Free Consultation

Preference Actions: What is the “Ordinary Course of Business” Defense?

D-FenceIn a previous post (“Defenses to Preference Actions – Part I“), I explained that there are three common defenses to preference actions (also often called “preference lawsuits”) that you can use if you’ve received a demand letter from a bankruptcy trustee, from counsel to a Debtor-In-Possession or counsel to a creditors committee.

The first one I’ll explain is called the “Ordinary Course of Business” Defense.

Simply put, under the “Ordinary Course of Business” Defense a creditor makes the case that the payment they received from the debtor was not a payment for an outstanding debt, but rather a payment made in the “ordinary course of business.”

Example:

You’ve been providing materials, goods or services to the debtor for several years (i.e., before it became known as “the debtor”).  Every month you sent an invoice to the debtor.  Every month the debtor paid it.  Then one day the debtor filed for bankruptcy.  So you ended your relationship with the debtor and that was that.

Or so you thought.

Now it’s a year later (a trustee has 2 years from the date of a bankruptcy filing to initiate a preference action against a creditor), and you get a demand letter in the mail saying you owe money to the debtor’s estate.  The amount is the same as the last transaction you did with the debtor, right before they filed for bankruptcy.

“This is crazy,” you think.  “As an avid reader of the NYBankruptcyNet blog, I know full well what a preference is.  And I don’t think my transaction constitutes a preference.”

And you’re right.  A payment made in the ordinary course of business by the debtor to  the vendor, or a payment made to the vendor under “ordinary business terms,” is a valid defense against a preference action.*

You know that.  I know that.  And if the trustee is up on her bankruptcy law, then she knows that as well.  Great, so everyone can just forget this ever happened and go home, right?

Wrong.  Because the trustee’s duty is to recover as much as possible for the debtor’s estate.  So if you want to keep your money, you’re going to either have to prove your case in the bankruptcy court or negotiate a settlement with the trustee.

Still, it’s better than having no defense.  And it means that with the help of an experienced bankruptcy lawyer, you can sidestep the preference action.  Or at least negotiate a better result than you would without the “Ordinary Course of Business” Defense.

If you’re the subject of a preference action in New York, please contact me for a free consultation.

As a New York bankruptcy lawyer who has experience on both sides of New York preference lawsuits-–the trustee side as well as the creditor site–-I know the lay of the land, and I’ll help you figure out the best strategy for your situation.

*Note:  Before the 2005 bankruptcy law went into effect, the Ordinary Course of Business Defense required you to prove that the transaction was (1) in the ordinary course of business and (2) that the payment was made under “ordinary business terms.”  Under the 2005 law, it’s “or” instead of “and,” which means you only have to prove one or the other.

Go to Bankruptcy Attorney Brooklyn NY to learn more about Rosenberg Musso & Weiner LLP and/or to set up a free consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

Recent Posts

NEW CORONAVIRUS STIMULUS BILL MAKES IT EASIER FOR CONSUMERS AND SMALL BUSINESSES TO FILE FOR BANKRUPTCY

The $2 trillion “Coronavirus Aid, Relief and Economic Security Act” (CARES Act), signed into law by President Trump on Friday afternoon. provides financially distressed consumers and small businesses with greater access to bankruptcy relief. Key bankruptcy provisions within Section 1113 of the CARES Act include: Amending the Small Business Reorganization Act of 2019 (SBRA) to

Read More »

Stay Clear of Payday Lenders, Bankruptcy Is So Much Safer

For too many people, bankruptcy feels like giving up. Choosing other, riskier options may make them feel as though they’re still in control, and who knows? Maybe things will turn around for them. They run down their savings, rely on credit cards, and then as a last resort make a visit to a payday lender.

Read More »

How to Deal with “Zombie Debt” Collectors in New York

At some point, if it believes it will never be repaid, the original bank that makes a loan will sell it to a debt collection company. The loan will be bundled with numerous other ones in the sale, and the price will be a fraction of the total value of the loans. Because of the small

Read More »

How to Use Bankruptcy to Reduce Auto Loan Payments in New York

Many New Yorkers have difficulty with auto loans. In some cases, the car’s value has depreciated significantly, making resale difficult, and in others the car was over-financed to begin with, which is more common when the dealership plays the role of lender as well. Unlike the underwater mortgage, the bankruptcy code offers solutions that are

Read More »
Scroll to Top