Wrestling With the Meaning of 'Ordinary' Under the Bankruptcy Code

But there is another risk that can be even more frustrating. One of the basic policies of bankruptcy law is that creditors who receive payments on antecedent debts as the debtor slides into bankruptcy may have those payments recovered by the bankruptcy estate as a preference. In the face of this risk, suppliers have taken comfort knowing the Bankruptcy Code protects regular, ordinary commercial transactions between distressed companies and vendors willing to continue the relationship. But what is ordinary? For decades, courts have wrestled with this question. And it can involve significant sums. In a recent decision of the U.S. Bankruptcy Court for the Southern District of Indiana in the Chapter 11 case In re HHGregg, (Adv. No. 17-50282), a supplier whose invoices were paid consistent with payment terms was nevertheless held liable for $3,517,805.06 plus prejudgment interest as a preference.

The Parties' Billing and Payment Behaviors

The debtors in the case, HHGregg and affiliates, were an appliance and consumer electronics retailer chain that operated 220 brick-and-mortar locations in 19 states and online. Following several years of financial distress, they filed Chapter 11 bankruptcy petitions on March 6, 2017. Pursuant to an order entered in May 2017, as is often the case, control of the debtors' preference claims was assigned to the Official Committee of Unsecured Creditors appointed in the case. On Nov. 17, 2017, the committee filed a complaint against D&H Distributing Co., seeking to avoid payments in the total amount of $4,687,308.20 as, among other things, preferential payments pursuant to Section 547(b) of the Bankruptcy Code. In response to the committee's motion for summary judgment, the court entered an order on May 6, 2020, ruling that the committee had established the elements of a preference claim, but reserved for trial the question of whether any of the transfers were not subject to avoidance because they qualified as ordinary course payments between the parties, and therefore were protected by the affirmative defense set forth in Section 547(c)(2) of the Bankruptcy Code. Trial was held on July 7 and 8, 2021.