February 2014

This is the second post devoted to defenses against preference avoidance actions.  It covers the so-called ordinary course of business defense.

Defenses To Preference Avoidance Actions, Part II:

The Ordinary Course Of Business Defense

Suppose a corporate debtor in Chapter 11 has a lease on the building in which it conducts its business.  Suppose the debtor has lease payments of $25,000 per month.  If it makes its usual on-time payments during the ninety-day prepetition period — i.e., a total of $75,000 — will the DIP (the Debtor-in-Possession, who is the debtor serving as a quasi-trustee) successfully avoid those payments?  Based on 11 U.S.C. § 547(c)(2), the answer is “no”:

The trustee may not avoid under this section a transfer — . . . to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was —

(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or

(B) made according to ordinary business terms.

Although this Code subsection appears to have two possible conditions ((A) and (B)), each of which focuses on the nature of the payments, there is a third crucial requirement embedded in the introductory language:  the underlying debt itself must have been incurred in the ordinary course of business. 
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I’m back.  I have been busy writing a book on Chapter 13 bankruptcy — I was asked to do so by a publisher.  I should have it completed in a few months, so watch for it.  In any event, I am ready to start posting again.

Some time ago I posted on preferential transfers (a.k.a. preferences).  Since I will be speaking on preferential transfers (and on fraudulent transfers) in May these topics have been on my mind.  Today’s post will look at the statutory definition of a preference.  It’s complicated, which is why the post a bit long.  However, it’s worth the read.  Subsequent posts will look at preference avoidance and defenses to preference avoidance.

I.          Introduction

There are two main goals of bankruptcy.

The first goal is to give the debtor a fresh financial start .  This goal has a laudable pedigree that has its origins in the Bible, ancient Roman law, and the U.S. Constitution .

The second goal is to ensure that all creditors who are similarly situated are treated equally and fairly.  There are two ways in which debtors sometimes violate this second big goal:  (1) They don’t list all of their creditors in their bankruptcy papers, and (2) They make preferential payments to certain creditors in anticipation of bankruptcy.

If a debtor omits a creditor from the list, then the debt to that creditor will not be discharged at the conclusion of the case.  (See 11 U.S.C. §§ 523(a)(3) and 1328(a)(2). But see In re Beezley, 994 F. 2d 1433 (9th Cir. 1993) (Unscheduled debt is discharged in a no-asset Chapter 7 case if the debt would have been discharged if it had been listed).)  If the debtor purposely omitted the creditor, and thus “made a false oath,” i.e., committed perjury, the debtor may either be denied a discharge, or have a discharge revoked.  (See 11 U.S.C. §§ 727(a)(4)(A), 1144, 1230, and 1328(e)(1).)  However, there can be a bright side to this scenario:  the debtor may end up receiving free room and board at government expense, which could greatly reduce any stress over finances .

The focus of these posts is on the other way debtors violate the second big goal:  preferential transfers.  We begin with the definition.
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I will be covering the topics of :  1) Preferential Transfers: Preference Actions and Substantive Defenses, 2) Fraudulent Transfers: Actual Intent and Affirmative Defenses, and 3) Appellate Procedure and Strategies: Appeals from Final Orders and Interlocutory Appeals.  I will present this talk at the National Business Institute’s “Bankruptcy Litigation 101” seminar in Orange, CA on