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Absent Other Unusual Factors, Evidence of Timing Range May Be Enough to Satisfy Burden Under Section 547(c)(2)(A)

Forman v. Moran Towing Corp. (In re AES Thames, LLC), Case No. 13-50395 (KJC), 2016 WL 853091 (Bankr. D. Del. Mar. 3, 2016)

In this Memorandum, evidence that payments made during the preference period fell within historical ranges was enough for Judge Kevin Carey to rule that the timing was “subjectively” ordinary under section 547(c)(2)(A) of the Bankruptcy Code, even though the average timing compared unfavorably to the parties’ historical dealings.  The Court’s analysis sheds light on the “somewhat unique circumstances” in which a court may emphasize the importance of the range of payment timing for purposes of the ordinary course of business defense. Op. at *4.

Under the facts, the chapter 7 trustee (the “Trustee”) sought to avoid and recover two preference payments (the “Transfers”) from defendant Moran Towing Corporation (“Moran”). The payments were in the aggregate amount of $798,068.23. After applying other defenses, the parties’ dispute boiled down to whether the timing of the payments was subjectively ordinary under section 547(c)(2).

The range of payments during the preference period – from 10 to 19 days after the due date – fell within the historical patterns established by the parties’ previous dealings.  However, the average lateness varied by more than 13 days from the previous average – 15.63 days versus 2.45 days during the historical period.  The Trustee argued this difference, an increase of 560% over the historical norm, was a “substantial deviation from the parties’ past practices.” Trustee’s Trial Br., p. 14.  The Trustee cited Forklift LP Corp. v. Spicer Clark-Hurth (In re Forklift LP Corp.), 2006 WL 2042979 (Bankr. D. Del. July 20, 2006) (58.5% increase in average timing of preference payments material) and analogous cases in support of his position.

Although acknowledging the importance of payment timing (and not disagreeing with the cases cited by the Trustee), the Court rejected the Trustee’s argument and concluded that the evidence of the historical range sufficed for Moran to meet its burden under section 547(c)(2) in the absence of other activity, such as unusual collection efforts or changes in the timing or amount of payments.

Judge Carey’s holding joins a limited number of cases in which courts have found the range of payments can establish the ordinary course of business notwithstanding differences in average timing that might otherwise appear greater than amounts courts typically find acceptable under section 547(c)(2)(A). See, e.g., Sass v. Vector Consulting, Inc. (In re American Home Mortgage Holdings, Inc.), 476 B.R. 124 (Bankr. D. Del.  2012) (payments within historical range ordinary despite variance of more than 30 days in average timing).

At a glance, opinions such as this one and American Home may appear to be anomalies.  However, it is notable that the cases involved only a handful of preference payments.  There were two in this case and four in American HomeId. at 128.  When there is only a small sample of transfers in the preference period, these cases suggest courts may be inclined to give less weight to average payment time, and find payments ordinary under section 547(c)(2) as long as there are no other unusual factors.