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Ordinary-Course Preference Defense
Congress' one-word change to the ordinary course of business preference defense will make this already common preference defense even more prevalent. The Bankruptcy Abuse Prevention and Consumer Protection Act's ('BAPCPA') substitution of an 'and' for an 'or' to the defense's elements should significantly assist the typical unsecured creditor in defending a preference claim, and, in most cases, enable the creditor to defend the claim without an expert witness.
Section 547(c)(2): Ordinary Course of Business Defense
The legislative history behind ' 547(c)(2)'s ordinary course of business defense states that its purpose 'is to leave undisturbed normal financing relations because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or [its] creditors during the debtor's slide into bankruptcy.' HR Rep No 95-595 at 373, as reprinted in 1978 USCCAN 5963. The defense, as amended by the BAPCPA, provides that a transfer may not be avoided to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was '
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms. (Emphasis denotes new language).
Like prior law, the BAPCPA continues the requirement that the debt be incurred in the ordinary course of business of the debtor and the transferee. However, the amended language now provides that meeting either subsection (A) or subsection (B) is sufficient. Courts have interpreted the requirements of (A) to be a subjective test ' ie, that the transfer be ordinary in relation to the other business dealings between that creditor and that debtor. Courts have interpreted the requirements of (B) to be an objective test ' ie, that the transfer be ordinary in relation to prevailing standards in the relevant industry. Prior to the BAPCPA, the ordinary-course defense was written in the conjunctive; a creditor had to show that the transaction was ordinary both subjectively and objectively. The BAPCPA's one-word change significantly relaxes the standard for a transfer to be considered ordinary course because a transfer now need only be subjectively or objectively ordinary course to qualify for the defense. The BAPCPA's changes to the ordinary course defense apply to bankruptcy cases commenced on or after Oct. 17, 2005. Thus, conduct today will be subject to the amended statute.
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