Deaths, taxes and prosecution preferably: at least one can be escaped | Arnall Golden Gregory LLP


There is an old adage that only two things in life are certain: death and taxes. When it comes to bankruptcy cases, there is another certainty: Creditors who were paid within 90 days of their client’s bankruptcy filing will be sued for a preference. In other words – and this is the hard part for creditors to understand – a creditor who was paid just before bankruptcy for goods or services that they actually provided may have to return the money.

Basically, a “preference” is a payment for past debt that allows an unsecured creditor to receive more than what it would have received had it simply received its pro-rated distribution in a Chapter 7 case. Unless the creditor has received an early repayment (setting aside the previous debt requirement) or holds collateral (setting aside the Chapter 7 payout requirement), this is not a strict standard for a trustee to meet. applicant. Therefore, in the usual case, a defendant preferably must turn to one of the listed defenses. The two most popular defenses are “new later value” and “regular course”. The defense of “new subsequent value” is one which, in theory, should be easily calculated: a creditor can set off his liabilities preferably to the extent that, after the disputed payment, he has granted non-credit. guaranteed for which it has not been paid (or, if it has been paid, must come back as a preference itself). The “ordinary course” defense is more subjective, and therefore more prone to disagreement.

Since the changes made to the Bankruptcy Code in 2005, this defense applies when a transfer was (i) in payment of a debt incurred in the ordinary course of business or financial affairs of the debtor, and (ii) the transfer was been made (A) in the ordinary course of the business or financial affairs of the debtor and the assignee, Where (B) under usual commercial conditions. In other words, a creditor need only establish part (i) and either A or B in part (ii).

Assuming part (i) of the test is satisfied, as is usually the case, most creditors / defendants first look at part (ii) (A) of the test to determine if they can establish a defense. without resorting to contract terms and industry standards. as required by section (ii) (B). This is a subjective analysis. Provided there is a sufficient history of transactions between the parties, however, many courts have found that the ordinary course defense applies to protect a wide variety of payments. See, for example, Kennedy v. 3M Corp. (In re Henberger Co.), 2005 WL 6960222, * 4 (9th Cir. BAP Sep 12, 2005) (“[T]the purpose of the analysis [is] to determine whether the payments made during the preference period are so inconsistent with the pre-preference transactions that they are out of the ordinary course of transactions between the parties. “); Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 498 (8th Cir. 1991) (“Although it appears that payment has generally been made [10 days] earlier in the 90-day period than in the previous 12 months, the difference was not significant enough to show that payments in the 90-day period did not follow the normal course of business reflected in the previous 12 months. “); In re Mouled Acoustical Products, Inc., 18 F.3d 217, 224 (3d Cir. 1994) (“Only transactions so idiosyncratic [the] wide range “established between the parties before the preference period” should be considered extraordinary and therefore outside the scope of the [Section 547(c)(2)]. “); and In re Hechinger Investment Co. of Delaware, Inc., 320 BR 541, 549 (Bankr. D. Del. 2004) (only a “substantial departure from normal and ordinary invoicing and payment procedures” which existed between the parties before the preference period does not fall within the ordinary course of business. trade defense).

Recently, another bankruptcy court added to the weight of authority in concluding that even late payments can satisfy the normal course of trade defense under Stream A – this time in the landlord-tenant context. In Baumgart v. Savani Props Ltd. (In re Murphy), Case n ° 20-11873, Adv. Pro. No. 20-1070, 2021 WL 2524946 (Bankr. ND Ohio April 19, 2021), the creditor / defendant owned an apartment building of which the debtor was the tenant. Under the lease, rent was due on the first of each month and late fees were charged for any payments made after the fifth day of the month. About 20 months after signing the lease, the tenant filed for bankruptcy. During the 20 months of the lease, the debtor paid the rent on time twice: once in November 2019 and once in October 2018, which is the first month of the lease. But the debtor’s rent payments were late – up to 29 late dates – for each of the remaining 18 months of her tenancy. The trustee filed a preferential action against the landlord to recover the payments made in the 90 days preceding the bankruptcy. The landlord defended himself, arguing that he was entitled to the ordinary defense under part (ii) (A). The trustee, of course, disagreed.

