RECENT CASE CONFIRMS: DON’T PAY A PREFERENCE DEMAND WITHOUT FULL ANALYSIS OF POTENTIAL DEFENSES
If you are engaged in any type of business enterprise, the unfortunate reality is that one or more of your customers may file bankruptcy at some point. Not only does this mean that you may be out of luck collecting on open invoices, but perhaps even more egregiously, you might be threatened with a lawsuit as a preference defendant in a court far away with demands that you return money that you were paid for products or services you actually provided to the debtor. These so-called preference claims usually start with a demand letter from counsel for the debtor, a trustee, or a committee like an unsecured creditors committee. These types of claims have been extensively litigated and there are statutory defenses available to payment. The law is constantly evolving as to how these various defenses should be applied though. One of the primary defenses that is fluid is the “ordinary course of business” defense. That defense can involve looking at the age of invoices paid during ninety days prior to bankruptcy as compared to other times. In determining whether or not invoices were paid “in the ordinary course,” bankruptcy courts can apply several tests including an average lateness test, a total range test, a bucketing test and others. The court has significate latitude in which of these tests to employ and how to employ them.
Earlier this year in the United States Bankruptcy Court for the Eastern District of New York, a judge’s preferable application of these tests to a defendant’s claims resulted in a win for the preference defendants (Ryniker v. Bravo Fabrics, Inc. (In re: Décor Holdings, Inc., et al.)). The defendants laid out their case well and demonstrated which tests should be applied and why.
The litigation administrator in that case on behalf of the plaintiffs was not happy with the outcome and appealed to the United States District Court for the Eastern District of New York. Just this past month, the District Court handed down its opinion affirming the Bankruptcy Court’s ruling for the defendants. This case and others show that by carefully analyzing preference exposure and available defenses, considerable reduction or even elimination of preference liability can be achieved.