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Payments Made With Credit Terms and
Ordinary Course of Business Defense
Prompt Payments may be protected by the "ordinary course of busines defense

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

In the face of bankruptcy, a debtor will often delay payments to its creditors. As a result, the transfers that are the subject of a preference action are usually those that pay invoices much later than in the prior course of dealings between the debtor and creditor. Under some circumstances, however, the debtor may pay its creditor sooner than it did in the prior course. This is the situation in the recent case of In re TWA, Inc. v. World Aviation Supply, Inc. In TWA, the Delaware bankruptcy court decides the issue of weather an invoice paid within credit terms is conclusively presumed to be within the ordinary course of business between the parties.

In TWA, the creditor sold goods to the debtor on credit terms of net thirty days. Prior to the preference period, the parties completed seven transactions over a period of less than two years. Of the seven invoices paid by the debtor during the prior course of dealings, none of the invoices was paid within invoice terms. Instead, the invoices were paid in the range of 23 to 158 days after their due date and an average of 69 days late. In contrast, the alleged preferential transfer paid one invoice within the 30-day credit terms.

In lieu of a trial, the parties submitted a joint trial brief containing stipulated facts and arguments from which the court made its decision. The creditor argued that a payment made within credit terms is conclusively presumed to be within the ordinary course of business. The creditor asserted that the court should not look to the prior course of dealings, but, instead, focus solely on whether the debtor made its payment within the contract terms. The creditor likened its proposition to that of the holdings in many jurisdictions that payments made beyond the payment terms are considered as falling outside the ordinary course of business between the parties and are presumed to be non-ordinary. The court noted, however, that such presumption can be rebutted by an examination of the prior course of dealings, unlike the irrebuttable presumption proffered by the creditor.

In ruling against the creditor, the court found that a payment made within contract terms during the preference period, when the history of dealings between the parties was that of payments being made well outside such terms, is far more likely to be preferential than it is to be ordinary. In ruling against protecting all payments made within credit terms, the court acknowledged that Congress could have easily provided a ´┐Żbright line´┐Ż or presumptive rule to protect such transfers, but did not. In the end, the court found that the history of dealings between the parties made it clear that the alleged preferential transfer was not at all consistent with any of the transfers which were made in the prior course of dealings between the parties.

It is important to note the changes to the ordinary course of business under the Bankruptcy Amendment, as the creditor in TWA would have likely succeeded under the new laws had they been in effect. Under the new preference laws, the subjective and objective tests are disjunctive, meaning that a creditor must only prove one or the other, but not both as under the current law. Under facts such as those in TWA, a creditor could argue that payment within credit terms is ordinary for the industry, in order to satisfy its burden under the ordinary course of business defense (and also demonstrate that the debt was incurred in the ordinary course). Barring extraordinary circumstances, this should be a winning argument under the new laws, but only time will tell.

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