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New Jersey Court – Relevant Inquiry for Determining Ordinary Course Analysis is Whether Transactions Reflect Divergence from Industry Norms

Dots, LLC v. Milberg Factors, Inc. (In re Dots, LLC), 562 B.R. 286 (Bankr. D.N.J. 2017)

Debtor Dots, LLC was a women’s discount clothing retailer. Defendants Finance One, Inc. and Milberg Factors, Inc (Factors) operate as financing and factoring companies. The relationships between Dots and the Factors arose out of an arrangement between Dots, the vendors, and the Factors. Dots purchased its products from multiple vendors. Dots placed orders for goods with the vendors, and the Factors approved and purchased the accounts from the vendors. The vendors then shipped goods to Dots, and Dots made payments for those goods directly to the Factors. Significantly, the Factors did not enter into any agreement directly with Dots. Sometime in late 2012 and early 2013, the Factors adjusted the credit lines and reduced the amount of credit made available to the vendors for sales to Dots. This credit line adjustment had the effect of reducing the amount of new inventory that Dots could purchase on credit. To maintain a historically consistent level of inventory purchases and expand credit availability, Dots began to anticipate payments and pay for the goods earlier than required by the terms of their invoices. However, the Factors never formally changed the terms of the vendors’ invoices.

Dots filed for bankruptcy and subsequently commenced adversary proceedings against the Defendants to avoid transfers made by Dots to Factors as preferential payments under § 547(b). The Defendants asserted that the transfers were not voidable because they have valid affirmative defenses under §547(c). According to Dots, the mere fact that the parties’ credit relationship changed during the preference period was sufficient to preclude a finding that the challenged transfers were made according to the ordinary business terms.

The Court disagreed and opined that the examination should be focused primarily upon whether the transactions reflected a divergence from industry norms. To determine whether the transactions, in this case, were made under ordinary business terms of the creditor’s industry, the Court ascertained that it must have a more comprehensive understanding of the sector in which these parties operated and the inquiry must extend into the industry of “factoring sales to clothing retailers.” Adding further, the Court said that a more extensive research was required to determine the Defendant’s ordinary business terms defense, i.e., whether the Factors’ credit line adjustments were carried out with the goal of coercing payment, or rather, reducing exposure consistent with industry practices.

The Court also held that the affirmative defenses under §547(c) had to be available in the order that the Defendant deemed most advantageous. The Court also found that the Defendant provided new value under §547(c)(4) in the form of goods because the Defendant held title to the goods that were shipped ultimately to the Debtor. The Court denied the Trustee’s Motion for summary judgment.


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