Section 6.15 Ordinary Course of Business

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

2. (§6.15) Ordinary Course of Business

BAPCPA, effective for cases filed after October 17, 2005, expands the ordinary course defense. Under prior 11 U.S.C. § 547(c)(2), a creditor was required to prove that the transfer was made:

· in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;

· in the ordinary course of business or financial affairs of the debtor and the transferee; and

· according to ordinary business terms.

Prior § 547(c)(2). The second element has been referred to as the “subjective test” because it focuses on the course of dealing between the parties, and the third element has been referred to as the “objective test” because it looks beyond the parties’ relationship to what is ordinary in the relevant industry. Under prior § 547(c)(2), the creditor had the burden of proving all three of these elements.

Current § 547(c)(2) provides that the trustee may not avoid a transfer if either the subjective or the objective element is satisfied. Thus, under BAPCPA, a creditor may qualify for the defense if the payments in question were consistent with the history established between the parties over the course of their relationship, even if their practices were not consistent with industry practice. Alternatively, a creditor who cannot establish a long-standing payment history, or who cannot establish that the payments in question were consistent with other payments throughout the parties’ history, may nonetheless qualify for the defense if the payments in question were consistent with industry practice.

The requirement that the underlying debt on which the payment was made must have been incurred in the ordinary course of business or financial affairs of both parties does not change under BAPCPA. An analysis of this element requires an inquiry into whether the debt was incurred in a typical arms-length commercial transaction or whether it was incurred as an insider arrangement with a closely held entity. Provided that these criteria are met, long-term or first-time debt may qualify as debt incurred in the ordinary course of business. In re Finn, 909 F.2d 903, 908 (6^th Cir. 1990) (first-time transaction may qualify as
long as it is the type of transaction not out of the ordinary
for similarly situated parties); In re Valley Steel Corp., 182 B.R. 728, 735 (Bankr. W.D. Va. 1995). While most commonly applicable to payments on trade debt, this defense is not limited to...