Siegel v. Russellville Steel (In re Circuit City Stores Inc.)1 uniquely demonstrates the challenges of proceeding with a preference case in which certain defenses are not developed for trial. Many times, counsel and client may consider the objective ordinary course of business defense of § 547(c)(2)(B) of the Bankruptcy Code,2 which provides that a transfer cannot be avoided as a preference to the extent it was made according to “ordinary business terms,” only to rule out such a defense due to the cost associated with preparing an extensive analysis. However, while certain preference actions may require a complex and sophisticated analysis of ordinary industry terms, a basic analysis of the objective ordinary course of business defense can often be developed with limited cost.3
Significant updates to the Bankruptcy Code were made as part of the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which eased the burden of proof required of creditors in bankruptcy preference actions. Prior to BAPCPA’s enactment, § 547(c)(2) required creditors to prove that the transfer at issue was both ordinary between the debtor and the transferee (the subjective test) and ordinary in the industry (the objective test). When BAPCPA became effective, the ordinary course of business defense became less arduous to creditors as they no longer had the burden of proving both measures. Rather, they now only need to satisfy either the subjective test or the objective test.
In In re Circuit City Stores Inc., although the payments made during the preference period were delayed relative to the “net-30” agreement between the parties,5 all payments throughout the relationship were late, as the preliquidity days-to-pay window ranged from 31-41 days. Other courts have held that “late payments can fall within the ordinary course of business exception if the prior course of conduct between the parties demonstrates that those types of payments were ordinarily made late.”6 Here, the three payments during the preference period were made 45, 46 and 51 days after the invoice date, all of which exceeded the preliquidity payment window. While some courts have opined that “[i]t seems ill-advised to rely too heavily upon a difference of a few days,”7 the In re Circuit City Stores Inc., Court, stated that the totality of the evidence that was presented, ruled that the payments were not subjectively ordinary between the parties.
Peculiarly, despite the fact that this was a post-BAPCPA case, the defendant in In re Circuit City Stores Inc. chose not to offer any evidence regarding the objective ordinary course of business defense outlined in § 547(c)(2)(B).8 The court noted that “[s]ince the defendant has the burden of proof… the court treated the potential defense afforded by § 547(c)(2)(B) as abandoned.”9 It is not known why the defendant did not present evidence pertaining to the objective ordinary course of business defense. However, it does appear that its absence focused the court’s analysis solely to the subjective ordinary course of business defense, which, as noted, ultimately proved to be unsuccessful.
Had the defendant pursued the objective ordinary course of business defense,10 considerations may have included both quantitative and qualitative industry analysis and research relating to both the debtor and the creditor and their respective industries. While defense counsel may consider proofs associated with the objective ordinary course of business defense to be costly, complex, sophisticated and requiring expert witnesses, this is not necessarily true in all cases.
In fact, in certain instances, it is possible to identify significant information to assist in presenting evidence in support of this defense utilizing limited and less-costly measures. For example, the defendant in In re Circuit City Stores Inc. could have considered a quantitative industry analysis based on payment days outstanding in the steel and electronics industry. As specific details for payment days outstanding is often limited in common research sources, similar metrics, such as accounts receivable days outstanding (ARDO) and accounts payable days outstanding (APDO) may be useful in evidencing ordinary industry practices. Such standard industry metrics can be accessed from multiple sources, including, but not limited to, Capital IQ, Dun & Bradstreet and IBIS World. Contingent on the availability of data, defendants can also define ordinary industry terms using information specific to the debtor-creditor relationship. Suitable data could include the creditor’s internal records with historical invoices and subsequent payments, which establish a standard timeline in similar transaction relationships with other similar companies.11 Finally, the defendant could have complemented the industry analysis with relevant macroeconomic or industry-wide factors impacting the time period under scrutiny. Market expansion, contraction and volatility can all play an important role in short-term lending practices, as well as the recession’s impact on liquidity and consumer spending on a macroeconomic scale.
Counsel and clients often believe that this data and the related analyses are costly and complex. While this can be true, it does not always have to be the case. In fact, much of the information necessary to prepare an objective ordinary course of business defense is available in the client’s own records, online or from other publicly-available sources.
If the defendant in In re Circuit City Stores Inc. had presented an objective ordinary course of business analyses, there may have been a different outcome. However, as the defendant failed to present any evidence with respect to this defense, the court was left only to consider its subjective ordinary course of business defense.
1 Siegel v. Russellville Steel (In re Circuit City Stores Inc.), 2012 WL 1981781 (Bankr.
E.D. Va. June 1, 2012).
2 Section 547(c)(2) provides as follows: (c) The trustee may not avoid under this section
a transfer – (2) 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; 11 U.S.C. § 547(c)(2).
3 Although the Bankruptcy Code sets forth a number of defenses to a preference action,
this article will focus solely on the ordinary course of business defense of § 547(c)(2).
4 4. Id. at *4.
5 Id. at *1.
6 Sulmeyer v. Suzuki (In re Grand Chevrolet Inc.), 25 F.3d 728 (9th Cir. 1994); Lovett v.
St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991); Yurika Foods Corp v. United
Parcel Service (In re Yurika Foods Corp.), 888 F.2d 42, 44 (6th Cir.1989).
7 Brown v. Shell Canada Ltd. (In re Tennessee Chemical Co.), 112 F.3d 234, 237
(6th Cir. 1997).
8 Id. at *2.
9 Id. at *1.
10 Id. at *2.
11 For instance, if a debtor consistently pays invoices past their due date throughout the debtorcreditor relationship, these late payments can be considered “ordinary” although the
related contract may not agree. See, e.g., Payne v. Clarendon National Insurance Co. (In re Sunset Sales Inc.), 220.