4,393,024.56.[8] Ultimately, the Defendant moved for summary judgment claiming that “$1,297,376.50 of the payments made by the Debtors to it were made according to the ordinary business terms of companies in its industry and thus are not avoidable” under section 547(c)(2)(B) of the Bankruptcy Code.[9] Furthermore, the Defendant asserted the remainder of the payments, totaling $3,095,648.06 were “exempt from avoidance under section 547(c)(4) because they provided subsequent new value to the Debtors.”[10] At issue was the admissibility of the Defendant's expert witness’ analysis which relied on Risk Management Association (“RMA”) data to support the defendant’s “ordinary course of business” and “new value” defenses.[11]

The Court ultimately admitted the testimony, ruling the flexible approach given to analyzing industry standards under the ordinary course of business defense typically warrants acceptance of an expert's conclusions that are based on sound analysis and data from reputable sources.[12] Further, whether the transfers were made along ordinary business terms is an objective test.[13] Under this test, the court compared “the range of days it took for the Debtors to pay the Defendant's invoices against the range for payments by companies in the same industry and of the same size as the Defendant.”[14] However, the Debtors objected to the admissibility of the RMA data and methodology of the expert who opined that $1,297,376.50 of the transfers were made according to ordinary business terms within the industry.[15] The Debtors argued the RMA data was inadmissible hearsay.[16] However, the RMA data was admissible under Federal Rule of Evidence section 803(17), which provides an exception to hearsay for “[m]arket quotations, lists, directories, or other compilations that are generally relied on by the public or by persons in particular occupations.”[17] Since “the RMA data is a compilation of the ‘days to pay’ data garnered from information provided to RMA from companies in the industry,” is often relied on by experts for non-hearsay testimony, and is “routinely admitted” by courts, it is admissible under Rule 803(17) of the Federal Rules of Evidence.[18]  

Further, the court upheld the methodology of the expert's interpretation of the RMA data despite the Debtor's claims of unreliability due to the small number of companies sampled, the inclusion of outlier data, and the use of an incorrect industry definition.[19] “‘[O]rdinary business terms' refers to the range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage,” and do not “imply that the creditor must prove the existence of some single, uniform set of industry-wide credit.”[20] As a result, the “accommodating and flexible approach to establishing an industry standard for ordinary business terms warrants acceptance of [the expert's] conclusions that the RMA data is sufficient to establish the industry range of  ‘days to pay.’”[21] Further, the Debtors failed to establish “any genuine issue of material fact regarding the reliability of [the expert's] testimony.”[22] Here, applying this standard, $1,297,376.50 of the transfers were made according to ordinary business terms within the industry and not avoidable.[23]

Accordingly, where a debtor files to avoid and recover transfers made prior to the date of petition pursuant to section 547 of the Bankruptcy Code, bankruptcy courts will likely enforce a lenient approach to the admission of expert testimony establishing industry standard for ordinary business terms under subsection 547(c)(2).[24] That is, where an expert's testimony establishing an industry standard for ordinary business terms is based on sound analysis and reliable data from reputable sources such as the RMA, the flexible standard warrants acceptance of expert's conclusions.[25]