Must the Vendor Provide Expert Testimony to Prove up the Ordinary course
of Business Preference Defense?
By Robert Norman
Vendors often complain that the cost of defending (and
even prevailing on) a preference action can exceed the cost of simply
paying a percentage of the preference demand to immediately settle
the action, especially if the vendor must employ an expert to prove
up the preference defense.
However, a bankruptcy court recently ruled that a vendor
need not employ an expert in proving up the ordinary course of business
defense. In In re Bridge Information Systems, Inc., 297 B.R. 759
(Bankr.E. D.Mo.2003), the bankruptcy court ruled that non-expert
testimony was sufficient for the creditor to establish the prevailing
industry terms among similarly situated vendors faced with a similar
transaction in which the debtor made the challenged payment. The
court went on ease the creditor's burden by stating, "evidence need
not be in the form of empirical data of the [creditor's] competitors'
collection practices." This decision may open the door for the use
of non-expert testimony to establish an ordinary course of business
defense in a preference action case.
In Bridge Systems, the plan administrator filed a preference
action against a vendor that had provided advertising services on
credit. Despite the invoice terms, the common practice between the
debtor and creditor, as well as the newspaper industry, was to accept
late payment from continuing customers. Thus, the creditor asserted
that the preference payments could not be avoided since they were
remitted in the ordinary course of business.
Bankruptcy Code section 547(c)(2) provides that a preferential
transfer may not be avoided to the extent that the transfer was:
(A) in payment of a debt incurred by the debtor in the ordinary course
of business or financial affairs of the debtor and the creditor;
(B) made in the ordinary course of business or financial affairs
of the debtor and the creditor; and (C) made according to ordinary
business terms. The creditor must prove each of these elements by
a preponderance of the evidence.
To prevail under section 547(c)(2)(C), the creditor
must show that the "payment was objectively ordinary in relation
to the standards prevailing among similarly situated companies within
the relevant industry with respect to the type of transaction in
which the debtor made the challenged payment." Jones v. United Savings & Loan
Assoc. (In re U.S.A. Inns), 9 F.3d 680, 685 (8th Cir. 1993). The
Jones court went on to explain that "[t]his does not require the
[creditor] to establish a uniform practice within the relevant industry,
however, but only requires the [creditor] to demonstrate that the
payment in question falls within the general range of terms that
are prevailing within the industry. Id.
Bridge Systems is meaningful for the vendor as the
bankruptcy court did not require " outside" expert testimony. The
court found that "the [creditor] can meet its burden of proof under
section 547(c)(2)(C) by producing the testimonial evidence of one
[of] its employees as to the range of the prevailing practices within
the relevant industry provided that such testimony is based on the
employee's first hand knowledge." (emphasis added).
In the instant case, the vendor provided sworn testimony
of its credit professional to establish the range of practices prevailing
in the industry regarding the acceptance of late payments from customers.
Accordingly, the court found that the vendor successfully defended
the preference payments as the debtor made payments to the vendor
in the ordinary course of business of both p arties.
The gist of this decision provides that a vendor may
use its own representative, who has direct knowledge about the practices
of their industry, to defend a preference action in the applicable
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley
LLP Winter 03