On March 3, 2016, the U. S. Bankruptcy Court for the District of Delaware in Forman v. Moran Towing Group (in the legal case of AES Thames, LLC, et. al., Case No. 13 A 50395) adopted a creditor-friendly approach when analyzing whether a vendor has a valid ordinary course of business defense.
In Thames, the debtor paid its vendor based on the loaded quantity of cargo (i.e., coal) being shipped to the debtor. Under the contract between the parties, the vendor generated an invoice within 10 days after the loading of a vessel. The agreement further provided that on the 25th day of each month (or, if the 25th was not a business day, then the first business day thereafter), the debtor would pay the vendor for all cargoes loaded during the previous calendar month. When analyzing the timing of the debtor's payments, one could choose to review the number of days between the loading date and payment, the invoice date and payment, or the due date and payment. While the vendor argued any of the three dates were applicable, the court found that measuring the time from load date to payment or from invoice date to payment does not reflect whether the payments were timely or whether there was a consistency to the payments.
During the preference period (90 days before the bankruptcy date), the debtor made two payments to the vendor, and those payments were made 19 days (covering five invoices) and 10 days (covering three invoices), respectively, after the applicable due date. The trustee argued that the debtor historically paid the vendor on average 2.45 days after the due date, while during the preference period the debtor paid the vendor on average 15.63 days after the due date. The trustee also argued that during the lengthy historical period, only 4 of 164 invoices (or 2.44%) were paid 10 days or later after the due date. Therefore, the trustee concluded that the alleged preference payments did not conform to more than 97% of the payments during the historical period.
The vendor argued in response that historical payments ranged between 28 days before and 35 days after the due date. Therefore, the range of payments during the preference period (10-19 days) falls within the historical range. The court, in ruling in favor of the vendor, found that the trustee's reliance on the average payment time did not present a complete picture of the payment history. After reviewing the parties’ entire payment history, the court found that a late payment of 10 or 19 days, although infrequent, was not unprecedented in the parties' relationship. Moreover, the other factors to be considered in analyzing an ordinary course of business defense all fell in favor of the vendor. The amount of the transfers fell within the historical range of the amount of payments; the payments continued the debtor's practice of paying a number of invoices together for all cargo shipped in the previous month. The alleged transfers, like all payments during the historical period, were made by wire transfer. The parties stipulated that the vendor did not take any unusual action to collect on the invoices paid during the preference period, and there was no evidence that the creditor did anything to gain an advantage over other creditors during the preference period. The court therefore concluded that the business relationship between the vendor and the debtor fell within the type of relationship the ordinary course of business defense is intended to protect.
The moral of the story is that a vendor should not be intimidated by a trustee’s statistical analysis of past practices when the actual relationship between the parties suggests a different conclusion. The ordinary course of business defense can be interpreted broadly to cover a wide range of payments and vendors should not hesitate to aggressively assert this defense when faced with preference litigation.
- Harold D. Israel and Brian J. Jackiw, Goldstein & McClintock LLLP