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Judge Walrath Rules in Favor of Preference Creditor Due to Successful Ordinary Course of Business Defense

By Evan T. Miller

On October 2, 2013, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware issued her Memorandum Opinion in Burtch v. Texstars, Inc. (In re AE Liquidation, Inc., et al.), Adv. No. 10-55502 (MFW), concluding that judgment should be entered in favor of Texstars, Inc. (“Defendant”) due to its satisfaction of the ordinary course of business factors provided for under 11 U.S.C. § 547(c)(4).  Plaintiff Jeoffrey L. Burtch, Chapter 7 Trustee for the estate of AE Liquidation, Inc., et al. (“Debtors”, and together with Defendant, the “Parties”), filed the complaint (the “Complaint”) seeking to avoid preferential transfers against Defendant pursuant to 11 U.S.C. § 547.

Debtors developed and manufactured private jets known as the Eclipse 500.  Defendant manufactured parts that were designed parts specifically for Eclipse 500 jets.  Defendant invoiced the Debtors with net-30 day payment terms, although Debtors routinely paid invoices beyond these terms.  Shortly before the Preference Period, Debtors began experiencing financial hardships, prompting Defendant to send a letter (the “Letter”) informing Debtors that failure to pay the existing accounts receivable would result in cessation of Defendant’s production.  Defendant would then require payment in full of all outstanding invoices before it could restart production and resume shipping products.

On November 25, 2008, Debtors filed for protection under chapter 11 of the Bankruptcy Code, by which time they had made nine Preference Period transfers (the “Transfers”) to Defendant totaling $781,702.61.  On November 19, 2010, Plaintiff filed the Complaint.  On March 14, 2011, Defendant filed an answer to the Complaint in which it admitted receipt of the Transfers, but asserted the ordinary course of business and new value defenses provided for under 11 U.S.C. § 547(c)(2) and (4) respectively.  Given that Plaintiff conceded Defendant’s new value amount, the only issue the Court considered was the 547(c)(2) defense.

The Court found the first element of 547(c)(2) satisfied because the Transfers were on account of debts incurred by Debtors in the ordinary course of business.  The Court conducted a more detailed analysis of the second element of 547(c)(2), which required Defendant to demonstrate that the Transfers were made in the ordinary course of business between the Parties.  The Court considered the entirety of the Parties’ relationship and found:

  • Length of the Parties Relationship: more than two years was sufficiently long to establish an ordinary course of dealings between the Parties.
  • Similarity of Transfers: in comparing the days-to-pay averages between the pre-Preference Period and Preference Period, the Court rejected Plaintiff’s method of calculating timing based on the invoice date and check “cut” date, favoring instead Defendant’s method using the invoice date and the “clearing date”.  Regardless, the Court found the resulting differences between the methods to be insignificant (payments made 10% quicker in the Preference Period using Defendant’s method vs. 15% using Plaintiff’s method).
  • Manner of Tender: the Transfers were made via overnight checks and wire payment, both deviations from the pre-Preference Period methods.  However, the Court agreed with Defendant that since Defendant did not request the change, the change should not be held against it.  Moreover, since the timing of payment did not significantly differ, the change in manner of payment alone would not take it outside of the ordinary course of business.  This position reinforces Judge Walrath’s earlier 2013 decision, Burtch v. Prudential Real estate and Relocation Services, Inc. (In re AE Liquidation, Inc.), 08-13031 (MFW), 2013 WL 3778141 (Bankr. D. Del. July 17, 2013).
  • Collection Efforts: the Court rejected Plaintiff’s argument that the Letter constituted an unusual collection effort sufficient to bring the Transfers outside the Parties’ ordinary course of business.  The Court agreed with Plaintiff that the Letter did not threaten termination of shipment, it simply stated the costs of restarting production.  Moreover, the Court found no meaningful difference in the amount or timing of the payments following Debtors’ receipt of the Letter.
  • Advantage in Light of Debtors’ Condition: the Court found that, while Defendant was aware of Debtors’ financial problems, it did not seek to take advantage of Debtors’ position to the detriment of other creditors, such as seeking immediate payment.

For the foregoing reasons, the Court found that Defendant established that the Transfers were within the parties’ ordinary course of business.

A copy of the opinion can be found here.

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