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 jurisdiction.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Winter 03