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Ordinary Course Of Business Defense Under The Bankruptcy Abuse Prevention And Consumer Protection Act Of 2005 |
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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”) has modified Section 547(c) to provide that if the indebtedness can be shown to have been incurred in the ordinary course of business and paid in the ordinary course of dealing specifically existing between the debtor and creditor, a trustee cannot demand that those payments must be repaid to the bankruptcy estate even if they were made within the ninety day period prior to the filing of the bankruptcy petition. This showing is sufficient under the Act, whereas previously it would have been necessary to also establish that the pattern of payments also conformed to industry standards. The National Bankruptcy Review Commission Report underlying the Act states that “the conduct between the parties should prevail to the extent that there was sufficient pre-petition conduct to establish a course of dealing.”
Keep in mind when asserting this defense that the Court in In re Buyer’s Club Markets, Inc., 123 B.R. 895, 899-900 (1991)* clearly holds that if a debtor enters into a payment plan to address arrearages and makes payments required by the plan, that payment plan becomes the ordinary course of business between the parties. This adds a very substantial dimension to the ordinary course of dealing exception. *On January 3, 1989, Buyer's Club cut a check payable to Hirschfeld in the amount of $130,243.09 in full satisfaction of its outstanding balance. Wilkes-Schatz testified however, that Jim McFadden, the then comptroller of the company, directed her to "void out" the check because of insufficient funds in the Buyer's Club account, and the check was voided on January 31, 1989. (See Trustee's Exhibit B-7). Buyer's Club's delay in paying this large invoice prompted Borer to contact the company on January 27, 1989.12 The result of Borer's discussions with McFadden was that, on January 31, 1989, the first of several "new" payment arrangements was entered into between the parties. On that date, Buyer's Club agreed to pay Hirschfeld $50,000 per week toward outstanding invoices, and in fact issued a check in the amount of $50,000 on February 1, 1989. Hirschfeld contends that this latest arrangement became their new ordinary course of business. Although we agree that there is authority to support this proposition, First Software Corp. v. Micro Educ. Corp. of Amer., 103 B.R. 359 (D.Mass.1988), the instant facts do not sustain such a finding. For instance, during the time in question, Buyer's Club held daily meetings with its staff to determine which creditors it could pay,13 and on February 15, 1989, because of constant cash shortages, amended its agreement with Hirschfeld to pay $25,000 every other week. Unhappy with this new arrangement, Borer attempted to obtain interest on the outstanding balance, but this was not agreed to by Buyer's Club. Finally, in late March, 1989, James Stuart, the new comptroller for Buyer's Club, sought to initiate yet a third payment schedule, and sent a letter to Borer stating that Buyer's Club intended to increase its payments to $50,000 per week, as of April 6, 1989, until the balance was paid off. (See Hirschfeld's Exhibit 3). However, the day before this latest "new deal" was scheduled to commence, Buyer's Club filed its Chapter 11 petition. While there is no direct evidence that Hirschfeld actually coerced the debtor into making these payments, such actions are irrelevant to our determination of whether a particular payment scheme was in the ordinary course of business. In fact, these payments could have been made at the insistence of the debtor, and still would be preferential. We hold that this type of payment plan, entered into during a period of cash flow shortage, is not in the ordinary course of business, unless specifically agreed to as the new "modus operandi" of the parties. There is no evidence to support such a finding or conclusion. The various and changing payment plan negotiations were in such flux that no new agreement could reasonably be considered to have been established, and no pattern was instituted that could constitute a new ordinary course of business. |
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