Payments made by the Debtor, a pool installer, to a subcontractor during the preference period were made in the ordinary course of business between the Debtor and subcontractor, even though the course of business between those parties changed when a new owner took over management of the subcontractor six months before the bankruptcy. To reach its decision, the Court compared the timing and manner of payments prior to the preference period, but beginning with the change in ownership, to the timing and manner of payments made during the preference period and found that they were substantially the same. Therefore, the Court found that the trustee could not avoid the payments as preferences.
WL Cite: Satija v. Hines-Harvey Interests, LLC (In re Sterry), No. 15-01108, 2016 WL 3357266, at *1 (Bankr. W.D. Tex. June 10, 2016)
Prior to filing bankruptcy, the Debtor retained a restructuring consultant who provided services to the Debtor up to and on the date the bankruptcy petition was filed. The various engagement agreements between the parties required the Debtor to pay the consultant within certain time periods by wire transfer. The liquidating trustee filed an adversary proceeding against the consultant to avoid the payments as preferential transfers. In the context of a summary judgment motion, the consultant asserted the affirmative defense that the payments were made in the ordinary course of business. To establish the defense, the consultant had to show (1) that each transfer was in payment of a debt incurred in the ordinary course of business or financial affairs of the debtor and consultant, and (2) that each payment was either made in the ordinary course of business or financial affairs of the debtor and consultant or was made according to ordinary business terms. The liquidating trustee first argued that debts for restructuring services were not debts “ordinarily” incurred by a furniture business and thus could never be incurred or paid in the ordinary course of the Debtor’s business. The Court disagreed and held that if the debt was incurred and paid in the ordinary course of business between the Debtor and restructuring consultant, the payments could be sheltered by the ordinary course of business defense. The Court then looked at the specific transfers and found that most of them were made in the ordinary course. At trial, the Court considered the remaining payments, including a payment of $50,000 on the day the bankruptcy petition was filed, and held that all but one of the payments were recoverable preferences because they were, unlike prior payments, paid in part by check and shortly after they were invoiced. The Court also noted that the $50,000 payment was a significantly higher amount than prior payments. Additionally, the Court pointed out that the engagement agreements could have provided for an eve-of-bankruptcy pay arrangement that would bring these payments within the ordinary course of the parties’ dealings, and perhaps shelter the payments from being preferences, but the various engagement agreements in this case did not. The Court held that the remaining payment, for services the consultant provided on the day the bankruptcy was filed, was not recoverable because it fell within the “new value” exception in 11 U.S.C. § 547(b)(4).
WL Cite: Ciesla, Trustee of the KLN Liquidating Trust v. Harney Management Partners (In re KLN Steel Products Co., L.L.C.), 506 B.R. 461 (Bankr. W.D. Tex. 2014)