Fireworks in the Sky But Not in Court: Bankruptcy Judge Takes Practical Approach to Ordinary Course of Corporate Defense | Patterson Belknap Webb & Tyler LLP

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A recent ruling applied the normal course of trade defense to a preferential transfer request where the parties had only made two transactions. In re Reagor Dykes Motors, LP, Case No. 18-50214, Adv. No. 20-05031, 2022 LEXIS 70 (Bankr. ND Tex. Jan. 11, 2022). The court took a hands-on approach to the defense, given the lack of a detailed billing and payment history between the parties.

The basic facts are simple. Every Independence Day, a charity organizes a fireworks display in Lubbock, Texas. The cost of the show is paid by local businesses. In 2017 and 2018, the fireworks were sponsored by a local car dealership.

In 2017, the charity sent the dealer an invoice for the sponsorship on February 16, 2017, and the dealer paid on May 24, 2017. In 2018, the invoice was sent on May 14, 2018, and payment was made July 13, 2017. 2018.

In August 2018, the car dealership filed for Chapter 11 bankruptcy. A bankruptcy trustee sued the charity to reverse and recover the 2018 payment it received as a preferential transfer . In response, the charity argued, among other things, that the payment was protected by the normal course of trade defence. Thus, the court analyzed whether the defense applied in light of the limited business relationship between the charity and the car dealership.

An assignment is privileged when it relates to property in which a debtor has an interest, and if the assignment was:

(i) to or for the benefit of a creditor;

(ii) for or in respect of a prior indebtedness;

(iii) made while the debtor was insolvent;

(iv) made within 90 days of filing for bankruptcy; and

(v) allowed the transferee to receive more than if it were a liquidation under Chapter 7 of the Bankruptcy Code.

11 USC § 547(b).

In Reagor Dykes, the parties agreed that all elements of Section 547(b) applied, unless the transfer was made because of a “prior indebtedness”. The court observed that the debt arose and the dealer became obligated to pay the bill for 2018, when the dealer received the sponsorship benefits during the 4th of July event. Thus, according to the court, the July 13 payment was in respect of a previous debt.

The trustee opposed the application of the defense in the normal course of business given the scarcity of transactions between the parties. The defense can be satisfied on the basis of a subjective or objective test. The subjective test takes into account the history of invoices and payments between the specific parties. 11 USC § 547(c)(2)(A). The objective test considers whether the invoice and payment history were up to industry standards. 11 USC § 547(c)(2)(B). The charity claimed the application of the injury test.

The court noted that it can be difficult to determine whether a transaction is ordinary. 2022 Bank. LEXIS 70, at *17. Factors include:

  • the length of time the parties have participated in the transaction;
  • if the amount or form of the offer differs from past transactions;
  • if the debtor’s payment or the recipient’s collection efforts are unusual;
  • the circumstances under which the payments were made; and
  • whether the assignee has benefited from the deterioration of the debtor’s financial situation.

Identifier. (citing Jubber versus SMC Elec. Products. Inc. (In re CW Mining Co.)798 F.3d 983, 991 (10th Cir. 2015)).

Applying these factions, the court of Reagor Dykes ruled in favor of the charity. 2017 and 2018 payments were made more than 30 days after invoicing. The 2017 payment was made before July 4, while the July 2018 payment was made after that date. But, the court found, the significance of that difference was “marginal.” The evidence also showed that in general the charity did not undertake any fundraising efforts and made none in relation to the 2018 event.

Additionally, the car dealership had paid the bill as part of “its practice of donating for community events.” This was an “annual deal” that bought the concessionaire publicity and goodwill in the local community. There was also no evidence that the dealer favored the charity over other creditors as it neared bankruptcy, a filing that was ‘sudden and unexpected’. 2022 Bank. LEXIS at *22. In short, because the court found nothing “unusual” about the 2018 transaction, it ruled that the normal course of trade defense applied to protect the payment the charity received. .

Fortunately, the charity was able to secure sponsorship for the fireworks display in 2019 – from a local law firm.

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