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Preferences Part 3 – Defenses: Ordinary Course of Business

Part 2 of this series discussed the importance of maintaining and collecting thorough records. Accurate and complete records will allow an attorney to determine whether a payment is actually a preference or if there is a defense to a preferential payment. Knowing exactly when services were rendered or goods were delivered and the exact payment date will indicate whether certain payments fall outside the 90 preference period or are in fact avoidable as preferences.

The “ordinary course of business” defense is a common defense to a preference claim. Under the ordinary course of business defense, the creditor bears the burden of proof to show that the transfer in question was for payment of a debt incurred in the ordinary course of business or financial affairs of the debtor and the transferee. Payments that fall within the preference period, but were made pursuant to the normal course of business between the parties are not avoidable.

A creditor can prove the ordinary course of business test by establishing a pattern of the number of days between services rendered and payment. Using simple mathematical formulas, a creditor can extrapolate the historical payment data to establish a range of dates that constitute the ordinary course of business between the parties. The creditor can argue that all preferential payments that were made within this range of dates are not avoidable as preferences.

Congress enacted this defense to encourage vendors to continue providing goods and services to distressed debtors on the brink of insolvency. In dealing with distressed companies, vendors should attempt to collect payments under the ordinary course of business and be cognizant of the risks if payments begin to deviate from the ordinary course of business.

Authors

Allen M. DeBard

Author

Allen has a broad background in financial restructuring and creditors’ rights matters. Some of his representative matters include serving as counsel to lenders, official creditors’ committees, ...

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