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Restructuring Agreements
and the Ordinary Course of Business Defense

Bankruptcy Articles
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By Bradley D. Blakeley
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

If a credit manager finds him or herself in the all too familiar position of having to restructure a debtor�s obligation, are payments made pursuant to the restructuring agreement outside of the ordinary course of business? Creditor Niagra Mohawk Power Company faced this question in the bankruptcy case of In re Ice Cream Liquidation from the District of Connecticut, wherein the debtor sought to recover alleged preferential transfers totaling more than seven hundred thousand dollars.

In In re Ice Cream Liquidation, the debtor fell behind in its monthly electric payments to the creditor. The creditor sent a termination notice to the debtor, and the parties entered into an �account agreement,� or restructuring agreement, establishing a repayment schedule. The debtor agreed to make large weekly payments under the agreement. At the end of the agreement, the debtor remained in default. As a result, the parties entered into a second restructuring agreement. Again, at the end of the second restructuring agreement, the debtor was in default. The parties contemplated a third restructuring agreement (there was a dispute as to whether the third agreement was ever effective between the parties), and the debtor made payments consistent with the third agreement, but again defaulted. Shortly thereafter, the debtor filed its voluntary petition.

The debtor commenced an adversary action against the creditor to recover the alleged preferential transfers. The creditor asserted, among other defenses, that the payments were made in the ordinary course of business and filed a motion for summary judgment seeking dismissal of the action. The debtor filed a cross-motion for summary judgment against the creditor.

The creditor asserted as part of its ordinary course of business defense that it was standard in the industry for parties to enter into restructuring agreements. In support, the creditor claimed that it was required to enter into the restructuring agreement pursuant to the industry regulations. The court stated that payments made pursuant to a restructuring agreement in accordance with industry regulations were per se within industry standard. The court made a special note of the requirement under the regulations that the restructuring agreement be made on more generous terms � a fact that other courts have also referenced. The court held, however, that there was a question of fact as to whether the restructuring agreement comported with the proper regulatory procedure, denied both parties� motions and required a trial on the merits.

In the end, the Ice Cream court�s decision gives more support to creditors faced with a decision of whether or not to restructure the obligation of a troubled debtor. While there have been recent decisions holding that restructuring agreements are not per se out of the ordinary course of business, the Ice Cream decision goes one significant step further by recognizing that a restructuring agreement may be per se within the industry standard, should it comply with industry regulations. Certainly, most defendants are not required to enter restructuring agreements under industry regulations. But the Ice Cream case illustrates that bankruptcy judges are thawing to the reality that restructuring agreements may be ordinary within an industry, and payments made pursuant to such agreements are within the ordinary course of business.

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