Is payment on the first time shipment within the ordinary course of
By Bradley D. Blakeley
Your company has just received a first-time order from
a company you know is having financial difficulty. As a credit manager,
do you agree to take the order and extend credit? The Pennsylvania
bankruptcy court's decision in In re Forman Enterprises, Inc. encourages
you to do so.
In In re Forman Enterprises, Inc., the debtor,
a retailer of casual clothing, placed an order with Golden Knitting
Mills, Inc. for sweaters valued at $115,200. It was the first transaction
between the parties, with stated invoice terms of "NET 30". The Debtor
failed to pay within terms, and several calls were placed by Golden
in an attempt to collect the past due amount. Golden went so far
as to re-send the invoice to the Debtor's Chief Financial Officer,
and finally spoke with the CFO concerning the delinquent payment.
The Debtor agreed to pay the full amount owing, and, in return, Golden
shipped additional goods to the Debtor. A week later, 19 days after
the due date, the Debtor paid Golden $115,200.
The trustee filed a preference action against Golden
seeking to recover the full $115,200. At trial, the court acknowledged
that several courts in other jurisdictions have adopted a per
se rule that first-time transactions between a debtor and creditor
can never qualify as an ordinary-course transaction. The Forman
Enterprises court rejected this position, however,
and asserted such a rule would discourage rather than encourage first-time
creditors from doing business with a struggling debtor. The court
found that the transfer was not made outside of the ordinary course
of business, and found in favor of Golden.
It is important to note that the court underscored
the importance of the second shipment made by Golden. With an interesting
interpretation on the communications between the parties, the court
found that the communications leading up to payment were a "prelude
to [the debtor] ultimately agreeing to ship the second order of sweaters," and
rejected the trustee's argument that the tactics employed by Golden
placed undue pressure on the Debtor to make the transfer.
In its decision, the Forman Enterprises court
recognizes the difficulties encountered by debtors to find new suppliers
willing to give credit in troubled times, and the importance of encouraging
creditors to do so. The decision is a step in the right direction
toward giving creditors the assurance they need before extending
credit to a firsttime customer.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley
LLP Fall 03