Learning how to defend a preferential transfer action is a particularly useful art for the credit professional. In Part One, we discussed the Bankruptcy Code’s specific requirements that must be established by the debtor or trustee in order for a transfer to be considered “preferential,” and subject to avoidance (return to the debtor’s bankruptcy estate) The logical follow-up is a discussion of the most common defenses to a preferential transfer action. The Bankruptcy Code describes…
The Art of Defending Preferential Transfers – Part Two: The Defenses
Defending Preferential Transfers: The Ordinary Business Terms Defense- Part VI: Successful Use of the Ordinary Business Terms Defense
Despite these rather instructive failures, there have been a number of cases in which creditors have successfully prevailed using the ordinary business terms defense. For example, in the In re Global Tissue case, the debtor and a supplier were in the same industry, and the supplier successfully asserted an ordinary business terms defense by producing evidence of the average length of time it took to receive payments from all of its customers, including the debtor,…
Defending Preferential Transfers: The Ordinary Business Terms Defense- Part V: Failures Using the Ordinary Business Terms Defense
Like all other defenses, the defendant/transferee must provide evidence establishing the elements of the ordinary business terms defense. Much can be learned from the many seeming half-hearted attempts to prove an ordinary business terms defense. For example, the lack of competence of witnesses (whether expert or non-expert) and failure to identify the relevant industry or industries has resulted in failed attempts to fully utilize the ordinary business terms defense. Further, changes to credit terms during…
Defending Preferential Transfers: The Ordinary Business Terms Defense- Part IV: Proving up the Ordinary Business Terms Defense
Once a debtor or trustee establishes a transfer is a preferential transfer, the burden falls upon the creditor to establish one or more of the defenses to avoidance set forth in Bankruptcy Code section 547(c), such as the “ordinary business terms” defense set forth in Bankruptcy Code section 547(c)(2)(B). Defining the Relevant Industry Recent case authority confirms that today’s ordinary business terms test focuses on whether preferential transfers are consistent with “industry norms” prevailing at…
Defending Preferential Transfers: The Ordinary Business Terms Defense- Part III: How Courts Apply Today’s Ordinary Business Terms Defense
Now that the ordinary business terms defense stands on its own as an independent defense, courts are compelled to focus specifically on whether the ordinary business terms test has been satisfied. As before, the burden is on the creditor to establish the ordinary business terms defense, using essentially the same four factors as the subjective test (timing, amount, manner and circumstances of payment), but with the focus being on business terms in the relevant industry,…
Defending Preferential Transfers: The Ordinary Business Terms Defense- Part II: Today’s Ordinary Business Terms Defense
Under the pre-October 2005 version of Bankruptcy Code section 547(c)(2), a creditor wishing to shield a transfer from avoidance using an “ordinary course” defense had to prove, by a preponderance of the evidence, that the preferential transfer was: (A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee; (B) made in the ordinary course of business or financial affairs of…
Defending Preferential Transfers: The Ordinary Business Terms Defense- Part I: Background of the Ordinary Business Terms Defense
For creditors defending a preferential transfer action in a bankruptcy case, one of the least understood, and therefore least used, defenses is the so-called “ordinary business terms” defense described in Bankruptcy Code section 547(c)(2). Credit managers are generally familiar with the “ordinary course of business” and “new value” defenses, which receive the predominant amount of attention in print and case authority. However, the ordinary business terms defense can be just as effective, or even more…
The Art of Defending Preferential Transfers-Part One: The Basics
Creditors face any number of perils when an account debtor files for bankruptcy – loss of sales, likely risk of collection of amounts owed, legal fees and more. One more challenge a creditor might encounter is a possibility the now-bankrupt debtor or a bankruptcy trustee will demand the return of prepetition debt payments made by the debtor to the creditor. Repayment might be required even if the debtor received and used (or sold) the underlying…