In 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.”
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.