New York Court Rules in Favor of Defendants on Their Ordinary Course of Business Defense
February 3, 2022, Eastern District of New York – Plaintiff Bryan Ryniker, the Litigation Administrator for the post-confirmation Debtors Décor Holdings, Inc., et al. commenced separate preference actions against three sets of defendants, all represented by Montgomery, McCracken, Walker & Rhoads LLP. Each defendant filed motions for summary judgment asserting the affirmative defenses of the ordinary course of business under § 547(c)(2) and the contemporaneous exchange for new value defense under § 547(c)(2). Plaintiff filed oppositions and cross-motions seeking summary judgment regarding their prima facie cases as to the preference claims.
The Court found the average lateness in all three cases as follows:
- Adversary Proceeding No. 21-8040: Average lateness during the baseline period is 40.55 days, and during the preference period is 36.71 days. The difference is less than four days.
- Adversary Proceeding No. 20-8133: Average lateness during the baseline period is 39.33 days, and during the preference period is 46.2 days. The difference is less than seven days.
- Adversary Proceeding No. 20-8125: Average lateness during the baseline period is 47.57 days, and during the preference period is 45.2 days. The difference is less than three days.
The Court highlighted that the relevant factors to consider when examining the ordinary course of business defense are:
- The prior course of dealing.
- The amount of payments
- The timing of the payments.
- The circumstances surrounding the payments.
The Court stated that no one factor is determinative regarding this issue. To determine whether transfers were in the ordinary course of business, the Court is charged with determining what the ordinary course of business was and then to compare the preferential transfers to it.
In the case at bar, the Court noted that the most extensive spread in averages between the baseline period and the preference period is less than seven days. Keeping in mind that there are scores of transactions during the baseline period in each case, coupled with the fact that there are sufficient transfers during the preference period in each case to analyze, the Court concluded that these averages provided sufficient evidence of an ordinary course defense to the otherwise preferential transfers. The Court further stated that there is no reason to go beyond the average lateness test, but even if the Court were to adopt the range of payment analysis, it would have been appropriate to further narrow the test by using the bucketing analysis. The Court stated that a bucketing analysis encompassing 82% of the payments made in the baseline periods for each case would capture all of the preference period payments in Adversary Proceeding Nos. 20-8125 and 20-8133, and all but one payment in the amount of $1,937.03 in Adversary Proceeding No. 21-8040.
The Court granted the defendants’ motions as to their ordinary course of business defense under section 547(c)(2)(B).
Décor Holdings, Et. Al.,1: Post Confirmation Debtors. Brian Ryniker, in His Capacity As: Litig. Adm’r of The: Post Confirmation Estates Of: Décor Holdings, 2022 Bankr. LEXIS 303