The “ordinary course of business” defense to a bankruptcy preference claim has two requirements. First, the liability being paid by the debtor must have been incurred in the ordinary course of business between the debtor and you. Second, the payment must have been made in accordance with the regular practices and procedures of both parties, or the payment must have been made in accordance with normal business or industry practices.
The first requirement is generally easy to prove. For example, if you showed that the debtor was one of your customers who regularly bought goods or services from you, the first requirement would be met.
The second requirement is tougher to prove. The second requirement can be met two different ways. Proving that the payment was made in accordance with normal business or industry practices generally requires hiring an expert to write an opinion or testify that the payment in question fell within the industry standards. Defending based on normal business or industry practices should certainly be considered. But defending based on business or industry standards might be more costly and would limit the protected payments to those that comply with such business or industry standard.
Proving that the payment in question fell within the general payment practices of the parties involved may be easier, may be less costly and may open the door for establishing payment practices that are more flexible than the business or industry standards. To prove that the payment in question fell within the general payment practices that the parties themselves established, several factors need to be considered including: (1) whether the amount or method of payment differed from past practices; (2) whether the timing of the payment differed from past practices; and (3) whether you took unusual collection actions or took advantage of the debtor’s financial condition. But the most important factor is whether the timing of the payment in question fell within the range that you can establish as being part of the ordinary dealing between the parties.
One way to demonstrate that the payment fell within a “past practices range” is to create a schedule showing the date of shipment/ invoice and the date of payment over the last year or so. If the schedule shows that all or most of the payments over the last year have been made at or about 180 days after shipment date or invoice date, then the payment in question should be protected by the “ordinary course of business between the parties” defense if the payment was made within such 180 day period.
However, there may be other factors that delay certain invoices that need to be accounted for. For example, some debtors may hold and pay multiple invoices in batches. This process could have the effect of showing some payments being made in 60 days after invoice, and other payments being made 120 days or longer after invoice. This batching process obviously can distort what the real “ordinary course of business” is between the parties. To correct for this batching, it might be necessary to calculate the date of payment after the final “batch” invoice was sent.
Another critical matter is the length of the look-back period. One year might be long enough. But some courts have required 3 or more years. The focus is finding a period of time when the debtor was not in financial distress and made enough transactions to show what the normal manner of payment between the parties was.
If we can help you defend or understand a preference claim, please give us a call. Thanks for sending a copy of SenneySays to your to your friends.
Serving Dayton
Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower Dayton OH 45423
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