Carter called Northern immediately and was assured that payment would be becoming. And so it was, but not all at once. A check for just over $23,000 arrived on January 9, another for about $17,000 on February 2, a third for almost $32,000 on February 9, and a fourth, for a little over $16,000, on February 28.
As much as he regretted losing the Northern account, Carter was reassured and fully expecting the balance to arrive when, on March 14, he received notification that Northern had filed for bankruptcy protection. And, in due course, in came the demand from the Bankruptcy trustee for the approximately $87,000 that Northern had remitted in the 90 days prior to the commencement of its bankruptcy proceeding.
Carter is well aware that if he fails to respond, the Trustees will file suit, contending these were preferential payments and should be returned to Northern's bankruptcy estate. But he's also aware that the 2005 reforms of the Bankruptcy Act relaxed the ordinary course of business standards.
Does First Mobile have any serious chance of keeping the money?
Answer: No. Even the 2005 Bankruptcy Abuse Prevention & Consumer Protection Act's more relaxed standard for "ordinary course of business," payments will not protect these remittances from being collected by the Trustee.
The Bankruptcy Code says that monies transferred to a creditor within the ninety days before the bankruptcy filing, in payment of an antecedent debt, are "preferences" or "preferential payments." Because these payments tend to favor one creditor over another during a time frame within which it is assumed the debtor was insolvent or nearly so, the Bankruptcy Trustee can recover these monies from creditors in a suit seeking "avoidance" of the transfers.
Two Defenses
However, there are two Bankruptcy Code provisions that can protect a creditor from a bankruptcy trustee's avoidance suit. One is the "new value" defense of §547(c)(1); the other is the "ordinary course of business" defense in §547(c)(2).
Section 547(c)(1) requires that the funds be paid to the creditor as part of a contemporaneous exchange for new value and that both parties intend such an exchange for new value. This would require First Mobile to demonstrate, at a minimum, that it had made additional deliveries of fuel during the preference period. This is not the case here, so First Mobile cannot avail itself of this defense.
Section 547(c)(2). The other defense, known as the ordinary course of business defense, was somewhat loosened up in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (a.k.a. BAPCPA). This statute changed the requirements of the defense under this section to require creditors only to show the fund's transfers were: (A) made in the payment of a debt that was incurred by the debtor in the ordinary course of business of both the debtor and creditor; and either (B) made in the ordinary course of business of the debtor and creditor; or (C) made according to ordinary business terms. (The law before BAPCPA required the creditor to prove A, B, and C.)
So how will this defense apply in the case of First Mobile and Northern?
To satisfy the ordinary course of business defense, the first thing First Mobile will have to show is that Northern remitted the four checks to reduce a debt arising out of their usual business dealings. Assuming, as it is, that the $101,000 outstanding balance relates to First Mobile's regular fuel deliveries, subsection (A) poses no problem.
Next, let us see whether First Mobile can satisfy either subsection (B) or (C). To establish compliance with subsection (B), the creditor must show that the payment was subjectively ordinary between the parties. The overriding factor considered when determining whether a transfer is subjectively ordinary under the Bankruptcy Code is whether there is consistency between the payments the debtor made to the creditor before the preference period and the payments made during the preference period.
Further, consistency is typically evaluated by a comparison of two aspects of the parties' business relationship: the timing of payments made before and during the preference period and whether the creditor's collection efforts departed from the norm during the preference period.
Timing Issues--A Fine Analysis Required
First, let us look at the timing issues. Although there is some variation in the methods courts will use to assess the ordinariness of a preference period payment as compared to those made in the pre-preference period, it is well established that subsection (B) requires quite a fine or granular analysis. Some courts, for example, will accept the comparison of the statistical distribution of payments, others engage in comparing such mathematical calculations as average invoice age and percentage of timely payments.
Assuming the last invoice was sent in November or December 2010, corresponding with the last fuel delivery, Northern's final four payments to First Mobile were significantly later than was usual before the preference period. Further calculation of how many invoices were paid, say, on average within 45 days of receipt, presumably would also show a marked increase during the preference period. This lack of consistency in payment timing between the pre-preference and preference periods alone defeats subsection (B), without even looking at whether the four checks were the result of First Mobile stepping up its collection activities.
Industry Practices Considered
Subsection (C) is First Mobile's only remaining chance, and this requires that Northern's last four payments have been "made according to ordinary business terms."
Unlike subsection (B), which is a subjective inquiry, subsection (C) calls for an objective look at what others in the business do. As with subsection (B), courts here also vary in terms of what factors they consider. Some will look at the credit, collection, and payment practices of the debtor's industry as the benchmark. Others will use the credit and collection norms prevailing in the creditor's industry as the standard.
Either way, independent expert testimony is usually required to prove whether or not the preference payments are "typical." In this case, perhaps those late final payments after the closing of a particular oil lease were either normal in the fuel supply industry or in those industries that use petroleum to fuel their fleets. A review of competitors' practices during the actual preference period would be relevant.
Thus it seems unlikely that First Mobile will win against the Trustee.
Perhaps Carter should instead consider broaching the subject of a settlement, which might allow First Mobile to retain some portion of the funds in consideration of the expenses of litigation the Trustee would thereby avoid.
