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- Asserting the Ordinary Course of Business Defense to a Bankruptcy Preference Demand; Ten Tips
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Asserting the Ordinary Course of Business Defense to a Bankruptcy Preference Demand; Ten Tips
A debtor is deemed insolvent ninety days prior to a bankruptcy filing. The bankruptcy trustee in a Chapter 11 case may treat all payments and transfer of assets during the ninety days leading up to the bankruptcy filing as preferential. There are defenses available to creditors.
- A payment may not be preferential if the payment was made in the ordinary course of business
- The intent of the bankruptcy code in reversing preferential transfers is to discourage usual payment arrangements made within 90 days of the bankruptcy filing date
- To qualify, the debt must be incurred in the ordinary course of business between seller and buyer
- Also, payment must be made to the seller in the ordinary course of business
- In addition, payment must be made according to ordinary business terms within the industry to be considered to have been paid in the ordinary course of business
- When considering whether the creditor can avoid having to disgorge a payment based on the Ordinary Course of Business Defense, the bankruptcy court looks at prior payments made to the seller to determine if the manner of payment or timeframe for payment were substantially similar, or were different
- The court may also require a creditor hoping to use the Ordinary Course of Business defense to prove that the payment terms were ordinary for the industry
- A late payment is not necessarily outside of the ordinary course of business, nor is an early payment or a wire transfer payment if the creditor can prove that these payments were in the normal course of dealings with the debtor
- Similarly, payments made under an extended payment plan might not be considered preferential if the creditor can demonstrate that such extended payment plans were not uncommon with this debtor
- Courts apply both objective and subjective tests to determine what is an ordinary payment during the 90 day lookback period. The burden of proof rests with the creditor. The creditor must provide the required documentation or evidence supporting its Ordinary Course of Business Defense
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