Business Credit Journal Aug/Sept 2014
Ordinary Business Terms as a Stand-Alone Preference Defense is Finally Getting Its Due in Court By David Grogan, Shumaker, Loop & Kendrick, LLP Receiving a preference demand letter from a bankruptcy debtor or trustee is never fun. One of the most valuable preference defenses is the ordinary course of business defense, which was made much more creditor friendly by amendments to the Bankruptcy Code enacted in 2005. Prior to the amendments, preference defendants asserting the ordinary course of business defense had to show that each payment was received in the ordinary (historic) course of business between that debtor and that creditor and that the payment was made according to ordinary business terms in the industry. In 2005, Congress changed the “and” to an “or,” creating two separate defenses as opposed to a single defense with two elements that must be proven by the creditor. Despite the change, most trustees have acted as if this favorable change to the ordinary course of business defense has not been made. In Pereira v. UPS (In re Waterford Wedgwood), decided on April 17, 2014, the Bankruptcy Court in the Southern District of New York expressly recognized this change in the statute in a persuasive opinion that will likely be followed by other courts. In addition, the Bankruptcy Court allowed the defendant’s credit manager, who had more than 25 years of experience, to present his analyses and testimony on practices in the industry in general, without the need for the defendant to hire an expert witness to present this evidence, which allows the evidence to be presented much more economically. In Waterford, the trustee asserted a $1 million preference claim against UPS, arguing that the ordinary course of business defense was not available to UPS as the payments during the preference period were substantially different from the prior history of payments between the parties. The court, however, made clear that there are two separate ordinary course defenses available: ordinary course between the parties, and ordinary course in the industry. In this case, the defendant chose the ordinary in the industry defense. The court noted that the trustee improperly tried to conflate these two separate defenses into a single defense. In a creditor-friendly decision, the court reached these findings and conclusions: •
The ordinary in the industry defense to a preference claim is a stand-alone defense and does not require any finding as to payments complying with historic ordinariness between the parties.
•
A properly experienced employee of a preference defendant is competent to offer testimony and evidence as to the ordinary course of business in the industry, without the need for hiring an expert witness.
In This Issue Ordinary Business Terms as a Stand-Alone Preference Defense is Finally Getting Its Due in Court ................................ 1 International Corner................ 2 President’s Message................ 3 National Summary of Domestic Trade Receivables................... 4 Questions from the Forum....... 5 Key to Success........................ 7 A Look Back at the CMI’s Accurate Predictions .............. 9 Ready for Growth in Credit Card Use and Related Interchange Fees?.................. 11 Congratulations CBA & CBF .... 12 Tips & Tricks........................... 12
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