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Late Payments That Became Significantly Late During the Preference Period Resulted in Denial of Ordinary Course Defense

AFA Inv. Inc. v. Dale T. Smith & Sons Meat Packing Co. (In re AFA Inv. Inc.), Nos. 12-11127 Jointly Administered, 14-50134(MFW), 2016 Bankr. LEXIS 741 (U.S. Bankr. D. Del. Mar. 9, 2016)

March 9, 2016, Delaware – The Debtors AFA Investment Inc., et al. was one of the largest ground beef processing operations in the U.S. Defendant Dale T. Smith & Sons Meat Packing Company provided beef processing and packing services to the Debtors. During the preference period, the Defendant received twenty-five transfers totaling $2 million from the Debtors. The Debtors filed a complaint to avoid and recover the transfers as preferences. The Debtors argued that there were no disputed issues of material fact as to the prima facie elements of the preference action and they were entitled to judgment as a matter of law on all of the Defendant’s asserted defenses. The Defendant argued that the Debtors did not establish that the Defendant received more than it would otherwise have obtained in a hypothetical chapter 7 liquidation. In addition, the Defendant asserted that the ordinary course of business defense applies to the alleged transfers.

The Court agreed with the Debtor that the Defendant was an unsecured creditor, and unsecured creditors were slated to receive less than a 100% distribution under the Debtors’ confirmed chapter 11 plan. The Court found that the declaration of David Beckham, the Debtors’ former chief restructuring officer, who estimated zero recovery for general unsecured creditors and a reduced recovery for section 503(b) (9) claimants, was sufficient to establish that the Defendant would receive less than a 100% recovery in a hypothetical chapter 7 liquidation, even if a portion of its claims are afforded section 503(b)(9) status. The Court concluded that the Debtors made a prime facie showing that the transfers were preferential.

On its ordinary course argument, the Defendant asserted that late payment from the Debtors was an ordinary occurrence throughout the parties’ historical dealings. The Debtors responded that the difference in payment timing between the historical period and the preference period demonstrated that the transfers were not ordinary under the subjective test. The Court concluded that, even if the Debtors’ payments to the Defendant were late historically, the weighted average of the invoice-to payment period nearly doubled from 22.43 days during the parties’ historical relationship to 43.95 days during the preference period. This was sufficiently significant to defeat the ordinariness of the transfers. The Defendant also failed to demonstrate that the transfers were consistent with ordinary business terms in its industry. The Court ruled in favor of the Debtor.