Fireworks in the Sky but Not in Court: The Bankruptcy Judge Takes a Practical Approach to the Ordinary Course of Business Defense | Patterson Belknap Webb & Tyler LLP

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A recent decision applied the ordinary course of business defense to a preferential transfer claim where the parties had entered into only two transactions. In relation to Reagor Dykes Motors, LP, Case No. 18-50214, Adv. No. 20-05031, 2022 LEXIS 70 (Bankr. ND Tex. Jan. 11, 2022). The court took a hands-on approach to the defense, given the absence of detailed billing and payment history between the parties.

The background is simple. Every Independence Day, a charity puts on a fireworks show in Lubbock, Texas. The costs of the show are paid by local companies. In 2017 and 2018, the fireworks were sponsored by a local car dealer.

In 2017, the charity sent the dealer an invoice for the sponsorship on February 16, 2017, and the dealer paid on May 24, 2017. In 2018, the invoice was sent on May 14, 2018, and payment was made on July 13, 2017. 2018.

In August 2018, the car dealer filed for chapter 11 bankruptcy protection. A bankruptcy trustee sued the charity to set aside and recover the 2018 payment it received as a preferential transfer. In response, the charity argued, among other things, that the payment was protected by the ordinary course of trade defence. Therefore, the court considered whether the defense applied in light of the limited business dealings between the charity and the car dealer.

A transfer is preferential when it involves property in which a debtor has an interest, and if the transfer was:

(i) to or for the benefit of a creditor;

(ii) by or because of a previous debt;

(iii) made while the debtor was insolvent;

(iv) made within 90 days prior to filing for bankruptcy; Y

(v) allowed the assignee to receive more than if the case were a liquidation under chapter 7 of the Bankruptcy Code.

11 USC § 547(b).

In reagor dams, the parties agreed that all elements of section 547(b) applied, except if the transfer was made because of “antecedent debt.” The court noted that the debt arose and the dealership was forced to foot the bill from 2018, when the dealership received sponsorship benefits at the 4th of July event. Thus, according to the court, the payment of July 13 was on account of an antecedent debt.

The trustee argued against applying the ordinary course of business defense given the scarcity of transactions between the parties. The defense can be satisfied based on subjective or objective evidence. The subjective test considers the invoice and the payment history between the specific parties. 11 USC § 547(c)(2)(A). The objective test considers whether the billing and payment history was within industry standards. 11 USC § 547(c)(2)(B). The charity requested the application of the subjective test.

The court noted that determining whether a transaction is ordinary “can be difficult.” Bank 2022 LEXIS 70, at *17. Factors include:

  • the length of time the parties were involved in the transaction;
  • if the amount or form of the offer differs from previous transactions;
  • whether the debtor’s payment or the receiver’s collection efforts are unusual;
  • the circumstances in which the payments were made; Y
  • if the assignee took advantage of the deteriorating financial situation of the debtor.

ID. (quoting Jubber vs. SMC Elec. Products Inc. (Regarding CW Mining Co.)798 F.3d 983, 991 (10th Cir. 2015)).

Applying these factions, the court in reagor dams ruled in favor of charity. Both 2017 and 2018 payments were made more than 30 days after billing. The 2017 payment was made before July 4, while the July 2018 payment was made after that day. But, the court concluded, the significance of that difference was “weak.” The evidence also showed that, in general, the charity did not make any fundraising efforts and did not do so in respect of the 2018 event.

Additionally, the car dealership had paid the bill as part of “its practice of donating to community events.” This was a “once a year deal” that bought the dealership publicity and goodwill in the local community. There was also no evidence that the dealership had favored the charity over other creditors as it neared bankruptcy, a statement that was “sudden and unexpected”. Bank 2022 LEXIS, at *22. In short, because the court found nothing “unusual” in the 2018 transaction, it ruled that the normal course of business defense applied to protect the payment received by the charity.

Fortunately, the charity was able to secure sponsorship from a local law firm for the fireworks display in 2019.

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