The bankruptcy court ruled in favor of the owner. As the bankruptcy court explained, “In considering whether payments have been made in the ordinary course of business between the parties, courts take into account the timing of the transfers, the amount and manner of the transfers, and the circumstances in which the transfers were made…. ‘[E]Even if the debtor’s business transactions were irregular, they may be considered “ordinary” for the purposes of 547 (c) (2) if those transactions were consistent with the course of transactions between the parties involved. Therefore, even late payments can be considered the ordinary course of business if such is the usual course of transactions between the parties. Identifier. (citations omitted). The bankruptcy court then concluded that “[a] The 29 day window is not that great for rent payments to fall outside the ordinary course of business between the parties. Identifier. The bankruptcy court concluded: “The nature of the transfers also supports the conclusion that the rent payments were made in the ordinary course of business. “Payment of rent owed to a lessor, whether pending or overdue, is part of the ordinary course of business under any lease. This is especially true if there have been no unusual circumstances. [ ], such as accelerating rental payments, which would make [a] the situation does not appear to be in the usual course. Although the debtor’s payments were almost always late, they were in fact ordinary rent payments between tenant and landlord. There were no exceptional or unusual circumstances to indicate that the rent payments were not made in the ordinary course of business under the lease. Identifier.

Although this decision concerns a lease, its application is not limited to the landlord-tenant context. The decision should also be applicable to any other contract.

Creditors-defendants should also remember that, where there is little pre-bankruptcy history between the two parties, or the history that does exist is unnecessary for the creditor, the “objective part” of (ii) ( B) can still provide defense. As the 9th Circuit explained:

In this circuit, the rules of Article 547 (c) (2)[(B)] are also well installed…. [T]The obligee must demonstrate that the payments concerned were “ordinary in relation to the prevailing commercial conditions”. As before, this effectively breaks down into two components. First, the creditor must establish the “wide range” of business terms employed by similarly-positioned debtors and creditors, including those in financial difficulty, during the period under review. Second, the obligee must show that the relevant payments were “ordinary in relation to [these] commercial conditions in force. In general, § 547 (c) (2)[(B)] should not represent a particularly high burden for creditors….

In re, 504 F.3d 775, 791 (9th Cir. 2007) (internal citations omitted) (emphasis added). And, there are many other courts that follow a similar approach. See for example, In the case of Jan Weilert RV, Inc., 315 F.3d 1192, 1198 (9th Cir. 2003) (containing only payments which are so unusual as to be “outliers”[s] in the sector concerned ‘do not meet the criteria); Regarding Ahaza Systems, Inc., 482 F.3d 1118, 1125 (9th Cir. 2007) (considering that the first transactions are eligible for the exception); With regard to Gulf City Seafoods, Inc., 296 F.3d 363, 369 (5th Cir. 2002) (“Because ‘ordinary commercial terms’ set an outer limit on the practices of the parties, the ultimate question is simply whether a particular agreement is so different from what others that it does not conform to “usual commercial terms”. ”); Regarding Roblin Industries, Inc., 78 F.3d 30, 42 (2nd Cir. 1996) (“the ‘ordinary trade terms’ refer to the general practices of similar members of the industry and that’ only transactions so idiosyncratic as to fall outside this wide range should be considered extraordinary… “”); and About Strauss, 2015 WL 1221380, * 3 (Bankr. D. Col. March 16, 2015) (explaining that the investigation of ordinary commercial terms “is extensive and that a creditor is not required to prove” stringent definitions of l ‘industry or the credit standards within that industry.’ ”) (citation omitted).

In short, while death and taxes may be inevitable, having to repay a payment that a creditor has received in payment of a legitimate debt is not predestined.

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