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.
Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part II)