Defending Preferential Transfers: The Ordinary Business Terms Defense- Part VI: Successful Use of the Ordinary Business Terms Defense
Despite these rather instructive failures, there have been a number of cases in which creditors have successfully prevailed using the ordinary business terms defense. For example, in the In re Global Tissue case, the debtor and a supplier were in the same industry, and the supplier successfully asserted an ordinary business terms defense by producing evidence of the average length of time it took to receive payments from all of its customers, including the debtor, and by showing that the debtor's payments were within this range. In In re GS Inc., a creditor/supplier on a construction project established that payments it received two months after shipping product to the debtor satisfied the ordinary business terms defense, where it was clear from testimony that payments in the construction business were based on a job's progress, not on counting the days from invoice, and that there was nothing unusual about the transaction which would render it outside the ordinary course of business for the industry.
In another Delaware bankruptcy case, a debtor's parts supplier provided expert testimony that payment terms of net sixty days, as specified in its invoices to the debtor, were consistent with existing practices in the automotive parts supply industry, and established that the payments were made according to ordinary business terms. In Arkansas, a creditor proved that eight prepetition transfers received from a Chapter 7 debtor fell within ordinary business terms where it was typical in the industry for customers to pay multiple invoices with a single check, and for customers to pay within 50 to 80 days after receiving invoices, as the debtor did. Finally, in the In re Safety-Kleen Corp. bankruptcy case, even without evidence of industry norms, the court accepted a creditor's argument that the creditor, a customer of the Chapter 11 debtor, had received a refund of an overpayment, where the debtor had initiated the refund process as soon as it discovered the customer's duplicate payment and promptly issued a refund check to the customer.
Finally, under rare circumstances, the creditor's own trade terms might constitute the relevant industry standard where the alleged preferential transferee dominates the relevant industry to such an extent that its business practice essentially constitutes the industry standard, and its dealings with the debtor are consistent with its dealings with other customers.
Conclusion and Practice Pointers
The ordinary business terms defense, like the ordinary course of business and new value defenses, is a potent weapon in a creditor's preference defense arsenal. But, like any defensive weapon, the creditor must be aware it exists, and know how to use it effectively. Before you're faced with the next demand to return alleged preferential payments, prepare yourself by taking a few minutes to contemplate the following:
- Never simply pay the preference amount demanded by the debtor; there is nearly always a way to negotiate a much better deal.
- When preference period payments do not compare well with pre-preference period transfers, consider establishing an "ordinary business terms" defense, and explore the use of other defenses, such as the “new value” defense.
- Keep an eye out for a reasonably-priced "expert" in your industry. Remember, a retired credit professional, trade group representative, or other person knowledgeable of trade practices in your industry during the relevant time period may be all you need.
- Be aware of relevant sources of credit information for your industry, such as Dun & Bradstreet, Credit Research Foundation, Risk Management Association, or trade groups in your specific industry. Ask yourself whether your credit terms and collection periods are comparable to those of others in your industry. If not, be prepared to distinguish the unique facts of your credit relationships from those of others in your industry.
Be able to show the credit terms you offer a financially-troubled customer are comparable to credit terms you offer similarly-situated customers (in terms of their size, purchases, geographic location, and other relevant factors). In the alternative, be able to show you have a long-term (three or more years) business relationship with the customer using consistent credit terms, even if those terms vary somewhat from industry norms.